1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cabot Corporation is organized into five reportable segments: Chemicals Group,
Performance Materials ("CPM"), Specialty Fluids ("CSF"), Microelectronics
Materials ("MMD"), and Liquefied Natural Gas ("LNG"). The Chemicals Group is
comprised of the carbon black, fumed silica, plastics, and inkjet colorants
businesses.
The following discussion of results includes segment sales and
operating profit before taxes ("PBT"). Segment PBT is a measure used by Cabot's
chief operating decision-makers to measure the Company's consolidated operating
results and assess segment performance. (Refer to Note Q of the consolidated
financial statements for a definition of PBT and additional segment
information.)
Cabot's calculation of segment PBT may not be consistent with the
calculation of PBT of other public companies and segment PBT should not be
viewed by investors as an alternative to Generally Accepted Accounting
Principles ("GAAP") measures of income.
The following analysis of financial condition and operating results
should be read in conjunction with Cabot's consolidated financial statements and
accompanying notes. Unless a calendar year is specified, all references in this
discussion to years are to Cabot's fiscal years ended September 30.
OVERVIEW
Cabot reported earnings per share of $1.31 versus $1.61 in 1998. The earnings
shortfall is largely the result of reduced margins in Cabot's carbon black
business, lower LNG profits, and $26 million of charges related to cost
reduction initiatives. Carbon black accounts for more than 50% of Cabot's total
PBT. Profitability in the carbon black business was negatively affected by lower
selling prices that more than offset the benefit of lower feedstock costs. In
LNG, lower natural gas selling prices more than offset volume improvements. CPM,
MMD, and Inkjet Colorants all reported improvements in financial performance in
1999.
In July 1999, Cabot announced several initiatives focused on improving
shareholder value. These included cost reduction initiatives across its
businesses aimed at reducing annual costs by $30 million to $35 million, plans
for an initial public offering of approximately 15% of MMD, and management's
intention to review the ownership structures of LNG and CPM. Currently, Cabot
expects the MMD initial public offering to occur in the second calendar quarter
of 2000. Management continues to examine various alternatives to optimize the
performance and value in its liquefied natural gas and performance materials
businesses.
Cabot continues to pursue its strategy of managing costs, and
developing new products and businesses based on its core competencies. Cabot is
also committed to achieving productivity improvements and further refining its
business portfolio in order to achieve its objectives of increasing earnings and
stock price performance.
RESULTS OF OPERATIONS
Cabot's sales for 1999, 1998 and 1997 were $1,695 million, $1,644 million and
$1,625 million, respectively. Higher volumes increased sales 9% in 1999, while
lower selling prices decreased sales by 4%. Negative currency exchange effects
also reduced revenue by 2%. Sales increased $19 million in 1998 due to increased
volumes and greater firm sales commitments in LNG, which more than offset the
effects of lower carbon black selling prices and negative currency effects.
Cabot has been developing and commercializing new high-value,
differentiated products. Five-year new products (defined as products first sold
in commercial quantities within the last five years) accounted for approximately
13% of revenues, excluding LNG, in 1999.
CHEMICALS GROUP: CARBON BLACK, FUMED SILICA, PLASTICS, INKJET COLORANTS
SEGMENT SALES SEGMENT PBT
- -------------------------------------------------------------------------
DOLLARS IN MILLIONS
1999 $1,204 $ 188
1998 1,279 221
1997 1,326 209
=========================================================================
Sales for the Chemicals Group were $1,204 million in 1999, compared with $1,279
million in 1998 and $1,326 million in 1997. Lower volumes reduced sales by 1% in
1999. Lower selling prices also reduced sales for the year by 3%, reflecting a
competitive pricing environment in several of Cabot's chemical businesses.
Finally, the negative effects of a stronger U.S. dollar reduced sales by 2%. PBT
decreased 15% to $188 million in 1999 from $221 million in 1998. Lower volumes
and selling prices more than offset the benefit of lower average raw material
costs. In 1998, sales fell 4% and PBT improved 6%. Chemicals Group volume gains
partially offset the effects of lower year-to-year carbon black selling prices
and a stronger U.S. dollar. Increased profitability in the fumed silica and
plastics businesses improved segment results in 1998.
Carbon black sales were down 6% from last year. Carbon black volumes
were flat and prices were down 6% year-over-year. Carbon black selling prices
decreased due to both dramatic oil
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2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
price declines during the first half of the year and a generally weak pricing
environment in certain markets. Oil price declines did, however, improve the
total cost of acquiring feedstock materials in 1999. Feedstock costs were
reduced by 11% compared with 1998. Lower feedstock costs were more than offset
by reduced selling prices, causing a 9% reduction in PBT in 1999.
Fumed silica sales and PBT were relatively flat compared with the prior
year. Volumes were down 2% caused in part by softened demand in the silicone
rubber market. Selling prices increased 2%, driven by higher sales of treated
products and increased sales of new products.
Plastics sales declined 6%. Volumes were relatively flat and prices
decreased 6%. Pricing in the plastics industry has come under pressure in recent
years with the addition of industry capacity. Lower carbon black feedstock costs
also put downward pressure on prices. PBT declined 9% for the year, as the
effects of lower raw material costs could not offset a reduction in prices and
increases in conversion costs.
Inkjet colorants contributed an incremental $6 million to PBT in the
form of reduced losses. Cabot colorants were included in a third inkjet printer
platform and a fourth is expected in the second quarter of 2000.
Sales by segment 1999 in percent
- --------------------- ----------
Chemicals Group......................... 67
Liquefied Natural Gas................... 15
Performance Materials................... 11
Microelectronics Materials.............. 6
Specialty Fluids........................ 1
OUTLOOK FOR 2000
The Chemicals Group expects volume growth in all businesses and price pressure
is expected to moderate in certain markets, however, the overall business
environment will likely remain very competitive in 2000. Recent cost initiatives
are aimed primarily at improving profitability in Cabot's Chemicals Group
businesses.
The carbon black business expects modest volume growth and continued
pressure on prices. Feedstock costs have increased substantially from mid-1999
lows, which has caused additional margin squeeze. Recent market conditions,
including the consolidation in the tire and auto industries, underscore the need
for continuing cost reduction efforts. Reduced conversion costs and operating
expenses will help offset margin squeeze in 2000.
Sales volume for fumed silica is expected to grow as a result of the
continued strength of the automotive industry, construction growth and sales of
new products. To meet overall increasing global demand, Cabot completed a fumed
silica plant in Midland, Michigan. The plant began production in November 1999
and has an annual capacity of 16 million pounds.
Plastics volumes have recently rebounded due to a combination of
increasing polymer prices and new business growth. Variable margins, however,
have suffered due to the inability to fully recover recent carbon black
feedstock and polymer price increases. Selling price increases, which have been
put in effect in the first quarter of 2000, and ongoing cost reductions, should
contribute to an improvement in operating results next year.
Inkjet colorants should contribute modestly to earnings in 2000.
PERFORMANCE MATERIALS(1)
SEGMENT SALES SEGMENT PBT
- -----------------------------------------------------------------------
DOLLARS IN MILLIONS
1999 $187 $34
1998 175 25
1997 153 16
=======================================================================
(1) Financial information includes distributor sales and equity in net
income of joint ventures.
Performance Materials sales were $187 million in 1999, compared with $175
million in 1998 and $153 million in 1997. Volumes increased 4% in 1999 due to
increased demand for tantalum capacitors by wireless communication companies,
coupled with a resurgence of the personal computer market. Volumes also
increased due to higher sales of Cabot's intermediate products. Improved prices
increased revenue by 3%. Improvements in volumes, prices, conversion, and
operating expenses offset increases in tantalum ore costs, resulting in a 36%
improvement in profitability. In 1998, improved financial performance was
largely the result of improved volumes, offset by increased new product
development spending.
OUTLOOK FOR 2000
The strength in the electronics industry is expected to contribute to improved
tantalum powder volumes in 2000. Higher capacitance powders produced by this
segment are currently sold out and on allocations with customers. Increases in
average selling prices are also anticipated due to a richer product mix.
However, lower contractual volumes for CPM's intermediate products are expected
to negatively impact financial results in 2000.
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SPECIALTY FLUIDS
SEGMENT SALES SEGMENT PBT
- -----------------------------------------------------------------------
DOLLARS IN MILLIONS
1999 $ 12 $(3)
1998 13 (2)
1997 11 (4)
=======================================================================
Specialty Fluids sales in 1999 were $12 million, versus $13 million in 1998 and
$11 million in 1997. Although this business is primarily focused on
commercializing cesium formate oilfield fluids, sales to date have been
generated primarily from the production and sales of spodumene and tantalum.
Customer trials of cesium formate drilling and completion fluids by the oil and
gas industry were inhibited in 1999 by an oil industry downturn. During 1999,
Cabot temporarily suspended production at the cesium formate plant due to an
inventory overload of cesium formate. Management expects production will resume
as cesium formate gains market acceptance.
Sales by geographic region 1999 in percent
- ------------------------------- ----------
North America......................... 51
Europe................................ 35
South America......................... 10
Asia Pacific.......................... 4
OUTLOOK FOR 2000
CSF continues to aggressively market cesium formate drilling fluids. Success in
this segment will be driven by market acceptance from the oil and gas drilling
sectors, which are gradually recovering from the industry downturn and are
expected to continue to recover over the next 12 months. Cesium formate was used
successfully in three North Sea completion operations. Each completion operation
was performed for a different major oil company. As fiscal 2000 progresses, CSF
expects to demonstrate that cesium brine fluids can provide value in a wider
variety of applications in the oil drilling business.
MICROELECTRONICS MATERIALS
SEGMENT SALES SEGMENT PBT
- -----------------------------------------------------------------------
DOLLARS IN MILLIONS
1999 $ 96 $ 22
1998 57 9
1997 34 1
=======================================================================
Microelectronics Materials sales were $96 million in 1999, compared with $57
million in 1998 and $34 million in 1997. The segment experienced strong volume
gains of 53% and average price increases of 14%. The substantial volumes growth
in 1999 resulted from the introduction of new products and strength in MMD's
existing product portfolio. Increased adoption of chemical mechanical
planarization in the semiconductor industry has driven the growth of this
business over the last three years. MMD completed a new facility in Geino,
Japan, during the year to provide additional capacity to keep pace with growing
demand. In 1998, volumes grew 61%.
PBT increased to $22 million in 1999, primarily due to improved volumes
and increased adoption of higher value new products, offset somewhat by
increased selling, technical, and administrative expenses. PBT was $9 million in
1998, up from $1 million in 1997 due to increased volumes and improved plant
utilization, offset somewhat by higher spending on research and development and
market development initiatives.
OUTLOOK FOR 2000
MMD's performance is expected to improve in 2000, with higher average prices and
volume growth anticipated from new product sales. In 1999, MMD introduced its
new LUSTRATM polishing slurry for the rigid disk market and EPICTM polishing
pads. Sales of rigid disk slurries have been better than anticipated and are
expected to contribute significantly to MMD's financial performance in 2000.
Significant investment spending will continue, including plans to expand North
American manufacturing and to purchase land in Korea for a new facility.
LIQUEFIED NATURAL GAS
SEGMENT SALES SEGMENT PBT
- -----------------------------------------------------------------------
DOLLARS IN MILLIONS
1999 $ 265 $ 7
1998 211 15
1997 200 7
=======================================================================
Sales for LNG were $265 million in 1999, compared with $211 million in 1998 and
$200 million in 1997. LNG volumes increased 46% in 1999. Commencement of LNG
shipments from Trinidad, which began during the third quarter, allowed Cabot to
increase volumes in 1999. LNG supplied the New England gas market with 88
million British Thermal Units ("BTU"s) in 1999 versus 60 million BTUs in 1998.
However, lower natural gas selling prices caused by warmer than normal weather
reduced revenues for the year by 20%.
PBT was $7 million in 1999 versus $15 million in 1998. Lower natural
gas selling prices offset the earnings effect of improved volumes and gas costs.
The increase in earnings in 1998 was 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OUTLOOK FOR 2000
Improved performance in LNG is expected in 2000 due to availability of natural
gas from Trinidad and higher gas selling prices. Cabot has sold forward a
significant portion of its expected cargoes in 2000 and, therefore, anticipates
that LNG will generate about $20 million in PBT.
COMPANY SUMMARY
INCOME BEFORE INCOME TAXES, INCOME TAXES, AND EQUITY IN NET INCOME OF AFFILIATED
COMPANIES
Income before income taxes was $136 million in 1999, down 19% from $168 million
in 1998 and up 16% from $117 million in 1997. Earnings for 1999 were
significantly reduced by several charges related to capacity utilization and
cost reduction initiatives. The cost reduction initiatives included $16 million
for severance and termination benefits for approximately 265 employees, of which
$7 million was paid in 1999, and a charge of $10 million for the retirement of
certain long-lived plant assets, primarily at the Australian carbon black
facility and European plastics masterbatch operations. Cabot expects the
initiatives to be substantially completed by the end of fiscal year 2000.
OPERATING EXPENSES*
DOLLARS IN MILLIONS
1997 1998 1999
- ---- ---- ----
284 296 281
* Includes research and technical, and selling and administrative expenses.
Gross margin decreased $30 million versus 1998, as significant declines
in carbon black and LNG selling prices offset lower carbon black feedstock costs
and volume improvements. In 1998 gross margin increased $39 million primarily
due to improved volumes, higher LNG selling prices and lower carbon black
feedstock costs, which offset the effects of lower year-over-year carbon black
selling prices and unfavorable currency exchange rates.
Operating expenses include research and technical service, and selling
and administrative expenses. Research and technical service spending was $73
million for 1999, down 9% from $80 million in 1998. The decrease reflected
reduced spending in the carbon black and CPM businesses, which was somewhat
offset by increased spending in MMD and fumed silica new product development
programs. Cabot is committed to the development of new differentiated products
for its businesses. Cabot anticipates research and technical service spending to
remain near $65 million in 2000 for these and other initiatives. Selling and
administrative expenses were $208 million in 1999 versus $216 million in 1998.
The decrease in 1999 reflects cost improvement efforts across Cabot's
businesses.
Interest expense was $46 million in 1999 compared with $42 million in
1998 and $43 million in 1997.
Other charges, net, decreased from $15 million in 1998 to $7 million in
1999. The decrease was primarily due to nonrecurring costs related to a divested
business in 1998 and a reduction in foreign currency exchange losses. Results in
1998 included the effects of a significant devaluation of the Indonesian rupiah.
Cabot's overall effective income tax rate was 36% in 1999, 1998 and
1997. The underlying factors affecting Cabot's overall effective tax rates are
summarized in Note M of the consolidated financial statements.
Cabot's share of the earnings of investments in equity affiliates was
$13 million in 1999 compared with $17 million in 1998 and $20 million in 1997.
NET INCOME
Net income in 1999 was $97 million ($1.31 per diluted common share) compared to
$122 million ($1.61 per diluted common share) in 1998 and $93 million ($1.19 per
diluted common share) in 1997.
The following table summarizes the impact of special items on diluted
earnings per common share:
1999 1998 1997
- ---------------------------------------------------------------------------
SPECIAL ITEMS
Sale of K N Energy, Inc. stock $ 0.09 $ 0.77 --
Carbon black asset impairment -- (0.51) --
Tantalum ore recovery charge -- (0.21) --
Cost reduction initiatives/programs (0.23) -- $(0.15)
- ----------------------------------------------------------------------------
Earnings per common
share - diluted $(0.14) $ 0.05 $(0.15)
============================================================================
Excluding special items, net income would have been $107 million in 1999, $118
million in 1998 and $104 million in 1997. For a more detailed discussion of
special items, refer to Note B of the consolidated financial statements.
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5
RISK MANAGEMENT
Cabot'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 earnings. To achieve its objectives, Cabot 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
Chemicals Group enters into contracts with customers and suppliers that are
designed to limit the risk of certain foreign currency rate and commodity price
changes. Cabot enters into certain contracts in the carbon black business in
which the price of the product is adjusted based on certain price movements in
feedstock. LNG enters into certain supply contracts where the purchase price of
LNG is adjusted based on the final selling price. Certain contracts in Cabot's
foreign subsidiaries are denominated in U.S. dollars or a currency other than
the functional currency of the subsidiary. Additionally, Cabot attempts to limit
its net monetary exposure in currencies of hyper-inflationary countries,
primarily in South America.
Cabot determines its worldwide exposures to interest rate changes,
foreign currency rate changes, and commodity price changes and reduces the
impact of rate and price changes through the use of derivative financial
instruments. These financial instruments are designated as hedges of underlying
exposures associated with specific assets, liabilities, or firm commitments or
anticipated transactions and are monitored to determine if they remain effective
hedges. Market risk exposure to other financial instruments is not material to
earnings, cash flow, or fair values.
Cabot manages market risks pursuant to policies aimed at protecting
Cabot against risks and prohibiting speculation on market movements. Actions
taken by Cabot's businesses to provide such protection are reviewed and approved
by Cabot's Risk Management Committee, which is charged with enforcing Cabot's
risk management policy.
Interest Rates
Cabot's objective in managing its exposure to interest rate changes is to reduce
the impact of interest rate changes on earnings and cash flows and to lower its
overall borrowing costs. To achieve its objectives, Cabot uses interest rate
swaps to hedge and/or lower financing costs and to adjust fixed and variable
rate debt positions. Cabot maintains a percentage of fixed and variable rate
debt within defined parameters.
Foreign Currency
Cabot's international operations are subject to certain opportunities and risks,
including currency fluctuations and government actions. Operations in each
country are closely monitored so Cabot can respond to changing economic and
political environments and to fluctuations in foreign currencies. Accordingly,
Cabot utilizes foreign currency option contracts and forward contracts to hedge
its exposure of firm commitments or anticipated transactions, and receivables
and payables primarily denominated in currencies other than the functional
currencies. Cabot also monitors its foreign exchange exposures to ensure the
overall effectiveness of its foreign currency hedge positions. Cabot has foreign
currency instruments primarily denominated in the EURO, Japanese yen, British
pound sterling, Swedish krona, Canadian dollar, and Australian dollar.
Commodities
Cabot is exposed to commodity price fluctuations that can affect its sales
revenues and supply costs. From time to time, Cabot enters into commodity
futures contracts, commodity price swaps, and/or option contracts to hedge a
portion of firmly committed and anticipated transactions against such natural
gas price fluctuations. Cabot monitors its exposure to ensure overall
effectiveness of its hedge positions.
Value-At-Risk
Cabot utilizes a Value-at-Risk ("VAR") model to determine the maximum potential
loss in the fair value of its interest rate, foreign exchange, and commodity
sensitive derivative financial instruments within a 95% confidence interval.
(See Note P of the consolidated financial statements for risk management.)
Cabot's computation was based on the interrelationships between movements in
interest rates, foreign currencies, and commodities. These interrelationships
were determined by observing historical interest rate, foreign currency, and
commodity market changes over corresponding periods. The assets and liabilities,
firm commitments and anticipated transactions, which are hedged by 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 that can be used in the
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6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
VAR computation. Cabot's computations are based on the Monte Carlo simulation.
The VAR model is a risk analysis tool and does not purport to represent actual
gains or losses in fair value that will be incurred by Cabot. The VAR model
estimated a maximum loss in market value of $20 million from October 1, 1999,
through September 30, 2000, for derivative instruments held as of September 30,
1999.
At no time during the year did actual changes in market value exceed
the VAR amounts during the reporting period.
In 1998, Cabot was unable to aggregate its derivative financial
instruments for the VAR model. Cabot's VAR models estimated a maximum loss in
market value for each type of derivative instrument held as of September 30,
1998. The results of the VAR models were as follows:
MAXIMUM LOSS PERIOD
------------ ------
Foreign currency $ 0.4 million two weeks
Interest rate $12.0 million six months
Commodity $ 1.0 million one month
Management does not foresee or expect any significant changes in the
management of hedging instruments relating to interest rate, foreign currency,
or commodity exposures or in the strategies it employs to manage such exposures
in the near future.
Since Cabot utilizes interest rate, foreign currency, 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 CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the EURO. The transition
period is anticipated to extend between January 1, 1999, and July 1, 2002. Cabot
has assessed the impact of the conversion on information technology systems,
currency exchange rate risk, derivatives and other financial instruments,
continuity of material contracts, as well as income tax and accounting issues.
Cabot does not expect the conversion during the transition period to have a
material impact on Cabot's consolidated financial statements.
CASH FLOW AND LIQUIDITY
Cash generated in 1999 from operating activities was $208 million, compared with
$237 million in 1998 and $144 million in 1997 (see the consolidated statements
of cash flows). The change in 1999 is primarily due to an increase in working
capital. The change in working capital was primarily due to the consolidation of
the company's Shanghai carbon black joint venture and increased business
activity at Cabot LNG in the fourth quarter this year compared with the fourth
quarter last year.
Capital spending on property, plant and equipment, and investments and
acquisitions for 1999, 1998 and 1997 was $172 million, $247 million and $181
million, respectively. The major components of the 1999 and 1998 capital program
included new business expansion and normal plant operating capital projects,
Cabot's equity share of a natural gas liquefaction project in Trinidad,
refurbishment of Cabot's LNG tanker, and capacity expansion in Cabot's fumed
silica and MMD businesses.
Capital expenditures for 2000 are expected to approximate $150 million
and include projects for maintenance and replacement, and MMD plant expansion.
Although Cabot expects to continue to invest in new business opportunities, this
represents a decrease in the rate of capital spending from 1999.
During the next several years, Cabot also expects to spend a
significant portion of its $39 million environmental reserve in connection with
remediation at various environmental sites. These sites are primarily associated
with divested businesses.
Capital expenditures 1999 in percent
- ------------------------- ----------
process improvement.................. 35
maintenance improvement.............. 25
new business expansion............... 20
compliance........................... 10
infrastructure....................... 10
In 1999, Cabot sold 1 million shares of K N Energy, Inc. ("KNE") and
recognized a $10 million gain from the sale of those equity securities. In 1998,
Cabot sold 2 million shares of KNE and recognized a $90 million gain from the
sale of those equity securities.
Cash used in 1999 in financing activities was $69 million, compared
with $131 million in 1998 and $15 million in 1997.
On September 11, 1998, Cabot's Board of Directors authorized the
repurchase of 4 million shares of Cabot's common stock. As of September 30,
1999, approximately 2 million shares remained available for purchase under the
Board authorization.
During 1999, Cabot repurchased 1.6 million shares of its common stock
for $39 million. During 1998, 3.8 million shares were repurchased for $101
million. During 1997, 3.5 million shares were repurchased for $85 million. Cabot
has predominately used the proceeds of asset sales to finance share repurchases
over the last three years.
On June 30, 1999, Cabot purchased from a financial institution, loans
to Cabot employees totaling $18 million in connection with the purchase of
restricted shares of Cabot Corporation common stock, awarded under the Company's
1996 Equity Incentive Plan.
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7
During 1999, Cabot paid cash dividends of $0.44 per share. In November
1999, the Board of Directors approved an $0.11 per share dividend payable in the
first calendar quarter of 2000.
Cabot's ratio of total debt (including short-term debt, net of cash) to
capital increased from 43% at September 30, 1998, to 44% at September 30, 1999.
On September 29, 1998, Cabot filed a shelf registration statement with
the Securities and Exchange Commission ("SEC") for up to $500 million of debt
securities that may be issued from time to time. The SEC declared the
registration statement effective on October 13, 1998.
In December 1998, Cabot issued $100 million of medium-term notes. As of
September 30, 1999, the notes mature as follows: $40 million in one year, $30
million in six years, and $30 million in 19 years. The notes have a
weighted-average interest rate of 6.6%. Proceeds from the issuance were used to
reduce short-term debt.
Cabot maintains a credit agreement under which it may borrow up to $300
million at floating rates. The facility is available through January 3, 2002.
Cabot had no borrowings outstanding under this agreement at September 30, 1999.
Management expects cash from operations and present financing arrangements,
including Cabot's unused line of credit and shelf registration, to be sufficient
to meet cash requirements for the foreseeable future.
SOURCES AND USES OF CASH
IN MILLIONS OF DOLLARS
SOURCES OF CASH USES OF CASH
1998 1999 1998 1999
---- ---- ---- ----
Other 6 8
Sales of assets 136 21
Borrowings 116 103
Operations 237 208
Other 18
Share repurchases, net 81 35
Dividends 32 32
Debt repayment 134 88
Capital expenditures and investments 247 172
YEAR 2000 READINESS DISCLOSURE
Cabot's Year 2000 plan has three key areas of focus and is overseen by the
Executive Steering Committee. Cabot's Program Management Office was established
to coordinate 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. Cabot's Year 2000 efforts have progressed on schedule.
The first key area of focus was Cabot's core business systems software,
PC hardware and desktop software, and manufacturing plant devices and software.
Cabot'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. Cabot completed the
inventory, assessment, remediation, and testing of core business systems, with
two exceptions as detailed below.
Global business systems renewal projects have been completed. These
projects included the rollout of AspenTech's manufacturing production support
systems, the migration of Cabot's Asia Pacific and European facilities to the
JDEdwards and Marcam suites of business software, and the upgrade to PeopleSoft
Human Resources globally. A small amount of data conversion and acceptance
testing will be completed in December 1999 for laboratory information management
systems in Asia Pacific and South America, and for a shop floor bar coding
system in one North American facility.
PC Hardware and Desktop Software: Cabot has completed the inventory,
assessment, remediation and testing phases for its PC hardware, including
replacement or repair of desktop hardware and mission critical software.
Manufacturing Plant Devices and Software: Cabot completed the inventory
and assessments of plant embedded devices and software during the second quarter
of 1999. Replacement or repair of plant devices and software, and final testing
in all manufacturing facilities was substantially completed by September 30,
1999.
Contingency plans for this key area have been developed and will be
reviewed and revised up through the change to the millennium.
The second key area of focus was Cabot's supply chain. This included
identifying key suppliers whose supply disruption could have an adverse impact
on Cabot'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 writ-
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
ten assurances that purchased products and services are Year 2000 ready. Even in
cases where Cabot has received assurances that delays or disruptions will not be
encountered by third parties, Cabot is not in a position to determine with
certainty whether the assurances will prove accurate, given the uncertainties
associated with the Year 2000 issue. The current status and plans for this area
are as follows:
Key suppliers were identified. Letters and questionnaires were sent to
those suppliers and a review of their responses was completed in the third
quarter of 1999. Contingency plans for this key area have been developed.
The final key area of focus was internal and external communications,
and included ongoing status reporting to management, coordinated responses to
external customer requests for information on Cabot's Year 2000 status, and
timely delivery of information on Year 2000 to Cabot 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
has continued throughout 1999.
Overall, Cabot met its established Year 2000 program goals:
- To complete activities related to mission critical core
business systems, PC hardware, and desktop software by June
30, 1999.
- To substantially complete activities related to manufacturing
embedded devices, manufacturing control systems, and supplier
readiness by September 30, 1999, and
- To substantially complete contingency plans by September 30,
1999.
During the final three months of 1999, Cabot focused on Year 2000 by
refining contingency plans as needed; reviewing and amending Year 2000
documentation as needed; and performing ongoing reviews of supplier readiness.
The cost of implementing system and program changes necessary to
address Year 2000 issues did not have a material effect on Cabot's results of
operations or financial condition. Cabot 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 other functionality. The vast
majority of Cabot's projects over the last year were considered to be part of
Cabot's ongoing global business systems renewal initiatives. Cabot recognizes
that a benefit of these initiatives was Year 2000 compliance. However, these
initiatives were not undertaken primarily for Year 2000 compliance and,
therefore, were not treated as Year 2000 costs. The Year 2000 compliance effort
was supported by a reallocation of existing information technology and human
resources. Cabot does not specifically track all costs associated with employees
working on Year 2000 projects. Cabot budgeted and spent approximately $2 million
during 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 Cabot's expectations based on
current Year 2000 plans and work progress, however, there is no assurance that
such expectations will be realized. While Cabot believes that prudent steps have
been taken to assure that there is an effective program, Cabot 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.
Cabot cannot reliably predict 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 Cabot, its operations or financial condition. Cabot does not know
what is the most likely "worse case scenario" as a result of Year 2000
disruptions, but believes that the effects on Cabot are not substantially
different from those facing industry generally. Cabot 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 Cabot's plants that
could delay production of Cabot's products, and disruptions in transporta-
28
9
tion services that could delay shipments from Cabot's suppliers or to Cabot's
customers. In addition, Cabot does not know whether any of its customers will
experience Year 2000 disruptions, either directly or as a result of disruptions
in their customers' or other suppliers' businesses or in the economy generally,
but any such disruptions might reduce demand for Cabot's products and adversely
affect Cabot. Cabot 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.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). Among other provisions, it
requires that entities recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. Gains and losses resulting from changes in the fair values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Cabot is
currently evaluating the effect of implementing SFAS No. 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"), which is effective for
fiscal years beginning after December 15, 1998. This standard requires
capitalization of certain internal-use computer software costs. Cabot engages in
ongoing update, enhancement, and replacement of its computer systems. Currently,
Cabot capitalizes significant external costs associated with services and
software incurred in connection with these activities. To date, internal
resources associated with these activities have not been significant,
therefore, adoption of this standard on October 1, 1999, is not expected to have
a material impact on Cabot's consolidated financial statements.
In April 1998, AcSEC issued Statement of Position 98-5, "Accounting for
the Costs of Start-Up Activities" ("SOP 98-5"), which is effective for fiscal
years beginning after December 15, 1998. SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs, requiring those
costs to be expensed as incurred. Adoption of this standard on October 1, 1999,
is not expected to have a material impact on Cabot's consolidated financial
statements.
FORWARD-LOOKING INFORMATION
Included herein are statements relating to management's projections of future
profits, the possible achievement of Cabot's financial goals and objectives,
management's expectations for Cabot'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 Cabot's customers' products, and
competitors' reactions to market conditions. Timely commercialization of
products under development by Cabot 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 Cabot to assess and mitigate risks should not be considered
projections of future events or losses.
29
10
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- -----------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents $ 35 $ 40
Accounts and notes receivable, net of reserve for doubtful accounts of $5 and $5 321 284
Inventories (Note C) 259 251
Prepaid expenses and other current assets 27 26
Deferred income taxes (Note M) 17 18
- -----------------------------------------------------------------------------------------------------------------
Total current assets 659 619
- -----------------------------------------------------------------------------------------------------------------
Investments:
Equity (Notes B and D) 72 91
Other (Notes D and N) 47 72
- -----------------------------------------------------------------------------------------------------------------
Total investments 119 163
- -----------------------------------------------------------------------------------------------------------------
Property, plant and equipment (Note E) 2,039 1,914
Accumulated depreciation and amortization (1,015) (936)
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 1,024 978
- -----------------------------------------------------------------------------------------------------------------
Other assets:
Intangible assets, net of accumulated amortization of $16 and $11 (Note B) 20 24
Deferred income taxes (Note M) 6 4
Other assets 14 17
- -----------------------------------------------------------------------------------------------------------------
Total other assets 40 45
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,842 $ 1,805
=================================================================================================================
The accompanying notes are an integral part of these financial statements.
30
11
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- ---------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 186 $ 253
Current portion of long-term debt (Note G) 11 11
Accounts payable and accrued liabilities (Notes F and H) 252 269
Deferred income taxes (Note M) 1 3
- ---------------------------------------------------------------------------------------------------
Total current liabilities 450 536
- ---------------------------------------------------------------------------------------------------
Long-term debt (Note G) 419 316
Deferred income taxes (Note M) 68 82
Other liabilities (Notes H, J, and O) 167 140
Commitments and contingencies (Note O)
Minority interest 32 25
Stockholders' equity (Notes D, G, J, 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 $65 and $67) 75 75
Less cost of shares of preferred treasury stock (17) (14)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued and outstanding: 67,123,892 and 67,241,624 shares 67 67
Additional paid-in capital 5 5
Retained earnings 734 672
Unearned compensation (30) (26)
Deferred employee benefits (59) (60)
Notes receivable for restricted stock (25) --
Accumulated other comprehensive loss (44) (13)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 706 706
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,842 $ 1,805
===================================================================================================
The accompanying notes are an integral part of these financial statements.
31
12
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Revenues:
Net sales and other operating revenues $ 1,695 $ 1,644 $ 1,625
Interest and dividend income (Notes D and P) 4 5 7
- --------------------------------------------------------------------------------------------------------------------
Total revenues 1,699 1,649 1,632
====================================================================================================================
Costs and expenses:
Cost of sales 1,213 1,133 1,155
Selling and administrative expenses 208 216 204
Research and technical service 73 80 80
Interest expense (Notes G and P) 46 42 43
Special items (Note B) 26 85 18
Gain on sale of equity securities (Note D) (10) (90) --
Other charges, net 7 15 15
- --------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,563 1,481 1,515
====================================================================================================================
Income before income taxes 136 168 117
Provision for income taxes (Note M) (49) (60) (42)
Equity in net income of affiliated companies (Note D) 13 17 20
Minority interest in net income (3) (3) (2)
- --------------------------------------------------------------------------------------------------------------------
Net Income 97 122 93
====================================================================================================================
Dividends on preferred stock, net of tax benefit of $2, $2, and $2 (3) (4) (3)
- --------------------------------------------------------------------------------------------------------------------
Income applicable to common shares $ 94 $ 118 $ 90
====================================================================================================================
Weighted-average common shares outstanding, in millions (Notes K and L):
Basic 64 66 68
Diluted 73 75 77
Income per common share (Note L):
Basic $ 1.47 $ 1.80 $ 1.33
Diluted $ 1.31 $ 1.61 $ 1.19
====================================================================================================================
The accompanying notes are an integral part of these financial statements.
32
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 97 $ 122 $ 93
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 125 115 110
Deferred tax expense (benefit) (3) 12 (13)
Equity in net income of affiliated companies, net of dividends received 6 (10) (9)
Special items 19 60 18
Gain on sale of equity securities (10) (90) --
Other, net 15 12 8
Changes in assets and liabilities, net of the effect
of the consolidation of equity affiliates:
Decrease (increase) in accounts and notes receivable (38) 8 (29)
Decrease (increase) in inventories (7) (3) 3
Increase (decrease) in accounts payable and accrued liabilities (2) 31 (23)
Decrease in income taxes payable (14) (2) (24)
Increase (decrease) in other liabilities 29 (8) (1)
Other, net (9) (10) 11
- ---------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 208 237 144
=====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (166) (188) (163)
Proceeds from sales of property, plant and equipment 1 6 1
Purchases of equity securities -- (20) (11)
Proceeds from sales of equity securities 20 130 --
Investments and acquisitions, excluding cash acquired (6) (39) (7)
Proceeds from sale of business -- -- 35
Cash from consolidation of equity affiliates and other 8 2 --
- ---------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (143) (109) (145)
=====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 103 63 90
Repayments of long-term debt (11) (134) (21)
Increase (decrease) in short-term debt, net (77) 53 17
Purchases of preferred and common stock (46) (106) (87)
Sales and issuances of preferred and common stock 11 25 18
Cash dividends paid to stockholders (32) (32) (32)
Purchase of notes receivable for restricted stock, net of repayments received (17) -- --
- ---------------------------------------------------------------------------------------------------------------------
Cash used in financing activities (69) (131) (15)
=====================================================================================================================
Effect of exchange rate changes on cash (1) 4 (3)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (5) 1 (19)
Cash and cash equivalents at beginning of year 40 39 58
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 35 $ 40 $ 39
=====================================================================================================================
The accompanying notes are an integral part of these financial statements.
33
14
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
PREFERRED
STOCK, NET OF COMMON
YEARS ENDED SEPTEMBER 30 TREASURY STOCK COMMON STOCK TREASURY STOCK
- ----------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
1997
Balance at October 1, 1996 $ 67 $136 $(634)
==================================================================================================================================
Net income
Foreign currency translation adjustments
Change in unrealized gain on available-for-sale securities
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid
Issuance of stock under employee compensation plans, net of tax benefit of $4 12
Issuance of common stock to CRISP 2
Purchase and retirement of common stock (85)
Purchase of treasury stock-preferred (2)
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
==================================================================================================================================
Balance at September 30, 1997 $ 65 $136 $(705)
==================================================================================================================================
1998
Net income
Foreign currency translation adjustments
Change in unrealized gain on available-for-sale securities
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid
Issuance of stock under employee compensation plans, net of tax benefit of $5 16
Issuance of common stock to CRISP 2
Purchase and retirement of common stock (69) 687
Purchase of treasury stock-preferred (4)
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
==================================================================================================================================
Balance at September 30, 1998 $ 61 $ 67 $ --
==================================================================================================================================
1999
Net income
Foreign currency translation adjustments
Change in unrealized gain on available-for-sale securities
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ----------------------------------------------------------------------------------------------------------------------------------
Common dividends paid
Issuance of stock under employee compensation plans, net of tax benefit of $5 2
Issuance of common stock to CRISP
Purchase and retirement of common stock (2)
Purchase of treasury stock-preferred (3)
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
Notes receivable for restricted stock, net
==================================================================================================================================
Balance at September 30, 1999 $ 58 $ 67 $ --
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
34
15
- ------------------------------------------------------------------------------------------------------------------------
ACCUMULATED NOTES
OTHER DEFERRED RECEIVABLE TOTAL TOTAL
ADDITIONAL RETAINED COMPREHENSIVE UNEARNED EMPLOYEE FOR RESTRICTED STOCKHOLDERS' COMPREHENSIVE
PAID-IN CAPITAL EARNINGS INCOME (LOSS) COMPENSATION BENEFITS STOCK EQUITY INCOME
- ------------------------------------------------------------------------------------------------------------------------
$ 24 $1,177 $ 56 $ (17) $ (64) $ -- $ 745
========================================================================================================================
93 $ 93
(45) (45)
24 24
- -----------------------------------------------------------------------------------------------------------=============
$ 72
- -----------------------------------------------------------------------------------------------------------=============
(28)
13 (11)
2
(4)
2
10
========================================================================================================================
$ 39 $1,238 $ 35 $ (18) $ (62) $ -- $ 728
========================================================================================================================
122 $ 122
(11) (11)
(37) (37)
- -----------------------------------------------------------------------------------------------------------=============
$ 74
- -----------------------------------------------------------------------------------------------------------=============
(29)
27 (18)
3
(64) (656)
(3)
2
10
========================================================================================================================
$ 5 $ 672 $(13) $ (26) $ (60) $ -- $ 706
========================================================================================================================
97 $ 97
(17) (17)
(14) (14)
- -----------------------------------------------------------------------------------------------------------=============
$ 66
- -----------------------------------------------------------------------------------------------------------=============
(29)
34 (16)
5
(39) (3)
(3)
1
12
(25)
========================================================================================================================
$ 5 $ 734 $ (44) $ (30) $ (59) $ (25) $ 706
========================================================================================================================
The accompanying notes are an integral part of these financial statements.
35
16
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 ("Cabot") are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cabot 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% to
50% owned affiliates are accounted for using 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 or losses, net of
taxes, are excluded from income and recognized as a separate component of other
comprehensive income within 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 K)
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. The cost and accumulated depreciation for property,
plant and equipment sold, retired, or otherwise disposed of are relieved from
the accounts, and resulting gains or losses are reflected in income. (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 during 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 of $5 million for 1999, 1998 and 1997.
(Note B)
IMPAIRMENT OF LONG-LIVED ASSETS
Cabot 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 as a separate
component of other comprehensive income and 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 1999, 1998 and 1997, are foreign exchange losses
of $1 million, $7 million and $6 million, respectively. The financial statements
of foreign operations that operate in hyper-inflationary economies are
translated at either current or historical exchange rates, as appropriate. These
currency adjustments are included in net income. (Note K)
FINANCIAL INSTRUMENTS
Derivative financial instruments are used by Cabot to manage its interest rates,
foreign currency exposures, and commodity prices. Interest rate swaps are
employed to achieve Cabot'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 income
or expense. Realized gains and losses on foreign currency instruments, that are
effective as hedges of investments in foreign operations, are recognized in
income as the instruments mature. Realized and unrealized gains and losses on
forward currency contracts, which are not hedges of committed transactions of
assets and liabilities, are recognized in income in other charges, net. Realized
gains and losses on foreign currency instruments, which are hedges of committed
transactions, are
36
17
recognized at the time the underlying transaction is completed. Commodity
futures, forward contracts, price swaps, and option contracts are used by Cabot
on occasion to hedge the procurement of raw materials, primarily liquefied
natural gas, and to hedge the purchase and sale of feedstock. Realized gains and
losses on commodity futures, forwards, swaps, and options contracts on
qualifying hedges are included as a component of raw materials or sales revenue,
as appropriate, and are recognized when the related materials are purchased or
sold. (Note P)
REVENUE RECOGNITION
Revenues are recognized when finished products are shipped to unaffiliated
customers or services have been rendered, with an 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 Cabot has designated to be
indefinitely reinvested. (Note M)
EQUITY INCENTIVE PLANS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), Cabot 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. Cabot discloses the
summary of pro forma effects to reported net income and earnings per share for
1999, 1998 and 1997, as if Cabot 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 J)
Under Cabot's Equity Incentive Plans, common stock may be granted at a
discount to certain key employees. Generally, restricted stock awards cannot be
sold or otherwise encumbered during the three years following the grant. Upon
issuance of stock under the plan, unearned compensation equivalent to the
difference between the market value on the date of the grant and the discounted
price is charged to a separate component of stockholders' equity and
subsequently amortized over the vesting period.
YEAR 2000 COSTS
Costs of modifying hardware and software for Year 2000 compliance are expensed
as they are incurred.
COMPREHENSIVE INCOME
As of October 1, 1998, Cabot 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,
translation adjustments on investments in foreign subsidiaries, and translation
adjustments on foreign securities. Prior to the adoption of SFAS No. 130, Cabot
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. (Note K)
PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Effective September 30, 1999, Cabot adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). The provisions of SFAS No. 132 revise
employers' disclosures regarding pension and other postretirement benefit plans,
but do not change the measurement or recognition of such plans. (Note H)
FINANCIAL INFORMATION BY SEGMENT
Beginning with this annual report, Cabot adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The new framework
for segment reporting is intended to give analysts and other financial statement
users a view of Cabot "through the eyes of management." It designates Cabot's
internal management reporting structure as the basis for determining Cabot's
reportable segments, as well as the basis for determining the information to be
disclosed for those segments. SFAS No. 131 also requires certain disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 did not affect results of operations or financial position, but
did affect the disclosure of segment information. (Note Q)
37
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENVIRONMENTAL CLEANUP MATTERS
Cabot expenses environmental costs related to existing conditions resulting from
past or current operations and from which no current or future benefit is
discernible. Cabot 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.
Cabot'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 Cabot
is not discounted or reduced for possible recoveries from insurance carriers.
(Note O)
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.
RECLASSIFICATIONS
Certain amounts in 1998 and 1997 have been reclassified to conform to the 1999
presentation. Additionally, global focus in manufacturing, primarily in the
chemicals businesses, resulted in reclassifications related to revenues, cost of
sales, selling and administrative expenses, and research and technical service
to achieve consistent definitions for cost classifications across all businesses
and regions. The reclassifications resulted in the following adjustments in the
statements of income:
- -------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- -------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Decrease in revenue $ 5 $ 4 $ 5
Increase in cost of sales 13 12 11
Decrease in selling
and administrative expense 17 14 13
Decrease in research
and technical service 1 2 3
- --------------------------------------------------------------------------------
NOTE B SPECIAL ITEMS AND BUSINESS DEVELOPMENTS
During 1999, Cabot began implementation of initiatives to reduce costs and
improve operating efficiencies. In connection with these efforts, Cabot recorded
a $26 million charge for capacity utilization and cost reduction initiatives.
These initiatives included $16 million for severance and termination benefits
for approximately 265 employees, of which $7 million was paid out in 1999, and a
charge of $10 million for the retirement of certain long-lived plant assets,
primarily at the Australian carbon black facility and European plastics
masterbatch operations. These expenses are included as special items in the
consolidated statements of income. Cabot expects these initiatives to be
substantially completed by the end of fiscal year 2000.
On November 14, 1995, Cabot modified its joint venture agreement for its
carbon black venture in Shanghai, China. This amendment provided for the
expansion of the facility and the increase of Cabot's ownership interest to 70%,
to take effect as the expansion was funded. On October 1, 1998, Cabot's
ownership in the venture increased to 70% and accordingly, is now accounted for
on a consolidated basis.
During 1996, Cabot acquired an 80% ownership interest in P.T. Continental
Carbon Indonesia ("PTCCI"), an Indonesian carbon black plant located in Merak,
Indonesia. During 1998, the financial and economic circumstances in Indonesia
resulted in a significant decline in demand for carbon black in the region. As a
result, management halted production at this plant. In accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets" ("SFAS No. 121"), Cabot recognized in the third quarter of
1998, an impairment loss of $60 million for the difference between the carrying
value of PTCCI's long-lived assets of $77 million and the estimated fair value.
The charge related to the Chemicals Group consisted of $34 million for property,
plant and equipment and other assets and $26 million for goodwill and other
intangible assets. Cabot 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, Cabot entered into an agreement to process tantalum ore
residues accumulated from Cabot's past production of tantalum. Cabot expected
the process to produce economic recoveries of tantalum and capitalized prepaid
expenses of approximately $25 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 million related to operations of the Performance Materials
segment.
On December 18, 1997, Cabot 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 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 million, was recorded as goodwill and is being amortized over
15 years.
38
19
During 1997, earnings were reduced by the recognition of special charges
totaling $18 million comprised of asset impairments of $10 million and employee
severance costs of $8 million related to the Chemicals Group and Performance
Materials segments.
NOTE C INVENTORIES
Inventories, net of reserves, were as follows:
- --------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Raw materials $72 $ 68
Work in process 55 63
Finished goods 91 76
Other 41 44
- --------------------------------------------------------------------------------
Total $259 $251
================================================================================
Inventories valued under the LIFO method comprised approximately 27% and
32% of 1999 and 1998 total inventory, respectively. At September 30, 1999 and
1998, the estimated current cost of these inventories exceeded their stated
valuation determined on the LIFO basis by approximately $45 million and $32
million, respectively.
NOTE D INVESTMENTS
At September 30, 1999 and 1998, investments in common stock accounted for using
the equity method amounted to $72 million and $91 million, respectively.
Dividends received from equity affiliates were $19 million in 1999, $7 million
in 1998, and $11 million in 1997.
The combined results of operations and financial position of Cabot's
equity-basis affiliates are summarized below:
- -------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- -------------------------------------------------------------------------------
DOLLARS IN MILLIONS
CONDENSED INCOME STATEMENT
INFORMATION:
Net sales $622 $618
Gross profit 228 238
Net income 39 26
CONDENSED BALANCE SHEET
INFORMATION:
Current assets $274 $281
Non-current assets 396 419
Current liabilities 247 222
Non-current liabilities 280 307
Net assets 143 171
================================================================================
Other investments include available-for-sale equity securities. The cost and
fair value of available-for-sale equity securities are summarized as follows:
- -------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- -------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Cost $ 20 $ 31
Cumulative unrealized holding gains 5 26
Foreign currency translation adjustment
on foreign denominated securities (1) (3)
- -------------------------------------------------------------------------------
Fair value $ 24 $ 54
================================================================================
Unrealized holding gains were credited to accumulated other comprehensive
income in stockholders' equity net of deferred taxes of $2 million and $9
million at September 30, 1999 and 1998, respectively. Foreign currency
translation adjustments on foreign securities are included in accumulated other
comprehensive income within stockholders' equity as part of foreign currency
translation adjustments. Gains related to sales of available-for-sale equity
securities were $10 million and $90 million in 1999 and 1998, respectively.
Sales of available-for-sale equity 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 1999 1998
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Land and improvements $ 74 $ 74
Buildings 297 291
Machinery and equipment 1,394 1,277
Other 80 74
Construction in progress 194 198
- --------------------------------------------------------------------------------
Total property, plant and equipment 2,039 1,914
Less: accumulated depreciation 1,015 936
- --------------------------------------------------------------------------------
Net property, plant and equipment $1,024 $ 978
================================================================================
Depreciation expense was $120 million, $110 million and $105 million for
the years ended September 30, 1999, 1998 and 1997, respectively.
39
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F ACCOUNTS PAYABLE & ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
- --------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Accounts payable $157 $148
Accrued employee compensation 28 22
Other accrued liabilities 67 99
- --------------------------------------------------------------------------------
Total $252 $269
================================================================================
NOTE G DEBT
Unsecured long-term debt consisted of the following:
- -------------------------------------------------------------------------------
SEPTEMBER 30 1999 1998
- -------------------------------------------------------------------------------
DOLLARS IN MILLIONS
FIXED RATE NOTES (STATED RATE):
Notes due 2002-2022, 8.1% $ 105 $ 105
Notes due 2004-2011, 7.1% 90 90
Note due 2027, 7.3% 25 25
Note due 2027, put option 2004, 6.6% 25 25
Notes due 2000-2018, 6.6% 100 --
Guarantee of ESOP notes, due 2013, 8.3% 59 60
Notes due 1999-2002, 6.0% 6 --
Notes due 1999-2002, 7.2% 5 --
Foreign term loan, due 2000, 8.7% 2 7
Other, due beginning in 2000 with
various rates from 3.0% to 18.5% 8 7
VARIABLE RATE NOTE (END OF YEAR RATE):
Foreign term loan, due 2001,
floating rate 4.7% 5 8
- -------------------------------------------------------------------------------
430 327
Less: current portion of long-term debt (11) (11)
- -------------------------------------------------------------------------------
Total $ 419 $ 316
===============================================================================
In June 1992, Cabot filed a registration statement on Form S-3 with the
Securities and Exchange Commission covering $300 million of debt securities. In
1992, $105 million of medium-term notes were issued to refinance $105 million of
notes payable. The medium-term notes have a weighted-average maturity of 19
years and a weighted-average interest rate of 8.1%.
In February 1997, Cabot issued $90 million of medium-term notes. The notes
have a weighted-average maturity of 11 years and a weighted-average interest
rate of 7.1%.
In October 1997, Cabot issued a total of $50 million in medium-term notes.
These notes included a $25 million note, with an interest rate of 7.3% due in
2027, and a $25 million note, with an interest rate of 6.6% due in 2027, with a
put option in 2004.
In September 1998, Cabot filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission covering $500 million of debt
securities. This registration includes the remaining $55 million not then issued
under the 1992 registration.
In December 1998, Cabot issued $100 million in medium-term notes. The notes
have a weighted-average maturity of 6 years and a weighted-average interest rate
of 6.6%.
In November 1988, Cabot's Employee Stock Ownership Plan ("ESOP") borrowed
$75 million from an institutional lender in order to finance its purchase of
75,000 shares of Cabot's Series B ESOP Convertible Preferred Stock. This debt
bears interest at 8.3% per annum, and is to be repaid in equal quarterly
installments through December 31, 2013. Cabot, as guarantor, has reflected the
outstanding balance of $59 million and $60 million as a liability in the
consolidated balance sheet at September 30, 1999 and 1998, respectively. An
equal amount, representing deferred employee benefits, has been recorded as a
reduction to stockholders' equity.
Cabot may borrow up to $300 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, 1999 or 1998.
The aggregate principal amounts of long-term debt due in each of the five
fiscal years 2000 through 2004 and thereafter are $11 million, $50 million, $30
million, $5 million, $40 million and $294 million, respectively.
At September 30, 1999 and 1998, the fair market value of long-term
borrowings was approximately $417 million and $334 million, respectively.
The weighted-average interest rate on short-term borrowing was
approximately 6.0% as of September 30, 1999 and 1998.
40
21
NOTE H EMPLOYEE BENEFIT PLANS
The following provides a reconciliation of benefit obligations, plan
assets, the funded status, and weighted-average assumptions of the defined
benefit pension and postretirement benefit plans:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------- -----------------------
SEPTEMBER 30 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $220 $193 $90 $80
Service cost 7 8 1 1
Interest cost 13 11 6 6
Plan participants' contribution 1 1 -- --
Amendments -- 13 -- (1)
Foreign currency exchange rate changes (3) 2 -- --
Gain (loss) from changes in actuarial assumptions (1) 8 (1) 10
Special termination benefit 1 -- -- --
Benefits paid (17) (16) (6) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $221 $220 $90 $90
===================================================================================================================================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $238 $222 $-- $--
Actual return on plan assets 40 24 -- --
Employer contribution 5 5 6 6
Plan participants' contribution 1 1 -- --
Foreign currency exchange rate changes (4) 2 -- --
Benefits paid (17) (16) (6) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $263 $238 $-- $--
===================================================================================================================================
Funded status $42 $18 $(90) $(90)
Unrecognized transition amount -- (3) -- --
Unrecognized prior service cost (3) 1 (3) (1)
Unrecognized net (gain) loss (51) (34) 17 20
- -----------------------------------------------------------------------------------------------------------------------------------
Recognized liability $(12) $(18) $(76) $(71)
===================================================================================================================================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS
CONSIST OF:
Prepaid benefit cost $15 $11 $-- $--
Other liabilities (27) (29) (76) (71)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $(12) $(18) $(76) $(71)
===================================================================================================================================
WEIGHTED-AVERAGE RATES:
Discount rate 6.2% 6.3% 7.0% 6.3%
Expected rate of return on plan assets 8.1% 8.1% N/A N/A
Assumed rate of increase in compensation 4.3% 4.6% N/A N/A
Assumed annual rate of increase in health care benefits N/A N/A 6.3% 5.5%
Net periodic defined benefit pension and other postretirement benefit costs
include the following components:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------------- -----------------------------------
YEARS ENDED SEPTEMBER 30 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Service cost $7 $8 $8 $1 $1 $1
Interest cost 13 11 14 6 6 6
Expected return on plan assets (16) (16) (17) -- -- --
Amortization of transition asset (1) (1) 1 -- -- --
Amortization of prior service cost -- -- (1) -- -- --
Recognized losses (gains) 1 2 (1) 1 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $4 $4 $4 $8 $7 $7
===================================================================================================================================
41
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cabot provides both defined benefit and defined contribution plans for its
employees. Defined benefit pension plans include, but are not limited to, the
Cabot Cash Balance Plan ("CBP") and several foreign pension plans. Defined
contribution plans include the Cabot Retirement Incentive Savings Plan
("CRISP"), Cabot Employee Savings Plan ("CESP"), and the Cabot Employee Stock
Ownership Plan ("ESOP").
Cabot also has postretirement benefit 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. Cabot funds the plans as claims
or insurance premiums come due.
DEFINED BENEFIT PENSION PLANS
The worldwide defined benefit pension plan assets are comprised principally
of investments in equity securities and government bonds. Prior service costs
are amortized over the remaining 4 to 15 years, while the net transition
assets are amortized over 1 to 4 years.
The benefit obligation for certain foreign defined benefit pension plans
with benefit obligations in excess of plan assets were $23 million and $32
million, as of September 30, 1999 and 1998, respectively. The fair value of
plan assets for the aforementioned plans were $16 million and $23 million, as
of September 30, 1999 and 1998, respectively.
Measurement of defined benefit pension expense is based on assumptions
used to value the defined benefit pension liability at the beginning of the
year.
DEFINED CONTRIBUTION PLANS
The total contribution recognized as an expense for the CRISP was $5 million
in 1999 and $4 million for both 1998 and 1997. Information regarding the ESOP
can be found in Note I.
POSTRETIREMENT BENEFIT PLANS
Postretirement benefit plans include health care and life insurance plans.
Measurement of postretirement benefit expense is based on assumptions used to
value the postretirement liability at the beginning of the year. Assumed
health care trend rates have a significant effect on the amounts reported for
the health care plans. A 1-percentage-point change in the 1999 assumed health
care cost trend rate would have the following effects:
1-PERCENTAGE-POINT
----------------------------
SEPTEMBER 30 INCREASE DECREASE
- -------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Effect on total of service and interest
cost components $1 $(1)
Effect on postretirement benefit obligation $8 $(8)
================================================================================
NOTE I EMPLOYEE STOCK OWNERSHIP PLAN
PLAN DESCRIPTION
In September 1988, Cabot established an Employee Stock Ownership Plan
("ESOP"), a defined contribution plan, as an integral part of the retirement
program that was designed for participants to share in the growth of Cabot.
All employees of Cabot and its participating subsidiaries, except those
individuals subject to collective bargaining agreements and employed by the
Performance Materials segment, are eligible to participate beginning on the
later of the first day of employment or the date the employee is included in
an employee group that participates in the plan.
In November 1988, Cabot placed 75,336 shares of its Series B ESOP
Convertible Preferred Stock in the 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 Cabot'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
Cabot to redeem shares sufficient to provide for periodic distributions to
plan participants. Cabot has the option to redeem the shares for $1,000 per
share, convert the shares to common stock, or a combination thereof.
The issued shares of Series B ESOP Convertible Preferred Stock receive
preferential and cumulative quarterly dividends, and are ranked as to
dividends and liquidation prior to Cabot's Series A Junior Participating
Preferred Stock and common stock. At September 30, 1999, 6 million shares of
Cabot's common stock were reserved for conversion of the Series B ESOP
Convertible Preferred Stock.
CONTRIBUTIONS
On the last business day of each calendar quarter, 750 shares of the Series B
preferred stock are released and allocated to participants' accounts. The
allocation to each participant is based on the value of Cabot's preferred
stock, the number of shares allocated as dividends, and the total eligible
compensation. Effective January 1, 1997, the participant's respective
contribution allocation cannot fall below 4% of the participant's eligible
compensation. If the amount of the participant allocation were to fall below
4%, Cabot would make an additional contribution to bring the total value to
4% for the participant. Additionally, allocations in excess of 8% are used
first to fund the CRISP employer match and any surplus would then be
allocated to ESOP participants. The allocation is made to the account of each
participant who is employed on that date, or has retired, died, or become
totally and permanently disabled during the quarter. Cabot recognized
expenses related to the ESOP of $2 million in 1999 and $1 million in both
1998 and 1997.
42
23
NOTE J EQUITY INCENTIVE PLANS
Cabot has an Equity Incentive Plan for key employees. Under the plan adopted in
1988, Cabot was able to grant participants various types of stock and
stock-based awards. During the period from 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 Cabot'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. From 1992 through 1995, awards
consisted of Cabot common stock, which employees could elect to receive in the
form of restricted stock purchased at a price equal to 50% of the fair market
value on the date of the award, nonqualified stock options at fair market value
of Cabot's common stock on the date of the award, or a combination of one-half
of each. Effective in March 1996, no new awards were permitted under this plan.
In December 1995, the Board of Directors adopted, and in March 1996, Cabot
stockholders approved, the 1996 Equity Incentive Plan. Under this plan, Cabot
can make various types of stock and stock-based awards, the terms of which are
determined by Cabot's compensation committee. Awards under the 1996 plan have
been made primarily as part of Cabot's Long-Term Incentive Program. These awards
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
exercisable at the fair market value of Cabot's common stock on the date of the
award. Variations of the restricted stock 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 of the grant for participants
then employed by Cabot, and the options generally expire five years from the
date of grant. In November 1998, the Board of Directors adopted, and in March
1999, Cabot stockholders approved, the 1999 Equity Incentive Plan. This plan is
similar to the 1996 Equity Incentive Plan with the exception of the discount
price, which was established at a price equal to 30% of the fair market value on
the date of the award.
Cabot had 6 million shares of common stock reserved for issuance under the 1996
and 1999 plans. There were approximately 3 million shares available for future
grants at September 30, 1999, under both plans. Compensation expense recognized
during 1999, 1998, and 1997 for restricted stock grants was $12 million, $10
million and $10 million, respectively.
RESTRICTED STOCK
The following table summarizes the plans' restricted stock activity for the last
three fiscal years:
WEIGHTED-
AVERAGE
RESTRICTED PURCHASE
STOCK PRICE
- --------------------------------------------------------------------------------
SHARES IN THOUSANDS
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
Granted 1,034 9.19
Vested (733) 11.48
Canceled (135) 9.60
- --------------------------------------------------------------------------------
Outstanding at September 30, 1999 2,667 $11.08
================================================================================
STOCK-BASED COMPENSATION
The following table summarizes the plans' stock option activity from
September 30, 1996 through September 30, 1999:
WEIGHTED-
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
- --------------------------------------------------------------------------------
OPTIONS IN THOUSANDS
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
Granted 582 27.00
Exercised (209) 9.73
Canceled (50) 27.96
- --------------------------------------------------------------------------------
Outstanding at September 30, 1999 1,645 $20.53
================================================================================
Options outstanding at September 30, 1999, were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
WEIGHTED-
THOUSANDS REMAINING THOUSANDS AVERAGE
RANGE OF OF OPTIONS EXERCISE CONTRACTUAL OF OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING PRICE LIFE YEARS EXERCISABLE PRICE
- -------------------------------------------------------------------------------------
$7.59 - 8.50 634 $ 7.79 1.65 634 $ 7.79
20.00 - 26.70 180 23.20 1.88 98 22.64
27.00 - 35.31 831 29.67 4.68 -- --
- -------------------------------------------------------------------------------------
Total options 1,645 732
=====================================================================================
The estimated weighted-average fair value of the options granted during
fiscal 1999, 1998 and 1997 were $8.24, $11.00 and $6.37, respectively, on the
date of grant using the Black-
43
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scholes option-pricing model and the following weighted-average assumptions:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
------------------------------------------------------------------------------
Expected stock price volatility 35% 34% 26%
Risk free interest rate 5.4% 5.6% 6.5%
Expected life of options 4 YEARS 4 years 4 years
Expected annual dividends $ 0.44 $ 0.42 $ 0.40
==============================================================================
Had the fair value based method been adopted, Cabot's pro forma net
income and pro forma net income per common share for fiscal 1999, 1998 and
1997 would have been as follows:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
-----------------------------------------------------------------------------
Net income - pro forma
(in millions) $ 96 $ 121 $ 93
Net income per common
share - pro forma:
Basic $ 1.45 $ 1.80 $ 1.32
Diluted $ 1.29 $ 1.60 $ 1.18
=============================================================================
The effects of applying the fair value based method in this pro forma
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.
NOTE K STOCKHOLDERS' EQUITY
The following table summarizes Cabot's stock activity:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
----------------------------------------------------------------------------
PREFERRED SHARES IN THOUSANDS,
COMMON SHARES IN MILLIONS
PREFERRED STOCK
Beginning of year 75 75 75
----------------------------------------------------------------------------
End of year 75 75 75
============================================================================
PREFERRED TREASURY STOCK
Beginning of year 9 7 6
Purchased preferred treasury stock 1 2 1
----------------------------------------------------------------------------
End of year 10 9 7
============================================================================
COMMON STOCK
Beginning of year 67 136 136
Issued common stock 2 -- --
Purchased and retired
common stock (2) -- --
Retirement of treasury stock -- (69) --
----------------------------------------------------------------------------
End of year 67 67 136
============================================================================
COMMON TREASURY STOCK
Beginning of year -- 67 65
Purchased -- 4 3
Issued -- (2) (1)
Retirement of treasury stock -- (69) --
----------------------------------------------------------------------------
End of year -- -- 67
============================================================================
In May 1999, Cabot adopted a stock purchase assistance plan whereby
Cabot may extend credit to purchase restricted shares of Cabot Corporation
common stock awarded under Cabot's 1999 Equity Incentive Plan to those
participants in Cabot's 1999 Long-Term Incentive Program. The notes bear
interest at 6% per annum on a principal amount of up to 30% of the aggregate
fair market value of such purchased stock on the day of grant. Interest is
payable quarterly and principal is due on various dates through May 2002. On
June 30, 1999, Cabot purchased, from a financial institution, loans to Cabot
employees totaling $18 million. These loans were made to help finance the
purchase of restricted shares of Cabot Corporation common stock under Cabot's
Long-Term Incentive Program. As of September 30, 1999, the notes outstanding
totaled approximately $25 million and are included as a separate component of
stockholders' equity.
In September 1998, the Board of Directors authorized Cabot to purchase
up to 4 million shares of Cabot's common stock, superseding the previous
authorization issued in May 1997. As of September 30, 1999, Cabot had
purchased approximately 2 million shares under the new authorization.
On September 11, 1998, the Board of Directors adopted a resolution to
retire and restore to the status of authorized, but unissued, both the entire
balance of shares of common stock classified as common treasury stock and all
subsequent acquisitions/purchases effective September 30, 1998. For the year
ended September 30, 1998, a total of 69 million shares of Cabot's common
stock had been retired.
In November 1995, Cabot declared a dividend of one Preferred Stock
Purchase Right ("Right") for each outstanding share of Cabot's common stock.
Each Right entitles the holder, upon the occurrence of certain specified
events, to purchase from Cabot one one-hundredth of a share of Series A
Junior Participating Preferred Stock at a purchase price of $200 per share.
The Right further provides that each Right will entitle the holder, upon the
occurrence of certain other specified events, to purchase from Cabot 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 Cabot was merged or which acquired 50% or more of
Cabot's assets or earnings power, common stock of such other person having a
value of twice the exercise price of the Right. The Right may generally be
redeemed by Cabot at a price of $0.01 per Right. The Rights are not presently
exercisable and will expire on November 10, 2005.
44
25
COMPREHENSIVE INCOME
The pretax, tax, and after-tax effects of the components of other
comprehensive income are shown below:
YEARS ENDED SEPTEMBER 30 PRETAX TAX AFTER-TAX
- ----------------------------------------------------------------------------------
DOLLARS IN MILLIONS
1997
Foreign currency translation
adjustments $(45) $-- $(45)
Unrealized holding gain arising
during period on marketable
equity securities 38 (14) 24
- ----------------------------------------------------------------------------------
Other comprehensive income (loss) $ (7) $(14) $(21)
==================================================================================
1998
Foreign currency translation
adjustments $(11) $-- $(11)
UNREALIZED GAIN ON MARKETABLE
EQUITY SECURITIES:
Unrealized holding gain arising
during period 28 (14) 14
Less: reclassification adjustment
for gain realized in net income (90) 39 (51)
- ----------------------------------------------------------------------------------
Change in unrealized gain (62) 25 (37)
- ----------------------------------------------------------------------------------
Other comprehensive income (loss) $(73) $ 25 $(48)
==================================================================================
1999
Foreign currency translation
adjustments $(17) $-- $(17)
UNREALIZED GAIN ON MARKETABLE
EQUITY SECURITIES:
Unrealized holding loss arising
during period (10) 3 (7)
Less: reclassification adjustment
for gain realized in net income (11) 4 (7)
- ----------------------------------------------------------------------------------
Change in unrealized gain (21) 7 (14)
- ----------------------------------------------------------------------------------
Other comprehensive income (loss) $(38) $ 7 $(31)
==================================================================================
The balance of related after-tax components comprising accumulated other
comprehensive income (loss) are summarized below:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Foreign currency translation
adjustment $(47) $(30) $(19)
Unrealized gain on marketable
equity securities 3 17 54
- --------------------------------------------------------------------------------
Accumulated other
comprehensive income (loss) $(44) $(13) $ 35
================================================================================
NOTE L EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated as follows:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- -------------------------------------------------------------------------------------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
BASIC EPS:
Income available to common
shares (numerator) $ 94 $ 118 $ 90
=====================================================================================
Weighted-average common
shares outstanding 67 68 70
Less: contingently issuable shares (3) (2) (2)
- -------------------------------------------------------------------------------------
Adjusted weighted-average
shares (denominator) 64 66 68
=====================================================================================
Basic EPS $1.47 $1.80 $1.33
=====================================================================================
DILUTED EPS:
Income available to common
shares $ 94 $ 118 $ 90
Dividends on preferred stock 3 4 3
Less: income impact of assumed
conversion of preferred stock (2) (2) (2)
- -------------------------------------------------------------------------------------
Income available to common
shares plus assumed
conversions (numerator) $ 95 $ 120 $ 91
=====================================================================================
Weighted-average common
shares outstanding 67 68 70
Effect of dilutive securities:
Stock-based compensation(a) 6 7 7
- -------------------------------------------------------------------------------------
Adjusted weighted-average
shares (denominator) 73 75 77
=====================================================================================
Diluted EPS $1.31 $1.61 $1.19
=====================================================================================
(a) Options to purchase 1 million shares of common stock with a
weighted-average exercise price of $29.54 were outstanding at September
30, 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.
NOTE M INCOME TAXES
Income before income taxes was as follows:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Domestic $ 40 $ 46 $ 30
Foreign 96 122 87
- --------------------------------------------------------------------------------
Total $136 $168 $117
================================================================================
45
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Taxes on income consisted of the following:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
U.S. FEDERAL AND STATE:
Current $ 12 $ (1) $ 8
Deferred (2) 6 (9)
- --------------------------------------------------------------------------------
Total $ 10 $ 5 $ (1)
================================================================================
FOREIGN:
Current $ 40 $ 50 $ 47
Deferred (1) 5 (4)
- --------------------------------------------------------------------------------
Total $ 39 $ 55 $ 43
================================================================================
Total U.S. and foreign $ 49 $ 60 $ 42
================================================================================
The provision for income taxes at Cabot's effective tax rate differed from
the provision for income taxes at the statutory rate as follows:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Computed tax expense at the
federal statutory rate $ 47 $ 59 $ 41
FOREIGN INCOME:
Impact of taxation at different
rates, repatriation and other 3 3 1
Impact of foreign losses for
which a current tax benefit
is not available 4 4 4
State taxes, net of federal effect 1 1 1
Foreign sales corporation (2) (2) (1)
U.S. and state benefits from research
and experimentation activities (3) (4) (1)
Other, net (1) (1) (3)
- --------------------------------------------------------------------------------
Provision for income taxes $ 49 $ 60 $ 42
================================================================================
Significant components of deferred income taxes were as follows:
SEPTEMBER 30 1999 1998
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
DEFERRED TAX ASSETS:
Depreciation and amortization $ 41 $ 30
Pension and other benefits 60 57
Environmental matters 14 13
Special charges 12 5
Investments 11 11
State and local taxes 4 4
Net operating loss and other
tax carryforwards 16 12
Other 29 32
- --------------------------------------------------------------------------------
Subtotal 187 164
- --------------------------------------------------------------------------------
Valuation allowances (18) (11)
================================================================================
Total deferred tax assets $ 169 $ 153
===============================================================================
DEFERRED TAX LIABILITIES:
Depreciation and amortization $ 83 $ 79
Pension and other benefits 14 14
Special charges 4 --
Investments 2 11
Other 112 112
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 215 $ 216
================================================================================
The valuation allowance at September 30, 1999 and 1998 represents
management's best estimate of the ultimate realization of the net deferred tax
amounts. The deferred tax valuation allowance increased in 1999 by $7 million
due to the uncertainty of the ultimate realization of certain future foreign tax
benefits and net operating losses reflected as deferred tax assets.
Approximately $53 million of net operating losses and other tax
carryforwards remain at September 30, 1999. Of this amount, $36 million will
expire in the years 2000 through 2006; $17 million can be carried forward
indefinitely. The benefits of these carryforwards are dependent upon taxable
income during the carryforward period in those foreign jurisdictions where they
arose. 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.
Other accrued liabilities include a U.S. and foreign income tax benefit of
$15 million for 1999, and a U.S. and foreign income tax liability of $1 million
for 1998.
U.S. 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.
46
27
Provisions have not been made for U.S. income taxes or foreign withholding
taxes on approximately $130 million of undistributed earnings of foreign
subsidiaries, as these earnings are considered indefinitely reinvested. These
earnings could become subject to U.S. income taxes and foreign withholding taxes
(subject to a reduction for foreign tax credits) if they were remitted as
dividends, were loaned to Cabot or a U.S. subsidiary, or if Cabot should sell
its stock in the subsidiaries. However, Cabot 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 N SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------------------------------------------
Cash payments for interest and taxes were as follows:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
Income taxes paid $ 59 $ 41 $ 66
Interest paid $ 36 $ 40 $ 39
================================================================================
During 1999, Cabot made a charitable contribution of equity securities
worth $1 million and issued restricted stock for notes receivable of $8 million.
NOTE O COMMITMENTS & CONTINGENCIES
- --------------------------------------------------------------------------------
LEASE COMMITMENTS
Cabot leases certain transportation vehicles, warehouse facilities, office
space, machinery, and equipment under operating cancelable and non-cancelable
leases, most of which expire within ten years and may be renewed by Cabot.
Rent expense under such arrangements for 1999, 1998 and 1997, totaled $14
million, $15 million and $15 million, respectively. Future minimum rental
commitments under non-cancelable leases are as follows:
- --------------------------------------------------------------------------------
DOLLARS IN MILLIONS
2000 $ 12
2001 16
2002 12
2003 12
2004 12
2005 and thereafter 76
- --------------------------------------------------------------------------------
Total future minimum rental commitments $ 140
================================================================================
OTHER LONG-TERM COMMITMENTS
Cabot has entered into long-term purchase agreements for various key raw
materials. The purchase commitments covered by these agreements aggregate
approximately $114 million for the periods 2000 to 2003.
Cabot has also entered into a purchase agreement for liquefied natural gas
("LNG") that expires in 2003. The purchase commitments covered by this agreement
have a firm take provision of nine LNG cargoes per winter season at current
prices subject to the supplier's shipping capacity. Cabot has entered into a
second long-term agreement with a liquefaction plant in Trinidad to purchase LNG
whereby the purchase commitments have a firm take provision of up to
approximately 30 LNG cargoes per year at current prices expiring in 2019.
During 1995, Cabot entered into an agreement 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, 1999, Cabot's investment in
this project was approximately $21 million and is included in other investments.
Deliveries of liquefied natural gas from Trinidad commenced in the third quarter
of 1999.
Also during 1995, Cabot 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.
CONTINGENCIES
Cabot 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, 1999, Cabot has approximately $39 million reserved for
environmental matters primarily related to divested businesses. The amount
represents Cabot'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. Cabot
reviews the adequacy of this reserve as circumstances change at individual
sites. Cabot is unable to reasonably estimate the amount of possible loss in
excess of the accrued amount. Operating results included charges for
environmental expense of $4 million for both 1999 and 1998. There were no
charges for 1997.
47
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the opinion of Cabot, although final disposition of these suits and
claims may impact Cabot's financial statements in a particular period, they will
not, in the aggregate, have a material adverse effect on Cabot's financial
position.
Cabot is contingently liable under a limited guarantee of its proportionate
share for the project financing of the liquefaction plant in Trinidad. The plant
began commercial production in August 1999, however, Cabot's guarantee will not
expire until the plant's debt reserve fund reaches a predetermined level and the
plant meets production quotas for 90 consecutive days. The plant is expected to
meet both of these requirements no later than the first calendar quarter of
2000. At September 30, 1999, approximately $570 million was outstanding under
the joint venture's debt agreement. Cabot's 10% share amounted to $57 million.
NOTE P RISK MANAGEMENT
- --------------------------------------------------------------------------------
Cabot Corporation is a global company divided into five reportable segments. The
Chemicals Group, Performance Materials, Specialty Fluids and Microelectronics
Materials segments manufacture, market, and distribute commodity and specialty
chemicals and materials. 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, Cabot's Liquefied Natural Gas segment
operates a liquefied natural gas importing, storing, and distribution business
serving markets that include gas and electric utilities, natural gas marketers,
and independent power producers. In total, Cabot and its affiliates operate 45
plants in over 20 countries.
MARKET RISK
Cabot uses derivative financial instruments primarily to reduce exposure to
fluctuations in interest rates, foreign exchange rates, commodity prices, and
other market risks. When entered into, these financial instruments are
designated as hedges of underlying exposures associated with specific assets,
liabilities, firm commitments or anticipated transactions, 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 Cabot through its use of derivatives. The amounts
exchanged are calculated by reference to the notional amounts and by other terms
of the derivatives, such as interest rates, exchange rates, commodity prices, or
other financial indices.
Counter-parties to the derivative agreements expose Cabot to credit loss in
the event of nonperformance. However, Cabot has established counter-party credit
guidelines and only enters into transactions with financial institutions of
investment grade or better. Cabot 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
Cabot maintains a percentage of fixed and variable rate debt within defined
parameters. Cabot 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 fixed interest rate provided by the swap on variable rate
debt is 7.4%.
During the second quarter of 1999, Cabot settled its LIBOR basket swap. The
loss associated with the settlement was not material. At September 30, 1999 and
1998, the notional principal amounts of the interest rate swap agreements were
$100 million, expiring in 2007, and $150 million, expiring in 2004 and 2007. The
notional amount is the amount used for the calculation of interest payments that
are exchanged over the life of the swap transaction and equal to the amount of
principal exchanged at maturity. For 1999, 1998 and 1997, the gains or losses in
interest income or expense associated with these agreements were immaterial. The
fair value of the swaps was $(4) million and $(18) million as of September 30,
1999 and 1998, respectively.
FOREIGN CURRENCY
Cabot's international operations are subject to certain opportunities and risks,
including currency fluctuations and government actions. Cabot closely monitors
its operations in each country so it can respond to changing economic and
political environments and to fluctuations in foreign currencies. Accordingly,
Cabot utilizes foreign currency option contracts and forward contracts to hedge
its exposure on firm commitments and anticipated transactions, primarily for
receivables and payables denominated in currencies other than the entities'
functional currencies. Cabot 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.
48
29
Cabot has foreign currency instruments primarily denominated in the EURO,
Japanese yen, British pound sterling, Swedish krona, Canadian dollar, and
Australian dollar. At September 30, 1999 and 1998, Cabot had $95 million and $72
million in foreign currency instruments outstanding, respectively. For 1999,
1998 and 1997, the net realized gains or (losses) associated with these types of
instruments were $(3) million, $2 million and $5 million, respectively. The net
unrealized loss as of September 30, 1999, and net unrealized gain as of
September 30, 1998, based on the fair market value of the instruments, were not
material to each respective period.
COMMODITIES
Cabot is exposed to commodity price fluctuations that can affect its sales
revenues and supply costs. Cabot, from time to time, enters into commodity
futures contracts, commodity price swaps, and/or option contracts to hedge a
portion of firmly committed and anticipated transactions against natural gas
price fluctuations. Cabot monitors its exposure to ensure overall effectiveness
of its hedge positions.
At September 30, 1998, the notional principal amounts of futures contracts
were $6 million, maturing through February 1999. These contracts were executed
on September 30, 1998, therefore, no gain or loss, realized or unrealized, was
recorded in 1998. In 1999, Cabot realized gains associated with these futures of
$2 million. During 1999, Cabot entered into option contracts that also expired
during the year. Cabot realized losses associated with these options of $2
million.
At September 30, 1999, the notional principal amounts for commodity futures
contracts, commodity price swaps, and option contracts were $115 million,
maturing through August 2000. No material realized gain or loss was recognized
in 1999.
CONCENTRATION OF CREDIT
Financial instruments that subject Cabot to concentrations of credit risk
consist principally of trade receivables. Tire manufacturers comprise a
significant portion of Cabot's trade receivable balance. At September 30, 1999
and 1998, Cabot had trade receivables of approximately $55 million and $54
million, respectively, from tire manufacturers. Although Cabot's exposure to
credit risk associated with nonpayment by tire manufacturers is affected by
conditions or occurrences within the tire industry, the majority of trade
receivables from the tire manufacturers were current at September 30, 1999, and
no such manufacturer exceeded 5% of Cabot's receivables at that date.
NOTE Q FINANCIAL INFORMATION BY SEGMENT & GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
SEGMENT INFORMATION
During 1999, Cabot reorganized into 19 market-focused strategic business units
("SBUs"), each having responsibility for individual global marketing strategies,
day-to-day business operations, and new product development. Under SFAS No. 131,
these SBUs aggregate into five reportable segments: Chemicals Group (which
includes carbon black, fumed silica, plastics, and inkjet colorants),
Performance Materials, Specialty Fluids, Microelectronics Materials, and
Liquefied Natural Gas. Cabot was organized into SBUs to better direct its
technical strengths and focus on key markets. Cabot's business segment reporting
under SFAS No. 131 is consistent with the changes in its financial reporting
structure incorporated in Cabot's management reporting during 1999. Segment
information for 1998 and 1997 has been restated to conform to the current
presentation. A description of Cabot's five business segments and their
products, services, and markets served is shown on page 20.
The accounting policies of the segments are the same as those described in
the summary of "Significant Accounting Policies." Exceptions are noted as
follows and are incorporated in the following tables. Revenues from external
customers for certain operating segments within the Chemicals Group include 100%
of equity affiliate sales. Transfers of ore to Performance Materials from
Specialty Fluids are generally valued at market-based prices, and revenues
generated by these transfers are shown as segment revenues from external
customers. Cabot evaluates the performance of its segments and allocates
resources based on segment profit or loss before tax ("PBT"), including equity
in net income of affiliated companies, but excluding special items (Note B),
gains on the sale of equity securities, and foreign currency transaction gains
and losses. Corporate costs, costs related to divested businesses, and interest
expense are not allocated to operating segments. Cash, short-term investments,
investments other than equity basis, income taxes receivable, deferred taxes,
and headquarters' assets are included in Unallocated and Other. Expenditures for
additions to long-lived assets include total equity and other investments
(including available-for-sale securities), property, plant and equipment, and
intangible assets.
49
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial information by segment was as follows:
MICRO-
CHEMICALS PERFORMANCE SPECIALTY ELECTRONICS LIQUEFIED SEGMENT UNALLOCATED
YEARS ENDED SEPTEMBER 30 GROUP MATERIALS FLUIDS MATERIALS NATURAL GAS TOTAL AND OTHER(1)
- ----------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
1999
Revenues from external customers(2) $1,204 $187 $ 12 $96 $265 $1,764 $ (69)
Depreciation and amortization 104 8 4 3 4 123 2
Equity in net income of affiliated companies 8 5 -- -- -- 13 --
Profit (loss) before taxes(3) 188 34 (3) 22 7 248 (112)
Assets(4) 1,244 205 50 70 167 1,736 106
Investment in equity-basis affiliates 52 20 -- -- -- 72 --
Total expenditures for additions to
long-lived assets(5) $ 114 $ 9 $ 3 $17 $ 22 $ 165 $ 7
==================================================================================================================================
1998
Revenues from external customers(2) $1,279 $175 $ 13 $57 $211 $1,735 $ (91)
Depreciation and amortization 100 7 3 2 2 114 1
Equity in net income of affiliated companies 12 5 -- -- -- 17 --
Profit (loss) before taxes(3) 221 25 (2) 9 15 268 (100)
Assets(4) 1,242 207 39 45 139 1,672 133
Investment in equity-basis affiliates 75 15 -- -- 1 91 --
Total expenditures for additions to
long-lived assets(5) $ 156 $ 11 $ 4 $ 9 $ 44 $ 224 $ 23
==================================================================================================================================
1997
Revenues from external customers(2) $1,326 $153 $ 11 $34 $200 $1,724 $ (99)
Depreciation and amortization 97 6 2 2 2 109 1
Equity in net income of affiliated companies 18 2 -- -- -- 20 --
Profit (loss) before taxes(3) 209 16 (4) 1 7 229 (112)
Assets(4) 1,252 202 31 31 96 1,612 214
Investment in equity-basis affiliates 71 15 -- -- -- 86 --
Total expenditures for additions to
long-lived assets(5) $ 133 $ 13 $ 14 $ 2 $ 7 169 $ 12
==================================================================================================================================
CONSOLIDATED
YEARS ENDED SEPTEMBER 30 TOTAL
- -------------------------------------------------------------
DOLLARS IN MILLIONS
1999
Revenues from external customers(2) $1,695
Depreciation and amortization 125
Equity in net income of affiliated companies 13
Profit (loss) before taxes(3) 136
Assets(4) 1,842
Investment in equity-basis affiliates 72
Total expenditures for additions to
long-lived assets(5) $ 172
=============================================================
1998
Revenues from external customers(2) $1,644
Depreciation and amortization 115
Equity in net income of affiliated companies 17
Profit (loss) before taxes(3) 168
Assets(4) 1,805
Investment in equity-basis affiliates 91
Total expenditures for additions to
long-lived assets(5) $ 247
=============================================================
1997
Revenues from external customers(2) $1,625
Depreciation and amortization 110
Equity in net income of affiliated companies 20
Profit (loss) before taxes(3) 117
Assets(4) 1,826
Investment in equity-basis affiliates 86
Total expenditures for additions to
long-lived assets(5) $ 181
=============================================================
(1) Unallocated and Other includes certain corporate items and eliminations
that are not allocated to the operating segments.
(2) Revenues from external customers for certain operating segments within
Chemicals Group include 100% of equity affiliate sales. Specialty Fluids
sales include transfers of ore to Performance Materials at market-based
prices. Unallocated and Other reflects an adjustment for these equity
affiliate sales and interoperating segment revenues and includes royalties
paid by equity affiliates:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------
Equity affiliate sales $ (69) $ (92) $ (103)
Royalties paid by equity affiliates 7 8 10
Interoperating segment revenues (7) (7) (6)
- --------------------------------------------------------------------------------
Total $ (69) $ (91) $ (99)
================================================================================
(3) Profit or loss before taxes for Unallocated and Other includes:
YEARS ENDED SEPTEMBER 30 1999 1998 1997
- --------------------------------------------------------------------------------------
Interest expense $ (46) $ (42) $ (43)
Gain on sale of equity securities 10 90 --
Corporate governance costs/other expenses, net(a) (32) (31) (27)
Costs related to divested businesses -- (5) --
Corporate expenses incurred on behalf of the segments (4) (7) (2)
Equity in net income of affiliated companies (13) (17) (20)
Foreign currency transaction gains (losses)(b) (1) (3) (2)
Special charges (Note B) (26) (85) (18)
- --------------------------------------------------------------------------------------
Total $(112) $(100) $(112)
======================================================================================
(a) Corporate governance costs/other expenses, net, includes corporate
headquarters costs reduced by investment income.
(b) Net of other hedging activity.
(4) Unallocated and Other assets include cash, short-term investments,
investments other than equity basis, income taxes receivable, deferred
taxes, and headquarters' assets.
(5) Expenditures for additions to long-lived assets include total equity and
other investments (including available-for-sale securities), property,
plant and equipment, and intangible assets.
50
31
GEOGRAPHIC AREA INFORMATION
Sales are attributed to the United States and to all foreign countries based on
customer location (region of sale) and not on the geographic location from which
goods were shipped (region of manufacture). Revenues from external customers
attributable to an individual country, other than the United States, were not
material for disclosure. The only other country, besides the United States, with
material long-lived assets was Indonesia, with approximately 4%, 5% and 11% of
Cabot's total in 1999, 1998 and 1997, respectively. No customer represents 10%
or more of Cabot's revenues.
Revenues from external customers and long-lived asset information by
geographic area are summarized as follows:
YEARS ENDED SEPTEMBER 30 UNITED STATES ALL FOREIGN COUNTRIES CONSOLIDATED TOTAL
- ----------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
1999
Revenues from external customers $ 883 $812 $ 1,695
Long-lived assets(1) 525 638 1,163
==============================================================================================
1998
Revenues from external customers $ 787 $857 $ 1,644
Long-lived assets(1) 515 650 1,165
==============================================================================================
1997
Revenues from external customers $ 727 $898 $ 1,625
Long-lived assets(1) 568 626 1,194
==============================================================================================
(1) Long-lived assets include total equity and other investments, (including
available-for-sale securities), net property, plant and equipment, and net
intangible assets.
NOTE R UNAUDITED QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Unaudited financial results, by quarter for the fiscal years ended September 30,
1999 and 1998, are summarized below and should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Certain 1999 and 1998 items have been reclassified to reflect global
changes in Cabot's organization during the year.
DECEMBER MARCH JUNE SEPTEMBER YEAR
- -------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
FISCAL 1999
Net sales $408 $435 $422 $430 $1,695
Cost of sales 277 308 298 330 1,213
Net income 32 33(a) 22(b) 10(c) 97
Income applicable to common shares $ 31 $ 32 $ 22 $ 9 $ 94
========================================================================================================
Income per common share (diluted) $0.43 $0.45 $0.30 $0.13 $ 1.31
========================================================================================================
FISCAL 1998
Net sales $434 $456 $376 $378 $1,644
Cost of sales 306 315 250 262 1,133
Net income 32 38 33(d) 19 122
Income applicable to common shares $ 31 $ 37 $ 32 $ 18 $ 118
- --------------------------------------------------------------------------------------------------------
Income per common share (diluted) $0.41 $0.50 $0.44 $0.26 $ 1.61
========================================================================================================
(a) Includes a $5 million pretax gain from the sale of K N Energy, Inc.
common stock.
(b) Includes a $16 million pretax charge for cost reduction initiatives.
Also includes a $5 million pretax gain from the sale of K N Energy,
Inc. common stock.
(c) Includes a $10 million pretax charge for cost reduction initiatives.
(d) Includes a $60 million pretax asset impairment charge related to an
Indonesian carbon black facility and a $25 million pretax charge
related to a tantalum ore recovery project. Also includes a $90
million pretax gain from the sale of K N Energy, Inc. common stock.
51
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MANAGEMENT RESPONSIBILITY
The accompanying financial statements were prepared by Cabot Corporation in
conformity with generally accepted accounting principles. Cabot'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 its 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 its internal audit staff, independent
accountants, and the Audit Committee of the Board of Directors.
PricewaterhouseCoopers LLP, independent accountants, were engaged by Cabot
to audit these financial statements. Their audit was conducted in accordance
with generally accepted auditing standards and included a study and evaluation
of Cabot'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 Cabot, the Committee meets periodically with Cabot
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 cash flows present fairly, in all material
respects, the financial position of Cabot Corporation and its subsidiaries at
September 30, 1999, and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, 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 25, 1999
52
33
SELECTED FINANCIAL DATA-FIVE YEAR SUMMARY
YEARS ENDED SEPTEMBER 30 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND OTHER DATA
CONSOLIDATED INCOME
Revenues:
Net sales and other operating revenues $ 1,695 $ 1,644 $ 1,625 $ 1,856 $ 1,830
Interest and dividend income 4 5 7 9 11
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,699 1,649 1,632 1,865 1,841
- ------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,213 1,133 1,155 1,310 1,259
Selling and administrative expenses 208 216 204 207 235
Research and technical service 73 80 80 79 59
Interest expense 46 42 43 42 36
Special items 26 85 18 -- --
Gain on sale of assets (10) (90) -- (67) (33)
Other charges, net 7 15 15 14 29
- ------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,563 1,481 1,515 1,585 1,585
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 136 168 117 280 256
Provision for income taxes (49) (60) (42) (98) (101)
Equity in net income of affiliated companies 13 17 20 18 17
Minority interest in net income (3) (3) (2) (6) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 97 $ 122 $ 93 $ 194 $ 172
==============================================================================================================================
COMMON SHARE DATA
Net income $ 1.31 $ 1.61 $ 1.19 $ 2.42 $ 2.03
Dividends 0.44 0.42 0.40 0.36 0.30
Stock prices - High 31.69 39.94 29.38 31.38 28.94
Low 19.75 21.75 21.50 22.88 12.82
Close 23.75 24.94 26.94 27.88 26.57
Average shares outstanding - millions 73 75 77 79 84
Shares outstanding at year-end - millions 67 67 69 72 75
CONSOLIDATED FINANCIAL POSITION
Total current assets $ 659 $ 619 $ 613 $ 710 $ 678
Net property, plant and equipment 1,024 978 922 903 707
Other assets 159 208 291 244 269
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,842 $ 1,805 $ 1,826 $ 1,857 $ 1,654
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities $ 450 $ 536 $ 543 $ 528 $ 403
Long-term debt 419 316 286 322 306
Other long-term liabilities 267 247 269 262 260
Stockholders' equity 706 706 728 745 685
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,842 $ 1,805 $ 1,826 $ 1,857 $ 1,654
- ------------------------------------------------------------------------------------------------------------------------------
Working capital $ 209 $ 83 $ 70 $ 182 $ 275
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Income as a percentage of sales 6% 7% 6% 11% 9%
Return on average stockholders' equity 13% 16% 12% 28% 26%
Net debt to capitalization ratio 44% 43% 43% 40% 29%
==============================================================================================================================
53