<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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2271897
(State of Incorporation) (I.R.S. Employer Identification No.)
75 STATE STREET 02109-1806
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 345-0100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES __X__ NO_____
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF JANUARY 31, 2000, THE COMPANY HAD 67,083,186 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
<PAGE> 2
CABOT CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended December 31, 1999 and 1998 3
Consolidated Balance Sheets
December 31, 1999 and September 30, 1999 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1999 and 1998 6
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended December 31, 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31
(In millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Net sales and other operating revenues $ 493 $ 408
Interest and dividend income 1 1
----- -----
Total revenues 494 409
----- -----
Costs and expenses:
Cost of sales 357 277
Selling and administrative expenses 50 53
Research and technical service 15 19
Interest expense 11 11
Other charges, net 1 1
----- -----
Total costs and expenses 434 361
----- -----
Income before income taxes 60 48
Provision for income taxes (21) (17)
Equity in net income of affiliated companies 1 2
Minority interest in net income (2) (1)
----- -----
Net income 38 32
Dividends on preferred stock, net of tax benefit (1) (1)
----- -----
Net income available to common shares $ 37 $ 31
===== =====
Weighted-average common shares outstanding (Note I):
Basic 64 65
===== =====
Diluted 73 74
===== =====
Income per common share (Note I):
Basic $0.57 $0.48
===== =====
Diluted $0.50 $0.43
===== =====
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 BALANCE SHEETS
December 31, 1999 and September 30, 1999
(In millions)
ASSETS
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35 $ 35
Accounts and notes receivable (net of reserve for doubtful
accounts of $4 and $5) 341 321
Inventories:
Raw materials 73 72
Work in process 48 55
Finished goods 104 96
Other 39 36
------- -------
Total inventories 264 259
Prepaid expenses 32 27
Deferred income taxes 15 17
------- -------
Total current assets 687 659
------- -------
Investments:
Equity 75 72
Other 49 47
------- -------
Total investments 124 119
------- -------
Property, plant and equipment 2,039 2,039
Accumulated depreciation and amortization (1,031) (1,015)
------- -------
Net property, plant and equipment 1,008 1,024
------- -------
Other assets:
Intangible assets, net of amortization 19 20
Deferred income taxes 5 6
Other assets 16 14
------- -------
Total other assets 40 40
------- -------
Total assets $ 1,859 $ 1,842
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and September 30, 1999
(In millions, except for share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31 September 30
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to banks $ 205 $ 186
Current portion of long-term debt 49 11
Accounts payable and accrued liabilities 249 252
Deferred income taxes 1 1
------- -------
Total current liabilities 504 450
------- -------
Long-term debt 377 419
Deferred income taxes 67 68
Other liabilities 157 167
Commitments and contingencies (Note D)
Minority interest 32 32
Stockholders' Equity (Note G):
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 75
Issued: 75,336 shares (aggregate redemption value of $65 and $65)
Less cost of shares of preferred treasury stock (18) (17)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 67,003,754 and 67,123,892 shares 67 67
Additional paid-in capital -- 5
Retained earnings 763 734
Unearned compensation (26) (30)
Deferred employee benefits (58) (59)
Notes receivable for restricted stock (25) (25)
Accumulated other comprehensive loss (Note H) (56) (44)
------- -------
Total stockholders' equity 722 706
------- -------
Total liabilities and stockholders' equity $ 1,859 $ 1,842
======= =======
</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, 1999 and 1998
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38 $ 32
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 32 30
Deferred tax benefit 3 1
Equity in income of affiliated companies,
net of dividends received -- (1)
Other, net 6 3
Changes in assets and liabilities, net of the effect of
the consolidation of equity affiliates:
Increase in accounts receivable (25) (26)
Increase in inventory (7) (26)
Decrease in accounts payable and accruals (15) (43)
Increase in prepayments and intangible assets (7) (4)
Increase in income taxes payable 12 8
Increase (decrease) in other liabilities (12) 13
Other, net -- (1)
----- -----
Cash provided by (used in) operating activities 25 (14)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (26) (56)
Investments -- (4)
Cash from consolidation of equity affiliates -- 8
----- -----
Cash used in investing activities (26) (52)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 100
Repayments of long-term debt (2) (2)
Increase (decrease) in short-term debt 20 (20)
Purchases of preferred and common stock (7) (26)
Sales and issuances of preferred and common stock 1 1
Cash dividends paid to stockholders (9) (8)
----- -----
Cash provided by financing activities 3 45
----- -----
Effect of exchange rate changes on cash (2) --
----- -----
Decrease in cash and cash equivalents -- (21)
Cash and cash equivalents at beginning of period 35 40
----- -----
Cash and cash equivalents at end of period $ 35 $ 19
===== =====
</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, 1999
(In millions)
UNAUDITED
<TABLE>
<CAPTION>
------------------------------------------------------------------
Accumulated
Preferred Additional Other
Preferred Treasury Common Paid-in Retained Comprehensive
Stock Stock Stock Capital Earnings Loss
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 75 $(17) $ 67 $ 5 $734 $(44)
------------------------------------------------------------------
Net income 38
Foreign currency translation adjustments (13)
Change in unrealized gain on available-for-
sale securities 1
------------------------------------------------------------------
Total comprehensive income
------------------------------------------------------------------
Common dividends paid (8)
Issuance of stock under employee
compensation plans, net of tax benefit 1
Issuance of common stock to CRISP
Purchase and retirement of common stock (6)
Purchase of treasury stock - preferred (1)
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax (1)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan
Amortization of unearned compensation
------------------------------------------------------------------
Balance at December 31, 1999 $ 75 $(18) $ 67 $ -- $763 $(56)
==================================================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Notes
Deferred Receivable Total Total
Unearned Employee for Restricted Stockholders' Comprehensive
Compensation Benefits Stock Equity Income
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $(30) $(59) $(25) $706
-------------------------------------------------
Net income $ 38
Foreign currency translation adjustments (13)
Change in unrealized gain on available-for-
sale securities 1
------------------------------------------------- ----
Total comprehensive income $ 26
------------------------------------------------- ====
Common dividends paid
Issuance of stock under employee
compensation plans, net of tax benefit
Issuance of common stock to CRISP
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
Amortization of unearned compensation 4
-------------------------------------------------
Balance at December 31, 1999 $(26) $(58) $(25) $722
=================================================
</TABLE>
7
<PAGE> 8
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 ("Cabot"). Investments in 20 to 50 percent owned affiliates
are accounted for on the equity method. Intercompany transactions have been
eliminated.
The unaudited consolidated 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 Cabot's Form 10-K for the year ended September
30, 1999.
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,
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. SPECIAL ITEMS AND BUSINESS DEVELOPMENTS
During fiscal 1999, Cabot began implementation of initiatives to reduce
costs and improve operating efficiencies. In connection with these efforts,
in fiscal 1999 Cabot recorded a $26 million charge for capacity
utilization and cost reduction initiatives. These Chemicals Group charges
included $16 million for severance and termination benefits for
approximately 265 employees, of which $7 million was paid out in 1999, and
a charge of $10 million for the retirement of certain long-lived plant
assets, primarily at the Australian carbon black facility and European
plastics masterbatch operations. An additional $6 million for severance and
termination benefits was paid out in the first quarter of fiscal 2000.
Cabot expects these initiatives to be substantially completed by the end of
fiscal 2000.
During 1996, Cabot acquired an 80% ownership interest in P.T. Continental
Carbon Indonesia ("PTCCI"), an Indonesian carbon black plant located in
Merak, Indonesia. During 1998, the financial and economic circumstances in
Indonesia and the region resulted in a significant decline in demand for
carbon black. As a result, management halted production at this plant. In
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets", Cabot recognized in
the third quarter of 1998 an impairment loss of $60 million for the
difference between the carrying value of PTCCI's long-lived assets of $77
million and the estimated fair value. The charge related to the Chemicals
Group consisted of $34 million for property, plant and equipment and other
assets and $26 million for goodwill and other intangible assets. Cabot has
continued to maintain the idled facility and has recently begun assessing
demand for carbon black in the region and has initiated the customer
reapproval process with plans for restarting production.
8
<PAGE> 9
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
UNAUDITED
C. RECLASSIFICATION
Certain amounts were reclassified in fiscal 1999 to reflect changes in
Cabot's organization during the year and to conform to the fiscal 2000
presentation.
D. COMMITMENTS AND CONTINGENCIES
During January 2000, Cabot entered into a sales agreement to provide
natural gas to a customer in North America. The contract is designed to
provide the customer with 70 billion cubic feet of vaporized natural gas
per year at prevailing market prices expiring in 2020.
E. LNG COMMODITIES
Cabot is exposed to natural gas price fluctuations that can affect its
sales revenues and supply costs. Cabot, from time to time, enters into
commodity futures contracts, commodity price swaps, and/or option contracts
to hedge a portion of firmly committed and anticipated transactions against
such natural gas price fluctuations. Cabot monitors its exposure to ensure
overall effectiveness of its hedge positions.
As of December 31, 1999, the notional principal amount for the commodity
futures contracts, commodity price swaps, and option contracts was $98
million, maturing through August 2000. For the first quarter of fiscal
2000, Cabot realized losses associated with the hedging activity of $1
million.
F. INTEREST RATE SWAPS
Cabot maintains a percentage of fixed and variable rate debt within defined
parameters. Cabot uses interest rate swaps to hedge its exposure on fixed
and variable rate debt positions. During the first quarter of fiscal 2000
the fixed interest rate on the $100 million notional principal amount of
the then remaining two interest rate swap agreements was 7.4%.
During the first quarter of fiscal 2000, Cabot settled one of its remaining
two interest rate swaps. The cost associated with this settlement was
approximately $1 million and will be amortized over the remaining eight
year life of the hedged debt positions. As of December 31, 1999, the
notional principal amount of the remaining interest rate swap agreement was
$50 million, expiring in 2007. For the first quarter of fiscal 2000, the
gains or losses in interest income or expense associated with these
agreements was immaterial.
In January 2000, Cabot settled the remaining interest rate swap. The cost
associated with this settlement was immaterial.
9
<PAGE> 10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
(Preferred shares in thousands and common shares in millions)
UNAUDITED
G. STOCKHOLDERS' EQUITY
The following table summarizes the changes in shares of stock for the three
months ended December 31:
<TABLE>
<CAPTION>
1999
----
<S> <C>
PREFERRED STOCK
Balance at September 30, 1999 75
===
Balance at December 31, 1999 75
===
PREFERRED TREASURY STOCK
Balance at September 30, 1999 10
Purchased preferred treasury stock 1
---
Balance at December 31, 1999 11
===
COMMON STOCK
Balance at September 30, 1999 67
Issued common stock --
Purchased and retired common stock --
---
Balance at December 31, 1999 67
===
</TABLE>
10
<PAGE> 11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
(In millions)
UNAUDITED
H. COMPREHENSIVE INCOME
The pre-tax, tax, and after-tax effects of the components of other
comprehensive loss for the three months ended December 31 are shown below:
<TABLE>
<CAPTION>
Pre-tax Tax After-tax
------- --- ---------
<S> <C> <C> <C>
1999
Foreign currency translation adjustments $(13) $ -- $(13)
Unrealized holding gain arising during period on
marketable equity securities 2 (1) 1
---- ---- ----
Other comprehensive loss $(11) $ (1) $(12)
==== ==== ====
</TABLE>
The balance of related after-tax components comprising accumulated other
comprehensive loss as of December 31 is summarized below:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Foreign currency translation adjustment $(60)
Unrealized gain on marketable equity securities 4
-----
Accumulated other comprehensive loss $(56)
=====
</TABLE>
11
<PAGE> 12
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 1999
(In millions, except per share amounts)
UNAUDITED
I. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the three
months ended December 31 as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator) $ 37 $ 31
===== =====
Weighted-average common shares outstanding 67 67
Less: Contingently issuable shares (3) (2)
----- -----
Adjusted weighted-average shares (denominator) 64 65
===== =====
Basic EPS $0.57 $0.48
===== =====
DILUTED EPS
Income available to common shares $ 37 $ 31
Dividends on preferred stock 1 1
Less: Income effect of assumed conversion of preferred stock (1) (1)
----- -----
Income available to common shares plus assumed conversions (numerator) $ 37 $ 31
===== =====
Weighted-average common shares outstanding 67 67
Effect of dilutive securities: Stock-based compensation(1) 6 7
----- -----
Adjusted weighted-average shares (denominator) 73 74
===== =====
Diluted EPS $0.50 $0.43
===== =====
</TABLE>
(1) Of the options to purchase shares of common stock outstanding at December
31, 1999, 1 million shares were not included in the computation of diluted
EPS because those 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)
December 31, 1999
(In millions)
UNAUDITED
J. FINANCIAL INFORMATION BY SEGMENT
The framework for segment reporting is intended to give analysts and other
financial statement users a view of Cabot "through the eyes of management".
It designates Cabot's internal management reporting structure as the basis
for determining Cabot's reportable segments, as well as the basis for
determining the information to be disclosed for those segments. The
following table provides financial information by segment for the three
months ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MICRO-
CHEMICALS PERFORMANCE SPECIALTY ELECTRONICS LIQUEFIED SEGMENT UNALLOCATED CONSOLIDATED
GROUP MATERIALS FLUIDS MATERIALS NATURAL GAS TOTAL AND OTHER TOTAL
--------- ----------- --------- ----------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Net sales and other operating revenues(1)(2) $322 $ 51 $ 4 $ 35 $102 $514 $(21) $493
Profit (loss) before taxes(3) $ 53 $ 8 $ (2) $ 9 $ 4 $ 72 $(12) $ 60
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Net sales and other operating revenues(1)(2) $298 $ 47 $ 3 $ 21 $ 54 $423 $(15) $408
Profit (loss) before taxes(3) $ 49 $ 5 $ -- $ 4 $ 2 $ 60 $(12) $ 48
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Unallocated and other net sales and other operating revenues includes the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Equity affiliate sales $ (20) $ (16)
Royalties paid by equity affiliates 1 2
Interoperating segment revenues (2) (1)
----- -----
Total $ (21) $ (15)
====== ======
- -----------------------------------------------------------------------------
</TABLE>
Unallocated and other profit (loss) before taxes includes the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Interest expense $ (11) $ (11)
General unallocated income (expense)(4) -- 1
Equity in net income of affiliated companies (1) (2)
----- -----
Total $ (12) $ (12)
====== ======
- -----------------------------------------------------------------------------
</TABLE>
(1) Net sales for certain operating segments within Chemicals Group include
100% of equity affiliate sales. Specialty Fluids sales include transfers of
ore to Performance Materials at market-based prices.
(2) Unallocated and other reflects an adjustment for equity affiliate sales and
interoperating segment revenues and includes royalties paid by equity
affiliates.
(3) Segment profit is a measure used by Cabot's chief operating decision-makers
to measure consolidated operating results and assess segment performance.
It includes equity in net income of affiliated companies, royalties paid by
equity affiliates, minority interest, and corporate governance costs, and
excludes foreign currency transaction gains (losses), interest income
(expense) and dividend income.
(4) General unallocated income (expense) includes foreign currency transaction
gains and (losses), interest income (expense), and dividend income and
reflects an adjustment for minority interest.
13
<PAGE> 14
CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
I. RESULTS OF OPERATIONS
Sales and operating profit by segment are shown in Footnote J to the
Consolidated Financial Statements.
THREE MONTHS ENDED DECEMBER 31, 1999 VERSUS
THREE MONTHS ENDED DECEMBER 31, 1998
Net income for the first quarter of fiscal 2000 was $38 million ($0.50 per
diluted common share), compared to $32 million ($0.43 per diluted common share)
in the same quarter a year ago. Sales increased 21% to $493 million from $408
million last year. Operating profit increased $12 million to $72 million from
$60 million last year. The increase in earnings is attributable to improved
volumes in all of the Company's businesses combined with significant cost
reduction efforts, which more than offset the effects of higher feedstock costs
and a stronger U.S. dollar.
Sales for the Chemicals Group, which includes the carbon black, plastics, fumed
silica and inkjet colorants businesses, increased 8% to $322 million from $298
million last year. Higher volumes and selling prices increased sales 13% and 1%,
respectively. Negative effects of a stronger U.S. dollar reduced sales by 6%.
Operating profit increased 8% to $53 million.
Carbon black sales increased 5% due to higher volumes and slightly improved
selling prices, partially offset by negative effects of a stronger U.S. dollar.
The carbon black business experienced higher volumes in all regions, most
notably in South America and Asia Pacific. Carbon black also benefited from cost
reduction initiatives announced last July. Reductions in selling and
administrative and, to a lesser extent, conversion and research and development
costs improved operating profit by approximately $13 million. The significant
increase in oil prices, however, caused average feedstock costs to increase
approximately 25%, or $19 million, quarter-over-quarter. Overall, improved
volumes and reduced costs offset higher feedstock and negative currency effects,
causing a 6% improvement in operating profit.
Plastics sales increased 16%. The price of thermoplastics resins has increased
rapidly during the last nine months. Such price fluctuations are not unusual in
the plastics industry, but the temporary effect has been to cause customers to
increase their inventories and, hence, to increase the sales volumes for this
business. The greater volumes and new business activity increased sales 24%.
Lower selling prices reduced sales by 1%. Negative effects of a stronger U.S.
dollar reduced sales by 7%. Significant volume improvement and manufacturing
cost reductions more than offset the increase in polymer and carbon black
feedstock costs, resulting in an operating profit improvement of 53%.
Fumed silica sales increased 11% on 10% greater volumes. Selling prices were
slightly higher in the first quarter of fiscal 2000 versus the first quarter of
last year. Volume improvements, driven mainly by increased sales to Dow Corning,
were offset by increased operating costs related to the Company's new fumed
silica plant in Midland, Michigan, causing slightly lower operating profit
compared with last year's first quarter.
The Company's inkjet colorants business reported slightly improved operating
profit in the form of reduced losses.
Performance Materials sales were $51 million in the first quarter of fiscal 2000
compared with $47 million in 1999. Operating profit increased 60% largely due to
improved volumes driven by increased demand for tantalum capacitors from the
telecommunications and electronics industries.
Specialty Fluids sales in the first quarter were $4 million versus $3 million
last year. This business focuses on commercializing cesium formate drilling and
completion fluids for oil and gas wells, however, sales to date have been
generated primarily from the production and sale of spodumene and tantalum. As
of the end of the first
14
<PAGE> 15
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
quarter, cesium formate was used successfully in three North Sea completion
operations. Each trial completion operation was performed for a different major
oil company. The cost of cesium formate trials reduced operating profit by $2
million. Additional trials are expected as interest in cesium formate continues
to grow. In addition, management plans to re-open its cesium formate plant
during the second quarter of fiscal 2000. Production was suspended in the fourth
quarter of fiscal 1999 because of the large inventory built for initial testing.
Microelectronics Materials (MMD) sales increased almost 70% to $35 million from
$21 million last year. Strength in demand and broader use by the semiconductor
industry of the chemical mechanical planarization process caused volumes to grow
48%. Higher average selling prices improved sales 22%. Operating profit
increased to $9 million primarily due to improved volumes and increased use of
higher-value new products, offset somewhat by increased selling, technical, and
administrative expenses.
Sales for Liquefied Natural Gas (LNG) were $102 million in the first quarter
compared with $54 million last year. LNG volumes doubled primarily due to the
new Trinidad supply. Additionally, LNG experienced modestly higher year-to-year
selling prices. Improved volumes caused operating profit to increase to $4
million from $2 million last year. Two events, however, reduced operating profit
by approximately $5 million more than expected. First, the new Berkshire power
plant, a large new customer with which Cabot recently signed a long-term supply
contract, did not come on line in October 1999 as scheduled. Cabot began
deliveries under the contract during December 1999. Second, Cabot incurred
approximately $2.5 million of costs, net, related to a bearing failure in the
Matthew.
Research and technical service spending was $15 million for the first quarter,
down 21% from $19 million in the first quarter of last year. The decrease
reflected reduced spending in the Chemicals Group. Selling and administrative
expenses were $50 million in the first quarter versus $53 million last year. The
decrease reflects cost improvement efforts across Cabot's businesses.
The Company's effective tax rate was 36% for the quarters ended December 31,
1999 and 1998.
II. CASH FLOWS AND LIQUIDITY
During the first three months of the year the Company's operations provided $25
million of cash compared to using $14 million of cash during last year's first
quarter.
Capital spending for the first three months of the year was $26 million. The
major components of the fiscal 2000 capital program include maintenance and
replacement projects, MMD plant expansion and expansion of vaporization capacity
at the Company's LNG terminal in Everett, Massachusetts.
On January 14, 2000, Cabot's Board of Directors authorized the repurchase of 4
million shares of the Company's common stock, superseding prior authorizations.
During the first three months of fiscal 2000, the Company purchased
approximately 0.3 million shares of common stock.
Cabot's ratio of total debt (including short-term debt net of cash) to capital
was 44% at both September 30 and December 31, 1999.
Cabot maintains a credit arrangement under which it may borrow up to $300
million at floating rates. As of December 31, 1999, the Company had $205
million of available borrowing capacity and no borrowing outstanding under this
arrangement. The facility is available through January 3, 2002. Management
expects cash from operations and present financing arrangements, including
Cabot's unused line of credit and shelf registration, to be sufficient to meet
the Company's cash requirements for the foreseeable future.
15
<PAGE> 16
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
III. YEAR 2000 READINESS DISCLOSURE
In anticipation of the January 1, 2000 date change, Cabot developed and
implemented a Year 2000 plan to address possible Year 2000 disruptions. During
the December 31, 1999 to January 1, 2000 date change, Cabot monitored its
operations and computer systems. Minor problems with some dates on isolated
computer generated reports occurred and were corrected. Cabot will monitor its
operations and computer systems during the leap year date changes from February
28, 2000 through March 1, 2000.
The cost of implementing system and program changes necessary to address Year
2000 issues did not have a material effect on Cabot's results of operations or
financial condition. Cabot identified Year 2000 expenses as costs incurred
specifically to modify hardware or software to be Year 2000 compliant where such
modifications did not add any other functionality. Cabot considered the vast
majority of its projects over the last year to be part of its ongoing global
business system renewal initiatives. Cabot recognizes that a benefit of those
initiatives was Year 2000 compliance. However, those initiatives were not
undertaken primarily for Year 2000 compliance and, therefore, were not treated
as Year 2000 costs. Specific Year 2000 compliance efforts were supported by a
reallocation of existing information technology and human resources. Cabot did
not separately track all costs associated with employees working on Year 2000
projects. In addition to the global business system renewal efforts, Cabot
budgeted and spent approximately $2 million during fiscal 1999 and the first
quarter of fiscal 2000 on direct Year 2000 remediation efforts.
Although Cabot believes that its Year 2000 plan successfully eliminated
potential problems associated with the Year 2000 date change, it cannot
guarantee that the plans, work and funds expended corrected all Year 2000 errors
or that the information systems will not generate Year 2000 errors in the
future, particularly when operating with third party computer systems or data.
To date Cabot has not experienced any material disruptions resulting from third
parties' Year 2000 problems. Cabot cannot, however, predict reliably the effect
any such future disruptions may have on Cabot, its operations or financial
condition.
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.
16
<PAGE> 17
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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule for the period ended December 31, 1999,
filed herewith. (Not included with printed copy of the Form 10-Q.)
27.2 Restated Financial Data Schedule for the period ended December 31,
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 December 31, 1999.
17
<PAGE> 18
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 9, 2000 /s/ Robert L. Culver
------------------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: February 9, 2000 /s/ William T. Anderson
------------------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 345
<ALLOWANCES> 4
<INVENTORY> 264
<CURRENT-ASSETS> 687
<PP&E> 2,039
<DEPRECIATION> 1,031
<TOTAL-ASSETS> 1,859
<CURRENT-LIABILITIES> 504
<BONDS> 377
0
57
<COMMON> 67
<OTHER-SE> 598
<TOTAL-LIABILITY-AND-EQUITY> 1,859
<SALES> 493
<TOTAL-REVENUES> 494
<CGS> 357
<TOTAL-COSTS> 357
<OTHER-EXPENSES> 16
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 60
<INCOME-TAX> 21
<INCOME-CONTINUING> 38
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 5
<INVENTORY> 284
<CURRENT-ASSETS> 669
<PP&E> 2,012
<DEPRECIATION> 974
<TOTAL-ASSETS> 1,894
<CURRENT-LIABILITIES> 500
<BONDS> 427
0
61
<COMMON> 66
<OTHER-SE> 575
<TOTAL-LIABILITY-AND-EQUITY> 1,894
<SALES> 408
<TOTAL-REVENUES> 409
<CGS> 277
<TOTAL-COSTS> 277
<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-BASIC> 0.48
<EPS-DILUTED> 0.43
</TABLE>
