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, 1996 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> <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 DECEMBER 31, 1996, THE COMPANY HAD 70,148,885 SHARES OF COMMON STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING. -1-
2 CABOT CORPORATION INDEX <TABLE> <CAPTION> Part I. Financial Information Page No. -------- <S> <C> <C> Item 1. Financial Statements Consolidated Statements of Income Three Months Ended December 31, 1996 and 1995 3 Consolidated Balance Sheets December 31, 1996 and September 30, 1996 4 Consolidated Statements of Cash Flows Three Months Ended December 31, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 12 </TABLE> -2-
3 Part I. Financial Information Item 1. Financial Statements CABOT CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months Ended December 31, 1996 and 1995 (Dollars in thousands, except per share amounts) UNAUDITED <TABLE> <CAPTION> 1996 1995 --------- --------- <S> <C> <C> Revenues: Net sales and other operating revenues $ 398,825 $ 443,031 Interest and dividend income 1,679 2,461 --------- --------- Total revenues 400,504 445,492 --------- --------- Costs and expenses: Cost of sales 279,683 305,133 Selling and administrative expenses 53,660 46,631 Research and technical service 20,926 14,277 Interest expense 9,670 9,421 Other charges, net 1,821 5,273 --------- --------- Total costs and expenses 365,760 380,735 --------- --------- Income before income taxes 34,744 64,757 Provision for income taxes (12,507) (23,960) Equity in net income of affiliated companies 3,974 3,723 Minority interest (1,098) (1,169) --------- --------- Net income 25,113 43,351 Dividends on preferred stock, net of tax benefit of $524 and $475 (820) (883) --------- --------- Income applicable to primary common shares $ 24,293 $ 42,468 ========= ========= Weighted average common shares outstanding (000): Primary 72,019 75,114 Fully diluted (Note A) 78,088 81,318 Income per common share: Primary $ 0.34 $ 0.57 ========= ========= Fully diluted (Note A) $ 0.32 $ 0.53 ========= ========= Dividends per common share $ 0.10 $ 0.09 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. -3-
4 CABOT CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1996 and September 30, 1996 (Dollars in thousands) ASSETS <TABLE> <CAPTION> December 31 September 30 1996 1996 (Unaudited) ----------- ----------- <S> <C> <C> Current assets: Cash and cash equivalents $ 42,328 $ 58,148 Accounts and notes receivable (net of reserve for doubtful accounts of $4,813 and $5,267) 292,041 363,763 Inventories: Raw materials 79,591 71,061 Work in process 68,103 72,914 Finished goods 83,097 72,163 Other 43,889 44,292 ----------- ----------- Total inventories 274,680 260,430 Prepaid expenses 18,897 17,408 Deferred income taxes 10,424 10,034 ----------- ----------- Total current assets 638,370 709,783 ----------- ----------- Investments: Equity 79,826 79,372 Other 106,223 95,680 ----------- ----------- Total investments 186,049 175,052 ----------- ----------- Property, plant and equipment 1,777,003 1,712,045 Accumulated depreciation and amortization (836,036) (809,053) ----------- ----------- Net property, plant and equipment 940,967 902,992 ----------- ----------- Other assets: Intangible assets, net of amortization 41,782 42,735 Deferred income taxes 2,494 2,402 Other assets 26,497 24,617 ----------- ----------- Total other assets 70,773 69,754 ----------- ----------- Total assets $ 1,836,159 $ 1,857,581 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. -4-
5 CABOT CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1996 and September 30, 1996 (Dollars in thousands) LIABILITIES & STOCKHOLDERS' EQUITY <TABLE> <CAPTION> December 31 September 30 1996 1996 (Unaudited) ----------- ----------- <S> <C> <C> Current liabilities: Notes payable to banks $ 244,520 $ 233,779 Current portion of long-term debt 114,570 16,175 Accounts payable and accrued liabilities 232,211 250,749 U.S. and foreign income taxes payable 20,486 26,083 Deferred income taxes 953 918 ----------- ----------- Total current liabilities 612,740 527,704 ----------- ----------- Long-term debt 219,796 321,497 Deferred income taxes 91,748 88,320 Other liabilities 151,024 147,991 Commitments and contingencies (Note B) Minority interest 26,697 27,138 Stockholders' Equity (Note C): Preferred Stock: Authorized: 2,000,000 shares of $1 par value Series A Junior Participating Preferred Stock Issued and outstanding: none Series B ESOP Convertible Preferred Stock 7.75% Cumulative Issued: 75,336 shares (aggregate redemption value of $70,671 and $71,193) 75,336 75,336 Less cost of shares of preferred treasury stock (7,089) (6,565) Common stock: Authorized: 200,000,000 shares of $1 par value Issued: 135,549,936 shares 135,550 135,550 Additional paid-in capital 23,993 23,618 Retained earnings 1,193,791 1,176,708 Less cost of common treasury stock (including unearned amounts of $13,791 and $16,611) (685,292) (650,981) Deferred employee benefits (63,855) (64,283) Unrealized gain on marketable securities 34,253 29,874 Foreign currency translation adjustments 27,467 25,674 ----------- ----------- Total stockholders' equity 734,154 744,931 ----------- ----------- Total liabilities and stockholders' equity $ 1,836,159 $ 1,857,581 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. -5-
6 CABOT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended December 31, 1996 and 1995 (Dollars in thousands) UNAUDITED <TABLE> <CAPTION> 1996 1995 -------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 25,113 $ 43,351 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 27,041 23,542 Deferred tax provision (490) 62 Equity in net income of affiliated companies, net of dividends received (1,629) (258) Other, net 2,165 2,414 Changes in assets and liabilities, net of consolidation of equity affiliates: (Increase) decrease in accounts receivable (11,637) 837 Increase in inventory (13,584) (34,677) Decrease in accounts payable and accruals (19,342) (17,283) Increase in prepayments and intangible assets (3,102) (695) Decrease in income taxes payable (5,688) (266) Other, net 1,992 (29,295) -------- --------- Cash (used) provided by operating activities 839 (12,268) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (58,648) (28,621) Proceeds on sale of business 35,000 Investments and acquisitions (3,962) Cash from consolidation of equity affiliates 9,306 Other 101 1,254 -------- --------- Cash used by investing activities (27,509) (18,061) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (3,684) (10,247) Increase in short-term debt 59,754 103,345 Purchases of treasury stock (38,217) (90,410) Sales and issuances of treasury stock 1,407 2,025 Cash dividends paid to stockholders (8,031) (7,499) Redemption of preferred stock purchase rights (1,840) -------- --------- Cash used by financing activities 11,229 (4,626) Effect of exchange rate changes on cash (379) 159 -------- --------- Decrease in cash and cash equivalents (15,820) (34,796) Cash and cash equivalents at beginning of period 58,148 90,792 -------- --------- Cash and cash equivalents at end of period $ 42,328 $ 55,996 ======== ========= </TABLE> The accompanying notes are an integral part of these financial statements. -6-
7 CABOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 A. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Cabot Corporation and majority-owned and controlled domestic and foreign subsidiaries. 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. 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, 1996. 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, 1996 and 1995. 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. Earnings Per Share The computation of fully diluted earnings per share considers the conversion of the Company's Series B ESOP Convertible Preferred Stock held by the Company's Employee Stock Ownership Plan, and also includes the potentially dilutive effects of the Company's Equity Incentive Plan adopted in 1989 and the 1996 Equity Incentive Plan. Reclassification Certain amounts in fiscal 1996 have been reclassified to conform to the fiscal 1997 presentation. B. COMMITMENTS AND CONTINGENCIES The Company has various lawsuits, claims and contingent liabilities. 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. As of the end of the quarter, approximately $37 million was committed for various capital projects. -7-
8 CABOT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) December 31, 1996 UNAUDITED C. STOCKHOLDERS' EQUITY The following table summarizes the changes in stockholders' equity for the three months ended December 31, 1996. (Dollars in thousands) <TABLE> <CAPTION> Preferred Stock Preferred Common Stock --------------- Treasury Stock ------------ Shares -------------- Shares Issued Value Shares Cost Issued Value ------ ------- ----- ------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> Balance at September 30, 1996 75,336 $75,336 5,744 $(6,565) 135,549,936 $135,550 Net income Common stock dividends paid Issuance of treasury stock under employee compensation plans Purchase of treasury stock - common Purchase of treasury stock - preferred 213 (524) Sale of treasury stock to Cabot Retirement Incentive Savings Plan Preferred stock dividends paid to Employee Stock Ownership Plan, net of tax Principal payment by Employee Stock Ownership Plan under guaranteed loan Amortization of unearned compensation Unrealized gain, net of deferred tax Foreign currency translation adjustments ------ ------- ----- ------- ----------- -------- Balance at December 31, 1996 75,336 $75,336 5,957 $(7,089) 135,549,936 $135,550 ====== ======= ===== ======= =========== ======== </TABLE> <TABLE> <CAPTION> Common Additional Treasury Stock Paid-in Retained -------------- Unearned Capital Earnings Shares Cost Compensation -------- ----------- ----------- --------- ------------ <S> <C> <C> <C> <C> <C> Balance at September 30, 1996 $ 23,618 $ 1,176,708 63,960,725 $(634,370) $(16,611) Net income 25,113 Common stock dividends paid (7,210) Issuance of treasury stock under employee compensation plans (216) (24,344) 174 470 Purchase of treasury stock - common 1,503,460 (37,693) Purchase of treasury stock - preferred Sale of treasury stock to Cabot Retirement Incentive Savings Plan 591 (38,790) 388 Preferred stock dividends paid to Employee Stock Ownership Plan, net of tax (820) Principal payment by Employee Stock Ownership Plan under guaranteed loan Amortization of unearned compensation 2,350 Unrealized gain, net of deferred tax Foreign currency translation adjustments -------- ----------- ----------- --------- -------- Balance at December 31, 1996 $ 23,993 $ 1,193,791 65,401,051 $(671,501) $(13,791) ======== =========== =========== ========= ======== </TABLE> <TABLE> <CAPTION> Unrealized Foreign Deferred Gain/(Loss) Currency Total Employee Marketable Translation Stockholders' Benefits Securities Adjustments Equity -------- ---------- ----------- --------- <S> <C> <C> <C> <C> Balance at September 30, 1996 $(64,283) $29,874 $25,674 $ 744,931 Net income 25,113 Common stock dividends paid (7,210) Issuance of treasury stock under employee compensation plans 428 Purchase of treasury stock - common (37,693) Purchase of treasury stock - preferred (524) Sale of treasury stock to Cabot Retirement Incentive Savings Plan 979 Preferred stock dividends paid to Employee Stock Ownership Plan, net of tax (820) Principal payment by Employee Stock Ownership Plan under guaranteed loan 428 428 Amortization of unearned compensation 2,350 Unrealized gain, net of deferred tax 4,379 4,379 Foreign currency translation adjustments 1,793 1,793 -------- ------- ------- --------- Balance at December 31, 1996 $(63,855) $34,253 $27,467 $ 734,154 ======== ======= ======= ========= </TABLE> -8-
9 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 industry segment are shown in the accompanying table on page 11. THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 Net income for the first quarter of fiscal 1997 was $25.1 million ($0.32 per common share, fully diluted), compared with net income of $43.4 million ($0.53 per common share, fully diluted) in the same quarter a year ago. Net sales and other operating revenues decreased 10% to $398.8 million from $443.0 million. Total operating profit was $50.4 million for the quarter, compared to $80.1 million in the same quarter a year ago, reflecting lower margins in the Company's carbon black business. Results for the first quarter of fiscal 1996 included $65.7 million of revenues and $2.9 million of operating profit from the Company's former coal handling subsidiary, which was sold at the end of that fiscal year. In the Specialty Chemicals and Materials Group, net sales were $340.2 million, compared with $344.0 million last year. The effects of greater specialty chemical volumes globally were more than offset by the effects of lower carbon black selling prices, primarily in the European and Pacific Asia markets. The Group reported operating profit of $45.9 million for the first quarter, compared with $71.8 million for the first quarter of fiscal 1996. More than half of the year-to-year decrease in operating profit occurred in the Company's European carbon black business. Price concessions made during 1996 and higher year-to-year feedstock costs, which the Company could not recover from its customers, resulted in tighter margins in that business. Higher year-to-year feedstock costs also affected North American carbon black margins during the first quarter, but were partially offset by higher selling prices. The Company's Performance Materials Division (CPM), which primarily manufactures tantalum products, experienced 20% lower volumes in the first quarter compared to the same quarter last year. CPM's customers continued to draw down their tantalum inventories from excessive levels caused by a slowdown in the U.S. electronics industry market during 1996. The Cab-O-Sil fumed silica business reported increased earnings for the first quarter, due primarily to an 18% increase in volumes from the first quarter of last year. As expected, increased spending on research and development and marketing costs associated with new product, new business and market development initiatives accounted for $6.8 million of the year-to-year operating profit decrease. The Company is pursuing a number of new product and new business development opportunities as part of a growth strategy. In the Energy Group, sales decreased to $58.6 million from $99.0 million in the first quarter of fiscal 1996. The first quarter of fiscal 1996 results included revenues of $65.7 million from the Company's former coal handling subsidiary, TUCO INC. The Company sold TUCO at the end of fiscal 1996. Excluding TUCO revenues from the Energy Group's 1996 results to form a comparative basis, the Group's revenues increased 76% in the first quarter of fiscal 1997. -9-
10 CABOT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) I. RESULTS OF OPERATIONS (CONTINUED) The Energy Group's operating profit was $4.5 million, compared with $8.3 million in the first quarter of 1996. Excluding the coal handling business' results and a gain from the reduction of the Company's ownership position in the Trinidad liquefaction joint venture from the 1996 results to form a comparative basis, the Group's operating profit increased $2.4 million, or 114% in the first quarter of fiscal 1997. The earnings increase reflected higher gas prices and greater availability of liquefied natural gas. The Company's income tax rate for the first quarter was 36%, compared with a 37% rate for fiscal 1996. II. CASH FLOWS AND LIQUIDITY During the quarter, the Company generated $0.8 million of cash from operations. Working capital increased $44.6 million primarily due to business seasonality. Effective September 30, 1996, the Company sold its TUCO INC. subsidiary for $77 million. Accordingly, during the quarter, the Company received $35 million in cash, which included $8 million of working capital adjustments, and $50 million in the form of a debt repayment on Cabot's behalf from the respective buyer. Capital expenditures totaled $58.6 million during the three months ended December 31, 1996. The Company expects to spend a total of $200 million to $225 million on capital projects during fiscal year 1997. The major components of the 1997 capital program include new carbon black capacity to support the contracts with U.S. tire manufacturers, Clean Air Act compliance, differentiated product manufacturing capabilities, new business expansion spending and normal plant maintenance spending. During the quarter, the Company repurchased approximately 1,500,000 shares of common stock. These repurchases were funded with the proceeds from the sale of its TUCO INC. subsidiary and short term borrowings. At the end of the quarter, approximately 1,800,000 shares remained under the April 1996 repurchase authorization for 4,000,000 shares. The Company's ratio of total debt (including short-term debt net of cash) to capital increased to 41% from 40% at the beginning of the three month period. On February 6, 1997, the Company issued $90 million of medium-term notes maturing from 2004 to 2011 with a weighted average interest rate of approximately 7%. The proceeds from the issuance were used to repay short-term debt. During the quarter, the Company renegotiated its line of credit agreement. The facility was increased to $300 million from $250 million and was extended to January 3, 2002. Management expects cash from operations and present financing arrangements, including the Company's unused line of credit of $300 million, to be sufficient to meet the Company's cash requirements for the foreseeable future. -10-
11 CABOT CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) (Dollars in millions, except per share amounts) UNAUDITED <TABLE> <CAPTION> Three Months Ended ------------------------ 12/31/96 12/31/95 -------- -------- <S> <C> <C> Industry Segment Data Sales: Specialty Chemicals and Materials $ 340.2 $ 344.0 Energy 58.6 99.0 ------- ------- Net sales $ 398.8 $ 443.0 ======= ======= Operating profit: Specialty Chemicals and Materials $ 45.9 $ 71.8 Energy 4.5 8.3 ------- ------- Total operating profit 50.4 80.1 Interest expense (9.7) (9.4) General corporate/other expenses (6.0) (5.9) ------- ------- Income before income taxes 34.7 64.8 Provision for income taxes (12.5) (24.0) Equity in net income of affiliated companies 4.0 3.7 Minority interest (1.1) (1.1) ------- ------- Net income 25.1 43.4 Dividends on preferred stock (0.8) (0.9) ------- ------- Income applicable to primary common shares $ 24.3 $ 42.5 ======= ======= Income per common share: Primary $ 0.34 $ 0.57 ======= ======= Fully diluted $ 0.32 $ 0.53 ======= ======= </TABLE> -11-
12 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> 4 Second Supplemental Indenture, dated as of January 31, 1997, between Cabot Corporation and State Street Bank and Trust Company, Trustee, filed herewith. 11 Statement Regarding Computation of Per Share Earnings, filed herewith. 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges, filed herewith. 25 Statement of Eligibility under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee, filed herewith. 27 Financial Data Schedule, 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, 1996. -12-
13 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 14, 1997 /s/ Kenyon C. Gilson ------------------------------------------ Kenyon C. Gilson Executive Vice President and Chief Financial Officer Date: February 14, 1997 /s/ William T. Anderson ------------------------------------------ William T. Anderson Acting Corporate Controller (Chief Accounting Officer) -13-