FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
March 31, 2004
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
| Delaware (State of Incorporation) |
04-2271897 (I.R.S. Employer Identification No.) |
| Two Seaport Lane Boston, Massachusetts (Address of principal executive offices) |
02210-2019 (Zip Code) |
Registrant’s telephone number, including area code: (617) 345-0100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
As of May 10, 2004
the Company had 62,261,651 shares of Common
Stock, par value $1 per share, outstanding.
CABOT CORPORATION
INDEX
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| EX-31.1 SECT. 302 CERTIFICATION OF C.E.O. | ||||||||
| EX-31.2 SECT. 302 CERTIFICATION OF C.F.O. | ||||||||
| EX-32 SECT. 906 CERTIFICATIONS OF C.E.O. & C.F.O. | ||||||||
-2-
Part I. Financial Information
Item 1. Financial Statements
CABOT CORPORATION
(In millions, except per share amounts)
UNAUDITED
| 2004 |
2003 |
|||||||
Net sales and other operating revenues |
$ | 500 | $ | 466 | ||||
Cost of sales |
369 | 339 | ||||||
Gross profit |
131 | 127 | ||||||
Selling and administrative expenses |
58 | 58 | ||||||
Research and technical expense |
13 | 12 | ||||||
Income from operations |
60 | 57 | ||||||
Other income and expense |
||||||||
Interest and dividend income |
1 | 1 | ||||||
Interest expense |
(7 | ) | (7 | ) | ||||
Other income (expense) |
(3 | ) | (21 | ) | ||||
Income from continuing operations before income taxes |
51 | 30 | ||||||
Provision for income taxes |
(13 | ) | (6 | ) | ||||
Equity in net income of affiliated companies, net of tax of $1 and $1 |
1 | 1 | ||||||
Minority interest in net income, net of tax of $1 and $1 |
(3 | ) | (2 | ) | ||||
Net income from continuing operations |
36 | 23 | ||||||
Discontinued operations |
||||||||
Income from a discontinued business, net of income taxes |
1 | — | ||||||
Net income |
37 | 23 | ||||||
Dividends on preferred stock, net of tax benefit |
(1 | ) | (1 | ) | ||||
Income available to common shares |
$ | 36 | $ | 22 | ||||
Weighted-average common shares outstanding: |
||||||||
Basic |
59 | 59 | ||||||
Diluted |
69 | 70 | ||||||
Income per common share: |
||||||||
Basic |
||||||||
Continuing operations |
$ | 0.61 | $ | 0.38 | ||||
Discontinued operations |
||||||||
Income from a discontinued business |
0.01 | — | ||||||
Net income per share |
$ | 0.62 | $ | 0.38 | ||||
Diluted |
||||||||
Continuing operations |
$ | 0.53 | $ | 0.33 | ||||
Discontinued operations |
||||||||
Income from a discontinued business |
0.01 | — | ||||||
Net income per share |
$ | 0.54 | $ | 0.33 | ||||
Dividends per common share |
$ | 0.15 | $ | 0.13 | ||||
The accompanying notes are an integral part of these financial statements.
3
CABOT CORPORATION
(In millions, except per share amounts)
UNAUDITED
| 2004 |
2003 |
|||||||
Net sales and other operating revenues |
$ | 946 | $ | 876 | ||||
Cost of sales |
708 | 632 | ||||||
Gross profit |
238 | 244 | ||||||
Selling and administrative expenses |
109 | 110 | ||||||
Research and technical expense |
25 | 24 | ||||||
Income from operations |
104 | 110 | ||||||
Other income and expense |
||||||||
Interest and dividend income |
3 | 2 | ||||||
Interest expense |
(15 | ) | (14 | ) | ||||
Other income (expense) |
(4 | ) | (23 | ) | ||||
Income from continuing operations before income taxes |
88 | 75 | ||||||
Provision for income taxes |
(21 | ) | (17 | ) | ||||
Equity in net income of affiliated companies, net of tax of $2 and $1 |
3 | 2 | ||||||
Minority interest in net income, net of tax of $1 and $1 |
(4 | ) | (3 | ) | ||||
Net income |
66 | 57 | ||||||
Dividends on preferred stock, net of tax benefit |
(2 | ) | (2 | ) | ||||
Income available to common shares |
$ | 64 | $ | 55 | ||||
Weighted-average common shares outstanding: |
||||||||
Basic |
59 | 59 | ||||||
Diluted |
69 | 70 | ||||||
Income per common share: |
||||||||
Basic |
$ | 1.10 | $ | 0.94 | ||||
Diluted |
$ | 0.96 | $ | 0.81 | ||||
Dividends per common share |
$ | 0.30 | $ | 0.26 | ||||
The accompanying notes are an integral part of these financial statements.
4
CABOT CORPORATION
(In millions)
| March 31, | September 30, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 257 | $ | 247 | ||||
Accounts and notes receivable, net of reserve for doubtful
accounts of $3 and $3 |
375 | 333 | ||||||
Inventories: |
||||||||
Raw materials |
129 | 129 | ||||||
Work in process |
152 | 155 | ||||||
Finished goods |
133 | 130 | ||||||
Other |
47 | 42 | ||||||
Total inventories |
461 | 456 | ||||||
Prepaid expenses |
46 | 35 | ||||||
Deferred income taxes |
40 | 40 | ||||||
Total current assets |
1,179 | 1,111 | ||||||
Investments: |
||||||||
Equity |
54 | 50 | ||||||
Other |
25 | 27 | ||||||
Total investments |
79 | 77 | ||||||
Property, plant and equipment |
2,294 | 2,202 | ||||||
Accumulated depreciation and amortization |
(1,383 | ) | (1,289 | ) | ||||
Net property, plant and equipment |
911 | 913 | ||||||
Other assets: |
||||||||
Goodwill |
115 | 110 | ||||||
Other intangible assets, net of accumulated amortization of $7 and $6 |
8 | 9 | ||||||
Assets held for rent |
32 | 29 | ||||||
Deferred income taxes |
18 | 17 | ||||||
Other assets |
48 | 42 | ||||||
Total other assets |
221 | 207 | ||||||
Total assets |
$ | 2,390 | $ | 2,308 | ||||
The accompanying notes are an integral part of these financial statements.
5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
(In millions, except for share and per share amounts)
LIABILITIES & STOCKHOLDERS’ EQUITY
| March 31, | September 30, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
Current liabilities: |
||||||||
Notes payable to banks |
30 | $ | 15 | |||||
Current portion of long-term debt |
25 | 40 | ||||||
Accounts payable and accrued liabilities |
274 | 278 | ||||||
Income taxes payable |
12 | 16 | ||||||
Deferred income taxes |
2 | 3 | ||||||
Total current liabilities |
343 | 352 | ||||||
Long-term debt |
519 | 516 | ||||||
Deferred income taxes |
104 | 101 | ||||||
Other liabilities |
238 | 220 | ||||||
Commitments and contingencies (Note I) |
||||||||
Minority interest |
39 | 40 | ||||||
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: 50,007 and 53,490 shares
(aggregate per share redemption value of $50 and $53) |
67 | 70 | ||||||
Less cost of shares of preferred treasury stock |
(38 | ) | (38 | ) | ||||
Common stock: |
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Authorized: 200,000,000 shares of $1 par value |
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Issued and outstanding: 62,200,623 and 62,243,010 shares |
62 | 62 | ||||||
Less cost of shares of common treasury stock |
(5 | ) | (5 | ) | ||||
Additional paid-in capital |
— | 14 | ||||||
Retained earnings |
1,205 | 1,160 | ||||||
Unearned compensation |
(24 | ) | (36 | ) | ||||
Deferred employee benefits |
(47 | ) | (48 | ) | ||||
Notes receivable for restricted stock |
(20 | ) | (21 | ) | ||||
Accumulated other comprehensive loss (Note K) |
(53 | ) | (79 | ) | ||||
Total stockholders’ equity |
1,147 | 1,079 | ||||||
Total liabilities and stockholders’ equity |
$ | 2,390 | $ | 2,308 | ||||
The accompanying notes are an integral part of these financial statements.
6
CABOT CORPORATION
(In millions)
UNAUDITED
| 2004 |
2003 |
|||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 66 | $ | 57 | ||||
Adjustments to reconcile net income to cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
66 | 64 | ||||||
Deferred tax provision |
3 | (10 | ) | |||||
Equity in income of affiliated companies |
(3 | ) | (2 | ) | ||||
Non-cash compensation |
13 | 15 | ||||||
Other non-cash charges, net |
4 | 24 | ||||||
Changes in assets and liabilities |
||||||||
Accounts receivable |
(32 | ) | (67 | ) | ||||
Inventory |
3 | (34 | ) | |||||
Accounts payable and accruals |
(8 | ) | (5 | ) | ||||
Prepayments and other assets |
(13 | ) | — | |||||
Income taxes payable |
(1 | ) | 6 | |||||
Other liabilities |
1 | 8 | ||||||
Other, net |
(6 | ) | 3 | |||||
Cash provided by (used in) Operating Activities |
93 | 59 | ||||||
Cash Flows from Investing Activities: |
||||||||
Additions to property, plant and equipment |
(43 | ) | (49 | ) | ||||
(Increase) decrease in assets held for rent |
(2 | ) | (3 | ) | ||||
Proceeds from sales of property, plant and equipment |
2 | 2 | ||||||
Cash used in Investing Activities |
(43 | ) | (50 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from long-term debt |
— | 75 | ||||||
Repayments of long-term debt |
(15 | ) | (52 | ) | ||||
Increase (decrease) in notes payable to banks |
— | (35 | ) | |||||
Increase (decrease) in short-term debt |
15 | (1 | ) | |||||
Purchases of common stock |
(21 | ) | (6 | ) | ||||
Sales and issuances of common stock |
4 | 2 | ||||||
Cash dividends paid to stockholders |
(20 | ) | (18 | ) | ||||
Cash dividends paid to minority interest stockholders |
(6 | ) | (4 | ) | ||||
Cash used in Financing Activities |
(43 | ) | (39 | ) | ||||
Effect of exchange rate changes on cash |
3 | 2 | ||||||
Increase (decrease) in cash and cash equivalents |
10 | (28 | ) | |||||
Cash and cash equivalents at beginning of period |
247 | 159 | ||||||
Cash and cash equivalents at end of period |
$ | 257 | $ | 131 | ||||
The accompanying notes are an integral part of these financial statements.
7
CABOT CORPORATION
(In millions)
UNAUDITED
| Preferred | Common | Accumulated | Notes | |||||||||||||||||||||||||||||||||||||
| Stock, Net | Stock, Net | Additional | Other | Deferred | Receivable | Total | Total | |||||||||||||||||||||||||||||||||
| of Treasury | of Treasury | Paid-in | Retained | Comprehensive | Unearned | Employee | for Restricted | Stockholders’ | Comprehensive | |||||||||||||||||||||||||||||||
| Stock |
Stock |
Capital |
Earnings |
Loss |
Compensation |
Benefits |
Stock |
Equity |
Income (Loss) |
|||||||||||||||||||||||||||||||
Balance at September 30, 2003 |
$ | 32 | $ | 57 | $ | 14 | $ | 1,160 | $ | (79 | ) | $ | (36 | ) | $ | (48 | ) | $ | (21 | ) | $ | 1,079 | ||||||||||||||||||
Net income |
66 | $ | 66 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
29 | 29 | ||||||||||||||||||||||||||||||||||||||
Change in unrealized gain (loss) on available-for-
sale securities, net of tax |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
Change in unrealized gain (loss) on derivative
instruments, net of tax |
(2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 92 | ||||||||||||||||||||||||||||||||||||||
Common dividends paid |
(19 | ) | ||||||||||||||||||||||||||||||||||||||
Issuance of stock under employee
compensation plans, net of forfeitures |
3 | 1 | ||||||||||||||||||||||||||||||||||||||
Purchase and retirement of common stock |
(20 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock conversion |
(3 | ) | 3 | |||||||||||||||||||||||||||||||||||||
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax |
(1 | ) | ||||||||||||||||||||||||||||||||||||||
Principal payment by Employee Stock
Ownership Plan under guaranteed loan |
1 | |||||||||||||||||||||||||||||||||||||||
Amortization of unearned compensation |
12 | |||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2004 |
$ | 29 | $ | 57 | — | $ | 1,205 | $ | (53 | ) | $ | (24 | ) | $ | (47 | ) | $ | (20 | ) | $ | 1,147 | |||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
8
CABOT CORPORATION
| A. | Basis of Presentation | |||
| The consolidated financial statements include the accounts of Cabot Corporation and majority-owned and controlled U.S. and non-U.S. subsidiaries (“Cabot” or the “Company”). Investments in 20% to 50% owned affiliates are accounted for using the equity method. Intercompany transactions have been eliminated. | ||||
| The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Form 10-K for the year ended September 30, 2003. | ||||
| The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended March 31, 2004 and 2003. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year. | ||||
| Certain amounts in fiscal 2003 have been reclassified to conform to the fiscal 2004 presentation. | ||||
| B. | Significant Accounting Policies | |||
| Revenue Recognition | ||||
| Cabot primarily derives its revenues from the sale of specialty chemicals, tantalum and related products and from the rental of cesium formate. Revenue from product sales is typically recognized when the product is shipped and title and risk of loss have passed to the customer. Revenue from the rental of cesium formate is recognized throughout the rental period based on the contracted rental amount. Customers are also billed and revenue is recognized, typically at the end of the job, for cesium formate product that is not returned. Other operating revenues, which represent less than ten percent of total revenues, include tolling, services and royalties for licensed technology. | ||||
| In the second quarter of fiscal 2004, the accounting treatment for the rental of cesium formate was changed from recording the revenue at the end of the rental period to recording the rental revenue throughout the rental period. Prior periods have not been adjusted as the impact is immaterial. This change also resulted in the reclassification for all periods presented of the cesium formate assets held for rent from a current asset to a non-current asset. | ||||
| Cabot recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Cabot generally is able to ensure that products meet customer specifications prior to shipment. | ||||
| Under certain multi-year supply contracts with declining prices and minimum volumes, Cabot recognizes revenue based on the estimated average selling price over the contract lives. | ||||
| Cabot prepares its estimates for sales returns and allowances, discounts and volume rebates quarterly based primarily on historical experience updated for changes in facts and circumstances, as appropriate. The discounts and rebates are recorded as a reduction of sales at the time revenue is recognized based on historical experience. If actual future results vary, Cabot may need to adjust its estimates, which could have an impact on earnings in the period of adjustment. | ||||
| Cabot maintains allowances for doubtful accounts for estimated losses resulting from the potential inability of its customers to make required payments. If the financial conditions of Cabot’s customers were to | ||||
-9-
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
March 31, 2004
UNAUDITED
| deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required, which could materially affect future earnings. As of March 31, 2004, the allowance for doubtful accounts was $3 million. | ||||
| Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price in accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs.” Shipping and handling costs are included in cost of sales. | ||||
| Assets Held for Rent | ||||
| Assets held for rent represent cesium formate inventory in the Specialty Fluids segment that will be rented to customers on a short-term basis. Assets held for rent are stated at average cost. These assets were included in finished goods inventory within current assets in previous periods. At March 31, 2004 and September 30, 2003, Cabot has assets held for rent of $32 million and $29 million, respectively. | ||||
| Equity Incentive Plans | ||||
| Cabot has equity compensation plans under which stock options and restricted stock awards are granted to employees. The plans are described more fully in Note N of Cabot’s Form 10-K for the year ended September 30, 2003. In accordance with the provisions of the Statement of Financial Accounting Standard (“FAS”) No. 123, “Accounting for Stock-Based Compensation”, Cabot accounts for stock-based compensation plans using the intrinsic value method consistent with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. | ||||
| The following table illustrates the effect on net income and earnings per share if Cabot had expensed stock options in accordance with the fair value recognition provisions of FAS No. 123. | ||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| March 31, |
March 31, |
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| 2004 |
2003 |
2004 |
2003 |
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(Dollars in millions, except per share amounts) |
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