Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
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 or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
TWO SEAPORT LANE, SUITE 1300
BOSTON, MASSACHUSETTS 02210
(Address of Principal Executive Offices) (Zip Code)
(617) 345-0100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE PER SHARE:
67,037,083 SHARES OUTSTANDING BOSTON STOCK EXCHANGE
AT NOVEMBER 30, 2000 NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's common stock held
beneficially or of record by shareholders who are not directors or executive
officers of the Registrant at November 30, 2000, was approximately
$1,512,170,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Shareholders are incorporated by reference in Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
GENERAL
Cabot's business was founded in 1882 and incorporated in the State of
Delaware in 1960. The Company has businesses in chemicals, performance
materials, and specialty fluids. The Company and its affiliates have
manufacturing facilities in the United States and more than 20 other countries.
The terms "Cabot" and "Company" as used in this Report refer to Cabot
Corporation and its consolidated subsidiaries.
The description of the Company's businesses is as of September 30, 2000,
unless otherwise noted. Information regarding the Company's revenues and profits
by business segment and geographic area appears in the Continuing Operations
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations which appears in Item 7, and in Note R of the Notes to the
Company's Consolidated Financial Statements, which appears in Item 8 of this
annual report on Form 10-K for the fiscal year ended September 30, 2000.
During the fiscal year ended September 30, 2000, Cabot repurchased
approximately 1.8 million shares of its common stock, $1.00 par value per share
(the "Common Stock"), for the purpose of reducing the total number of shares
outstanding as well as offsetting shares issued under the Company's employee
incentive compensation programs.
Additional information regarding significant events affecting the Company
during its fiscal year ended September 30, 2000, appears in Management's
Discussion and Analysis of Financial Condition and Results of Operations which
appears in Item 7 of this annual report on Form 10-K for the fiscal year ended
September 30, 2000.
CHEMICALS GROUP
CARBON BLACK
The Company manufactures and sells carbon black, which consists of fine
particles. The Company's carbon black products are grouped generally into three
categories: tire blacks, industrial product blacks and special blacks. Tire
blacks are used as reinforcing agents in tires, and are marketed to tire
companies for use in tires both for commercial and passenger vehicles.
Industrial product blacks are used as reinforcing agents in industrial products
such as extruded profiles, hoses and molded goods. Industrial product blacks are
marketed to the automotive, construction and rubber manufacturing industries,
among others. Special blacks, which are non-rubber grades of carbon black, are
used to provide pigmentation, conductivity and ultraviolet protection, among
other things, in many specialty applications such as inks, plastics, cables and
coatings.
The Company believes that it is the leading manufacturer of carbon black in
the world, with an estimated one-quarter of the worldwide production capacity
and market share of carbon black. The Company competes in the manufacture of
carbon black primarily with two companies having an international presence and
with at least 20 other companies in various regional markets in which it
operates (see "Other" below).
Carbon black plants owned by Cabot or a subsidiary are located in
Argentina, Australia, Brazil, Canada, Colombia, The People's Republic of China,
the Czech Republic, England, France (two plants), India, Indonesia (two plants),
Italy, Japan, The Netherlands, Spain and the United States (four plants).
Affiliates of the Company own carbon black plants in Japan (two plants),
Malaysia, Mexico and Venezuela. Headquarters for the Company's carbon black
business are located in Boston, Massachusetts, with regional headquarters in
Atlanta, Georgia (North America), Sao Paulo, Brazil (South America), Suresnes,
France (Europe) and Kuala Lumpur, Malaysia (Pacific Asia). Some of the plants
listed above are built on leased land (see "Properties," below). Because of
improving economic conditions in Asia, production at the Company's Merak
facility, one of the two it owns in Indonesia, has been resumed. See Note B of
the Notes to the Company's
3
Consolidated Financial Statements which appears in Item 8 of this annual report
on Form 10-K for the fiscal year ended September 30, 2000.
The principal raw materials used in the manufacture of carbon black are
carbon black oils, a portion of the residual oil pool which is derived from
petroleum refining operations and from the distillation of coal tars and the
production of ethylene throughout the world. The availability of raw materials
has not been and is not expected to be a significant factor for the Company's
carbon black business. Raw material costs are influenced by the cost and
availability of oil worldwide and the availability of various types of carbon
black oils. During the second half of fiscal year 1999 and fiscal year 2000, the
price of raw materials for the carbon black business increased significantly.
Sales are generally made by employees of the Company or its affiliates in
the countries where carbon black plants are located. Export sales are generally
made through distributors or sales representatives in conjunction with Company
employees. In fiscal year 1999, the Company's plastics business began marketing
carbon black to the plastics industry. Sales are made under various trademarks
owned by Cabot. (See "Other," below.)
The Company's carbon black business continues to pursue a dual strategy of
cost improvement and new product development. Management continues to support
carbon black new product development initiatives that have significant customer
involvement or sponsorship. The Company's management continues to believe that
if the Company can achieve a combination of effective cost and capacity
management and commercialization of new product initiatives, the Company's
carbon black business should have earnings growth opportunities over the next
several years.
The Company combined its existing plastics business, which consisted of
concentrates and compounds, with a portion of the special blacks category of the
Company's carbon black business. The Company's plastics business now markets
carbon black, and produces and markets black and white thermoplastic
concentrates and specialty compounds, to the plastics industry. Major
applications for the materials produced and sold by the Company's plastics
business include pipe and tubing, packaging and agricultural film, automotive
components, cable sheathing and special packaging for use in the electronics
industry. Customers use the carbon black marketed by the plastics business to
provide color, UV protection, electrical conductivity and opacity in plastics.
Sales are made under various Cabot trademarks, each of which is either
registered or pending in one or more countries (see "Other" below). Sales are
made by Company employees and through sales representatives and distributors
primarily in Europe (concentrates, compounds and carbon black), North America
(carbon black) and Asia (concentrates, compounds and carbon black). The
thermoplastic concentrates and compounds sold are produced in Company facilities
in Europe and Hong Kong. The carbon black sold is produced in Company facilities
in Europe, North America and Asia. The plastics business is headquartered in
Leuven, Belgium. In Europe, the Company is one of the five leading producers of
thermoplastic concentrates. Other than carbon black feedstock, the primary raw
materials used in this business are titanium dioxide, thermoplastic resins and
mineral fillers. The price of thermoplastic resins increased rapidly during the
second half of fiscal 1999 and during fiscal year 2000. 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 Company expects that if the price of
thermoplastic resins declines substantially, the level of orders will decrease.
Raw materials are, in general, readily available.
FUMED METAL OXIDES
The Company manufactures and sells fumed metal oxides, including fumed
silica and fumed alumina and dispersions thereof under various trademarks. Fumed
silica is an ultra-fine, high-purity particle used as a reinforcing, thickening,
abrasive, thixotropic, suspending or anti-caking agent in a wide variety of
products produced for the automotive, construction, microelectronics, and
consumer products industries, including adhesives, sealants, cosmetics, inks,
silicone rubber, coatings, polishing and pharmaceuticals. The headquarters for
the Company's fumed silica business are located in Billerica, Massachusetts.
This business has two North American fumed silica manufacturing plants, which
are located in Tuscola, Illinois and Midland,
2
4
Michigan. The Midland plant was completed in September 1999 and began operations
in November 1999. The performance of the plant was subject to delays in reaching
full anticipated output levels during 2000. Full output and qualification are
expected to be achieved in fiscal year 2001. The Company owns a manufacturing
plant in Wales and owns a manufacturing plant in Germany. In addition, a joint
venture owned 50% by the Company and 50% by an Indian entity owns a plant in
India, which began operations in the spring of 1998. Raw materials for the
production of fumed silica are various chlorosilane feedstocks. The feedstocks
are either purchased or toll converted for owners of the materials. The Company
has long-term procurement contracts or arrangements in place for the purchase of
feedstock for this business, which it believes will enable it to meet its raw
material requirements for the foreseeable future. In addition the Company buys
some materials in the spot market in order to help ensure flexibility and
minimize costs. Sales of fumed metal oxides products are made by Company
employees and through distributors and sales representatives. There are four
principal producers of fumed silica in the world (see "Other" below). The
Company believes it is the leading producer and seller of this chemical in the
United States and second worldwide.
INKJET COLORANTS
Inkjet colorants are pigment-based black colorants, which are designed to
replace traditional pigment dispersions and dyes used in inkjet printing
applications. Products produced by the Company's inkjet colorants business,
formed in 1996, target various printing markets, including home and office
printers, wide format printers, and commercial and industrial printing
applications. The Company's colorants have become integral components in several
inkjet printing systems introduced to the market since 1998. Sales are made by
Company employees and through distributors and sales representatives. The
headquarters of the Company's inkjet colorants business are located in
Billerica, Massachusetts. Raw materials for the inkjet colorants business
include carbon black, as well as other products, from various sources. The
Company believes that all raw materials for this business are in adequate
supply.
PERFORMANCE MATERIALS
The Company produces tantalum, niobium (columbium) and their alloys for the
electronic materials and refractory metals industries, and cesium, germanium,
rubidium and tellurium for a wide variety of industries including the fiber
optics and specialty chemicals industries. The Company is discontinuing
operations at its Revere, Pennsylvania semi-works facility and will no longer
produce germanium, rubidium and tellurium. The cesium business will be
transferred to the management of Cabot's Specialty Fluids business headquartered
in The Woodlands, Texas. Tantalum, which accounts for the majority of this
business' sales, is produced in various forms including powder and wire for
electronic capacitors. Tantalum and niobium and their alloys are also produced
in wrought form for non-electronic applications such as chemical process
equipment and the production of superalloys, and for various other industrial
and aerospace applications. The headquarters and principal manufacturing
facility for this business are in Boyertown, Pennsylvania. An affiliate of the
Company has a manufacturing plant in Japan. Raw materials are obtained by the
Company from ores mined principally in Africa, Australia, Brazil and Canada and
from by-product tin slags from tin smelting mainly in Malaysia and Thailand. The
strong current market demand has caused a short-term worldwide shortage in raw
materials with increasing pressure on spot prices in the raw materials market.
The Company continues to seek new sources of tantalum supply, and has entered
into long-term contract commitments to incent the expansion of current sources
to support future demand. Sales in the United States are made by Company
employees, with export sales to Europe handled by Company employees, independent
European sales representatives and an affiliated company. Sales in Japan and
other parts of Asia are handled primarily through employees of the Company's
Japanese affiliate. There are currently two principal groups producing tantalum
and niobium in the western world, with an emerging competitor in China. The
Company believes that it, together with its Japanese affiliate, is the leading
producer of electronic grade tantalum powder products, with competitors having
greater production in some other product lines (see "Other" below).
3
5
SPECIALTY FLUIDS
The Company's specialty fluids business produces and markets cesium formate
as a drilling and completion fluid for use in high pressure and high temperature
oil and gas well operations. Cesium formate is a solids-free high-density fluid
that has a low viscosity permitting it to flow readily in oil and gas wells. The
Company expects the fluid to be especially beneficial to operators of wells
where the oil or gas is difficult to reach. The fluid is resistant to high
temperatures, does not damage producing reservoirs and is readily biodegradable.
The Company has been shipping the fluid to Aberdeen, Scotland for application in
its target market, the North Sea. Expanded commercial tests of the Company's
cesium formate in this region during fiscal year 2000 continued to yield
positive results. The Company expects those initial test results to boost
industry confidence in the fluid, leading to additional applications. The
specialty fluids business has its headquarters in The Woodlands, Texas, and has
a mine and a cesium formate manufacturing facility in Manitoba, Canada. The
Company expects to make cesium formate sales through existing oil field service
companies, with periodic direct sales to oil and gas operating entities.
Customers will either rent or purchase cesium formate from the Company. Those
who rent cesium formate will be required to purchase any of the product that is
not returned to the Company after the job is completed. The principal raw
material used in this business is pollucite ore, which the Company obtains from
its mine. The Company has an adequate supply of this cesium-rich ore, with
approximately 82% of the world's known cesium reserves. Because each job for
which cesium formate is used requires a large volume of the product, the
specialty fluids business must carry a large inventory. Based on its current
information, the Company expects to reclaim between 60% and 90% of the cesium
formate used in each job, which will be returned to inventory for use in
additional well operations. The Company's specialty fluids business also markets
tantalum and spodumene to the electronics and pyroceramics industries. Sales of
those products are made either by Company employees or its agent.
DISCONTINUED BUSINESSES
As reported in the Company's Form 8-K filed October 3, 2000, on September
19, 2000 the Company sold all of its liquefied natural gas (LNG) business, which
is being reported as a discontinued operation in the Financial Information being
filed as a part of this annual report on Form 10-K. The Company also completed
the initial public offering of approximately 20% of its microelectronics
materials business, conducted by Cabot Microelectronics Corporation, in the
third quarter of fiscal year 2000. The offering was followed by a distribution
of the Company's remaining shares of Cabot Microelectronics Corporation common
stock to Cabot shareholders which was completed on September 29, 2000, which was
also reported in the Company's Form 8-K filed October 3, 2000. This business is
also being reported as a discontinued operation in the Financial Information
being filed as a part of this annual report on Form 10-K. See Note C of the
Notes to the Company's Consolidated Financial Statements which appears in Item 8
of this annual report on Form 10-K for the fiscal year ended September 30, 2000.
OTHER
The Company owns and is a licensee of various patents, which expire at
various times, covering many of its products, as well as processes and product
uses. Although the products made and sold under these patents and licenses are
important to the Company, the loss of any particular patent or license would not
materially affect the Company's business, taken as a whole. The Company sells
its products under a variety of trademarks, the loss of any one of which would
not materially affect the Company's business, taken as a whole.
With the exception of the Company's former LNG business referred to above,
the Company's businesses are generally not seasonal in nature, although they
experience some decline in sales in the fourth fiscal quarter due to European
summer plant shutdowns. The Company believes that as of September 30, 2000,
approximately $84 million of backlog orders for its businesses were firm,
compared to firm backlog orders as of September 30, 1999 of approximately $41
million (which excludes approximately $57 million relating to discontinued
businesses). All of the 2000 backlog orders are expected to be filled during
fiscal year 2001.
4
6
Many of the Company's chemicals and materials are used in products
associated with the automotive industry such as tires, extruded profiles, hoses,
molded goods, capacitors and paints. The Company's financial results are
affected by the cyclical nature of the automotive industry, although a large
portion of the market is for replacement tires and other parts which are less
subject to automobile industry cycles. The Company has long-term carbon black
supply contracts with certain of its North American tire customers. Those
contracts are designed to provide such customers with a secure supply of carbon
black and reduce the volatility in the Company's carbon black volumes and
margins caused, in part, by automobile industry cycles.
Five major tire and rubber customers, one fumed metal oxides customer, two
capacitor materials customers and one microelectronics customer represent a
material portion of the total net sales and operating revenues of the Company's
businesses; the loss of one or more of these customers might materially
adversely affect the Company's businesses taken as a whole.
Competition in the Company's businesses is based on price, service,
quality, product performance and technical innovation. Competitive conditions
also necessitate carrying an inventory of raw materials and finished goods in
order to meet customers' needs for prompt delivery of products. Competition in
quality, service, product performance and technical innovation is particularly
significant for the fumed metal oxides, industrial products, special blacks,
inkjet colorants and tantalum businesses. The Company's competitors, other than
in the carbon black business, vary by product group.
The Company owns approximately 41.4% of the common stock of Aearo
Corporation (formerly Cabot Safety Holdings Corporation) after the restructuring
of the Company's safety products and specialty composites business in July 1995.
The Company has two representatives serving on the Board of Directors of Aearo
Corporation and its principal subsidiaries ("Aearo"). Aearo manufactures and
sells personal safety products, as well as energy absorbing, vibration damping
and impact absorbing products for industrial noise control and environmental
enhancement.
EMPLOYEES
As of September 30, 2000, the Company had approximately 4,500 employees.
Approximately 300 employees in the United States are covered by collective
bargaining agreements. The Company believes that its relations with its
employees are satisfactory.
RESEARCH AND DEVELOPMENT
The Company develops new and improved products and processes and greater
operating efficiencies through Company-sponsored research and technical service
activities including those initiated in response to customer requests.
Expenditures by the Company for such activities are shown in the Consolidated
Statements of Income which appears in Item 8 of this annual report on Form 10-K
for the fiscal year ended September 30, 2000.
SAFETY, HEALTH AND ENVIRONMENT
The Company's operations are subject to various environmental laws and
regulations. Over the past several years, the Company has expended considerable
sums to add, improve, maintain and operate facilities for environmental
protection.
The Company has been named as a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(the "Superfund law") with respect to several sites (see "Legal Proceedings,"
below). During the next several years, as remediation of various environmental
sites is carried out, the Company expects to spend a significant portion of its
$38 million environmental reserve for costs associated with such remediation.
Additions are made to the reserve based on the Company's continuing analysis of
its share of costs likely to be incurred at each site. The sites are primarily
associated with divested businesses.
In 1996, the International Agency for Research on Cancer ("IARC") revised
its evaluation of carbon black from Group 3 (insufficient evidence to make a
determination regarding carcinogenicity) to Group 2B
5
7
(known animal carcinogen, possible human carcinogen), based solely on results of
studies of female rat responses to the inhalation of carbon black. The Company
has communicated this change in IARC's evaluation of carbon black to its
customers and employees and has made changes to its material safety data sheets
and elsewhere, as appropriate. The Company continues to believe that available
evidence, taken as a whole, indicates that carbon black is not carcinogenic to
humans, and does not present a health hazard when handled in accordance with
good housekeeping and safe workplace practices as described in the Company's
material safety data sheets.
In October 1999, the California Office of Environmental Health Hazard
Assessment ("OEHHA") published a Notice of Intent to add "carbon black (airborne
particles of respirable size)" to its list of chemicals known to the state to
cause cancer promulgated pursuant to the California Safe Drinking Water and
Toxic Enforcement Act, commonly referred to as Proposition 65. OEHHA stated it
was taking this action in light of IARC's 1996 reclassification of carbon black.
Proposition 65 requires businesses to give warnings to individuals before they
knowingly or intentionally expose them to chemicals subject to its requirements,
and it prohibits businesses from knowingly discharging or releasing the
chemicals into water or onto land where they could contaminate drinking water.
The Company is working with the International Carbon Black Association and
various customers and carbon black user groups to respond to the decision by
OEHHA to add carbon black to the list of chemicals subject to Proposition 65.
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, and management's expectations for the Company's product development
program. Actual results may differ materially from the results anticipated in
the statements included herein due to a variety of factors, including but not
limited to the following: market supply and demand conditions, fluctuations in
currency exchange rates, changes in the rate of economic growth in the United
States and other major international economies, changes in regulatory
environments, changes in trade, monetary and fiscal policies around the world,
pending and future litigation, cost of raw materials, patent rights of the
Company and others, 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. The Company undertakes no
obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document.
FINANCIAL INFORMATION ABOUT SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Segment financial data are set forth in the Continuing Operations section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7, and in Note R of the Notes to the Company's Consolidated
Financial Statements, which appears in Item 8 of this annual report on Form 10-K
for the fiscal year ended September 30, 2000. The Company's former LNG business
and microelectronics materials business are being reported as discontinued
operations in the Financial Information being filed as a part of this annual
report on Form 10-K. A significant portion of the Company's revenues and
operating profits is derived from overseas operations. The profitability of the
Company's segments is affected by fluctuations in the value of the U.S. dollar
relative to foreign currencies. (See the Geographic Area Information portion of
Note R for further information relating to sales and profits and long-lived
assets by geographic area and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".) Currency fluctuations and nationalization
and expropriation of assets are risks inherent in international operations. The
Company has taken steps it deems prudent in its international operations to
diversify and otherwise to protect against these risks, including the use of
foreign currency financial instruments to reduce the risk associated
6
8
with changes in the value of certain foreign currencies compared to the U.S.
dollar. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Management" in Item 7, and Note Q of the Notes to
the Company's Consolidated Financial Statements, which appears in Item 8, of
this annual report on Form 10-K for the fiscal year ended September 30, 2000.)
ITEM 2. PROPERTIES
The Company owns, leases and operates office, production, storage,
distribution, marketing and research and development facilities in the United
States and in foreign countries.
The principal facilities of the Company's business units are described
generally in Item 1 above.
The principal facilities owned by the Company in the United States are: (i)
the administrative offices and manufacturing plants of its carbon black
operations in Louisiana, Massachusetts, Texas and West Virginia; (ii) its
research and development facilities in Illinois, Massachusetts and Pennsylvania;
and (iii) administrative offices and manufacturing plants of its fumed metal
oxides business in Illinois and Michigan, and its performance materials business
in Pennsylvania.
The Company's principal foreign owned facilities are held through
subsidiaries and consist primarily of manufacturing facilities, together with
administrative facilities and research and development facilities. The largest
of such facilities are located in Australia, China, the Czech Republic, England,
France, India, Indonesia and Italy, and are used by the Company's carbon black
business. Administrative offices and manufacturing facilities of the fumed metal
oxides business are owned in Wales. Portions of the owned facilities in the
Czech Republic, France, Japan and Spain, and all of the owned facilities in
China, Hong Kong, India, Indonesia, The Netherlands and Wales are located on
leased land.
The principal facilities leased by subsidiaries in locations outside the
United States are administrative offices and research and development facilities
of the carbon black operations in France and Malaysia, and administrative
offices and manufacturing facilities of the specialty fluids business in Canada.
In addition, the Company holds mining rights in Canada.
The principal facilities leased by the Company in the United States are:
(i) its corporate headquarters in Massachusetts, and (ii) the headquarters of
its North American carbon black business in Georgia. The Company relocated its
corporate headquarters to a new location within Boston, Massachusetts in
September 2000.
The Company's administrative offices are generally suitable and adequate
for their intended purposes. Existing manufacturing facilities of the Company
are sufficient to meet the Company's anticipated requirements for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits and environmental
proceedings wherein substantial amounts are claimed. The following is a
description of the significant proceedings pending as of September 30, 2000,
unless otherwise specified.
Environmental Proceedings
In November 1997, Cabot was sued in the District Court of Potter County,
Texas by K N Energy, Inc. ("KNE") and various related entities for environmental
remediation costs at approximately 45 gas plants and compressor stations located
in New Mexico, Oklahoma and Texas. In July 1998, an arbitration panel ordered
Cabot to pay $3.38 million for past response costs incurred by KNE as well as up
to 80% of future groundwater remediation costs at six of the sites as such costs
are incurred by KNE. Cabot and Kinder Morgan, Inc., (KNE's successor) have
agreed in principle to settle all remaining issues with Cabot paying an
additional $942,000 and taking remedial responsibility directly at three of the
remaining disputed sites. Cabot estimates the future remediation costs at these
three sites to be in a range of $500,000 to $900,000.
7
9
Beginning in May 1986, the Department of Environmental Protection of the
State of New Jersey ("NJDEP") issued directives under the New Jersey Spill
Compensation and Control Act to Cabot and other potentially responsible parties
("PRPs") to fund a remedial investigation for the cleanup of a six acre site in
Old Bridge Township near Perth Amboy, New Jersey. Cabot and other PRPs
contributed funds for a remedial investigation and feasibility study which was
conducted by a consultant to NJDEP. In January 1996, ten companies, including
Cabot, entered into an Administrative Consent Order with NJDEP which required
them to perform an additional study of the site and to handle minor remedial
work. Most of the work required by the 1996 order is complete, and the companies
have submitted the results of their soils investigation to NJDEP. NJDEP has not
determined what, if anything, will be required to address site soils. In 1997,
the companies entered into an Administrative Consent Order with NJDEP whereby
they agreed to contribute funds toward the cost of an interim groundwater remedy
involving the collection of contaminated groundwater at the site and its
conveyance to a local sewer authority over a two year period pending a final
decision concerning long-term groundwater cleanup. The companies are currently
collecting data and evaluating whether a remedy of natural attenuation for
groundwater contamination associated with the site may be acceptable. Until
additional studies are complete, it is not possible to identify what
remediation, if any, will be required at the site. Cabot, along with certain
other PRPs ("Plaintiff PRPs") filed litigation against the current owner of the
property (Spiral Metal), the United States of America, and several other parties
in U.S. District Court for the District of New Jersey in January 1999. The
purpose of the litigation is to obtain deed restrictions on the property
(allowing for non-residential cleanup standards to be applied) from the current
owner and to obtain monetary contributions from the United States and the other
parties which would be applied to future response costs at the site. The
Plaintiff PRPs have commenced settlement discussions with the defendants and the
litigation has essentially been stayed for a designated period to focus the
parties' resources on the settlement discussions. Union Carbide Corp. and Oakite
Products, two PRPs, filed separate related actions, which include contribution
claims against the Plaintiff PRPs. The court has consolidated the three actions,
all of which are subject to the stay on litigation activity pending settlement
discussions.
In 1986, Cabot sold a manufacturing facility in Reading, Pennsylvania to
NGK Metals, Inc. ("NGK"). In doing so, Cabot agreed to share with NGK the costs
of certain environmental remediation of the Reading plant site. After the sale,
the United States Environmental Protection Agency ("EPA") issued an order to NGK
requiring it to address soil and groundwater contamination at the site.
Remediation activities at the Reading property are ongoing and the Company is
contributing to the costs associated with those activities.
Several lawsuits have been filed in 2000 in connection with Cabot's
discontinued beryllium operations. Cabot entered the beryllium industry through
an acquisition in 1978. It ceased manufacturing beryllium products at one of the
acquired facilities in 1980, and another portion of Cabot's former beryllium
business was sold to NGK Metals, Inc. in 1986. Two individuals who have resided
for many years in the immediate vicinity of Cabot's former beryllium facility
located in Reading, Pennsylvania have brought suit in United States District
Court for the Eastern District of Pennsylvania against Cabot and NGK for
personal injury allegedly caused by beryllium particle emissions produced at
that facility over the course of many decades. There are also approximately ten
other beryllium liability cases pending against Cabot in Tennessee,
Pennsylvania, Illinois and California. In addition, other individuals who reside
within a 6-mile zone surrounding the Reading facility have filed a purported
class action in Pennsylvania state court seeking the creation of a trust fund to
pay for the medical monitoring of the surrounding resident population. Another
class action has been filed in Pennsylvania state court purportedly on behalf of
all former employees of Cabot and NGK in Pennsylvania also seeking medical
monitoring. A third class action, also filed in the United States District Court
for the Eastern District of Pennsylvania, purports to assert claims on behalf of
a nationwide class of workers who have been employed by customers of various
beryllium manufacturers including Cabot. Plaintiffs in this action seek the
creation of a "medical surveillance and screening program" for all class
members. Finally, other individuals who reside within a 6-mile zone surrounding
Cabot's former facility in Hazelton have filed a purported class action in
Pennsylvania state court seeking the creation of a trust fund to pay for the
medical monitoring of the surrounding resident population. The Company believes
it has valid defenses to these actions and will assert them vigorously in the
various venues in which claims have been asserted. In addition, Cabot is
indemnified by NGK in connection with many of these matters. Moreover,
8
10
recent federal legislation creating a federally funded compensation scheme for
beryllium workers injured or otherwise requiring medical screening or testing
may well affect certain of these pending beryllium cases.
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; 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 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. Remediation efforts at the site are ongoing. Additional
contamination was recently discovered at the site and is currently being
evaluated by the performing companies, including Cabot.
During the summer of 1998, Cabot joined a group of companies in forming the
Ashtabula River Cooperative Group ("ARCG") which collectively agreed on an
allocation for funding private party shares of a public/private partnership (the
Ashtabula River Partnership (the "ARP")), established to conduct navigational
dredging and environmental restoration of the Ashtabula River (the "River") in
Ashtabula, Ohio. The ARP expects to obtain additional funding from both the
federal and state governments for the project under the Federal Water Resources
Development Act ("WRDA"). In September 1999, the ARP issued a Comprehensive
Management Plan ("CMP") which placed an initial estimate of $42 million on the
project. An updated cost estimate for the project is expected soon from the U.S.
Army Corps of Engineers as part of the WRDA process. Under the statutory formula
available for funding this project under WRDA, approximately 68% of its cost is
to be borne by the federal government, leaving 32% of the cost for non-federal
participants. The State of Ohio has pledged a contribution of $7 million to the
project. The ARCG expects to be asked to bear a substantial percentage of the
remaining costs. In addition, the ARCG has received a notice of claim for
natural resource damages related to the River and the amount of that claim
remains to be negotiated with the Natural Resource Trustees.
In 1994, Detrex Chemical Industries, Inc. filed third-party complaints
against eight companies, including Cabot, in connection with material allegedly
sent to the Koski/Reserve Environmental Services ("RES") landfill in Ashtabula,
Ohio. Cabot and other third-party defendants filed complaints against five
additional companies that sent waste to the site. In May 1998, Cabot and certain
other defendants agreed to settle their liability for this matter by agreeing to
fund and conduct a portion of the remedy at the landfill site and to loan RES
$1.2 million to fund cleanup activities of RES on other portions of the site.
Cabot is one of five of the settling defendants that agreed to conduct the work;
the others made one-time cash payments to resolve their liabilities at the site.
Cabot is the holder of a Nuclear Regulatory Commission ("NRC") license for
certain slag waste material deposited on industrial property on Tulpehocken
Street in Reading, Pennsylvania in the late 1960s by a predecessor of Cabot that
had leased a portion of the site to process tin slags. The slag material
contains low levels of uranium and thorium, thus subjecting it to NRC
jurisdiction. A consultant for Cabot has prepared a site decommissioning plan
for the slag material which concludes that the levels of radioactivity in the
slag are low enough that the material can be safely left in place and still meet
NRC requirements for license termination without restrictions. Cabot's
decommissioning plan proposing this in-place remedy was filed with the NRC in
late August 1998. The current owner of the Tulpehocken Street site, the City of
Reading and the Reading Redevelopment Authority (the "RRA") filed requests for a
hearing with the NRC concerning Cabot's decommissioning plan, alleging various
deficiencies with the plan. Cabot has reached an agreement with the City of
Reading and the RRA to settle their claims. Under that agreement, assuming the
NRC approves Cabot's decommissioning plan, Cabot will pay a fixed amount to the
RRA over three or more years. Cabot continues to work with the NRC to obtain
approval of the decommissioning plan.
9
11
In July 1991, EPA instituted litigation against a number of parties, not
including Cabot, seeking to recover its costs incurred in connection with an
investigation of the Berks Associates Superfund Site in Douglassville,
Pennsylvania. Cabot was joined in this litigation as a third-party defendant.
The litigation has been stayed pending settlement negotiations. In April 1996,
EPA proposed that ten companies, including Cabot, undertake the remaining
remediation required at the site and indicated it would be willing to
reconsider, to some extent, the remediation technology to be used. After further
study, the EPA agreed that the alternative remedy is feasible. The companies'
consultant estimates the cost to implement the alternative remedy at the site is
approximately $13 million to $18 million. EPA is in the process of negotiating a
Consent Decree with the companies, including Cabot, concerning implementation of
the alternative remedy. EPA also has claimed approximately $16 million in past
costs at the site, and the companies are also negotiating this claim with EPA.
In 1994, EPA issued a Unilateral Administrative Order to Cabot and 11 other
respondents pursuant to the Superfund law with respect to the Revere Chemical
Site (a/k/a Echo Site) in Nockamixon Township, Bucks County, Pennsylvania (the
"Revere Chemical Site"). The order required the respondents to design and
implement several remedial measures at the Revere Chemical Site. Cabot responded
to EPA's order by indicating that it should not have been named as a respondent
and by raising several objections to the order. Certain other recipients of the
order proceeded to conduct the work required by EPA, and Cabot understands that
the remedial work has been completed. Cabot has been informed by the parties who
performed the work that the total cost of cleanup activities at the site is
estimated to be approximately $12 million, not including certain unreimbursed
costs claimed by EPA. Cabot has initiated communications with the parties that
conducted the work in order to explore whether settlement of Cabot's potential
liability at the site may be feasible. Those discussions are on-going. In August
1999, Cabot received a letter from the U.S. Department of Justice ("DOJ"), which
stated that EPA had asked the DOJ to bring an enforcement action against Cabot
for its failure to comply with the EPA order. Cabot has entered into settlement
discussions with the DOJ and EPA in an attempt to resolve that dispute.
The EPA has recently completed an investigation of certain areas
surrounding the Company's Boyertown, Pennsylvania facility. The investigation
was prompted by media reports of complaints by area farmers of health impacts
and damage to livestock and crops allegedly associated with emissions from the
Boyertown facility. In a report dated November 2000, EPA stated that increased
concentrations of some elements in environmental media at locations near the
Boyertown site did not pose a health threat to the broad community necessitating
a cleanup action by the EPA. The EPA report concluded that EPA could find no
relationship between industrial emissions and reported poor farm production and
animal health concerns. In November 1999, Cabot received a letter from an
attorney representing certain farmers in the area threatening litigation
concerning contamination alleged to be caused by the Boyertown plant. To date,
no formal legal action has been taken. 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. Those studies have been completed and have generally confirmed the
findings of the earlier reports.
In May 2000, the Direction Regionale de L'Industrie, de la Recherche et de
L'Environment ("DRIRE") and the Prefecture de la Seine-Maritime (the
"Prefecture") issued an order to United Chemical France S.A. ("UCF"), a French
subsidiary of Cabot, requiring UCF to undertake a simplified risk assessment
("SRA") of a former waste dump operated by UCF from the mid-1960s to the early
1980s in the Town of Notre Dame de Gravenchon. The SRA was completed at the end
of November 2000. It concluded that the site does not pose a major risk of
groundwater contamination, and that no further investigation is necessary. The
report has been submitted to the authorities in France but has not yet been
approved by them. When Cabot purchased UCF in 1985, the seller indemnified Cabot
for matters relating to events occurring prior to the sale, including
environmental matters. Cabot has notified the seller that Cabot believes that
the indemnification would cover costs related to the Final Order.
In January 1999, DRIRE notified Cabot France S.A., a French subsidiary of
Cabot, that the DRIRE was investigating groundwater pollution in the Montee des
Pins area where Cabot France S.A.'s carbon black plant in Berre l'Etang, France
is located. The DRIRE convened meetings of various industries in the area and
asked
10
12
them to work together on a study of area groundwater conditions. Ten companies,
including Cabot France S.A., are working together to fund and undertake the
initial study requested by the DRIRE. Cabot estimates that its share of this
initial study will cost less than $10,000. Based on the results to date from
this study, it is highly unlikely that Cabot will be required to fund future
groundwater remediation in the area.
Cabot, along with a number of other companies, is a PRP under the Superfund
law with respect to the King of Prussia Technical Corp. site in Winslow
Township, New Jersey. Work on site remediation was completed several years ago
except for ongoing operation and maintenance of groundwater treatment
facilities. Cabot and four other companies involved have agreed on the portions
of the costs to be borne by each company. In a December 22, 1998 letter to Cabot
and the other four companies, EPA demanded approximately $4.1 million in past
costs at the site. This dispute has been resolved through settlement
negotiations between the group of companies and EPA for $1.7 million. The prior
agreement among Cabot and the four other companies fixes each party's respective
share of the costs to be paid to EPA under the settlement.
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 industrial facility.
As a result, a substantial amount of carbon black feedstock was released at the
neighboring facility. An expert for the public prosecutor in Ravenna has
completed an initial investigation of the facts of the spill. He has concluded
that the pipeline was damaged from drilling activity conducted by a third party,
and that Cabot is not responsible for causing the spill. In the interim, the
Company undertook emergency remediation efforts immediately following the spill.
Claims have been asserted against the Company 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, the Company has asserted a claim against the third
parties that caused the spill. The municipal environmental authorities issued an
order to the Company and the parties who damaged the pipeline ordering them to
undertake further activities to address conditions caused by the spill. The
Company and the other parties have challenged issuance of the order, and the
administrative courts in Italy are hearing the matter. The parties, including
the Company, have entered into an agreement to fund most of the activities
required by the administrative order, and work under that agreement is
proceeding. As of December 2000, the Company has spent in excess of $5 million
responding to the spill. The Company has notified its insurers about the spill
and has received reimbursement from them for a substantial portion of those
costs. At this point, the Company does not know the likely course that legal
proceedings will take, and does not have an estimate of the costs, if any, that
the Company will ultimately bear.
The Louisiana Department of Environmental Quality ("LADEQ") notified Cabot
in a January 5, 1995 letter of its potential liability with respect to the Great
National Oil/Ida Gas site in Ida, Louisiana (the "Ida Site") and requested
information regarding Cabot's activities related to the Ida Site or involvement
with the Hartsell Oil Company of Rodessa, Louisiana. Cabot responded on February
15, 1995 by indicating that during the 1982 to 1984 time period, Cabot's
Arcadia, Louisiana facility sold used oil to Hartsell for reprocessing. Cabot's
Arcadia facility was sold to Haynes International, Inc. ("Haynes") in December
1986. Cabot believes that it is entitled to indemnity from Haynes pursuant to
the acquisition agreement by which Haynes acquired the facility. Haynes has
denied Cabot's request for indemnification but also requested additional
information concerning this claim. In 1997, Cabot and eight other parties
received a demand letter from LADEQ for oversight costs incurred in connection
with the site from July 1989 to December 1996. Cabot paid its pro-rata share of
those costs in April 1997, which payment was an immaterial amount. In May 2000,
Cabot learned that the LADEQ intends to require the parties it has previously
notified, including the Company, to perform investigation and cleanup activities
at the site. The potential costs of those activities is unknown at this time.
Cabot has received various requests for information and notifications that
it may be a PRP at several other Superfund sites.
As of September 30, 2000, approximately $38 million was reserved for
environmental matters by the Company. This amount represents the Company's
current best estimate of costs likely to be incurred based on
11
13
its analysis of the extent of cleanup required, alternative cleanup methods
available, abilities of other responsible parties to contribute and its
interpretation of laws and regulations applicable to each site.
Other Proceedings
The Company is a defendant in a patent infringement case, Rodel v. Cabot,
now pending in the federal court in Delaware, in which it is alleged that the
Company's W2000 slurries and possibly other slurries made for use in Chemical
Mechanical Planarization infringe, or contribute to the infringement of, a
patent owned by Rodel (the "Roberts Patent"). The Company has filed an answer
denying infringement and asserting that the Roberts Patent is not valid. The
Company has also filed a motion to dismiss on the grounds that the plaintiff is
not the owner of the Roberts Patent. Rodel requested re-examination of the
Roberts Patent by the US Patent & Trademark Office. This lawsuit has been stayed
pending re-examination. The Motion to Dismiss was denied with leave to renew. It
appears that the Company has valid defenses and will vigorously defend the
action. The Company is a defendant in a second patent infringement case, also
entitled Rodel v. Cabot and pending in the federal court in Delaware, in which
it is alleged that unidentified slurries made by the Company for use in Chemical
Mechanical Planarization infringe, or contribute to the infringement of, one or
two other patents owned by Rodel (the "Brancaleoni Patents"). The Company has
filed an answer denying infringement and asserting that the Brancaleoni Patents
are not valid. The Company's motion to dismiss on the grounds that the plaintiff
is not the owner of the Brancaleoni Patents was denied. Discovery is in the
early phase. It appears that the Company has valid defenses and will vigorously
defend the action. Cabot Microelectronics Corporation, which was spun off from
the Company in 2000, has assumed the Company's liabilities in connection with
both of the foregoing cases.
The Company has various other lawsuits, claims and contingent liabilities
arising in the ordinary course of its business. 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.
(See Note P of the Notes to the Company's Consolidated Financial Statements,
which appears in Item 8 of this annual report on Form 10-K for the fiscal year
ended September 30, 2000.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
14
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below for each person who was an executive officer of Cabot at
the end of the 2000 fiscal year, is information, as of November 30, 2000,
regarding his or her age, position(s) with Cabot, the periods during which he or
she served as an officer and his or her business experience during at least the
past five years:
NAME AGE OFFICES HELD/BUSINESS EXPERIENCE DATES HELD
---- --- -------------------------------- ----------
John E. Anderson........ 60 Cabot Corporation
Vice President, Safety, Health and
Environmental Affairs March 2000 to present
Vice President and Director, Global
Quality March 1996 to March 2000
William T. Anderson..... 45 Cabot Corporation
Vice President March 2000 to present
Controller September 1997 to present
Acting Corporate Controller and Assistant
Controller February 1997 to September 1997
Assistant Controller July 1995 to February 1997
Private Eyes Sunglass Corporation
Chief Operating Officer 1991 to 1995
Chief Financial Officer 1990 to 1991
Samuel W. Bodman........ 62 Cabot Corporation
Chairman of the Board October 1988 to present
President February 1991 to February 1995
January 1987 to October 1988
Chief Executive Officer February 1988 to present
Kennett F. Burnes....... 57 Cabot Corporation
President February 1995 to present
Chief Operating Officer March 1996 to present
Executive Vice President October 1988 to February 1995
Robert L. Culver........ 52 Cabot Corporation
Executive Vice President and Chief
Financial Officer April 1997 to present
Northeastern University
Senior Vice President and Treasurer October 1990 to April 1997
Ho-il Kim............... 42 Cabot Corporation
Vice President and General Counsel July 2000 to present
Counsel August 1992 to July 2000
William P. Noglows...... 42 Cabot Corporation
Executive Vice President March 1998 to present
Vice President February 1994 to March 1998
Director of Global Manufacturing November 1997 to present
General Manager, Cab-O-Sil Division November 1992 to November 1997
Roland R. Silverio...... 53 Cabot Corporation
Vice President May 1998 to present
Director of Human Resources/Organizational
Effectiveness May 1998 to present
Director of Organizational Development January 1998 to May 1998
October 1992 to October 1995
Manager of Training and Development July 1990 to October 1992
The Franklin Group
Managing Partner October 1995 to January 1998
13
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Cabot's Common Stock is listed for trading (symbol CBT) on the New York,
Boston, and Pacific stock exchanges and the Chicago Board Options Exchange. As
of September 30, 2000, there were approximately 1,700 holders of record of
Cabot's Common Stock. The price range in which the stock has traded, as reported
on the composite tape, and the quarterly cash dividends for the past two years
are shown below.
STOCK PRICE AND DIVIDEND DATA
DECEMBER MARCH JUNE SEPTEMBER YEAR
-------- ------ ------ --------- ------
FISCAL 2000
Cash dividends per share....................... $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44
Price range of common stock:
High......................................... $23.63 $30.50 $30.88 $38.44 $38.44
Low.......................................... $17.94 $19.06 $24.75 $27.50 $17.94
Close........................................ $20.38 $30.50 $27.27 $31.69 $31.69
DECEMBER MARCH JUNE SEPTEMBER YEAR
-------- ------ ------ --------- ------
FISCAL 1999
Cash dividends per share....................... $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44
Price range of common stock:
High......................................... $31.69 $29.81 $28.50 $25.44 $31.69
Low.......................................... $22.63 $19.75 $21.31 $21.63 $19.75
Close........................................ $27.94 $21.25 $24.19 $23.75 $23.75
ITEM 6. SELECTED FINANCIAL DATA
Cabot Corporation Selected Financial Data:
YEARS ENDED SEPTEMBER 30
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Financial Highlights
Net sales and other operating revenues................... $1,517 $1,354 $1,392 $1,400 $1,694
------ ------ ------ ------ ------
Income from continuing operations........................ $ 108 $ 82 $ 116 $ 90 $ 192
------ ------ ------ ------ ------
Long-term debt........................................... $ 329 $ 419 $ 316 $ 286 $ 322
Minority interest........................................ 31 32 25 23 27
Stockholders' equity..................................... 1,047 706 706 728 745
------ ------ ------ ------ ------
Total capitalization................................ $1,407 $1,157 $1,047 $1,037 $1,094
------ ------ ------ ------ ------
Total assets........................................ $2,134 $1,842 $1,805 $1,826 $1,857
------ ------ ------ ------ ------
Income from continuing operations per common share:
Basic.................................................... $ 1.65 $ 1.24 $ 1.72 $ 1.29 $ 2.72
Diluted.................................................. $ 1.46 $ 1.11 $ 1.53 $ 1.15 $ 2.40
Cash dividends (declared and paid)....................... $ 0.44 $ 0.44 $ 0.42 $ 0.40 $ 0.36
------ ------ ------ ------ ------
Weighted average common shares outstanding in millions
(diluted)................................................ 73 73 75 77 79
------ ------ ------ ------ ------
Information regarding the sale of Cabot's LNG business and the spin-off of Cabot
Microelectronics Corporation common stock can be found in Note C of the Notes to
the Company's Consolidated Financial Statements, which appears in Item 8 of this
annual report on Form 10-K for the fiscal year ended September 30, 2000.
14
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cabot Corporation and subsidiaries (the "Company" or "Cabot") is organized
into three reportable segments: Chemical Businesses, Performance Materials
("CPM"), and Specialty Fluids ("CSF"). The Chemical Businesses are comprised of
the carbon black, fumed metal oxides, and inkjet colorants businesses. In the
past, the plastics business was treated as a separate business unit and its
results were separately reported within the Chemical Businesses. The plastics
business primarily sells carbon black to the plastics industry, either in the
form of dry carbon black or pre-dispersed masterbatch. Therefore, the Company
has elected to integrate plastics results within carbon black.
The following discussion of results of operations includes segment sales
and operating profit before taxes ("PBT"). Segment PBT is a measure used by
chief operating decision-makers to measure the Company's consolidated operating
results and assess segment performance. Cabot's calculation of segment PBT may
not be consistent with the calculation of PBT of other public companies and
segment PBT should not be viewed by investors as an alternative to Generally
Accepted Accounting Principles ("GAAP") measures of income. (Refer to Note R of
the consolidated financial statements for a definition of PBT and additional
segment information).
The following analysis of financial condition and operating results should
be read in conjunction with Cabot's consolidated financial statements and
accompanying notes. Unless a calendar year is specified, all references in this
discussion to years are to Cabot's fiscal years ended September 30.
OVERVIEW
Cabot reported diluted earnings per share of $6.20 in 2000 versus $1.31 in
1999. This substantial earnings increase included both strong operating results
and one-time events. Earnings from operations totaled $1.95 in 2000, including
$0.49 from discontinued operations and a net $0.09 charge for special items. In
2000, special items included environmental charges and plant closure costs
partially offset by insurance recoveries. Earnings from operations totaled $1.31
in 1999, including $0.20 from discontinued operations and a net $0.14 charge for
special items. In 1999, special items included charges for capacity utilization
and cost reduction initiatives, write-offs of certain long-lived plant assets,
and a gain on the sale of K N Energy, Inc. stock. Earnings from operations
totaled $1.61 in 1998, including $0.08 from discontinued operations and net
$0.05 income from special items. In 1998, special items consisted of write-offs
of certain long-lived plant assets and projects offset by a gain on the sale of
K N Energy, Inc. stock.
In 2000, Cabot benefited from higher volumes in all businesses. In addition
to higher volumes, the Chemical Businesses experienced increased pricing and
lower controllable costs which more than offset higher feedstock costs, negative
currency effects, and additional costs associated with the startup of a new
fumed silica facility. CPM contributed to increased operating earnings primarily
as a result of higher volumes. CSF and inkjet colorants also reported
improvements in operating performance in 2000. One-time events included the sale
of the liquefied natural gas ("LNG") business on September 19, 2000 for
approximately $688 million, resulting in a net gain of $4.25 per share.
In July 1999, Cabot announced several initiatives focused on improving
shareholder value. These initiatives included cost reduction measures targeted
at reducing annual costs by $30-35 million, plans for an initial public offering
("IPO") of Cabot Microelectronics Corporation ("CMC"), and management's
intention to review the ownership structure of LNG. The Company's successful
implementation of these initiatives resulted in the sale of LNG, the IPO and
subsequent spin-off of CMC, and the realization of $50 million in cost
reductions in 2000.
Cabot continues to pursue its strategy of managing costs and developing new
products and businesses based on its core competencies. Cabot is also committed
to achieving productivity improvements and further refining its business
portfolio in order to achieve its objectives of increasing earnings and stock
price performance.
15
17
RESULTS OF OPERATIONS
In fiscal 2000, Cabot's operating results were comprised of both
"continuing" and "discontinued" operations. As a result of the sale of LNG and
spin-off of CMC, these businesses are reported as discontinued operations. The
remaining segments, Chemical Businesses, Performance Materials, and Specialty
Fluids, are classified as continuing operations.
Cabot's sales for 2000, 1999 and 1998 were $1,517 million, $1,354 million
and $1,392 million, respectively, on a continuing operations basis. In 2000,
greater volumes and higher selling prices increased sales by 12% and 6%,
respectively, while negative currency exchange effects partially offset these
increases and reduced revenue by 6%. Sales decreased $38 million in 1999 as
compared to 1998 due to reduced volumes and lower selling prices in the Chemical
Businesses and negative currency trends.
2000 SEGMENT SALES
- ------------------
Chemical Businesses......................................... 85%
Performance Materials....................................... 14%
Specialty Fluids............................................ 1%
2000 SALES BY GEOGRAPHIC REGION
- -------------------------------
North America............................................... 43%
Europe...................................................... 32%
Latin America............................................... 10%
Asia Pacific................................................ 15%
CONTINUING OPERATIONS
CHEMICAL BUSINESSES: CARBON BLACK, FUMED METAL OXIDES, AND INKJET COLORANTS(1)
SEGMENT SALES SEGMENT PBT
------------- -----------
(DOLLARS IN MILLIONS)
2000........................................ $1,360 $180
1999........................................ 1,224 163
1998........................................ 1,295 187
- ---------------
(1) Financial information includes distribution sales and equity in net income
of joint ventures.
Sales for the Chemical Businesses were $1,360 million in 2000, compared
with $1,224 million in 1999 and $1,295 million in 1998. In 2000, higher volumes
increased sales by 11%. In addition to greater volumes, improved pricing and a
significant cost reduction effort offset the impact of higher feedstock costs
and a stronger US dollar. Feedstock costs increased every quarter in fiscal 2000
and reached all-time high levels in the fourth fiscal quarter of 2000. The cost
reduction effort which began in the fourth quarter of 1999 amounted to $50
million in annual cost savings in fiscal 2000. In 1999, diminished pricing in
the Chemical Businesses, unfavorable currency trends and lower volumes offset
lower average feedstock costs. As a result, sales decreased 5% and PBT declined
13% in 1999 versus 1998.
Carbon black sales were up 10% from last year on greater volumes and
slightly higher prices. Volume growth in all regions, especially Asia Pacific,
which realized 20% volume growth each quarter over quarter, led to an overall 9%
increase in carbon black volumes. While rising feedstock costs and a stronger US
dollar negatively impacted carbon black's profitability, greater volumes,
significant cost reductions, and improved pricing resulted in an annual increase
in PBT of 39%.
In 2000, the fumed silica business was renamed Fumed Metal Oxides ("FMO")
to reflect the broadening of its product line to include other oxides. Strong
demand for silicone rubbers, CMP slurries, and niche applications continued to
drive increases in volumes and sales which were up 7% and 12%, respectively. The
FMO business broadened its product line by constructing a fumed alumina unit in
Tuscola, Illinois. However, PBT for the FMO business was diminished as compared
to 1999, principally resulting from higher
16
18
raw material costs and additional operating costs associated with the start-up
of its new silica plant in Midland, Michigan.
Inkjet colorants continued to grow both sales and volumes in 2000. During
the year, inkjet colorants secured an additional printer platform with a second
printer manufacturer. As a result of the increase in the number of printers and
multifunction devices using inkjet colorants, sales increased 60% in 2000.
OUTLOOK FOR 2001
Subject to U.S. and global economy fluctuations, the Chemical Businesses
expect to achieve moderate volume growth in all businesses. The businesses
expect demand to remain firm, especially in FMO and certain carbon black markets
in 2001.
The carbon black business expects modest volume growth worldwide, driven
primarily from growth in South America and Asia Pacific. The continued strong US
dollar and high oil prices will likely result in negative comparisons, year over
year, for currency and feedstock costs. It is anticipated that this will be
partially offset by some improvement in pricing. As part of a continuous
improvement process, the business will search for cost efficiencies on an
ongoing basis; however, these will be modest compared to fiscal 2000 efforts.
Demand for fumed metal oxides is expected to remain strong in most markets.
In particular, anticipated growth at Cabot Microelectronics Corporation will
contribute to increased demand for fumed silica and fumed alumina. In addition,
increased capacity from the Midland plant will contribute to Cabot's ability to
produce higher volumes.
Inkjet colorants expects to expand its product line with the introduction
of a line of organic colored pigment dispersions intended for use in desktop,
wide format, photo, and industrial printing applications. Inkjet colorants will
continue to see increases in sales and volumes as the installed base of its
printers increases and should contribute modestly to earnings in 2001.
PERFORMANCE MATERIALS(1)
SEGMENT SALES SEGMENT PBT
------------- -----------
(DOLLARS IN MILLIONS)
2000........................................ $215 $38
1999........................................ 187 30
1998........................................ 175 21
- ---------------
(1) Financial information includes distributor sales and equity in net income of
joint ventures.
Performance Materials sales were $215 million in 2000, compared with $187
million in 1999 and $175 million in 1998. Volumes increased 23% in 2000 due to
increased demand for tantalum capacitors by wireless communication companies,
personal and handheld electronics manufacturers, and personal computer makers.
Volumes also increased due to higher sales of Cabot's intermediate products.
Improvements in volumes and prices offset increases in tantalum ore costs,
resulting in a 27% improvement in PBT. In 1999, improvements in volumes, prices,
conversion, and operating expenses offset increases in tantalum ore costs
resulting in a 43% improvement in profitability.
OUTLOOK FOR 2001
The Performance Materials business expects to achieve modest volume growth
in 2001. Increased demand for tantalum will result in higher average raw
materials costs for the tantalum business in fiscal year 2001. Due to previously
committed sales volumes, the Company will not be able to offset these higher
costs in the first fiscal quarter and therefore expects to make a loss in this
segment in the first fiscal quarter. The Company is in the process of
negotiating customer contracts for the calendar year 2001 that may offset its
17
19
higher raw materials costs during the balance of the year and improve its
profitability. However, the outcome of these negotiations remains uncertain.
SPECIALTY FLUIDS
SEGMENT SALES SEGMENT PBT
------------- -----------
(DOLLARS IN MILLIONS)
2000........................................ $20 $(3)
1999........................................ 12 (3)
1998........................................ 13 (2)
Specialty Fluids sales in 2000 were $20 million versus $12 million in 1999
and $13 million in 1998. Higher sales in the Specialty Fluids business resulted
from sales of cesium formate for oilfield drilling applications. In 2000, cesium
formate was successfully used in 19 oil well completion applications. Increased
demand resulted in the re-starting of cesium formate production that was
temporarily suspended in 1999 as a result of excess inventory. Customer trials
of cesium formate drilling and completion fluids by the oil and gas industry
were inhibited in 1999 by an oil industry downturn.
OUTLOOK FOR 2001
CSF continues to aggressively market cesium formate drilling fluids. Though
oil prices were significantly higher in 2000, drilling activity in HPHT
(High-Pressure High-Temperature) wells and drilling activity in the North Sea,
in particular, has not fully rebounded from the oil industry downturn in 1999.
However, activity appears to be increasing and is expected to improve CSF sales
and volumes in 2001.
DISCONTINUED OPERATIONS
Cabot reported earnings from discontinued operations of $0.49 per diluted
common share in 2000 compared to $0.20 per diluted common share in 1999. Income
from operations of discontinued businesses, net of tax, for 2000, 1999 and 1998
was $36 million, $15 million and $6 million, respectively. The $21 million
improvement in income in 2000 versus 1999 was primarily the result of increased
sales of CMC and LNG. Similarly, increased sales in both segments caused a $9
million increase in income from 1998 to 1999. The sale of LNG and the IPO and
spin-off of CMC are summarized in Note C of the consolidated financial
statements.
COMPANY SUMMARY
INCOME FROM CONTINUING OPERATIONS
Income before income taxes was $157 million in 2000, a 39% increase over
$113 million in 1999 and a 1% decline from $159 million in 1998. Income in 2000
was significantly enhanced by higher volumes in all businesses and cost
reduction efforts but was also negatively impacted by special items. In 2000,
special items consisted of an $18 million charge related to plant closing and a
$2 million charge to increase the environmental reserve offset by a $10 million
pre-tax settlement of insurance litigation. The $18 million plant closure charge
included $2 million for severance and termination benefits for approximately 38
employees of the Chemical and Performance Materials Businesses and a $7 million
charge for other facility closing costs, of which none was paid out in 2000. As
of September 30, 2000, $9 million was accrued, most of which will be expended in
fiscal 2001. Also included in the charge is $9 million for the impairment of
long-lived plant assets. These actions will result in reduced depreciation
expense and certain other cost savings. These expenses are included as special
items in the Consolidated Statement of Income. During 1999, special items
included a $10 million gain from the sale of K N Energy, Inc. stock and a $16
million charge for severance and termination benefits for approximately 265
employees and a $10 million charge for the retirement of certain long-lived
plant assets. As of September 30, 1999, $9 million was accrued, of which $8
million was expended in 2000. These plant closings resulted in reduced
depreciation expense and certain other cost savings totaling approximately $50
million. In 1998, special items consisted of a $60 million asset impairment
charge, a
18
20
$25 million write-off in the Performance Materials segment, and a $90 million
gain from the sale of equity securities.
Gross margin improved slightly, by $1 million, in 2000 due to cost
reductions, higher volumes, and higher prices, offset by higher raw material
costs and a stronger US dollar. In 1999, gross margin decreased $44 million as
compared to 1998 as significant declines in carbon black selling prices offset
lower feedstock costs and lower volumes.
Operating expenses include research and technical service, and selling and
administrative expenses. Research and technical service spending decreased
significantly from $58 million in 1999 to $43 million in 2000. The decrease
reflects reduced spending in the carbon black and CPM businesses. Similarly,
reduced spending resulted in a $12 million decrease in 1999 versus 1998. The
Company anticipates research and technical service spending will increase by an
additional $16 million in 2001 to reflect the ongoing developmental requirements
of its new and existing businesses. Selling and administrative expenses for
2000, 1999, and 1998 were $178 million, $186 million, and $187 million,
respectively. The decrease in 2000 reflects the success of cost improvement
initiatives, particularly in the Chemical Businesses. Selling and administrative
expenses remained essentially flat in 1999 as compared to 1998.
Interest expense from continuing operations was 15% lower in 2000 due to
the repayment of debt. Interest expense was $33 million, $39 million, $36
million in 2000, 1999, and 1998, respectively.
Other charges, net, decreased from $6 million in 1999 to $0 in 2000. This
decrease was attributable to a gain on the sale of equipment, and lower
amortization expense in 2000 while 1999 included a loss on sale of equipment.
Cabot's overall effective income tax rate was 36% in 2000, 1999 and 1998.
In 2000, the Company initiated a reorganization of its international legal
entity structure. The impact is expected to result in a lowering of the
Company's fiscal 2001 effective tax rate by 4-6%. The underlying factors
affecting Cabot's overall effective tax rates are summarized in Note N to the
consolidated financial statements.
Cabot's share of the earnings of investments in equity affiliates remained
stable at $13 million in 2000 and 1999 compared with $17 million in 1998.
NET INCOME
Net income was $453 million ($6.20 per diluted common share) in 2000
compared to $97 million ($1.31 per diluted common share) in 1999 and $122
million ($1.61 per diluted common share) in 1998.
The following table summarizes the impact of special items and the gains on
sales of LNG and equity securities on diluted earnings per common share:
SPECIAL ITEMS & GAINS ON SALES 2000 1999 1998
- ------------------------------ ------ ------ ------
Gain on sale of LNG......................................... $ 4.25 -- --
Environmental charges....................................... (0.01) -- --
Insurance litigation settlements............................ 0.08 -- --
Sale of K N Energy, Inc. stock.............................. -- $ 0.09 $ 0.77
Carbon black asset impairment............................... -- -- (0.51)
Tantalum ore recovery charge................................ -- -- (0.21)
Cost reduction initiatives/programs......................... (0.16) (0.23) --
------ ------ ------
Special Items & Gains on Sales per common share --diluted... $ 4.16 $(0.14) $ 0.05
====== ====== ======
Excluding special items and the gains on sales of LNG and equity
securities, net income for continuing operations would have been $114 million in
2000, $92 million in 1999 and $113 million in 1998.
19
21
RISK MANAGEMENT
Cabot's principal objective in managing its exposure to interest rate
changes, foreign currency rate changes, share price changes and commodity price
changes is to reduce volatility and limit the impact of the changes on earnings.
To achieve its objectives, Cabot identifies these risks and manages them through
its regular operating and financing activities and, when deemed appropriate,
through the use of derivative financial instruments. The Chemical Businesses
enter into contracts with customers and suppliers that are designed to limit the
risk of certain foreign currency rate and commodity price changes. Cabot enters
into certain contracts in the carbon black business in which the price of the
product is adjusted to a certain extent based on price movements in feedstock.
Certain contracts in Cabot's foreign subsidiaries are denominated in U.S.
dollars or a currency other than the functional currency of the subsidiary.
Cabot also enters into certain contracts for share repurchases to limit the risk
associated with stock price fluctuations. Additionally, Cabot attempts to limit
its net monetary exposure in currencies of hyper-inflationary countries,
primarily in South America.
MARKET RISK
Cabot determines its worldwide exposures to interest rate changes, foreign
currency rate changes, share price changes and commodity price changes and
reduces the impact of rate and price changes through the use of derivative
financial instruments. These financial instruments are designated as hedges of
underlying exposures associated with specific assets, liabilities, or firm
commitments or anticipated transactions and are monitored to determine if they
remain effective hedges. Since Cabot utilizes interest rate, foreign currency,
and commodity sensitive derivative instruments for hedging, a loss in fair value
for those instruments is generally offset by increases in the value of the
underlying transaction. Market risk exposure to other financial instruments is
not material to earnings, cash flow, or fair values.
Cabot manages market risks pursuant to policies aimed at protecting Cabot
against risks and prohibiting speculation on market movements. Actions taken by
Cabot's businesses to provide such protection are reviewed and approved by
Cabot's Risk Management Committee which is charged with enforcing Cabot's risk
management policy.
INTEREST RATES
Cabot's objective in managing its exposure to interest rate changes is to
reduce the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. To achieve its objectives, Cabot used
interest rate swaps to hedge and/or lower financing costs and to adjust fixed
and variable rate debt positions through January 2000. In January 2000, Cabot
settled its remaining outstanding interest rate swap.
As of September 30, 2000, Cabot had $638 million in cash and short-term
investments. It is the Company's practice to invest excess cash in instruments
that will earn a high rate of return, consistent with the protection of
principal. Interest income earned may vary as a result of changes in interest
rates and average cash balances, which could fluctuate over time. A ten percent
change in interest rates could cause interest income to fluctuate by
approximately $4 million.
FOREIGN CURRENCY
Cabot's international operations are subject to certain opportunities and
risks, including currency fluctuations and government actions. Operations in
each country are closely monitored so that Cabot can respond to changing
economic and political environments and to fluctuations in foreign currencies.
Accordingly, Cabot utilizes foreign currency option contracts and forward
contracts to hedge its exposure of firm commitments or anticipated transactions,
primarily for receivables and payables denominated in currencies other than the
entity's functional currencies. Cabot also monitors its foreign exchange
exposure to ensure the overall effectiveness of its foreign currency derivatives
programs. Cabot has foreign currency instruments primarily denominated in the
EURO, Japanese yen, British pound sterling, Canadian dollar, and Australian
dollar.
20
22
SHARE REPURCHASES
Cabot takes advantage of opportunities to repurchase shares of its common
stock with excess cash at a price that Cabot believes is below the fair market
value of the stock. Cabot, from time to time, enters into forward agreements for
its own stock in order to fix the price of stock for delivery at a future date.
These agreements provide Cabot with the right to settle forward contracts in
cash or an equivalent value of Cabot Corporation common stock.
COMMODITIES
Cabot is exposed to commodity price fluctuations that affect its sales
revenues and supply costs. From time to time, Cabot entered into commodity
futures contracts, commodity price swaps, and/or option contracts to hedge a
portion of firmly committed and anticipated transactions against natural gas
price fluctuations when it owned the LNG business. Cabot monitored its exposure
to ensure the overall effectiveness of its hedge positions. In 2000, Cabot
realized a $1 million loss on futures contracts. In 1999, Cabot realized gains
associated with futures of $2 million and losses associated with options of $2
million. At September 30, 1999, the notional principal amounts of commodity
futures contracts, commodity price swaps, and option contracts were $115
million, maturing through August 2000. At September 30, 2000, no contracts were
outstanding.
VALUE-AT-RISK
Cabot utilizes a Value-at-Risk ("VAR") model to determine the maximum
potential loss in the fair value of its foreign exchange, share repurchases and
commodity sensitive derivative financial instruments within a 95% confidence
interval. Cabot's computation was based on the interrelationships between
movements in interest rates, foreign currencies, share repurchases and
commodities. These interrelationships were determined by observing historical
interest rates, foreign currency, share price and commodity market changes over
corresponding periods. The assets and liabilities, firm commitments and
anticipated transactions, which are hedged by derivative financial instruments,
were excluded from the model. The VAR model estimates were made assuming normal
market conditions and a 95% confidence level. There are various modeling
techniques that can be used in the VAR computation. Cabot's computations are
based on a Monte Carlo simulation method. The VAR model is a risk analysis tool
and does not purport to represent actual gains or losses in fair value that will
be incurred by Cabot. The VAR model estimated a maximum loss in market value of
$1 million from October 1, 2000 through October 31, 2000 for foreign exchange
derivative instruments held as of September 30, 2000.
In 1999, the VAR model estimated a maximum loss in market value of $20
million for derivative instruments held as of September 30, 1999. In the fourth
quarter of fiscal 2000, the loss in market value exceeded the estimated maximum
loss by $1 million.
Financial instruments that subject Cabot to concentrations of credit risk
consist principally of trade receivables. Tire manufacturers comprise a
significant portion of Cabot's trade receivable balance. At September 30, 2000
and 1999, Cabot had trade receivables of approximately $83 million and $67
million, respectively, from tire manufacturers. Although Cabot's exposure to
credit risk associated with nonpayment by tire manufacturers is affected by
conditions or occurrences within the tire industry, the majority of the trade
receivables from the tire manufacturers were current at September 30, 2000.
Receivables with two tire manufacturers each made up 5% of Cabot's receivables
at that date.
CASH FLOW AND LIQUIDITY
Cash generated in 2000 from operating activities was $264 million, compared
with $208 million in 1999 and $237 million in 1998 (see the Consolidated
Statements of Cash Flows). The change in 2000 is primarily due to improved
working capital as a result of a yearlong working capital efficiency initiative.
The change in 1999 is primarily due to an increase in working capital.
21
23
Capital expenditures on property, plant and equipment, and investments and
acquisitions for 2000, 1999 and 1998 was $153 million, $172 million and $247
million, respectively. In 2000, 1999, and 1998 capital expenditures on property,
plant and equipment and investments and acquisitions for continuing operations
totaled $108 million, $133 million and $194 million, respectively. The major
components of the 2000 and 1999 capital program included new business expansion,
normal plant operating capital projects, and capacity expansion in Cabot's FMO,
CPM, and CMC businesses.
Capital expenditures for 2001 are expected to approximate $160 million and
include projects for maintenance and replacement, plant expansion, and an
enterprise-wide systems initiative.
2000 CAPITAL EXPENDITURES
Maintenance Improvement..................................... 35%
Process Improvement......................................... 25%
New Business Expansion...................................... 20%
Compliance.................................................. 10%
Infrastructure.............................................. 10%
Cabot is a defendant, or potentially responsible party, in various lawsuits
and environmental proceedings wherein substantial amounts are claimed or at
issue. During the next few years, Cabot also expects to spend a significant
portion of its $38 million environmental reserve in connection with remediation
at various environmental sites. These sites are primarily associated with
businesses divested in prior years.
Cash used in 2000 in financing activities was $184 million, compared with
$69 million in 1999 and $131 million in 1998.
Cabot's ratio of total debt (including short-term debt, net of cash) to
capital decreased from 44% at September 30, 1999 to negative 29% at September
30, 2000, primarily due to the proceeds of the LNG sale.
On September 19, 2000, Cabot completed a transaction to sell its LNG
business for approximately $688 million in cash. The sale included Cabot's LNG
terminal in Everett, Massachusetts, its LNG tanker, the Matthew, and its equity
interest in the Atlantic LNG liquefaction plant in Trinidad. The gain on the
sale of the LNG segment was approximately $487 million before tax and $309
million after tax. The proceeds may be used for share repurchase, retirement of
debt, investment in existing businesses or acquisitions.
On April 4, 2000, Cabot Microelectronics Corporation, then a subsidiary of
Cabot, sold 4.6 million shares of its common stock in an IPO. The 4.6 million
shares represented approximately 19.5% of CMC. The net proceeds from the IPO
were approximately $83 million. Cabot received an aggregate of approximately $81
million in dividends from CMC. On September 29, 2000, Cabot successfully
distributed its remaining 80.5% interest in CMC to Cabot's shareholders by means
of a stock dividend.
On May 18, 2000, Cabot repurchased $16 million in 8.36% Cabot Medium Term
Notes (MTNs). The Notes were due to mature August 17, 2022. On June 30, 2000,
Cabot arranged to buy back $10 million of MTNs. The 6.57% MTNs were due October
21, 2027 and were puttable at par in 2004. On September 25, 2000, Cabot
purchased $15 million of its MTNs. The MTNs were issued on October 21, 1997,
contained a coupon of 6.57%, had a maturity date of October 21, 2027, and were
puttable at par in 2004.
On September 8, 2000, Cabot's Board of Directors authorized the repurchase
of up to 10 million shares of Cabot's common stock, superseding prior
authorizations. Approximately 800,000 shares have been purchased under this new
authorization as of November 30, 2000.
In November 2000, a Cabot subsidiary borrowed 150 million EURO ($125
million) from institutional lenders. The loan is payable in EUROs, bears
interest at EURIBOR plus 1.10%, and matures in November, 2003.
22
24
During 2000, Cabot repurchased 1.8 million shares of its common stock for
$40 million. During 1999, Cabot acquired 1.6 million shares of its common stock
for $44 million. During 1998, 3.8 million shares were repurchased for $102
million.
Cabot maintains a credit agreement under which it may, under certain
conditions, borrow up to $300 million at floating rates. The facility is
available through January 3, 2002. As of September 30, 2000, Cabot had no
borrowings outstanding under this arrangement. Management expects cash on hand,
cash from operations and present financing arrangements, including Cabot's
unused line of credit and shelf registration for debt securities, to be
sufficient to meet Cabot's cash requirements for the foreseeable future.
During 2000, Cabot paid cash dividends of $0.44 per share of common stock.
In November 2000, the Board of Directors approved an $0.11 per share dividend on
its common stock in the first calendar quarter of 2001.
NEW ACCOUNTING STANDARDS
Cabot is assessing the impact of the following new accounting
pronouncements:
On October 1, 2000, Cabot adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended. FAS 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. FAS
133 requires that changes in the derivative instrument's fair value be
recognized currently in earnings, unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative instrument's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. There
were no derivative positions at year end for which Cabot would seek to achieve
hedge accounting under this pronouncement. As such, the effect of adopting FAS
133 on Cabot's financial statements is not expected to be significant. However,
this Statement could increase volatility in earnings and other comprehensive
income.
In December 1999, the Securities and Exchange Commission ("SEC"), released
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. In June 2000,
the SEC released SAB 101B, which postponed the effective date SAB 101 to the
fourth quarter of fiscal years beginning after December 15, 1999. Cabot will be
required to be in conformity with the provisions of SAB 101 in the fourth
quarter of fiscal 2001. Cabot is currently evaluating the impact that SAB 101
will have on its financial condition and results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 00-10 "Accounting for Shipping and Handling Revenues and
Costs." Amounts billed as shipping and handling are required to be recorded as
revenue, however it allows a company to adopt a policy of including shipping and
handling costs in cost of sales. If shipping and handling costs are significant
and are not included in cost of sales, a company should disclose both the amount
of such costs and which line item on the income statement includes that amount.
The Task Force also indicated that shipping and handling costs cannot be
reported as a reduction in revenue. EITF 00-10 is effective for Cabot for all
fiscal quarters beginning after July 1, 2001. Cabot does not expect the EITF to
have a material impact on Cabot's consolidated financial statements.
FORWARD-LOOKING INFORMATION
Included herein are statements relating to management's projections of
future profits, the possible achievement of Cabot's financial goals and
objectives, and management's expectations for Cabot's product development
program. Actual results may differ materially from the results anticipated in
the statements included herein due to a variety of factors, including but not
limited to the following: market supply and demand conditions, fluctuations in
currency exchange rates, changes in the rate of economic growth in the United
States and other major international economies, changes in regulatory
environments, changes in trade,
23
25
monetary and fiscal policies throughout the world, pending and future
litigation, cost of raw materials, patent rights of Cabot and others, demand for
Cabot's customers' products, and competitors' reactions to market conditions.
Timely commercialization of products under development by Cabot may be disrupted
or delayed by technical difficulties, market acceptance, 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 Cabot to assess and mitigate
risks should not be considered projections of future events or losses. The
Company undertakes no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required appears in the Risk Management portion of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the financial information which appears in Item 7 of this
annual report on Form 10-K for the fiscal year ended September 30, 2000, and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
(1) Consolidated Balance Sheets at September 30, 2000 and
1999.................................................. 25
(2) Consolidated Statements of Income for each of the three
fiscal years in the period ended September 30, 2000... 26
(3) Consolidated Statements of Cash Flows for each of the
three fiscal years in the period ended September 30,
2000.................................................. 27
(4) Consolidated Statements of Changes in Stockholders'
Equity................................................ 28
(5) Notes to Consolidated Financial Statements............. 30
(6) Report of Independent Accountants relating to the
Consolidated Financial Statements listed above........ 55
24
26
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
---------------------
2000 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ------ -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 638 $ 35
Accounts and notes receivable, net of reserve for doubtful
accounts of $3 and $5................................... 280 321
Inventories............................................... 232 259
Prepaid expenses and other current assets................. 23 27
Deferred income taxes..................................... 17 17
------ -------
Total current assets............................... 1,190 659
------ -------
INVESTMENTS:
Equity.................................................... 74 72
Other..................................................... 27 47
------ -------
Total investments.................................. 101 119
------ -------
Property, plant and equipment............................... 1,794 2,039
Accumulated depreciation and amortization................... (988) (1,015)
------ -------
Net property, plant and equipment......................... 806 1,024
------ -------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of $12
and $16................................................. 21 20
Deferred income taxes..................................... 2 6
Other assets.............................................. 14 14
------ -------
Total other assets................................. 37 40
------ -------
Total assets................................................ $2,134 $ 1,842
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks.................................... $ 20 $ 186
Current portion of long-term debt......................... 48 11
Accounts payable and accrued liabilities.................. 425 252
Deferred income taxes..................................... 1 1
------ -------
Total current liabilities.......................... 494 450
------ -------
Long-term debt.............................................. 329 419
Deferred income taxes....................................... 90 68
Other liabilities........................................... 143 167
Commitments and contingencies (Note P)
Minority interest........................................... 31 32
STOCKHOLDERS' EQUITY:
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, outstanding: 62,285
and 65,181 shares (aggregate redemption value
of $62 and $65)....................................... 75 75
Less cost of shares of preferred treasury stock........... (24) (17)
COMMON STOCK:
Authorized: 200,000,000 shares of $1 par value
Issued and outstanding: 67,700,060 and 67,123,892
shares............................................... 68 67
Additional paid-in capital.................................. 111 5
Retained earnings........................................... 1,040 734
Unearned compensation....................................... (39) (30)
Deferred employee benefits.................................. (56) (59)
Notes receivable for restricted stock....................... (27) (25)
Accumulated other comprehensive loss........................ (101) (44)
------ -------
Total stockholders' equity......................... 1,047 706
------ -------
Total liabilities and stockholders' equity.................. $2,134 $ 1,842
====== =======
The accompanying notes are an integral part of these financial statements.
25
27
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30,
--------------------------
2000 1999 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ------ ------ ------
REVENUES:
Net sales and other operating revenues.................... $1,517 $1,354 $1,392
Interest and dividend income.............................. 6 4 5
------ ------ ------
Total revenues....................................... 1,523 1,358 1,397
------ ------ ------
Costs and expenses:
Cost of sales............................................. 1,102 940 934
Selling and administrative expenses....................... 178 186 187
Research and technical service............................ 43 58 70
Interest expense.......................................... 33 39 36
Special items............................................. 10 26 85
Gain on sale of equity securities......................... - (10) (90)
Other charges, net........................................ - 6 16
------ ------ ------
Total costs and expenses............................. 1,366 1,245 1,238
------ ------ ------
Income before income taxes.................................. 157 113 159
Provision for income taxes.................................. (57) (41) (57)
Equity in net income of affiliated companies................ 13 13 17
Minority interest in net income............................. (5) (3) (3)
------ ------ ------
Income from continuing operations.................... 108 82 116
Discontinued Operations:
Income from operations of discontinued businesses, net of
income taxes........................................... 36 15 6
Gain on sale of business, net of income taxes............. 309 - -
------ ------ ------
Net Income........................................... 453 97 122
------ ------ ------
Dividends on preferred stock, net of tax benefit of $2, $2
and $2.................................................... (3) (3) (4)
------ ------ ------
Income applicable to common shares................... $ 450 $ 94 $ 118
====== ====== ======
Weighted-average common shares outstanding, in millions:
Basic..................................................... 64 64 66
====== ====== ======
Diluted................................................... 73 73 75
====== ====== ======
Income per common share:
Basic:
Continuing operations.................................. $ 1.65 $ 1.24 $ 1.72
Discontinued Operations:
Income from operations of discontinued
businesses...................................... 0.56 0.23 0.08
Gain on sale of business.......................... 4.83 - -
------ ------ ------
Net Income........................................... $ 7.04 $ 1.47 $ 1.80
====== ====== ======
Diluted:
Continuing operations.................................. $ 1.46 $ 1.11 $ 1.53
Discontinued Operations:
Income from operations of discontinued
businesses...................................... 0.49 0.20 0.08
Gain on sale of business.......................... 4.25 - -
------ ------ ------
Net Income........................................... $ 6.20 $ 1.31 $ 1.61
====== ====== ======
The accompanying notes are an integral part of these financial statements.
26
28
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
--------------------------
2000 1999 1998
(DOLLARS IN MILLIONS) ------ ------ ------
CASH FLOWS
Cash Flows from Operating Activities:
Net income................................................ $ 453 $ 97 $ 122
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.......................... 129 125 115
Deferred tax expense