FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
December 31, 2004
or
o 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 þ No o
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
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
As of February 4, 2005 the Company had 62,887,921 shares of Common
Stock, par value $1 per share, outstanding.
CABOT CORPORATION
INDEX
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| 27 | ||||||||
| 29 | ||||||||
| 29 | ||||||||
| EX-31.1 Section 302 CEO Certification | ||||||||
| EX-31.2 Section 302 CFO Certification | ||||||||
| EX-32 Section 906 Certification of CEO & CFO | ||||||||
-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 |
$ | 495 | $ | 446 | ||||
Cost of sales |
378 | 339 | ||||||
Gross profit |
117 | 107 | ||||||
Selling and administrative expenses |
54 | 51 | ||||||
Research and technical expense |
15 | 12 | ||||||
Income from operations |
48 | 44 | ||||||
Interest and dividend income |
2 | 1 | ||||||
Interest expense |
(8 | ) | (7 | ) | ||||
Other income (expense) |
3 | (1 | ) | |||||
Income from continuing operations before income
taxes |
45 | 37 | ||||||
Provision for income taxes |
(9 | ) | (8 | ) | ||||
Equity in net income of affiliated companies, net of
tax |
2 | 2 | ||||||
Minority interest in net income, net of tax |
(3 | ) | (1 | ) | ||||
Income from continuing operations |
35 | 30 | ||||||
Discontinued operations: |
||||||||
Loss from discontinued businesses, net of income taxes |
— | (1 | ) | |||||
Net Income |
35 | 29 | ||||||
Dividends on preferred stock, net of tax
benefit |
(1 | ) | (1 | ) | ||||
Net Income available to common shares |
$ | 34 | $ | 28 | ||||
Weighted-average common shares outstanding, in millions: |
||||||||
Basic |
60 | 59 | ||||||
Diluted |
69 | 68 | ||||||
Income per common share: |
||||||||
Basic: |
||||||||
Continuing operations |
$ | 0.58 | $ | 0.49 | ||||
Loss from discontinued businesses |
— | (0.01 | ) | |||||
Net income per share- basic |
$ | 0.58 | $ | 0.48 | ||||
Diluted: |
||||||||
Continuing operations |
$ | 0.51 | $ | 0.43 | ||||
Loss from discontinued businesses |
— | (0.01 | ) | |||||
Net income per share- diluted |
$ | 0.51 | $ | 0.42 | ||||
Dividends per common share |
$ | 0.16 | $ | 0.15 | ||||
The accompanying notes are an integral part of these financial statements.
-3-
CABOT CORPORATION
(In millions)
ASSETS
| December 31, | September 30, | |||||||
| 2004 | 2004 | |||||||
| (Unaudited) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 114 | $ | 159 | ||||
Short-term marketable securities investments |
100 | 70 | ||||||
Accounts and notes receivable, net of reserve for doubtful
accounts of $5 and $5 |
423 | 384 | ||||||
Inventories: |
||||||||
Raw materials |
148 | 143 | ||||||
Work in process |
157 | 150 | ||||||
Finished goods |
177 | 145 | ||||||
Other |
47 | 44 | ||||||
Total inventories |
529 | 482 | ||||||
Prepaid expenses and other current
assets |
53 | 38 | ||||||
Deferred income taxes |
43 | 40 | ||||||
Total current assets |
1,262 | 1,173 | ||||||
Investments: |
||||||||
Equity affiliates |
56 | 56 | ||||||
Long-term marketable securities and cost
investments |
17 | 37 | ||||||
Total investments |
73 | 93 | ||||||
Property, plant and equipment |
2,527 | 2,356 | ||||||
Accumulated depreciation and amortization |
(1,576 | ) | (1,438 | ) | ||||
Net property, plant and equipment |
951 | 918 | ||||||
Other assets: |
||||||||
Goodwill |
119 | 111 | ||||||
Intangible assets, net of accumulated amortization of $8
and $8 |
7 | 7 | ||||||
Assets held for rent |
34 | 33 | ||||||
Deferred income taxes |
39 | 35 | ||||||
Other assets |
52 | 56 | ||||||
Total other assets |
251 | 242 | ||||||
Total assets |
$ | 2,537 | $ | 2,426 | ||||
The accompanying notes are an integral part of these financial statements.
-4-
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and September 30, 2004
(In millions, except for share and per share amounts)
LIABILITIES & STOCKHOLDERS’ EQUITY
| December 31, | September 30, | |||||||
| 2004 | 2004 | |||||||
| (Unaudited) | ||||||||
Current liabilities: |
||||||||
Notes payable to banks |
$ | 25 | $ | 24 | ||||
Accounts payable and accrued liabilities |
286 | 290 | ||||||
Deferred income tax payable |
1 | — | ||||||
Income taxes payable |
52 | 50 | ||||||
Current portion of long-term debt |
129 | 8 | ||||||
Total current liabilities |
493 | 372 | ||||||
Long-term debt |
391 | 506 | ||||||
Deferred income taxes |
26 | 22 | ||||||
Other liabilities |
314 | 290 | ||||||
Commitments and contingencies (Note J) |
||||||||
Minority interest |
53 | 45 | ||||||
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: 46,756 and 47,534 shares (aggregate
redemption value of $47 and $48) |
63 | 64 | ||||||
Less cost of shares of preferred treasury stock |
(38 | ) | (38 | ) | ||||
Common stock: |
||||||||
Authorized:
200,000,000 shares of $1 par value, issued and outstanding: 62,972,619 and 63,055,006 shares |
63 | 63 | ||||||
Less cost of shares of common treasury stock |
(5 | ) | (5 | ) | ||||
Additional paid-in capital |
43 | 52 | ||||||
Retained earnings |
1,242 | 1,218 | ||||||
Unearned compensation |
(42 | ) | (49 | ) | ||||
Deferred employee benefits |
(44 | ) | (45 | ) | ||||
Notes receivables for restricted stock |
(19 | ) | (19 | ) | ||||
Accumulated other comprehensive loss |
(3 | ) | (50 | ) | ||||
Total stockholders’ equity |
1,260 | 1,191 | ||||||
Total liabilities and stockholders’ equity |
$ | 2,537 | $ | 2,426 | ||||
The accompanying notes are an integral part of these financial statements.
-5-
CABOT CORPORATION
(In millions)
UNAUDITED
| 2004 | 2003 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 35 | $ | 29 | ||||
Adjustments to reconcile net income to cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
35 | 32 | ||||||
Deferred tax provision |
2 | — | ||||||
Equity in income of affiliated
companies |
(2 | ) | (2 | ) | ||||
Non-cash compensation, net |
7 | 6 | ||||||
Other non-cash charges, net |
5 | |||||||
Changes in assets and liabilities: |
||||||||
Accounts and notes receivable |
(16 | ) | 14 | |||||
Inventory |
(28 | ) | (5 | ) | ||||
Prepayments and other current
assets |
(7 | ) | (20 | ) | ||||
Accounts payable and accrued
liabilities |
(14 | ) | (1 | ) | ||||
Income taxes payable |
1 | (3 | ) | |||||
Other liabilities |
(6 | ) | 4 | |||||
Other, net |
(3 | ) | (4 | ) | ||||
Cash provided by operating
activities |
9 | 50 | ||||||
Cash Flows from Investing Activities: |
||||||||
Additions to property, plant and
equipment |
(30 | ) | (22 | ) | ||||
Proceeds
from sales of property, plant and
equipment |
1 | 1 | ||||||
Increase in assets held for rent |
(1 | ) | (2 | ) | ||||
Purchase of marketable securities
investments |
(25 | ) | — | |||||
Proceeds
from sale and maturity of marketable securities
investments |
15 | — | ||||||
Cash used in investing
activities |
(40 | ) | (23 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Increase in notes payable to banks,
net |
1 | 5 | ||||||
Purchases of common stock |
(10 | ) | (21 | ) | ||||
Sales of common stock |
1 | 1 | ||||||
Cash dividends paid to stockholders |
(11 | ) | (10 | ) | ||||
Cash used in financing
activities |
(19 | ) | (25 | ) | ||||
Effect of exchange rate changes on
cash |
5 | 3 | ||||||
(Decrease) increase in cash and cash
equivalents |
(45 | ) | 5 | |||||
Cash and cash equivalents at beginning of
period |
159 | 247 | ||||||
Cash and cash equivalents at end of
period |
$ | 114 | $ | 252 | ||||
The accompanying notes are an integral part of these financial statements.
-6-
CABOT CORPORATION
(In millions)
UNAUDITED
| Preferred | Common | Notes | ||||||||||||||||||||||||||||||||||||||
| Stock, net | Stock, | Accumulated | Receivable | |||||||||||||||||||||||||||||||||||||
| of | net of | Additional | Other | Deferred | from | Total | Total | |||||||||||||||||||||||||||||||||
| Treasury | Treasury | Paid-in | Retained | Comprehensive | Unearned | Employee | Restricted | Stockholders’ | Comprehensive | |||||||||||||||||||||||||||||||
| Stock | Stock | Capital | Earnings | Loss | Compensation | Benefits | Stock | Equity | Income (Loss) | |||||||||||||||||||||||||||||||
Balance at September 30, 2004 |
$ | 26 | $ | 58 | $ | 52 | $ | 1,218 | $ | (50 | ) | $ | (49 | ) | $ | (45 | ) | $ | (19 | ) | $ | 1,191 | ||||||||||||||||||
Net income |
35 | $ | 35 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
52 | 52 | ||||||||||||||||||||||||||||||||||||||
Change in unrealized loss on derivative instruments |
(4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||
Minimum pension liability adjustment |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
Total comprehensive income |
82 | $ | 82 | |||||||||||||||||||||||||||||||||||||
Common dividends paid |
(10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||
Issuance of stock under employee compensation plans,
net of forfeitures |
— | — | — | |||||||||||||||||||||||||||||||||||||
Purchase and retirement of common stock |
(10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock conversion |
(1 | ) | 1 | — | ||||||||||||||||||||||||||||||||||||
Preferred dividends paid to Employee Stock Ownership
Plan, net of tax benefit |
(1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||
Principal payment by Employee Stock Ownership Plan
under guaranteed loan |
1 | 1 | ||||||||||||||||||||||||||||||||||||||
Amortization of unearned compensation |
7 | 7 | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 |
$ | 25 | $ | 58 | $ | 43 | $ | 1,242 | $ | (3 | ) | $ | (42 | ) | $ | (44 | ) | $ | (19 | ) | $ | 1,260 | ||||||||||||||||||
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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”). 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, 2004. | ||||
| The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended December 31, 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 2004 have been reclassified to conform to the fiscal 2005 presentation. | ||||
| B. | Significant Accounting Policies | |||
| Revenue Recognition | ||||
| Cabot’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, which establishes criteria that must be satisfied before revenue is realized or realizable and earned. | ||||
| Cabot primarily derives its revenues from the sale of specialty chemicals, tantalum and related products, and from the rental and sale 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, servicing and royalties for licensed technology. | ||||
| 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. | ||||
| During the first quarter of fiscal 2005, Cabot determined that its method of recognizing revenue from the sale of one particular product sold to one customer in the Supermetals Business required revision due to Cabot being unable to ensure that the product meets the customer’s specifications prior to shipment. Under the previous method, which was followed commencing with the third quarter of fiscal 2003 and through the end of fiscal 2004, revenue was recognized at time of invoice, net of a reserve for estimated returns based on historical experience. Cabot now believes that such revenue should have been deferred until the time of customer acceptance instead of recording revenue net of a reserve for estimated returns. Consequently, effective with the beginning of fiscal 2005, Cabot defers revenue until customer acceptance. The impact of this revision was not material to any of the quarters or years for which the previous method was followed. In addition, the cumulative effect of this revision is an increase of approximately $1 million of net income which is not material and consequently has been recorded in the first quarter of fiscal 2005. Prior to the third quarter of fiscal 2003, revenue from product sold to this particular customer was appropriately recorded upon receipt of customer acceptance. At December 31, 2004, there was $8 million of deferred revenue for these sales. | ||||
| 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. At December 31, 2004 and September 30, 2004, Cabot had $3 million of deferred revenue related to certain supply agreements, | ||||
-8-
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004
UNAUDITED
| representing the difference between the billed price and the estimated average selling price. The deferred revenue will be recognized as customers purchase the contracted minimum volumes through 2006. | ||||
| Cabot prepares its estimates for sales returns and allowances, discounts and volume rebates quarterly based primarily on historical experience and contractual obligations updated for changes in facts and circumstances, as appropriate. The Company offers certain of its customers cash discounts and volume rebates as sales incentives. The discounts and rebates are recorded as a reduction of sales at the time revenue is recognized based on historical experience. Rebates that are earned over a period of time are recorded based on the estimated amount to be earned. A provision for sales returns and allowances is recorded at the time of sale based on historical experience as a reduction of sales. | ||||
| Accounts and notes receivable as of December 31, 2004 and September 30, 2004, primarily include trade accounts receivable, which arise in the normal course of business, income tax receivables of $18 million for each period and the current portion of notes receivable of $12 million and $9 million, respectively. Trade receivables are recorded at the invoiced amount and generally do not bear interest. Cabot maintains allowances for doubtful accounts for estimated losses resulting from the potential inability of its customers to make required payments primarily based on historical experience. Customer account balances are charged off against the allowance when it is probable the receivable will not be recovered. Provisions and charge-offs in the first quarter of fiscal 2005 and 2004, were not material. There is no off-balance-sheet credit exposure related to our customers’ receivable balances. | ||||
| 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 Emerging Issues Task Force (“EITF”) 00-10, “Accounting for Shipping and Handling Fees and Costs.” Shipping and handling costs are included in cost of sales. | ||||
| 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, 2004. 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. If Cabot applied the fair value recognition provisions of FAS No. 123, Cabot would have recorded compensation expense of $1 million in each of the three months ended December 31, 2004 and 2003. The expense would be in addition to the $5 million and $4 million of compensation expense, net of tax, for restricted stock that was recorded in the three months ended December 31, 2004 and 2003, respectively. | ||||
| The following table illustrates the effect on net income and earnings per share if Cabot had applied the fair value recognition provisions of FAS No. 123: | ||||
| Three Months Ended | ||||||||
| December 31, | ||||||||
| 2004 | 2003 | |||||||
Net income, as reported |
$ | 35 | $ | 29 | ||||
Add: Stock-based compensation expense
included in reported net
income, net of related tax
effects |
5 | 4 | ||||||
Deduct: Stock-based compensation using
fair value method for all
awards, net of related tax
effects |
(6 | ) | (5 | ) | ||||
Pro forma net income
|
$ | 34 | $ | 28 | ||||
-9-
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004
UNAUDITED