<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
JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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 AUGUST 11, 1999, THE COMPANY HAD 66,111,742 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
<PAGE> 2
CABOT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Income
Nine Months Ended June 30, 1999 and 1998 4
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1999 and 1998 7
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended June 30, 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues:
Net sales and other operating revenues $ 423.6 $ 376.3
Interest and dividend income 1.0 1.0
------- -------
Total revenues 424.6 377.3
------- -------
Costs and expenses:
Cost of sales 295.0 247.3
Selling and administrative expenses 55.8 60.6
Research and technical service 18.7 19.8
Special items (Note H) 16.3 85.0
Interest expense 11.3 10.7
Gain on sale of equity securities (Note G) (5.3) (90.3)
Other charges, net 0.7 0.2
------- -------
Total costs and expenses 392.5 333.3
------- -------
Income before income taxes 32.1 44.0
Provision for income taxes (11.5) (15.8)
Equity in net income of affiliated companies 3.4 6.1
Minority interest in income (1.6) (1.0)
------- -------
Net income 22.4 33.3
Dividends on preferred stock, net of tax benefit of $0.5 and $0.5 (0.8) (0.8)
------- -------
Income applicable to common shares $ 21.6 $ 32.5
======= =======
Weighted average common shares outstanding (Note K):
Basic 64.5 66.4
======= =======
Diluted 72.5 74.5
======= =======
Income per common share (Note K):
Basic $ 0.34 $ 0.49
======= =======
Diluted $ 0.30 $ 0.44
======= =======
Dividends per common share $ 0.11 $ 0.11
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended June 30
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Net sales and other operating revenues $1,268.4 $1,268.7
Interest and dividend income 3.2 4.3
-------- --------
Total revenues 1,271.6 1,273.0
-------- --------
Costs and expenses:
Cost of sales 872.5 861.9
Selling and administrative expenses 170.9 173.1
Research and technical service 57.0 59.0
Special items (Note H) 16.3 85.0
Interest expense 34.3 33.2
Gain on sale of equity securities (Note G) (9.9) (90.3)
Other charges, net 3.2 8.1
-------- --------
Total costs and expenses 1,144.3 1,130.0
-------- --------
Income before income taxes 127.3 143.0
Provision for income taxes (45.8) (51.5)
Equity in net income of affiliated companies 8.9 13.1
Minority interest in income (3.0) (2.4)
-------- --------
Net income 87.4 102.2
Dividends on preferred stock, net of tax benefit of $1.5 and $1.5 (2.4) (2.4)
-------- --------
Income applicable to common shares $ 85.0 $ 99.8
======== ========
Weighted average common shares outstanding (Note K):
Basic 64.8 66.6
======== ========
Diluted 72.8 74.6
======== ========
Income per common share (Note K):
Basic $ 1.31 $ 1.50
======== ========
Diluted $ 1.18 $ 1.35
======== ========
Dividends per common share $ 0.33 $ 0.31
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
ASSETS
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19.2 $ 39.6
Accounts and notes receivable (net of reserve for
doubtful accounts of $4.7 and $4.6) 327.2 284.3
Inventories:
Raw materials 72.2 68.2
Work in process 57.4 62.9
Finished goods 87.5 76.1
Other 45.9 43.9
-------- --------
Total inventories 263.0 251.1
Prepaid expenses 28.9 26.1
Deferred income taxes 17.1 17.8
-------- --------
Total current assets 655.4 618.9
-------- --------
Investments:
Equity (Note B) 76.8 91.1
Other (Note G) 42.8 72.5
-------- --------
Total investments 119.6 163.6
-------- --------
Property, plant and equipment 1,989.7 1,914.3
Accumulated depreciation and amortization (990.3) (936.3)
-------- --------
Net property, plant and equipment 999.4 978.0
-------- --------
Other assets:
Intangible assets, net of amortization 22.0 24.2
Deferred income taxes 3.9 3.9
Other assets 17.4 16.6
-------- --------
Total other assets 43.3 44.7
-------- --------
Total assets $1,817.7 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to banks $ 249.1 $ 253.3
Current portion of long-term debt 10.1 11.4
Accounts payable and accrued liabilities 211.9 268.2
U.S. and foreign income taxes payable 0.4 0.4
Deferred income taxes 3.0 3.0
-------- --------
Total current liabilities 474.5 536.3
-------- --------
Long-term debt 422.0 316.3
Deferred income taxes 67.7 82.4
Other liabilities 151.1 139.6
Commitments and contingencies (Note F) -- --
Minority interest 29.0 25.1
Stockholders' Equity (Notes I and L):
Preferred Stock:
Authorized: 2,000,000 shares of $1 par value
Series A Junior Participating Preferred Stock
Issued and outstanding: none
Series B ESOP Convertible Preferred Stock 7.75% Cumulative 75.3 75.3
Issued: 75,336 shares (aggregate redemption value
of $65.7 and $67.4)
Less cost of preferred treasury stock (16.3) (13.6)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 66,088,410 and 67,241,624 shares 66.1 67.2
Additional paid-in capital -- 4.9
Retained earnings 706.0 671.7
Unearned compensation (15.6) (26.2)
Deferred employee benefits (59.1) (60.6)
Notes receivable for restricted stock (18.2) --
Accumulated other comprehensive loss (Note C) (64.8) (13.2)
-------- --------
Total stockholders' equity 673.4 705.5
-------- --------
Total liabilities and stockholders' equity $1,817.7 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 7
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1999 and 1998
(Dollars in millions)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 87.4 $ 102.2
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 93.4 82.0
Deferred tax benefit (7.4) 4.0
Equity in income of affiliated companies,
net of dividends received (1.4) (7.6)
Special charges and impairments 16.3 85.0
Gain on sale of equity securities (9.9) (90.3)
Other, net 12.2 8.1
Changes in assets and liabilities, net of the effect of
acquisitions and the consolidation of equity affiliates:
Increase in accounts receivable (45.1) (8.7)
Increase in inventory (14.2) (4.9)
Decrease in accounts payable and accruals (71.9) (29.4)
Increase (decrease) in income taxes payable 1.1 (7.2)
Increase (decrease) in other liabilities 10.6 2.0
Other, net (3.4) 2.2
------- -------
Cash provided by operating activities 67.7 137.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (117.4) (115.0)
Investments and acquisitions (5.4) (32.3)
Purchase of available-for-sale securities -- (20.2)
Proceeds from sale of equity securities 19.6 129.5
Cash from consolidation of equity affiliates and other 7.8 2.3
Proceeds from sale of property, plant and equipment 0.2 5.0
------- -------
Cash used in investing activities (95.2) (30.7)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 102.5 63.1
Repayments of long-term debt (7.7) (128.4)
Increase (decrease) in short-term debt (11.8) 71.3
Purchases of preferred and common stock (44.0) (65.3)
Sales and issuances of preferred and common stock 8.5 8.5
Cash dividends paid to stockholders (24.4) (23.4)
Purchase of notes receivable for restricted stock (18.2) --
------- -------
Cash provided by financing activities 4.9 (74.2)
------- -------
Effect of exchange rate changes on cash 2.2 (0.9)
------- -------
Decrease in cash and cash equivalents (20.4) 31.6
Cash and cash equivalents at beginning of period 39.6 39.2
------- -------
Cash and cash equivalents at end of period $ 19.2 $ 70.8
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE> 8
CABOT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended June 30, 1999
(Dollars in millions)
UNAUDITED
<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 87.4
Common dividends paid (22.0)
Issuance of stock under employee
compensation plans 0.3 3.7
Issuance of common stock to Cabot Retirement
Incentive Savings Plan 0.1 2.5
Purchase and retirement of common stock (1.5) (11.1) (28.7)
Purchase of treasury stock - preferred (2.7)
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax (2.4)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan
Amortization of unearned compensation
Notes receivable for restricted stock
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $0.2
Foreign currency translation adjustments
------ ------- ------ ------ ------
Balance at June 30, 1999 $ 75.3 $ (16.3) $ 66.1 $ -- $706.0
====== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Notes Accumulated
Deferred Receivable Other Comprehensive
Unearned Employee for Restricted Comprehensive Income
Compensation Benefits Stock Loss (Note C)
------------- -------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998: $(26.2) $(60.6) $ -- $(13.2)
Net income $ 87.4
Common dividends paid
Issuance of stock under employee
compensation plans 2.0
Issuance of common stock to Cabot Retirement
Incentive Savings Plan
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 1.5
Amortization of unearned compensation 8.6
Notes receivable for restricted stock (18.2)
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $0.2 (16.3) (16.3)
Foreign currency translation adjustments (35.3) (35.3)
------ ------ ------- ------ ------
Balance at June 30, 1999 $(15.6) $(59.1) $ (18.2) $(64.8) $ 35.8
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE> 9
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
UNAUDITED
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
June 30, 1999 and 1998. All such adjustments are of a normal recurring
nature. The results for interim periods are not necessarily indicative
of the results to be expected for the fiscal year.
B. BUSINESS DEVELOPMENTS
On November 14, 1995, the Company modified its existing joint venture
agreement for its carbon black venture in Shanghai, China. This
amendment provided for the expansion of the facility and the increase
of the Company's ownership interest to 70%, to take effect as the
expansion is funded. As of October 1, 1998 the Company began accounting
for this venture on a consolidated basis.
C. COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). The adoption of this Statement had no impact on net income
or stockholders' equity. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components.
Accumulated Other Comprehensive Income (Loss), which is disclosed in
the stockholders' equity section of the consolidated balance sheet,
includes unrealized gains or losses on available-for-sale securities
and translation adjustments on investments in foreign subsidiaries.
Prior to the adoption of SFAS No. 130, the Company reported such
unrealized gains or losses and translation adjustments separately in
the stockholders' equity section of the consolidated balance sheet.
Amounts in the prior year financial statements have been reclassified
to conform to SFAS No. 130.
D. SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board 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
-9-
<PAGE> 10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
D. SEGMENTS OF AN ENTERPRISE (CONTINUED)
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. COMMITMENTS AND CONTINGENCIES
During the second quarter the Company entered into a non-cancelable
lease agreement for its corporate offices in Boston, Massachusetts
expiring in September, 2015. This contract results in additional future
minimum rental commitments under the non-cancelable lease as follows:
(dollars in millions)
2000 $ 0.4
2001 5.0
2002 5.2
2003 5.2
2004 and thereafter 64.4
-----
$80.2
=====
The Company is currently evaluating opportunities for the existing
facility lease that expires in 2001.
The Company is a defendant, or potentially responsible party, in
various lawsuits and environmental proceedings wherein substantial
amounts are claimed or at issue. In the opinion of the Company,
although final disposition of all of its suits and claims may impact
the Company's financial statements in a particular period, they should
not, in the aggregate, have a material adverse effect on the Company's
financial position.
G. GAIN ON SALE OF EQUITY SECURITIES
During each of the second and third quarters, the Company sold 0.5
million shares of its investment in K N Energy, Inc. In the second
quarter, the Company received cash proceeds of $9.4 million and
recorded a gain of $4.6 million. In the third quarter, the Company
received cash proceeds of $10.2 million and recorded a gain of $5.3
million.
In the third quarter, the Company made a non-cash contribution to the
Cabot Foundation consisting of 0.1 million shares of K N Energy, Inc.
The shares donated had a market value of $1.1 million, which was
recorded as a contribution expense net of a pre-tax gain of $0.5
million within other charges.
-10-
<PAGE> 11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
H. COST REDUCTION INITIATIVES
During the third quarter, the Company began implementation of
initiatives to reduce costs and improve operating efficiencies. In
connection with these efforts, the Company recorded a $16.3 million
charge for capacity utilization and cost reduction initiatives. These
initiatives included $6.7 million for severance and termination
benefits for approximately 95 employees and a charge of $9.6 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 Statement of Income.
I. NOTES RECEIVABLE FOR RESTRICTED STOCK
On June 30, 1999 the Company purchased from Merrill Lynch Bank & Trust
Co. loans to Cabot Corporation employees totaling $18.2 million in
connection with their purchase of restricted shares of Cabot
Corporation common stock, awarded under the Company's 1996 Equity
Incentive Plan.
J. LNG COMMODITIES
The Company has price risk exposure, due to changes in its natural gas
sales prices and supply costs. The Company enters into commodity
futures contracts and purchases put options to hedge its anticipated
sales. The Company utilizes call options for hedging inventory
purchases subject to a net back arrangement. The Company has increased
its use of commodity derivatives in the third quarter related to LNG
purchase obligations from the liquefaction plant in Trinidad beginning
in fiscal year 2000.
At June 30, 1999, the notional principal amounts of the futures
contracts were $57.7 million, maturing through August, 2000. For the
third quarter of 1999, there were no realized gains or losses
associated with these contracts.
-11-
<PAGE> 12
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
K. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the
three months ended June 30, 1999 and 1998 as follows (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator) $ 21.6 $ 32.5
====== ======
Weighted-average common shares outstanding 66.3 67.9
Less: Contingently issuable shares (1.8) (1.5)
------ ------
Adjusted weighted-average shares (denominator) 64.5 66.4
====== ======
Basic EPS $ 0.34 $ 0.49
====== ======
Diluted EPS
Income available to common shares $ 21.6 $ 32.5
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) $ 22.0 $ 32.9
====== ======
Weighted-average common shares outstanding 66.3 67.9
Effect of dilutive securities: Stock-based
compensation (1) 6.2 6.6
------ ------
Adjusted weighted-average shares (denominator) 72.5 74.5
====== ======
Diluted EPS $ 0.30 $ 0.44
====== ======
</TABLE>
(1) Options to purchase 0.3 million shares of common stock were outstanding at
June 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.
-12-
<PAGE> 13
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
K. EARNINGS PER SHARE (continued)
Basic and diluted earnings per share ("EPS") were calculated for the nine
months ended June 30, 1999 and 1998 as follows (dollars in millions,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator) $ 85.0 $ 99.8
====== =======
Weighted-average common shares outstanding 66.6 68.1
Less: Contingently issuable shares (1.8) (1.5)
------ -------
Adjusted weighted-average shares (denominator) 64.8 66.6
====== =======
Basic EPS $ 1.31 $ 1.50
====== =======
Diluted EPS
Income available to common shares $ 85.0 $ 99.8
Dividends on preferred stock 2.4 2.4
Less: Income effect of assumed conversion of
preferred stock (1.2) (1.3)
------ -------
Income available to common shares plus
assumed conversions (numerator) $ 86.2 $ 100.9
====== =======
Weighted-average common shares outstanding 66.6 68.1
Effect of dilutive securities: Stock-based
compensation (1) 6.2 6.5
------ -------
Adjusted weighted-average shares (denominator) 72.8 74.6
====== =======
Diluted EPS $ 1.18 $ 1.35
====== =======
</TABLE>
(1) Options to purchase 0.3 million shares of common stock were outstanding at
June 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.
-13-
<PAGE> 14
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
L. SHARES OF STOCK
The following table summarizes the changes in shares of stock for the
three months ended June 30, 1999 (preferred shares in thousands and
common shares in millions):
<TABLE>
<CAPTION>
1999
-----
<S> <C>
PREFERRED STOCK
Balance at March 31, 1999 75.3
----
Balance at June 30, 1999 75.3
====
PREFERRED TREASURY STOCK
Balance at March 31, 1999 9.3
Purchased preferred treasury stock 0.3
----
Balance at June 30, 1999 9.6
====
COMMON STOCK
Balance at March 31, 1999 66.4
Issued common stock 0.2
Purchased and retired common stock (0.5)
----
Balance at June 30, 1999 66.1
====
</TABLE>
-14-
<PAGE> 15
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1999
UNAUDITED
L. SHARES OF STOCK ( CONTINUED )
The following table summarizes the changes in shares of stock for the
nine months ended June 30, 1999 (preferred shares in thousands and
common shares in millions):
<TABLE>
<CAPTION>
1999
-----
<S> <C>
PREFERRED STOCK
Balance at September 30, 1998 75.3
----
Balance at June 30, 1999 75.3
====
PREFERRED TREASURY STOCK
Balance at September 30, 1998 8.5
Purchased preferred treasury stock 1.1
----
Balance at June 30, 1999 9.6
====
COMMON STOCK
Balance at September 30, 1998 67.2
Issued common stock 0.4
Purchased and retired common stock (1.5)
----
Balance at June 30, 1999 66.1
====
</TABLE>
-15-
<PAGE> 16
CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 22.
THREE MONTHS ENDED JUNE 30, 1999 VERSUS
THREE MONTHS ENDED JUNE 30, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the quarter ended June 30, 1999 versus the quarter ended June 30, 1998.
Net income for the third quarter of fiscal year 1999 was $22.4 million ($0.30
per diluted common share), compared with $33.3 million ($0.44 per diluted common
share) in the same quarter a year ago. The Company's operating results included
special items in the quarter just ended and in the same quarter last year. Third
quarter earnings this year included pre-tax charges totaling $16.3 million
related to cost reduction efforts primarily in the Company's Australian carbon
black and European plastics masterbatch businesses and a $5.3 million gain from
the sale of equity securities. The third quarter charge included $6.7 million
for severance and termination benefits for approximately 95 employees and a
charge of $9.6 million for the retirement of certain long-lived plant assets.
Last year's third quarter earnings included a $90.3 million gain from the sale
of equity securities and an $85 million charge related to asset impairments in
the Company's Indonesian carbon black business and costs related to a tantalum
ore recovery project. Excluding the special items from earnings to form a
comparative basis, the Company's third quarter results were $0.40 per diluted
share, or flat with last year's third quarter.
Net sales and other operating revenues increased 13% to $423.6 million from last
year's $376.3 million. Most of the revenue increase was due to increased volumes
in the liquefied natural gas (LNG) business. The Company's operating profit
excluding special items was $62.1 million for the quarter compared to $58.6
million in the same quarter a year ago. Operating profit for the Specialty
Chemicals and Materials Group decreased 3% to $62.2 million due primarily to
lower year-to-year carbon black margins. The Energy Group, which consists of the
Company's LNG business, reported a $5.3 million improvement in financial
performance.
In the SPECIALTY CHEMICALS AND MATERIALS GROUP, third quarter revenues increased
3% to $365.9 million from $354 million last year. The revenue increase reflected
8% greater volumes in the Company's chemical businesses, partially offset by
lower carbon black selling prices. Each of the chemical businesses achieved
greater volumes globally. Operating profit excluding special items for the
Specialty Chemicals and Materials Group decreased 3% to $62.2 million compared
with $64 million. The decrease was primarily the result of lower earnings in the
Company's carbon black business, partially offset by earnings improvements in
the microelectronic materials (MMD) and capacitor materials businesses.
The Company's CARBON BLACK businesses reported a decrease in operating profit of
approximately $8 million, excluding a $7 million third quarter charge for cost
improvement measures at the Australian operation. The effects of lower
year-to-year selling prices more than offset lower feedstock costs, and
accounted for most of the earnings decrease. Additionally, the earnings effect
of 4% greater volumes was offset by higher depreciation costs and the effects of
a stronger U.S. dollar.
The FUMED SILICA business reported a decrease in operating profit of
approximately $1 million. Softened demand in the silicone rubber market caused
the Company's fumed silica business to produce at lower rates than during the
last few quarters. The lower production rate resulted in higher average per unit
product costs during the quarter.
The CAPACITOR MATERIALS business (CPM) reported a $6 million operating profit
increase for the third quarter. CPM achieved 37% greater volumes and improved
margins for intermediate products, and 9% greater volumes for capacitor powders
in the third quarter.
-16-
<PAGE> 17
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's PLASTICS business reported a $1 million increase in operating
profit in the quarter compared with last year's third quarter, excluding a $9
million third quarter charge for cost improvement measures primarily at two
facilities. The earnings effects of 9% greater volumes were partially offset by
the effects of a stronger U.S. dollar.
The Company's new chemical businesses contributed about $3 million of increased
operating profit in the third quarter. A large portion of the increase was due
to improved performance of the microelectronics materials business, which
reported a 50% revenue increase. This business also reported higher average
prices and margins mainly due to improved product mix and increased capacity
utilization. The INKJET COLORANTS and SPECIALTY FLUIDS businesses contributed
incrementally to earnings by reducing operating losses.
In the ENERGY GROUP, which is comprised of the LNG operation, third quarter
revenues increased to $57.7 million from $22.3 million for the same quarter a
year ago. The LNG business is seasonal and historically has reported operating
losses in the third and fourth quarters. In the third quarter, the LNG business
reported a $0.1 million operating loss, compared with a $5.4 million loss in the
third quarter of 1998. Commencement of shipments from the new Trinidad supply
source during the June quarter caused LNG volumes to increase 158% compared with
last year, and resulted in lower year-to-year gas costs. However, lower natural
gas prices partially offset the earnings effects of the improved volumes and gas
costs. The LNG business also realized a $4.1 million pre-tax gain during the
third quarter from the buyout of a customer's contract related to the customer's
closing of a small power plant.
SELLING AND ADMINISTRATIVE EXPENSES were $55.8 million for the third quarter of
1999 versus $60.6 million for the third quarter of 1998. The decrease reflects
cost improvement efforts across the Company's businesses.
RESEARCH AND TECHNICAL EXPENSES decreased $1.1 million to $18.7 million. The
decrease reflects a reduction in spending primarily in the Company's carbon
black business, offset somewhat by an increase in spending in MMD and fumed
silica new product development programs. The Company continues to pursue and is
encouraged by progress made in several of its new product and new business
initiatives, although progress to date in some of the Company's initiatives has
been slower than expected. The Company's objective of developing higher value,
differentiated products and creating new businesses is central to its strategy
for generating earnings growth.
The Company's effective INCOME TAX RATE was 36% for the quarters ended June 30,
1999 and 1998.
On July 28, 1999 the Company announced publicly the results of a recent
comprehensive business review. The outcome of the review was to refine the
Company's strategic business unit structure, to take certain cost reduction
actions and to consider changing the ownership structures of certain of the
Company's businesses. The resulting initiatives caused a $16.3 million pre-tax
charge to third quarter earnings, as described above. The Company also expects
to recognize a charge of similar magnitude during the September quarter. The
severance and termination benefits associated with these initiatives are
expected to be paid within the next twelve months. In total, the cost reduction
initiatives involve the elimination of approximately 250 positions throughout
the Company, the majority of which were announced on or before July 13, 1999.
These initiatives are expected to provide ongoing annual cost savings of $30
million to $35 million starting in fiscal 2000. The Company also announced that
it was planning an initial public offering for approximately 15% of the
microelectronic materials business, that it is considering the issuance of a
targeted stock for the LNG business and that the Company will explore
alternative ownership structures for the capacitor materials business. An
initial public offering of the microelectronics materials business would be
made only by means of a prospectus.
NINE MONTHS ENDED JUNE 30, 1999 VERSUS
NINE MONTHS ENDED JUNE 30, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the nine-month period ended June 30, 1999 versus the nine-month period ended
June 30, 1998.
-17-
<PAGE> 18
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net income for the nine-month period ended June 30, 1999 was $87.4 million
compared with $102.2 million for the nine-month period ended June 30, 1998.
Operating profit increased $65.9 million to $175.8 million from $109.9 million.
The Company's operating results for both periods included special items.
Earnings for the nine month period ended June 30, 1999 included pre-tax charges
totaling $16.3 million related to cost improvement efforts primarily in the
Company's Australian carbon black and European plastics masterbatch businesses.
These charges included $6.7 million for severance and termination benefits for
approximately 95 employees and a charge of $9.6 million for the retirement of
certain long-lived plant assets. Last year's operating profit included pre-tax
charges totaling $85 million related to asset impairments in the Company's
Indonesian carbon black business and costs related to a tantalum ore recovery
project. Excluding special items from both years' earnings, operating profit for
the nine month period ended June 30, 1999 was $192.1 compared with $194.9 for
the same period last year. The earnings decrease reflected the effects of
significantly lower year-to-year natural gas prices, partially offset by
improved earnings in the Company's chemical businesses.
In the SPECIALTY CHEMICALS AND MATERIALS GROUP, revenues decreased 2% to
$1,068.7 million from $1,089.1 million. The reduction in revenue reflected
competitive pricing in several of the Company's market segments. Operating
profits excluding special items increased 2% to $181.5 million from $177.5
million. The improvement in operating profit was driven primarily by greater
chemical volumes, and to a lesser extent, improved carbon black feedstock costs.
However, competitive price pressures, primarily in the Company's carbon black
business, drove average selling prices down from prior year levels. Lower
year-to-year carbon black selling prices more than offset the benefit of lower
feedstock costs. Profit improvement in the Company's new businesses contributed
incrementally to earnings, particularly the Company's MMD business.
In the Company's ENERGY GROUP, revenues increased 11% to $199.7 million from
$179.6 million and operating profits decreased 39% to $10.6 million from $17.4
million in the same period a year ago. The decrease in operating profit was
attributable to the combination of warmer than normal winter weather and lower
average natural gas prices. Average gas selling prices decreased approximately
19% year-over-year. Offsetting weak prices was an increase in volumes equivalent
to 8 additional cargoes for the first nine months of the year.
OTHER CHARGES, NET, decreased from $8.1 million to $3.2 million for the nine
months ended June 30, 1998 and 1999, respectively. The decrease was primarily a
reduction in foreign currency exchange losses. Results in fiscal 1998 included
the effects of a significant devaluation of the Indonesian rupiah.
Certain conditions that negatively impacted the Company's earnings in the first
nine months of the year improved during the third quarter. The Brazilian Real
and South American carbon black market have been more stable than earlier in the
year. In addition, natural gas prices have risen and natural gas futures prices
indicate that next year, given a greater and more predictable supply, the LNG
business should contribute significantly to earnings. In contrast, recent
increases in carbon black feedstock prices continue to present near term
challenges given the current pricing environment in several of the Company's
carbon black markets. Continuing cost reduction efforts are expected to mitigate
a portion of any margin squeeze.
CASH FLOWS AND LIQUIDITY
During the first nine months of the year, the Company's operations provided
$67.7 million of cash compared to $137.4 million last year. The change
year-to-year is primarily due to increased working capital.
Capital spending for the first nine months of the year was $122.8 million. The
Company expects capital expenditures during the fiscal year to total
approximately $200 million. The major components of the 1999 capital program
include new business expansion and normal plant operating capital projects, the
Company's equity share of a natural gas liquefaction project in Trinidad,
refurbishment of the Company's LNG tanker, and capacity expansion in the
Company's fumed silica and MMD businesses.
-18-
<PAGE> 19
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On September 11, 1998, the Company's Board of Directors authorized the
repurchase of 4 million shares of the Company's common stock, superseding prior
authorizations. During the first nine months of the year, the Company purchased
1.1 million shares of common stock. At June 30, 1999, 2.1 million shares
remained under the September 1998 repurchase authorization.
On June 30, 1999 the Company purchased from Merrill Lynch Bank & Trust Co. loans
to Cabot Corporation employees totaling $18.2 million in connection with their
purchase of restricted shares of Cabot Corporation common stock, awarded under
the Company's 1996 Equity Incentive Plan.
The Company's ratio of total debt (including short-term debt net of cash) to
capital increased from 43% at September 30, 1998 to 49% at the end of the third
quarter of fiscal year 1999.
On September 29, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") for up to $500 million of debt
securities that the Company may issue from time to time. The SEC declared the
registration statement effective on October 13, 1998.
In December 1998, the Company issued $100 million of medium-term notes. The
notes mature as follows: $40 million in 2 years, $30 million in 7 years and $30
million in 20 years. At issuance, the notes had a weighted average interest rate
of 6.6%. Proceeds from the issuance were used to reduce short-term debt.
The Company maintains a credit agreement under which it may borrow up to $300
million at floating rates. The facility is available through January 3, 2002.
The Company had no borrowings outstanding under this agreement at June 30, 1999.
Management expects cash from operations and present financing arrangements,
including the Company's unused line of credit and shelf registration, to be
sufficient to meet the Company's cash requirements for the foreseeable future.
LNG COMMODITIES
The Company has price risk exposure, due to changes in its natural gas sales
prices and supply costs. The Company enters into commodity futures contracts and
purchases put options to hedge its anticipated sales. The Company utilizes call
options for hedging inventory purchases subject to a net back arrangement. The
Company has increased its use of commodity derivatives in the third quarter
related to LNG purchase obligations from the liquefaction plant in Trinidad
beginning in fiscal year 2000.
At June 30, 1999, the notional principal amounts of the futures contracts were
$57.7 million, maturing through August, 2000. For the third quarter of 1999,
there were no realized gains or losses associated with these contracts.
The Company utilizes Value-at-Risk ("VAR") analysis to estimate its maximum loss
in market value for each type of derivative instrument held. As of June 30,
1999, the VAR analysis for commodities indicated a potential maximum loss of
$4.3 million for a 30 day period with 95% confidence.
YEAR 2000 READINESS DISCLOSURE
The Company's Year 2000 plan has three key areas of focus and is overseen by an
Executive Steering Committee. A Program Management Office was 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 have progressed on schedule.
-19-
<PAGE> 20
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
1. The first key area of focus was the Company's core business systems
software, PC hardware and desktop software, and manufacturing plant devices
and software. The Company's plan with respect to this area includes the
inventory of all core business systems software, PC hardware and desktop
software, and plant devices and software that have clocking devices or
computer codes that will be impacted by the change of date to Year 2000;
assessment for priority as to mission critical systems; upgrading or
replacing such hardware and software as required; testing and placing into
an operational state; and developing contingency plans. The current status
and plans for each component of this area are as follows:
o 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 substantially completed the inventory, assessment,
remediation and testing of core business systems. The Company's
assessment indicated 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 were completed as
expected by June 30, 1999. These projects included the rollout of
AspenTech's manufacturing production support systems, the migration of
the Company's Asia Pacific and plastics manufacturing facilities to
JDEdwards software, the migration of the Company's European facilities
to the JDEdwards and Marcam suites of business software and the upgrade
to PeopleSoft Human Resources/Payroll in North America. Some regional
system upgrades remain in process. Specifically, testing of systems at
3 joint ventures will be completed by the end of the fourth quarter of
fiscal 1999, and new laboratory information systems in South America
and Asia Pacific will be installed during the fourth quarter of fiscal
1999.
o PC Hardware and Desktop Software: The Company has completed the
inventory, assessment, remediation and testing phases for its PC
hardware. Replacement or repair of desktop hardware and mission
critical software was completed by June 30, 1999.
o Manufacturing Plant Devices and Software: The Company completed the
inventory and assessment of plant embedded devices and software during
the second quarter of fiscal year 1999. Replacement or repair of plant
devices and software is ongoing and will continue into the fourth
fiscal quarter. Final testing and remediation in all manufacturing
facilities is expected to be completed during normal plant shutdowns by
September 30, 1999.
2. The second key area of focus was the Company's supply chain. This included
identifying key suppliers whose supply disruption could have an adverse
impact on the Company's ability to produce and ship product; working with
these suppliers to decrease the chances supply will be disrupted;
identifying alternative sources or contingency plans as needed; and
attempting to obtain written assurances that purchased products and
services are Year 2000 compliant. Even in cases where the Company has
received assurances that delays or disruption will not be encountered by
third parties, the Company is not in a position to determine with 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:
o Key suppliers were identified. Letters and questionnaires were sent to
those suppliers and review of their responses was completed in the
third quarter of fiscal year 1999. The development of contingency plans
is expected to be completed by September 30, 1999.
-20-
<PAGE> 21
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
3. The final area of key focus was internal and external communications, and
included 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:
o 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 met its established goal to complete activities related
to mission critical core business systems, PC hardware and desktop software, and
plant devices and software by June 30, 1999. Testing and some device remediation
at certain manufacturing facilities will occur during plant shutdowns in the
fourth quarter of fiscal year 1999. Work with suppliers, contingency planning
and ongoing communications will continue throughout fiscal year 1999, with
periodic reviews to be scheduled through the millennium date change.
The Company does not believe that the cost of implementing system and program
changes necessary to address Year 2000 issues will have a material effect on the
Company's results of operations or financial condition. The Company has
identified Year 2000 expenses as costs incurred specifically to modify hardware
or software to be Year 2000 compliant where such modifications do not add other
functionality. The vast majority of the Company's projects currently in progress
are considered to be part of the Company's ongoing global business system
renewal initiatives. The Company recognizes that a benefit of these initiatives
will be Year 2000 compliance. However, these initiatives were not undertaken
primarily for Year 2000 compliance and, therefore, are not treated as Year 2000
costs. The Year 2000 compliance effort is being supported by a reallocation of
existing information technology and human resources. The Company does not
specifically track all costs associated with employees working on Year 2000
projects. The Company expects to spend approximately $2 million during fiscal
year 1999 on direct Year 2000 remediation efforts in addition to the global
business system renewal efforts. There can be no assurance that there will not
be increased costs associated with the implementation of such changes.
The above plans and status represent the Company's expectations based on current
Year 2000 plans and work progress. However, there is no assurance that such
expectations will be realized. While the Company believes that prudent steps
have been taken to assure that there is an effective program, the Company cannot
guarantee that the plans and funds expended will correct all Year 2000 errors or
that the information systems will not generate Year 2000 errors when operating
with third party computer systems or data.
The Company cannot predict reliably the source, nature, or extent of any Year
2000 disruptions that may be experienced in the U.S. or other countries where it
operates and, therefore, cannot predict reliably the effect any such disruptions
may have on the Company, its operations or financial condition. The Company does
not know what is the most likely "worse case scenario" as a result of Year 2000
disruptions, but believes that the effects on the Company are not substantially
different from those facing industry generally. The Company believes that the
most likely causes of disruption are one or more of the following: disruptions
in the banking system, disruptions in the supply of electricity to the Company's
plants that could delay production of the Company's products, and disruptions in
transportation services that could delay shipments from the Company's suppliers
or to the Company's customers. In addition, the Company does not know whether
any of its customers will experience Year 2000 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 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.
-21-
<PAGE> 22
CABOT CORPORATION
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended June 30 Nine Months Ended June 30
-------------------------- -------------------------
1999 1998 1999 1998
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Industry Segment Data
- ---------------------
Net Sales:
Specialty chemicals and materials $365.9 $354.0 $1,068.7 $ 1,089.1
Energy 57.7 22.3 199.7 179.6
------ ------ -------- ---------
Net sales 423.6 376.3 $1,268.4 $ 1,268.7
====== ====== ======== =========
Operating profit:
Specialty chemicals and materials - before special items $ 62.2 $ 64.0 $ 181.5 $ 177.5
Energy (0.1) (5.4) 10.6 17.4
------ ------ -------- ---------
Total operating profit - before special items 62.1 58.6 192.1 194.9
Specialty chemicals and materials - special items (16.3) (85.0) (16.3) (85.0)
------ ------ -------- ---------
$ 45.8 (26.4) $ 175.8 $ 109.9
------ ------ -------- ---------
Interest expense (11.3) (10.7) (34.3) (33.2)
Gain on sale of equity securities 5.3 90.3 9.9 90.3
General corporate/other expenses (7.7) (9.2) (24.1) (24.0)
------ ------ -------- ---------
Income before income taxes 32.1 44.0 127.3 143.0
Provision for income taxes (11.5) (15.8) (45.8) (51.5)
Equity in net income of affiliated companies 3.4 6.1 8.9 13.1
Minority interest in income (1.6) (1.0) (3.0) (2.4)
------ ------ -------- ---------
Net income 22.4 33.3 87.4 102.2
Dividends on preferred stock (0.8) (0.8) (2.4) (2.4)
------ ------ -------- ---------
Income applicable to common shares $ 21.6 $ 32.5 $ 85.0 $ 99.8
====== ====== ======== =========
Income per common share:
Basic $ 0.34 $ 0.49 $ 1.31 $ 1.50
====== ====== ======== =========
Diluted $ 0.30 $ 0.44 $ 1.18 $ 1.35
====== ====== ======== =========
</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 program, and Year 2000 risks. Actual results may
differ materially from the results anticipated in the statements included herein
due to a variety of factors, including market supply and demand conditions,
fluctuations in currency exchange rates, cost of raw materials, patent rights of
others, Year 2000 disruptions, demand for the Company's customers' products and
competitors' reactions to market conditions. Timely commercialization of
products under development by the Company may be disrupted or delayed by
technical difficulties, market acceptance or competitors' new products, as well
as difficulties in moving from the experimental stage to the production stage.
The risk management discussion and the estimated amounts generated from the
analyses are forward-looking statements of market risk assuming certain adverse
market conditions occur. Actual results in the future may differ materially
from these projected results due to actual developments in the global financial
markets. The methods used by the Company to assess and mitigate risks should
not be considered projections of future events or losses.
-22-
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
Environmental Proceedings
Cabot is one of approximately 25 parties identified by EPA as PRPs under
the Superfund law with respect to the cleanup of Fields Brook (the "Brook"), a
tributary of the Ashtabula River in northeast Ohio. From 1963 to 1972, Cabot
owned two manufacturing facilities located beside the Brook. Pursuant to an EPA
administrative order, 13 companies, including Cabot, are performing the design
and other preliminary work relating to remediation of sediment in the Brook and
soil in the floodplain and wetlands areas adjacent to the Brook. In 1997, EPA
and the companies reached agreement on the remedy for these areas; the EPA made
certain changes to that remedy in response to its finding low levels of
previously undetected radioactive material in the Brook. In addition, EPA's cost
recovery claims through the end of 1989 have been settled, and the companies
have negotiated consent decrees with EPA, the State of Ohio and the Natural
Resource Trustees that settle the governments' claims for past costs and natural
resource damages and obligates the companies to implement the agreed remedy.
Those consent decrees were entered by the United States District Court for the
Northern District of Ohio on July 7, 1999. Cabot's share of the settlement
amount is approximately $585,000; Cabot's estimated share of future remediation
costs is approximately $5.6 million. The companies, including Cabot, that have
paid for work at the site are seeking to recover a share of those costs from
other responsible parties.
In July 1998, EPA informed Cabot that it will be undertaking corrective
action under the Resource Conservation and Recovery Act at Cabot's facility in
Boyertown, Pennsylvania. The Army Corps of Engineers performed a site visit in
September 1998 to initiate this action. It is unclear at this time what
corrective action, if any, will be required at the site and what costs Cabot may
incur as a result. Cabot is aware that EPA is investigating certain areas
surrounding the Boyertown facility with a view to determining what conditions
exist in those areas and whether those conditions are related to Cabot's
Boyertown facility. As of August 9, 1999, EPA has not taken any formal action
nor alleged that Cabot has any responsibility for conditions in the area. In
addition, the Pennsylvania Department of Environmental Protection has requested
that Cabot conduct additional groundwater investigations at the Boyertown
facility to supplement studies conducted in the early 1990s.
On June 5, 1999, there was a break in the pipeline used to transport carbon
black feedstock from a nearby port to a Ravenna, Italy carbon black facility
owned by Cabot Italiana S.p.A., a wholly-owned subsidiary of Cabot. The break
was in a portion of the pipeline adjacent to a neighboring facility. As a
result, a substantial amount of carbon black feedstock was released at the
neighboring facility. An investigation of the facts to determine
responsibilities is ongoing. In the meantime, emergency remediation efforts are
underway. Claims have been asserted against Cabot by the owner of the facility
where the spill occurred and by the owners of a sewer system into which some of
the oil flowed. In addition, Cabot has asserted a claim against a third party
which Cabot believes damaged the pipeline and, thus, caused the spill. Cabot has
notified its insurers and they are involved in the matter, although they have
not necessarily admitted coverage. At this point, Cabot does not know the likely
course that legal proceedings, if any, will take, and does not have an estimate
of the costs, if any, that Cabot will ultimately bear.
-23-
<PAGE> 24
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
12 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges, filed herewith.
27.1 Financial Data Schedule for the period ended June 30, 1999,
filed herewith. (Not included with printed copy of the Form
10-Q.)
27.2 Restated Financial Data Schedule for the period ended June 30,
1998, filed herewith. (Not included with printed copy of the
Form 10-Q.)
</TABLE>
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company during the
three months ended June 30, 1999.
-24-
<PAGE> 25
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: August 13, 1999 /s/ Robert L. Culver
------------------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: August 13, 1999 /s/ William T. Anderson
------------------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
-25-
<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>
Nine Months
ended
June 30 Years ended September 30
----------- ---------------------------------------------------
1999 1998 1997 1996 1995 1994
------ ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income from continuing operations $127.3 $168.0 $117.0 $279.8 $256.0 $118.3
Distributed income of affiliated companies 7.6 7.5 10.4 11.2 11.7 5.6
Add fixed charges:
Interest on indebtedness 34.3 42.0 43.2 41.7 35.6 41.7
Portion of rents representative of
the interest factor 3.8 5.1 4.9 4.8 5.5 5.9
------ ------ ------ ------ ------ ------
Income as adjusted $173.0 $222.6 $175.5 $337.5 $308.8 $171.5
Fixed charges:
Interest on indebtedness $ 34.3 $ 42.0 $ 43.2 $ 41.7 $ 35.6 $ 41.7
Portion of rents representative of
the interest factor 3.8 5.1 4.9 4.8 5.5 5.9
------ ------ ------ ------ ------ ------
Total fixed charges $ 38.1 $ 47.1 $ 48.1 $ 46.5 $ 41.1 $ 47.6
Ratio of earnings to fixed charges 4.5 4.7 3.6 7.3 7.5 3.6
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 332
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