<PAGE> 1
FORM 10-Q
---------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
DECEMBER 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2271897
(State of Incorporation) (I.R.S. Employer Identification No.)
75 STATE STREET 02109-1806
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 345-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF FEBRUARY 5, 1999, THE COMPANY HAD 66,685,721 SHARES OF COMMON STOCK, PAR
VALUE $1 PER SHARE, OUTSTANDING.
<PAGE> 2
CABOT CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997 3
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1998 and 1997 6
Consolidated Statement of Changes in Stockholders'
Equity Three Months Ended December 31, 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
- 2 -
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Net sales and other operating revenues .......... $409.0 $435.4
Interest and dividend income .................... 1.3 1.6
------ ------
Total revenues ................................ 410.3 437.0
------ ------
Costs and expenses:
Cost of sales ................................... 272.8 302.2
Selling and administrative expenses ............. 58.4 55.9
Research and technical service .................. 19.5 18.8
Interest expense ................................ 10.9 11.4
Other charges, net .............................. 0.7 3.4
------ ------
Total costs and expenses ...................... 362.3 391.7
------ ------
Income before income taxes ......................... 48.0 45.3
Provision for income taxes ......................... (17.3) (16.3)
Equity in net income of affiliated companies ....... 2.0 3.0
Minority interest in income ........................ (0.9) (0.5)
------ ------
Net income ......................................... 31.8 31.5
Dividends on preferred stock, net of tax
benefit of $0.5 and $0.5 ........................ (0.8) (0.8)
------ ------
Income applicable to common shares ................. $ 31.0 $ 30.7
====== ======
Weighted average common shares outstanding (Note G):
Basic ........................................... 64.6 66.1
====== ======
Diluted ......................................... 73.5 75.3
====== ======
Income per common share (Note G):
Basic ........................................... $ 0.48 $ 0.46
====== ======
Diluted ......................................... $ 0.43 $ 0.41
====== ======
Dividends per common share ......................... $ 0.11 $ 0.10
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE> 4
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and September 30, 1998
(Dollars in millions, except share amounts)
ASSETS
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 19.3 $ 39.6
Accounts and notes receivable (net of reserve
for doubtful accounts of $5.2 and $4.6) ........ 321.3 284.3
Inventories:
Raw materials .................................. 79.0 68.2
Work in process ................................ 59.6 62.9
Finished goods ................................. 96.8 76.1
Other .......................................... 48.2 43.9
-------- --------
Total inventories ............................ 283.6 251.1
Prepaid expenses ................................. 27.7 26.1
Deferred income taxes ............................ 17.0 17.8
-------- --------
Total current assets ............................... 668.9 618.9
-------- --------
Investments (Note B):
Equity ........................................... 74.4 91.1
Other ............................................ 66.3 72.5
-------- --------
Total investments ............................ 140.7 163.6
-------- --------
Property, plant and equipment ...................... 2,012.3 1,914.3
Accumulated depreciation and amortization .......... (974.5) (936.3)
-------- --------
Net property, plant and equipment ................ 1,037.8 978.0
-------- --------
Other assets:
Intangible assets, net of amortization (Note B) .. 24.9 24.2
Deferred income taxes ............................ 3.9 3.9
Other assets ..................................... 18.2 16.6
-------- --------
Total other assets ........................... 47.0 44.7
-------- --------
Total assets ....................................... $1,894.4 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE> 5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and September 30, 1998
(Dollars in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31 September 30
1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to banks .......................... $ 242.1 $ 253.3
Current portion of long-term debt ............... 11.5 11.4
Accounts payable and accrued liabilities ........ 234.2 268.2
U.S. and foreign income taxes payable ........... 8.9 0.4
Deferred income taxes ........................... 3.0 3.0
-------- --------
Total current liabilities ..................... 499.7 536.3
-------- --------
Long-term debt ..................................... 426.8 316.3
Deferred income taxes .............................. 78.8 82.4
Other liabilities .................................. 154.4 139.6
Commitments and contingencies (Note F) ............. -- --
Minority interest .................................. 32.5 25.1
Stockholders' Equity (Note H):
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 $66.5 and $67.4) ..................... 75.3 75.3
Less cost of preferred treasury stock .............. (14.3) (13.6)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 66,411,467 and 67,241,624 shares ........ 66.4 67.2
Additional paid-in capital ......................... -- 4.9
Retained earnings .................................. 676.7 671.7
Unearned compensation .............................. (23.0) (26.2)
Deferred employee benefits ......................... (60.1) (60.6)
Accumulated other comprehensive income (Note C) .... (18.8) (13.2)
-------- --------
Total stockholders' equity ......................... 702.2 705.5
-------- --------
Total liabilities and stockholders' equity ......... $1,894.4 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE> 6
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, 1998 and 1997
(Dollars in millions)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 31.8 $ 31.5
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization .......................... 30.4 29.5
Deferred tax expense (benefit) ......................... 0.8 (0.2)
Equity in income of affiliated companies,
net of dividends received ............................ (0.9) (1.0)
Other, net ............................................. 3.3 2.8
Changes in assets and liabilities, net of the effect of
acquisitions and the consolidation of equity affiliates:
Increase in accounts receivable ........................ (26.0) (33.5)
Increase in inventory .................................. (26.2) (15.1)
Decrease in accounts payable and accruals .............. (42.6) (8.5)
Increase in prepayments and intangible assets .......... (4.2) (17.1)
Increase in income taxes payable ....................... 8.3 9.7
Increase in other liabilities .......................... 12.7 4.7
Other, net ............................................. (0.7) (0.5)
------ -------
Cash provided (used) by operating activities ............. (13.3) 2.3
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ............... (55.9) (30.6)
Investments and acquisitions ............................. (4.1) (24.1)
Other .................................................... 7.9 2.4
------ -------
Cash used by investing activities ...................... (52.1) (52.3)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ............................. 100.0 62.6
Repayments of long-term debt ............................. (2.2) (114.8)
Increase (decrease) in short-term debt ................... (19.4) 152.7
Purchases of preferred and common stock .................. (26.1) (45.0)
Sales and issuances of preferred and common stock ........ 0.8 1.3
Cash dividends paid to stockholders ...................... (8.1) (7.6)
------ -------
Cash provided by financing activities .................. 45.0 49.2
------ -------
Effect of exchange rate changes on cash ..................... 0.1 (0.5)
------ -------
Decrease in cash and cash equivalents ....................... (20.3) (1.3)
Cash and cash equivalents at beginning of period ............ 39.6 39.2
------ -------
Cash and cash equivalents at end of period .................. $ 19.3 $ 37.9
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE> 7
CABOT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended December 31, 1998
(Dollars in millions)
<TABLE>
<CAPTION>
Preferred Additional
Preferred Treasury Common Paid-in Retained
Stock Stock Stock Capital Earnings
--------- --------- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998: ............. $75.3 $(13.6) $67.2 $4.9 $671.7
Net income ................................. 31.8
Common dividends paid ...................... (7.3)
Issuance of stock under employee
compensation plans ....................... 0.1 0.9
Purchase and retirement of common stock ... (0.9) (5.8) (18.7)
Purchase of treasury stock - preferred ..... (0.7)
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax ......... (0.8)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan .....
Amortization of unearned compensation.......
Unrealized loss on available-for-sale
securities, net of deferred tax of $2.9....
Foreign currency translation adjustments....
----- ------ ----- ---- ------
Balance at December 31, 1998 ............... $75.3 $(14.3) $66.4 $0.0 $676.7
===== ====== ===== ==== ======
<CAPTION>
Unearned Deferred Accumulated Other Comprehensive
Compensation Employee Benefits Comprehensive Income Income (Note C)
------------ ----------------- -------------------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998: ............. $(26.2) $(60.6) $(13.2)
Net income ................................. $31.8
Common dividends paid ......................
Issuance of stock under employee
compensation plans ....................... (0.2)
Purchase and retirement of common stock ....
Purchase of treasury stock - preferred .....
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax .........
Principal payment by Employee Stock
Ownership Plan under guaranteed loan ..... 0.5
Amortization of unearned compensation ...... 3.4
Unrealized loss on available-for-sale
securities, net of deferred tax of $2.9 ... (5.9) (5.9)
Foreign currency translation adjustments ... 0.3 0.3
------ ------ ------ -----
Balance at December 31, 1998 ............... $(23.0) $(60.1) $(18.8) $26.2
====== ====== ====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 7 -
<PAGE> 8
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cabot
Corporation and majority-owned and controlled U.S. and non-U.S.
subsidiaries (the "Company"). Investments in majority-owned affiliates
where control does not exist and investments in 20 percent to 50
percent owned affiliates are accounted for on the equity method.
Intercompany transactions have been eliminated.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all
disclosures required by Form 10-K. Additional information may be
obtained by referring to the Company's Form 10-K for the year ended
September 30, 1998.
The financial information submitted herewith is unaudited and reflects
all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results for the interim periods ended
December 31, 1998 and 1997. All such adjustments are of a normal
recurring nature. The results for interim periods are not necessarily
indicative of the results to be expected for the fiscal year.
B. BUSINESS DEVELOPMENTS
On November 14, 1995, the Company modified its existing joint venture
agreement for its carbon black venture in Shanghai, China. This
amendment provided for the expansion of the facility and the increase
of the Company's ownership interest to 70%, to take effect as the
expansion is funded. As of October 1, 1998 the Company began accounting
for this venture on a consolidated basis.
C. COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). The adoption of this Statement had no impact on net income
or stockholders' equity. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components.
Accumulated Other Comprehensive Income which is disclosed in the
stockholders' equity section of the consolidated balance sheet includes
unrealized gains or losses on available-for-sale securities and
translation adjustments on investments in foreign subsidiaries. Prior
to the adoption of SFAS No. 130, the Company reported such unrealized
gains or losses and translation adjustments separately in the
stockholders' equity section of the consolidated balance sheet. Amounts
in the prior year financial statements have been reclassified to
conform to SFAS No. 130.
- 8 -
<PAGE> 9
D. SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board ("FASB") issued
a new Statement, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes new requirements
for the reporting of segment information by public companies. It
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, and is effective for the annual financial statements of
fiscal years beginning after December 15, 1997. The new framework for
segment reporting is referred to as the management approach. It is
intended to give analysts and other financial-statement users a view of
the company "through the eyes of management", by looking to a company's
internal management reporting structure as the basis for determining
the company's external segments, as well as the basis for determining
the information that is to be disclosed for those segments. The Company
is currently assessing the impact this Statement will have on the
consolidated financial statements.
E. RECLASSIFICATION
Certain amounts were reclassified in fiscal year 1998 to reflect
changes in the Company's organization during the year.
F. CONTINGENCIES
The Company is a defendant, or potentially responsible party, in
various lawsuits and environmental proceedings wherein substantial
amounts are claimed or at issue. In the opinion of the Company,
although final disposition of all of its suits and claims may impact
the Company's financial statements in a particular period, they should
not, in the aggregate, have a material adverse effect on the Company's
financial position.
- 9 -
<PAGE> 10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1998
UNAUDITED
G. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the
three months ended December 31, 1998 and 1997 as follows (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator)... $31.0 $30.7
===== =====
Weighted-average common shares outstanding ..... 67.1 68.5
Less: Contingently issuable shares ............ (2.5) (2.4)
----- -----
Adjusted weighted-average shares (denominator).. 64.6 66.1
===== =====
Basic EPS ...................................... $0.48 $0.46
===== =====
DILUTED EPS
Income available to common shares .............. $31.0 $30.7
Dividends on preferred stock ................... 0.8 0.8
Less: Income effect of assumed conversion of
preferred stock ............................. (0.4) (0.4)
----- -----
Income available to common shares plus
assumed conversions (numerator) ............. $31.4 $31.1
===== =====
Weighted-average common shares outstanding ..... 67.1 68.5
Effect of dilutive securities: Stock-based
compensation ................................ 6.4 6.8
----- -----
Adjusted weighted-average shares (denominator).. 73.5 75.3
===== =====
Diluted EPS .................................... $0.43 $0.41
===== =====
</TABLE>
- 10 -
<PAGE> 11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1998
UNAUDITED
H. SHARES OF STOCK
The following table summarizes the changes in shares of stock for the
three months ended December 31, 1998 (preferred shares in thousands and
common shares in millions):
<TABLE>
<CAPTION>
1998
----
<S> <C>
PREFERRED STOCK
Balance at September 30, 1998............ 75.3
----
Balance at December 31, 1998............. 75.3
====
PREFERRED TREASURY STOCK
Balance at September 30, 1998............ 8.5
Purchased preferred treasury stock....... 0.3
----
Balance at December 31, 1998............. 8.8
====
COMMON STOCK
Balance at September 30, 1998............ 67.2
Issued Common Stock...................... 0.1
Purchased and retired common stock....... (0.9)
----
Balance at December 31, 1998............. 66.4
====
</TABLE>
- 11 -
<PAGE> 12
CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
I. RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 17.
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS
THREE MONTHS ENDED DECEMBER 31, 1997
Net income for the first quarter of fiscal year 1999 was $31.8 million ($0.43
per diluted common share), compared to $31.5 million ($0.41 per diluted common
share) in the same quarter a year ago. Net sales and other operating revenues
decreased 6% to $409.0 million from last year's $435.4 million. Operating
profit was $68.4 million for the quarter compared to $62.9 million in the same
quarter a year ago. The increase in earnings is attributable to improved
performance of the Company's chemical businesses which more than offset a
negative earnings comparison in the Company's liquefied natural gas ("LNG")
business.
Specialty Chemicals and Materials Group sales for the three month periods ended
December 31, 1998 and 1997 amounted to $354.9 million and $362.6 million,
respectively. The reduction in sales primarily reflects lower year-to-year
carbon black selling prices offset by improved volumes in the Company's
Microelectronics Materials ("MMD") business. Overall, Specialty Chemicals and
Materials Group global volumes were flat.
Specialty Chemicals and Materials Group operating profit increased 26% to $65.1
million from $51.5 million in the same quarter last year. Operating profit in
the Company's carbon black business contributed significantly to the improved
performance of the group for the quarter compared to the same quarter last year.
The effects of significantly lower year-to-year feedstock costs were somewhat
offset by lower carbon black selling prices. Cost management efforts and the
reduction in research and development spending in the carbon black business also
contributed incrementally to earnings. In addition, last year's first quarter
included a $4.1 million loss primarily related to the Indonesian economic
crisis. No such loss occurred this year. In total, year-to-year carbon black
volumes were flat.
The Company's MMD business experienced tremendous business growth this quarter
over the year ago quarter. Volume grew in excess of 50% compared with the first
quarter of 1998. Greater sales of new generation slurry products drove the
volume growth and improved MMD's product mix. Additionally, greater plant
utilization contributed to MMD's profitability.
Cabot Performance Materials ("CPM") earned $0.4 million less in operating profit
in the first quarter compared to the same quarter a year ago. The effects of
slightly lower volumes and higher year-to-year tantalum ore costs were offset by
improved production efficiencies and, to a lesser extent, slightly higher
selling prices.
The Company's silicas business reported flat earnings for the first quarter of
1999 versus the first quarter of 1998. The effects of 2% lower volumes and
higher research and development spending about offset lower production costs.
The Plastics business experienced a reduction in volumes for the first quarter
compared to a strong first quarter in fiscal year 1998. Volumes in the first
quarter of last year included sales that were non-recurring in nature (e.g.,
special orders) and sales from some low margin products which have been
de-emphasized during the past year. Excluding these sales, comparable volumes of
core products declined by approximately 8%. Lower volumes were partially offset
by improved margins due primarily to improved product mix.
- 12 -
<PAGE> 13
Research and technical spending for the first quarter of 1999 increased $0.7
million to $19.5 million from $18.8 million for the first quarter of 1998. The
increase reflects increased spending in the Company's MMD and silica new
product development programs, offset somewhat by a reduction in spending in the
Company's carbon black businesses. The Company continues to pursue, and is
encouraged by progress being made in, several of its new product and new
business initiatives. The Company's objective of developing higher value,
differentiated products and creating new businesses is central to its strategy
for generating earnings growth.
In the Energy Group, sales for the first quarter decreased to $54.1 million from
$72.8 million for the same quarter a year ago. The group's operating profit
decreased $8.1 million to $3.3 million, compared with $11.4 million in the first
quarter of 1998. Approximately $5 million of the decrease in operating profit
was attributable to warmer than normal weather and weak natural gas prices.
Additionally, first quarter earnings in 1998 included a $3.2 million contract
revenue payment from the signing of a long-term gas supply contract.
General corporate and other expenses increased by $3.3 million to $9.5 million
in the first quarter of 1999 primarily due to items of a one-time nature. Base
corporate expenses, predominantly driven by headcount, were flat in the first
quarter of 1999 compared to the first quarter of 1998.
The Company's effective tax rate was 36% for the quarters ended December 31,
1998 and 1997.
II. CASH FLOWS AND LIQUIDITY
During the first three months of fiscal year 1999, the Company's operations used
$13.3 million of cash compared to providing $2.3 million during the first three
months of 1998. The change is primarily due to greater working capital needs
during the first three months of fiscal year 1999. Due to the seasonality of
certain of the Company's businesses, working capital needs increase during the
first quarter of each year. This year, in addition to normal seasonality, the
working capital increase reflected the timing of certain payments, weaker
year-to-year economic conditions in the Asia Pacific region and an increase in
inventories of new products in some of the Company's new businesses.
Capital spending for the first three months of the year was $60 million. The
major components for 1999 include new business expansion and normal plant
operating capital projects, the Company's share of the Trinidad LNG project,
refurbishment of the Company's LNG tanker and capacity expansion in the
Company's silica and MMD businesses.
On September 11, 1998, the Company's Board of Directors authorized the
repurchase of 4.0 million shares of the Company's common stock, superceding
prior authorizations. During the first three months of fiscal 1999, the Company
purchased approximately 0.8 million shares of common stock. At December 31,
1998, approximately 2.4 million shares remained under the September 1998
repurchase authorization.
The Company's ratio of total debt (including short-term debt net of cash) to
capital increased from 43% at September 30, 1998 to 47% at the end of the first
quarter of fiscal year 1999.
On September 29, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission (SEC) for up to $500 million of debt
securities that the Company may issue from time to time. The SEC declared the
registration statement effective on October 13, 1998.
- 13 -
<PAGE> 14
In December 1998, the Company issued $100 million of medium-term notes. The
notes mature as follows: $40 million matures in 2 years, $30 million matures in
7 years and $30 million matures in 20 years. The notes have a weighted average
interest of 6.6%. Proceeds from the issuance were used to reduce short-term
debt.
The Company maintains a credit agreement under which it may borrow up to $300
million at floating rates. The facility is available through January 3, 2002.
The Company had no borrowings outstanding under this agreement at December 31,
1998. Management expects cash from operations and present financing
arrangements, including the Company's unused line of credit and shelf
registration, to be sufficient to meet the Company's cash requirements for the
foreseeable future.
III. YEAR 2000 READINESS DISCLOSURE
The Company's Year 2000 plan has three areas of key focus and is overseen by an
Executive Steering Committee. A Program Management Office has been established
to coordinate the Year 2000 efforts with regional teams in Asia Pacific, Europe,
North America, and South America. These teams have been in place and working for
more than a year. The Company's Year 2000 efforts are proceeding on schedule.
1. The first area of key focus is the Company's core business systems software,
PC hardware and desktop software, and manufacturing plant devices and
software. The Company's plan with respect to this area includes the inventory
of all core business systems, PC hardware and desktop software, and plant
devices 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 as required; testing and placement
into an operational state; and developing contingency plans. The current
status and plans for each component of this area are as follows:
- Core Business Systems: This component includes all software and hardware
systems that record relevant data for business operations and summarize
revenue, cost, cash flows, capital, and other information. The Company has
completed the inventory for core business systems. The Company's assessment
indicates that, as a result of investments in significant global business
system renewals during the past several years as well as ongoing efforts,
the Company's core business systems are expected to be Year 2000 ready.
Current global business system renewal projects include the rollout of
AspenTech's manufacturing production support systems, an upgrade to
PeopleSoft Human Resources/Payroll in North America, the migration of the
Company's Asia Pacific and plastics manufacturing facilities to JDEdwards
software, and the migration of the Company's European facilities to
JDEdwards and Marcam suites of business software. Testing of all core
business systems is expected to occur during the third quarter of fiscal
year 1999.
- PC Hardware and Desktop Software: Dates have been established for each
phase of work to inventory, assess, test, and upgrade PC hardware and
software. The Company expects to complete the inventory, assessment, and
testing phase during the second quarter of fiscal year 1999. Replacement or
repair of desktop and mission critical software is ongoing and expected to
be completed by the third quarter of fiscal year 1999.
- 14 -
<PAGE> 15
- Manufacturing Plant Devices and Software: Dates have been established for
each phase of work to inventory, assess, test, and upgrade manufacturing
plant hardware and software. The Company expects to complete the inventory,
assessment and testing phase during the second quarter of fiscal year 1999.
Replacement or repair of manufacturing plant hardware and software is
ongoing and expected to be completed by third quarter of fiscal year 1999.
Final testing in all manufacturing facilities is expected to be completed
during normal plant shutdowns in the fourth quarter of fiscal year 1999.
2. The second area of key focus is the Company's suppliers. This includes
identifying key suppliers whose supply disruption would have an adverse
impact on the Company's ability to produce and ship product, working with
these suppliers to decrease the chances that supply will be disrupted,
identifying alternative sources or contingency plans as needed, and
attempting to include in all purchase contracts language providing that
purchased products and services are Year 2000 compliant. Even in cases where
the Company has received assurances that delays or disruption will not be
encountered by third parties, the Company is not in a position to determine
with certainty whether the assurances will prove accurate, given the
uncertainties associated with the Year 2000. The current status and plans for
this area are as follows:
- Key suppliers have been identified and classified. Contact with mission
critical suppliers and review of their evaluations are expected to be
completed by the third quarter of fiscal year 1999. The development of
contingency plans is expected to be completed by the fourth quarter of
fiscal year 1999.
3. The final area of key focus is internal and external communications, and
includes ongoing status reporting to the Company's management, coordinated
responses to external customer requests for information on the Company's Year
2000 status, and timely delivery of information on Year 2000 to Company
employees worldwide. The current status and plans for this area are as
follows:
- An internal status reporting mechanism is in place. Coordinated responses
are being delivered to key customers. An employee awareness program will
continue throughout 1999.
Overall, the Company has established a goal to complete most activities related
to mission critical core business systems, PC hardware and desktop software, and
manufacturing plant devices and software by the end of the third quarter of
fiscal year 1999. Testing at some manufacturing facilities will occur during
normal plant shutdowns between the months of June and September, 1999. Work with
suppliers, contingency planning, and ongoing communications will continue
throughout fiscal year 1999.
The Company does not believe that the cost of implementing system and program
changes necessary to address Year 2000 issues will have a material effect on the
Company's results of operations or financial condition. The Company has
identified Year 2000 expenses as costs incurred specifically to modify hardware
or software to be Year 2000 compliant where such modifications do not add any
other functionality. The vast majority of the Company's projects currently in
progress is part of the Company's ongoing global business system renewal
initiatives. The Company does recognize that a benefit of these initiatives will
be Year 2000 compliance. However, these initiatives are not underway primarily
for Year 2000 compliance and therefore are not treated as Year 2000 costs.
Through the end of the first quarter of fiscal year 1999, the Company has
recognized cumulative direct Year 2000 costs of approximately $1 million. The
Company expects to spend approximately $2 million during fiscal year 1999 on
direct Year 2000 remediation efforts in addition to the global business system
renewal efforts. There can be no assurance that there will not be increased
costs associated with the implementation of such changes.
- 15 -
<PAGE> 16
The current status and plans represent the Company's expectations based on
current Year 2000 plans and work progress. However, there is no assurance that
such expectations will be realized. While the Company believes that prudent
steps have been taken to assure that there is an effective program to address
the Year 2000 issue, the Company cannot guarantee that all Year 2000 errors will
be corrected or that the information systems will not generate Year 2000 errors
when operating with third party computer systems or data.
The Company cannot predict reliably the source, nature, or extent of any Year
2000 disruptions that may be experienced in the U.S. or other countries where it
operates and, therefore, cannot predict reliably the effect any such disruptions
may have on the Company, its operations or financial condition. The Company does
not know what is the most likely "worse case scenario" as a result of Year 2000
disruptions, but believes that the effects on the Company are not substantially
different from those facing industry generally. The Company believes that the
most likely causes of disruption are one or more of the following: disruptions
in the banking system, disruptions in the supply of electricity to the Company's
plants that could delay production of the Company's products, and disruptions in
transportation services that could delay shipments from the Company's suppliers
or to the Company's customers. In addition, the Company does not know whether
any of its customers will experience Year 2000 disruptions, either directly or
as a result of disruptions in their customers' businesses or in the economy
generally, but any such disruptions might reduce demand for the Company's
products and adversely affect the Company. At this time, however, the Company
believes that if none of the third parties with which it deals, directly or
indirectly, experience disruptions or delays related to the Year 2000 problem,
it will be able to continue to operate with little or no disruption or delay.
- 16 -
<PAGE> 17
CABOT CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Three Months Ended December 31
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------ ------
Industry Segment Data
- ---------------------
<S> <C> <C>
Net Sales:
Specialty chemicals and materials ............. $354.9 $362.6
Energy ........................................ 54.1 72.8
------ ------
Net sales .................................... $409.0 $435.4
====== ======
Operating profit:
Specialty chemicals and materials ............. $ 65.1 $ 51.5
Energy ........................................ 3.3 11.4
------ ------
Total operating profit ....................... 68.4 62.9
Interest expense ................................ (10.9) (11.4)
General corporate/other expenses ................ (9.5) (6.2)
------ ------
Income before income taxes ...................... 48.0 45.3
Provision for income taxes ...................... (17.3) (16.3)
Equity in net income of affiliated companies .... 2.0 3.0
Minority interest in income ..................... (0.9) (0.5)
------ ------
Net income ...................................... 31.8 31.5
Dividends on preferred stock .................... (0.8) (0.8)
------ ------
Income applicable to common shares .............. $ 31.0 $ 30.7
====== ======
Income per common share:
Basic ........................................ $ 0.48 $ 0.46
====== ======
Diluted ...................................... $ 0.43 $ 0.41
====== ======
</TABLE>
FORWARD LOOKING INFORMATION: Included herein are statements relating to
management's projections of future profits, the possible achievement of the
Company's financial goals and objectives, management's expectations for the
Company's product development programs and Year 2000 risks. Actual results may
differ materially from the results anticipated in the statements included herein
due to a variety of factors, including market supply and demand conditions,
fluctuations in currency exchange rates, cost of raw materials, patent rights of
others, Year 2000 disruptions, demand for our customers' products and
competitors' reactions to market conditions. Timely commercialization of
products under development by the Company may be disrupted or delayed by
technical difficulties, market acceptance, competitors' new products, or
difficulties in moving from the experimental stage to the production stage.
- 17 -
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item
601 of Regulation S-K:
Exhibit
Number Description
------- -----------
12 Statement Regarding Computation of Ratio
of Earnings to Fixed Charges, filed
herewith.
27.A Financial Data Schedule for the three
months ended December 31, 1998, filed
herewith. (Not included with printed
copy of the Form 10-Q.)
27.B Restated Financial Data Schedule for the
three months ended December 31, 1997,
filed herewith. (Not included with
printed copy of the Form 10-Q.)
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated November 20, 1998, was
filed with the Securities and Exchange Commission during the
quarterly period ended December 31, 1998 (the "Report"). The
Report described (i) the legal proceedings pending as of
November 17, 1998 in which material developments have occurred
since June 30, 1998 and (ii) the filing of a Registration
Statement on Form S-3 with the Securities and Exchange
Commission covering up to $500,000,000 of debt securities
issuable under an indenture between the Company and State
Street Bank and Trust Company, and the issuance and sale from
time to time of medium-term notes through various Agents
pursuant to a Distribution Agreement among the Company and the
Agents, dated November 20, 1998.
- 18 -
<PAGE> 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CABOT CORPORATION
Date: February 11, 1999 /s/ Robert L. Culver
------------------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: February 11, 1999 /s/ William T. Anderson
------------------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
- 19 -
<PAGE> 1
EXHIBIT 12
CABOT CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions, except ratios)
<TABLE>
<CAPTION>
Three
Months
ended
December 31 Years ended September 30
----------- --------------------------------------
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Earnings:
<S> <C> <C> <C> <C> <C> <C>
Pre-tax income from continuing operations... $48.0 $168.0 $117.0 $279.8 $256.0 $118.3
Distributed income of affiliated companies.. 1.1 7.5 10.4 11.2 11.7 5.6
Add fixed charges:
Interest on indebtedness.................. 10.9 42.0 43.2 41.7 35.6 41.7
Portion of rents representative of
the interest factor..................... 1.3 5.1 4.9 4.8 5.5 5.9
----- ------ ------ ------ ------ ------
Income as adjusted........................... $61.3 $222.6 $175.5 $337.5 $308.8 $171.5
Fixed charges:
Interest on indebtedness..................... $10.9 $42.0 $43.2 $41.7 $35.6 $41.7
Portion of rents representative of
the interest factor....................... 1.3 5.1 4.9 4.8 5.5 5.9
----- ------ ------ ------ ------ ------
Total fixed charges.......................... $12.2 $47.1 $48.1 $46.5 $41.1 $47.6
Ratio of earnings to fixed charges........... 5.0 4.7 3.6 7.3 7.5 3.6
===== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 5
<INVENTORY> 284
<CURRENT-ASSETS> 669
<PP&E> 2,012
<DEPRECIATION> 975
<TOTAL-ASSETS> 1,894
<CURRENT-LIABILITIES> 500
<BONDS> 427
0
61
<COMMON> 66
<OTHER-SE> 575
<TOTAL-LIABILITY-AND-EQUITY> 1,894
<SALES> 409
<TOTAL-REVENUES> 410
<CGS> 273
<TOTAL-COSTS> 273
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 48
<INCOME-TAX> 17
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 325
<ALLOWANCES> 5
<INVENTORY> 263
<CURRENT-ASSETS> 672
<PP&E> 1,788
<DEPRECIATION> 856
<TOTAL-ASSETS> 1,925
<CURRENT-LIABILITIES> 590
<BONDS> 336
0
65
<COMMON> 135
<OTHER-SE> 515
<TOTAL-LIABILITY-AND-EQUITY> 1,925
<SALES> 435
<TOTAL-REVENUES> 437
<CGS> 302
<TOTAL-COSTS> 302
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 45
<INCOME-TAX> 16
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.41
</TABLE>
