Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-5667

(617) 345-0100

Securities registered pursuant to Section 12(b) of the Act:

      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 þ          No o

      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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes þ

      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 þ          No o

      As of the last business day of the Registrant’s most recently completed second fiscal quarter (March 31, 2004), the aggregate market value of the Registrant’s common stock held by non-affiliates was approximately $1,936,254,454. As of December 1, 2004, there were 63,064,692 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive Proxy Statement for its 2005 Annual Meeting of Shareholders are incorporated by reference in Part III of this annual report on Form 10-K.

PART I

General

      Cabot’s business was founded in 1882 and incorporated in the State of Delaware in 1960. Cabot is a global specialty chemicals and performance materials company headquartered in Boston, Massachusetts. Our principal products are carbon black, fumed metal oxides, inkjet colorants, tantalum and related products, and cesium formate drilling fluids. Cabot and its affiliates have manufacturing facilities in the United States and more than 20 other countries.

      The terms “Cabot”, “Company”, “we”, and “our” as used in this Report refer to Cabot Corporation and its consolidated subsidiaries.

      The description of Cabot’s businesses is as of September 30, 2004, unless otherwise noted. We are organized into three reportable segments: the Chemical Business, the Supermetals Business and the Specialty Fluids Business. These businesses are discussed in more detail later in this section. Financial information about our business segments and geographic areas appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below (“MD&A”), and in Note X of the Notes to our Consolidated Financial Statements in Item 8 below.

      Our business strategy includes optimizing our core businesses and investing the cash and intellectual resources they generate in developing new businesses. In 2004, we focused on expanding our carbon black and fumed metal oxides manufacturing capacity in emerging markets, negotiating new tantalum supply contractual arrangements with two of our tantalum customers, and growing our inkjet colorants, Specialty Fluids and other new businesses. Our business highlights for 2004 included the following:

Chemical Business

	•	Construction of an additional manufacturing unit at Shanghai Cabot Chemical Company Ltd.’s carbon black plant in Shanghai was completed. Shanghai Cabot Chemical Company Ltd. is a joint venture between Cabot and Shanghai Coking & Chemical Company.
	•	In November 2004 we expanded our relationship with Shanghai Coking and entered into a joint venture for the construction and operation of a new carbon black plant in Tianjin, China, the first production unit of which is expected to be operational by calender year 2006.
	•	We began construction of a new carbon black unit at our facility in Maua, Brazil, which we expect to become operational in late calendar year 2005.
	•	We entered into an additional long-term supply contract with an existing major tire customer that expands the geographic scope of our contracted supply arrangements with that customer.

	•	We entered into a joint venture with Bluestar New Chemical Materials Co., Ltd., an entity within the China National Bluestar Group, to manufacture fumed silica in China. Construction of the plant is scheduled to begin in the spring of 2005 and expected to be completed in early calendar year 2006.
	•	We entered into a new long-term fumed silica supply contract with an existing microelectronics customer, which replaced an existing long-term supply contract with that customer.

	•	We began shipment of our pigment-based ink dispersions in commercial quantity to an additional original equipment manufacturer.

1

Supermetals Business

	•	We entered into amendments of our long-term supply agreements with KEMET Corporation and EPCOS A.G. for the supply of capacitor grade tantalum powders through 2009.
	•	We exercised our option to renew one of our two long-term tantalum ore supply contracts with Sons of Gwalia, beginning January 1, 2006. Performance under this contract is secured by a charge we hold over the tantalum mine that is the source of our supply.

Specialty Fluids Business

	•	The business completed a greater number of, and larger sized, jobs in the year than in prior years, which led to strong growth in both volumes and profits for the year.

Other Developments

      As part of our strategy, we also seek to control costs and optimize capacity. In 2003, we implemented an “excellence” initiative to improve our overall operating performance. We achieved our targeted cost savings from this initiative during fiscal year 2004. In connection with the excellence initiative, in May 2003, we began a restructuring of certain of our European operations aimed at reducing costs, enhancing customer service and improving competitiveness. The restructuring initiatives are all related to the Chemical Business segment and included the closure of our carbon black manufacturing facility in Zierbena, Spain; the consolidation of administrative activities for all European businesses in one shared service center; the implementation of a consistent staffing model for all manufacturing facilities in Europe; and the discontinuance of two energy projects. We expect these restructuring initiatives to result in pre-tax charges to earnings of approximately $63 million. As of September 30, 2004, the Company has recorded $52 million of these charges, and expects to record an additional $2 million over the next six to nine months. At September 30, 2004, $9 million of foreign currency translation adjustments have been recorded and will be recognized upon the substantial liquidation of our Spanish entity. In addition, in the fourth quarter of fiscal year 2003, the Company implemented a reduction in workforce in North America to reduce costs. This initiative resulted in a pre-tax charge to earnings of $5 million in that year for involuntary terminations of 88 employees at facilities throughout North America, of which $4 million related to the Chemical Business and $1 million related to the Supermetals Business.

      In August 2004, Sons of Gwalia appointed Voluntary Administrators under the Australia Corporations Act. As a result, we recorded an impairment charge in the fourth fiscal quarter for our remaining equity investment in Sons of Gwalia.

      In October 2004, we announced that we intend to close our carbon black manufacturing facility in Altona, Australia. The decision to close the facility was driven by a number of factors. In particular, the Company’s raw materials supplier indicated to us that they would cease supply in September 2005. In addition, Australia’s domestic carbon black market is in decline. The Company expects that the closure plan will result in an after-tax charge to earnings of approximately $12 million over the next two years. The closure, which is subject to certain statutory consultation processes, is planned to occur in early October 2005.

      During the fiscal year ended September 30, 2004, we repurchased approximately 1.7 million shares of our common stock, $1.00 par value per share (the “Common Stock”) (not including forfeitures), for approximately $54 million in the aggregate, principally to offset a similar number of shares issued during the year under our employee incentive compensation programs.

      Additional information regarding significant events affecting Cabot during its fiscal year ended September 30, 2004 is set forth in the MD&A section.

SEC and Corporate Governance Matters

      Our internet address is www.cabot-corp.com. We make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and

2

Chemical Business

      The Chemical Business is principally comprised of the carbon black, fumed metal oxides, inkjet colorants and aerogels product lines. In addition, certain of our new business development activities, including those associated with Superior MicroPowders, are conducted in the Chemical Business reporting segment. The businesses within the Chemical Business share regional administrative services and, in certain cases, sales organizations. The amount of sales for each product line for each of the last three fiscal years is set forth in the following table:

      We manufacture and sell carbon black. Carbon black is a form of elemental carbon, which is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Carbon black is widely used to enhance the physical, electrical and optical properties of the systems and applications in which it is incorporated. Our carbon black products are used in tires, industrial products and high performance applications. Carbon blacks are used in the tire industry as a rubber reinforcing agent and a performance additive. Carbon blacks are used in industrial products in applications such as hoses, belts, extruded profiles and molded goods. In fiscal year 2000, we combined our plastics business with our special blacks business to form our performance products business group (“PPBG”). PPBG manufactures specialized grades of carbon black, which are used to enhance conductivity and static charge control, to provide UV protection, to enhance mechanical properties, to provide chemical flexibility through surface treatment and as pigments. These products are used in a wide variety of industries such as inks, coatings, cables, pipes, toners and electronics. PPBG also produces and markets black and white thermoplastic concentrates and specialty compounds and markets carbon black to the plastics industry.

      Cabot sells products under various trademarks, a large number of which are registered or for which the Company is seeking registration in one or more countries. Sales are made in Europe (concentrates, compounds and carbon black), North America (carbon black), South America (concentrates, compounds and carbon black), and Asia (concentrates, compounds and carbon black) through Company employees, and through distributors and sales representatives.

      Because many of our carbon black products are used in products associated with the automotive industry, our financial results may be affected by the cyclical nature of the automotive industry. However, a large portion of the market for our products is in replacement tires and other parts that are less subject to automobile industry cycles. Under appropriate circumstances, we have pursued a strategy of entering into long-term supply contracts (those with a term longer than one year) designed to provide our customers with a secure supply of carbon black and reduce the volatility in our carbon black volumes and margins caused, in part, by automotive industry cycles. We currently have long-term carbon black supply contracts (those with

3

      We are one of the leading manufacturers of carbon black in the world, with an estimated one-quarter of the worldwide production capacity. We compete in the manufacture of carbon black primarily with Columbian Chemicals Company (a division of Phelps Dodge Corporation) and Degussa AG, both of which have a global presence, and with at least 20 other companies in various regional markets in which we operate. As many of our carbon black customers move their manufacturing operations to emerging, lower cost regions, we too are moving some of our operations to those regions. In this regard, we completed expansion of a carbon black plant in Shanghai, which is operated by Shanghai Cabot Chemical Company Ltd. (our joint venture with Shanghai Coking & Chemical Company), and began constructing a new carbon black unit at our plant in Maua, Brazil. In addition, in November 2004 we expanded our relationship with Shanghai Coking and entered into a joint venture for the construction and operation of a new carbon black plant in Tianjin, China, the first production unit of which is expected to be operational by early calendar year 2006.

      We own and operate carbon black production plants in Argentina, Australia, Brazil, Canada, China, Colombia, the Czech Republic, the United Kingdom, France, India, Indonesia, Italy, The Netherlands, and the United States. Our affiliates own carbon black plants in Japan, Malaysia, Mexico and Venezuela. Some of the plants listed above are built on leased land (see “Properties” below). Headquarters for our carbon black business are located in Boston, Massachusetts, with regional headquarters in Alpharetta, Georgia (North America), São Paulo, Brazil (South America), Suresnes, France and Leuven, Belgium (Europe) and Kuala Lumpur, Malaysia (Asia Pacific).

      The principal raw material used in the manufacture of carbon black is a portion of the residual heavy oils derived from petroleum refining operations and from the distillation of coal tars and the production of ethylene throughout the world. Natural gas is also used in the production of carbon black. While the lack of availability of raw materials has not been a significant factor for our carbon black business, we may experience some difficulty obtaining low sulfur feedstock at an acceptable cost for our European operations in the event the proposed Best Available Techniques Reference Documents, which are commonly referred to as “BREF-Notes,” are adopted. The proposed BREF Note for the European carbon black industry, which is described more fully under “Safety, Health and Environment” below, calls for a reduction in annual average sulfur content in carbon black feedstock to 0.5%. Raw material costs are influenced by the cost and availability of oil worldwide, the availability of various types of carbon black oils and related transportation costs.

      The thermoplastic concentrates and specialty compounds sold by the Company are produced in facilities in Belgium, Italy, the United Kingdom and Hong Kong. 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. Raw materials for these concentrates and components are, in general, readily available.

      Management continues to support carbon black new product development initiatives that have significant customer involvement or sponsorship. Management also supports process research and development initiatives that can lead to greater production optimization.

      We manufacture and sell 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. These products include adhesives, sealants, cosmetics, inks, silicone rubber, coatings, polishing slurries and pharmaceuticals. Fumed

4

      The headquarters for our fumed metal oxides business are located in Billerica, Massachusetts. This business has two North American fumed metal oxides manufacturing plants, which are located in Tuscola, Illinois and Midland, Michigan. We also own manufacturing plants in Wales and 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. As part of our market development and capacity expansion plans in China, the Company entered into a joint venture in February 2004 with Bluestar New Chemical Materials Co., Ltd. to manufacture fumed silica in China. Cabot owns 90% of the venture. Cabot Bluestar Chemical Company will invest approximately US $30 million to build China’s first world scale fumed silica manufacturing facility, which will be located near Nanchang, in Jiangxi province. Construction of the facility is scheduled to begin in the spring of 2005 and is expected to be completed in early calendar year 2006.

      Raw materials for the production of fumed silica are various chlorosilane feedstocks. The feedstocks are either purchased or converted to product on a fee-basis (so called “toll conversion”) for owners of the feedstock. We also purchase aluminum chloride as feedstock for the production of fumed alumina. We have long-term procurement contracts or arrangements in place for the purchase of feedstock for this business, which we believe will enable us to meet our raw material requirements for the foreseeable future. In addition, we buy some raw materials in the spot market to help ensure flexibility and minimize costs.

      We currently supply fumed metal oxides to two of our customers pursuant to long-term contracts. These contracts accounted for approximately 59% of the volume of fumed metal oxides sold by the Company in fiscal year 2004. In addition, sales of fumed metal oxides products are made by Cabot employees and through distributors and sales representatives. There are four principal producers of fumed silica in the world. We believe we are the leading producer and seller of this chemical in the United States and second worldwide.

      Inkjet colorants are pigment-based black and other colorants that are designed to replace traditional pigment dispersions and dyes used in inkjet printing applications. Products produced by Cabot’s inkjet colorants business target various printing markets, including home and office printers, wide format printers, and commercial and industrial printing applications. Our black colorants have become integral components in several inkjet printing systems introduced to the market since 1998. We commercialized color pigments during fiscal year 2002. Sales are made by Cabot employees and through distributors and sales representatives. The headquarters of our inkjet colorants business are located in Billerica, Massachusetts. Raw materials for the inkjet colorants business include carbon black, as well as other products that are available from various sources. We believe that all raw materials for this business are in adequate supply. Competitive products are organic dyes and other treated carbon black technologies manufactured and marketed by large chemical companies and small independent producers.

      Cabot’s aerogels, which are marketed under the Nanogel® trademark, are hydrophobic silica particles with potential uses in a variety of thermal and acoustic insulation applications. During 2002, the aerogels business completed construction of a new semi-works facility located in Frankfurt, Germany. Since then, substantial attention has been paid to refining the unique and patented manufacturing process at the semi-works facility to improve production rates and quality yield to permit manufacturing at the facility’s intended capacity. The headquarters for the business are located in Billerica, Massachusetts. The principal raw materials for the production of aerogels are silica sol or sodium silicate and trimethyl-chloro-silane, which we believe are in adequate supply.

      The first commercial shipment of Cabot’s Nanogel® product occurred in December 2002. To date, the product has been incorporated into the skylight, window and wall system products of six leaders in the daylighting segment of the construction industry. Because this business uses a new chemical process in its manufacturing, there is the risk that expected capacity output at the semi-works facility may be delayed or not

5

      In May 2003, we purchased the assets of Superior MicroPowders (now Cabot Superior MicroPowders (“CSMP”)), a development-stage enterprise with multiple technology platforms and core competencies in advanced powder manufacturing across a wide range of materials and the related materials chemistry. During 2004, we focused on integrating the CSMP acquisition and positioning CSMP for success in key market and technology development focus areas. Its principal areas of commercial focus are in particle development for applications in the energy materials and printed electronic and display materials markets. We also expect CSMP to provide our other businesses with technology support to develop new technologies that complement existing markets and provide opportunities for new business growth.

Supermetals Business

      Through Cabot Supermetals, formerly Cabot Performance Materials, we produce tantalum, niobium (columbium) and their alloys. Tantalum, which accounts for substantially all of this business’s 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 the production of superalloys and chemical process equipment, and for various other industrial and aerospace applications.

      The headquarters for Cabot Supermetals are located in Boston, Massachusetts. We operate manufacturing facilities for this business in Boyertown, Pennsylvania and Kawahigashi-machi, Fukushima-ken, Japan. We obtain the majority of our raw materials in the form of tantalum ore from the mine we own in Manitoba, Canada and from mines in Australia owned by Sons of Gwalia. We purchase a significant portion of the ore we need under two long-term supply contracts with Sons of Gwalia. During the fiscal year we exercised our option to renew one of these contracts, commencing January 1, 2006. Although the contract contains provisions for determining the price at which we will purchase ore, the application of those provisions is still being negotiated with Sons of Gwalia. Because the parties had not reached agreement as to the application of those provisions, pursuant to the terms of the contract, in July of this year Sons of Gwalia filed a Request for Arbitration with the London Court of International Arbitration seeking arbitration between the Company and Sons of Gwalia to determine the price of the ore. Negotiations between the parties, however, continue. Separately, we elected not to extend our second long-term supply contract with Sons of Gwalia beyond December 31, 2005, the current expiration date. On August 29, 2004, Voluntary Administrators were appointed by Sons of Gwalia under the Australian Corporations Act after it was unable to negotiate a standstill agreement with its creditors. Sons of Gwalia continues to supply tantalum ore to us under our long-term supply contracts, performance under which is secured by charges we hold on the mines that are the source of our supply. Furthermore, we have significant amounts of tantalum ore inventory on hand. Accordingly, management does not anticipate any disruption to our supply of tantalum products.

      Many of our tantalum products are used in products for the electronics industry, which is cyclical in nature. We have long-term contracts for the supply of tantalum powder and wire with four customers, which are designed to provide our customers with a secure supply of such products and to mitigate volatility in our tantalum volumes caused by cycles in the electronics industry. These contracts accounted for approximately 68% of the volume of finished powder and wire sold by Cabot Supermetals in fiscal year 2004. In addition to sales made under long-term contracts, sales in the United States are made by Cabot employees, with export sales to Europe handled by Cabot employees and independent European sales representatives. Sales in Japan and other parts of Asia are handled primarily through Cabot employees and distributors. We currently have two principal competitors in our tantalum and niobium business. We believe that we are the leading producer of electronic grade tantalum powder products, with competitors having greater production in some other product lines.

6

      In addition, Cabot Supermetals sells tantalum products to the thin films market. For a number of years, Cabot Supermetals has provided the starting metals (high-purity grade tantalum powders, plates and ingots) used to manufacture tantalum sputtering targets for use in thin film applications, including semiconductors, optics, magnetics and flat panel displays. In August of 2003, we began construction of a manufacturing facility in Etna, Ohio for the manufacture of tantalum sputtering targets. While the facility is being built, Cabot uses subcontracted services to manufacture sputtering targets. Once the facility is fully operational, which is scheduled for the first half of calendar year 2005, we plan to manufacture complete sputtering target assemblies using the Etna facility in combination with subcontracted services.

      In fiscal year 2003, Cabot Supermetals ended its business development efforts with respect to barium titanate.

Specialty Fluids Business

      Our Specialty Fluids Business produces and markets cesium formate as a drilling and completion fluid for use primarily in high pressure and high temperature oil and gas well operations. Cesium formate products are solids-free, high-density fluids that have a low viscosity, permitting them to flow readily in oil and gas wells. The fluid is resistant to high temperatures, minimizes damage to producing reservoirs and is readily biodegradable. Formate fluids, which were introduced to the market in the mid-1990s, are a relatively small but growing part of the fluids market and compete mainly with traditional drilling fluid technologies. Cabot has fluid on location at its facilities in Aberdeen, Scotland, and in Bergen and Kristiansund, Norway for use in the North Sea, and in The Woodlands, Texas for use in the Gulf of Mexico. To date, cesium formate has been used successfully in 87 oil and gas well completions and drill-in applications. In 2003, we entered into an agreement with a major energy service company to provide a supply of cesium formate fluids for both reservoir drilling and completion activities on two large gas and condensate field projects in the Norwegian Continental Shelf being developed and operated by Statoil.

      The Specialty Fluids Business has its headquarters in Aberdeen, Scotland, and has a mine and a cesium formate manufacturing facility in Manitoba, Canada. We make cesium formate sales directly to oil and gas operating companies and through oil field service companies. We generally rent cesium formate to our customers for use in drilling operations on a short-term basis. After completion of a job, the customer returns the fluid to Cabot, and it is reprocessed for use in subsequent well operations. Any of the fluid that is lost during use and not returned to Cabot is paid for by the customer. The rates to be charged to the customer for the daily rental of the product and for the product that is lost are negotiated and agreed to prior to the beginning of the job. The revenue for product lost is not finalized until the product has been returned to Cabot and the necessary analysis has been performed and accepted by the customer. Generally, we invoice customers for both the rental revenue and the lost product once the final analysis has been performed after completion of a job. Ordinarily, approximately 15% of the cesium formate used in an operation is lost. As discussed in Note A of the Notes to our Consolidated Financial Statements, in the second quarter of fiscal 2004, the accounting treatment for the rental of cesium formate was changed from recording revenue at the end of the rental period to recording the rental revenue throughout the rental period.

      The principal raw material used in this business is pollucite ore, which we obtain from the Company’s mine in Manitoba. We have an adequate supply of this cesium-rich ore, owning approximately 82% of the world’s known pollucite 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 supply. Our Specialty Fluids Business also markets fine cesium chemicals to various industrial chemical companies. Sales of those products are made either by Cabot employees or sales representatives.

Discontinued Businesses

      As reported in our Form 8-K filed with the SEC on October 3, 2000, in September 2000 we sold all of our liquefied natural gas (LNG) business. We also completed the initial public offering of approximately 20% of our microelectronics materials business, conducted by Cabot Microelectronics Corporation, in the third quarter of fiscal year 2000. The offering was followed by a distribution of Cabot’s remaining shares of Cabot

7

Patents and Trademarks

      We own and are a licensee of various patents, which expire at various times, covering many of our products, as well as processes and product uses. Although the products made and sold under these patents and licenses are important to Cabot, the loss of any particular patent or license would not materially affect our business, taken as a whole. We sell our products under a variety of trademarks, the loss of any one of which would not materially affect our businesses, taken as a whole.

Backlog

      The Company’s businesses are generally not seasonal in nature, although they typically experience some decline in European and North American sales in the fourth fiscal quarter due to summer plant shutdowns and in Asia Pacific sales in the second fiscal quarter because of the Chinese New Year. In general, no significant lead-time between order and delivery exists in any of our business segments and management does not use backlog information in managing our business. As a result, we do not consider that the dollar amount of backlog orders believed to be firm as of any particular date is material for an understanding of our business.

Customers

      Five major tire and rubber customers, one silicones customer, three 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 any one or more of our important customers could affect our business taken as a whole. One of our five tire and rubber customers is The Goodyear Tire and Rubber Company (“Goodyear”). In fiscal year 2004, sales to Goodyear by the Company’s Chemical Business amounted to 11% of the Company’s consolidated revenues. We did not have sales during the fiscal year to any other customer in an amount equal to or greater than 10% of the Company’s consolidated revenues for the year.

Competition

      Competition in the Company’s businesses is based on price, service, quality, product performance, technical innovation, and proximity to our customers. Competitive conditions also necessitate carrying an inventory of raw materials and finished goods in order to meet customers’ needs for prompt delivery of products.

Employees

      As of September 30, 2004, we had approximately 4,300 employees. Some of our employees in the United States and abroad are covered by collective bargaining or similar agreements. We believe that our relations with our employees are satisfactory.

Research and Development

      Cabot 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. Our expenditures for such activities are shown in the Consolidated Statements of Income.

Safety, Health and Environment

      The Company has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (the “Superfund law”) and comparable state statutes

8

      The Company’s ongoing operations are subject to extensive federal, state, local, and foreign laws, regulations, rules, and ordinances relating to safety, health, and environmental matters (“SH&E Requirements”). We have expended considerable sums to construct, maintain, operate, and improve facilities for safety, health and environmental protection and to comply with SH&E Requirements. We spent approximately $15 million in environmentally related capital expenditures at existing facilities in fiscal year 2004 and anticipate spending approximately $18 million for such costs in fiscal year 2005. Part of this spending will relate to costs necessary to comply with the new carbon black emissions standards under the Generic Maximum Achievable Control Technology standards applicable to carbon black production, as described more fully below.

      In recognition of the importance of SH&E Requirements to the Company, in February 1990, our Board of Directors established a Safety, Health, and Environmental Affairs Committee. The Committee, which is comprised of six non-employee directors and generally meets three times a year, provides oversight and guidance in respect of the Company’s safety, health and environmental management programs and performance. In particular, the Committee reviews the Company’s environmental reserve, risk assessment and management processes, environmental and safety audit reports, performance metrics, performance as benchmarked against industry peer groups, assessed fines or penalties, site security and safety issues, health and environmental training initiatives, and SH&E budget and capital expenditures, and consults with the Company’s outside and internal advisors regarding management of the Company’s safety, health and environmental programs.

      The operation of any chemical manufacturing business as well as the sale and distribution of chemical products involve risks under SH&E Requirements, many of which provide for substantial monetary fines and criminal sanctions for violations. The production and/or processing of carbon black, fumed metal oxides, tantalum, niobium, aerogels and other chemicals involve the handling, manufacture or use of certain substances or components that may be considered toxic or hazardous within the meaning of applicable SH&E Requirements, and certain operations have the potential to cause environmental or other damage as well as injury or death to employees or third parties. We could incur significant expenditures in connection with such operational risks. We believe that our ongoing operations comply with current SH&E Requirements in a

9

      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 (known animal carcinogen, possible human carcinogen), based solely on results of studies of female rat responses to the inhalation of carbon black. We have communicated this change in IARC’s evaluation of carbon black to our customers and employees and have made changes to our material safety data sheets and elsewhere, as appropriate. We anticipate that IARC will review the classification of carbon black regarding carcinogenicity over the next two years, and as a result, it is possible that IARC could change the classification of carbon black from possible human carcinogen to probable human carcinogen. In the event that IARC does change the classification of carbon black to probable human carcinogen (Group 2A), this change would impose additional labeling and other hazard communication requirements on the Company. We are not able to predict what other impacts would be associated with reclassification of carbon black to Group 2A. It is possible that such a reclassification could lead customers to evaluate possible substitutes to the use of carbon black in their products and it could lead regulators to consider changing the occupational exposure limits for carbon black. We continue to believe that the 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 our 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. In February 2003, OEHHA published a notice adding “carbon black (airborne, unbound particles of respirable size)” to the Proposition 65 list. We worked with the International Carbon Black Association (“ICBA”), as well as various customers and carbon black user groups, to ensure compliance with the requirements associated with the Proposition 65 listing of carbon black, which became effective in February 2004.

      In April 2002, The Netherlands published the “Dutch Notes on BAT for the Carbon Black Industry” to support the identification of Best Available Techniques (“BAT”) for the European carbon black industry pursuant to European Union (“EU”) Directive 96/61/ EEC. BAT Reference Documents, so-called BREF Notes, are being prepared by various EU member countries under the supervision of the Integrated Pollution Prevention and Control Bureau (the “IPPC Bureau”). The Netherlands has taken initial responsibility for preparing a BREF Note for the carbon black manufacturing industry. The proposed Dutch BREF Note for the carbon black industry calls for an annual average sulfur content in carbon black feedstock of 0.5% to control sulfur dioxide emissions. If adopted, this could have significant financial effects on the carbon black industry, including the Company, and could cause the Company to experience difficulty obtaining low sulfur feedstock at an acceptable cost for its European operations. The ICBA has proposed a 1.5% annual average. The Dutch BREF Note proposal will be taken up for further review by the IPPC Bureau’s Technical Working Group in 2005. It is possible that the final BREF Note may provide for a range of acceptable sulfur content between 0.5% to 1.5%, with the exact percentage to be determined by the individual member countries. We are not able to predict whether this regulatory development in the EU will affect our earnings or cash flow in a materially adverse manner.

      The European Commission (“EC”) has been working with the European tire industry on a proposal to restrict the marketing and use of certain polycyclic hydrocarbons (“PAHs”) in extender oils and tires. This proposal to amend European Union Directive 76/769/ EC would prohibit the use of extender oils containing

10

      On May 15, 2002, the United States Environmental Protection Agency (“EPA”) signed the final rule amending the Generic Maximum Achievable Control Technology (“MACT”) standards to add National Emissions Standards for Hazardous Air Pollutants (“NESHAP”) for the carbon black production source category (“Carbon Black MACT”) as required under Title III of the Clean Air Act Amendments of 1990. This new rule was published in the Federal Register on July 12, 2002 and will become effective for carbon black plants located in the United States on July 12, 2005. EPA has identified hazardous air pollutants (“HAPs”) associated with the production of carbon black. The Carbon Black MACT requires 98% elimination of HAPs emissions from process vents on facility main unit filters. This is generally accomplished by combusting the tail gas vented from these filters. We estimate that we may be required to expend as much as $10 million in capital improvements to comply with the Carbon Black MACT in connection with three of our carbon black facilities located in the United States. We have been granted a one-year extension by the Department of Environmental Protection’s West Virginia Division of Air Quality (“DAQ”) to comply with the new Carbon Black MACT at our Ohio River facility in Waverly, West Virginia. The December 2004 Consent Order between the Company and DAQ provides that the Ohio River facility will be in compliance with the Carbon Black MACT by July 12, 2006.

      Since the terrorist attacks on September 11, 2001, various U.S. agencies and international bodies have adopted new requirements that impose increased security requirements on certain manufacturing and industrial facilities and locations. The new security-related requirements involve the preparation of security assessments and security plans in some cases, and in other cases the registration of certain facilities with specified governmental authorities. We are closely monitoring all security related regulatory developments and believe we are in compliance with all existing requirements. Compliance with such requirements is not expected to have a material adverse effect on our operations.

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 X of the Notes to the Company’s Consolidated Financial Statements, which appear in Item 8 of this annual report on Form 10-K for the fiscal year ended September 30, 2004. A significant portion of our revenues and operating profits is derived from overseas operations. The profitability of our segments is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. (See the Geographic Information portion of Note X for further information relating to sales 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. We have taken steps we deem prudent in our international operations to diversify and otherwise to protect against these risks, including the use of foreign currency financial instruments to reduce the risk associated with changes in the value of certain foreign currencies compared to the U.S. dollar. (See the Risk Management discussion contained in “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A below, and Note V 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, 2004.)

11

      Cabot’s corporate headquarters are in leased office space in Boston, Massachusetts. We also own or lease office, manufacturing, storage, distribution, marketing, and research and development facilities in the United States and in foreign countries. The locations of our principal manufacturing and/or administrative facilities are set forth in the table below. Unless otherwise indicated, all the properties are owned.

Business Using Facility