Cabot Corp (CBT) 2002 Q3 法說會逐字稿

General Manager of our [indiscernible], Bill Brady, General Manager of our [indiscernible] business, Martin Coffee, Assistant Controller, and [Indiscernible] Kim, our General Counsel. Before I comment on the quarter’s results, I will remind you that our conversation today will include forward-looking statements, which are subject to risks and uncertainties, including those with Cabot’s 2001 Form 10-K filing, a copy of which is available on our Website.

Last night, we released earnings for the third fiscal quarter and related supplemental business information. For those of you on our mailing list, you received these here by fax or e-mail. If you are not on our mailing list and are interested in receiving this information in the future, please contact our Website or our investor relations department.

Today, I will begin with a short overview of the results of the quarter, and will then open the floor to questions. Last night, the company reported third-quarter earnings per share of 28 cents, compared to 51 cents per share for the same period last year. Included in the 28 cents was a total of 7 cents per share in charges for special items, and a 1-cent per share of income related to discontinued business.

Earnings per share from continuing operations for special items was therefore 34 cents per share compared to 65 cents per share for the same period last year. Special items included a 3-cent-per-share charged for project write-offs in our performance materials business, due to the show at Cabot’s super metals acquisition, and a 5-cent-per-share charge to increase our reserve related to respirator litigation claims as well as a 1-cent-per-share benefit from insurance companies. Finally, we received a 1-cent benefit from an insurance company related to the discontinued L&G business.

The decline in operating results for this quarter was driven largely by reduced margins in the [indiscernible] business and lower volumes in the [indiscernible] business, so the [indiscernible] business saw a decline in profitability. The business shows signs of recovering volume. Volumes in card blank [phonetic] were significantly improved compared to most last quarter and the same period last year. However, sequential margins were squeezed in the third quarter due to higher feedstock cost and the lag in contract-related pricing adjustments.

The [indiscernible] oxide business also experienced higher volumes sequentially, and we believe that the business will continue to improve in the fourth quarter. The chemical business has reported a decrease in operating profit of three million or 10 percent, both from the third fiscal quarter of 2001 and sequentially.

For much of the third quarter, we saw strong demand for the card blank business, with indications that capacity utilization was becoming tighter, particularly in North America. However, automotive plants shut downs in June and customer inventory corrections resulted in flat [indiscernible] volumes versus June of last year. In light of this, we remain somewhat cautious as we head into the fourth quarter, which is typically weak through the normal seasonality in scheduled plan shutdowns.

During the quarter, we continued our efforts to resolve certain issues under supply contracts with two of our tantalum customers. As previously announced, we are able to successfully dissolve the contract dispute with the [indiscernible]. In exchange for volume and price concessions, the [indiscernible] has extended one of their contracts and agreed to purchase-handle a product at regular intervals throughout the terms of the contracts beginning late in the third quarter. We are pleased to have come to a mutual resolution, and look forward to continuing a strong and mutually beneficially relationship with the [indiscernible].

Litigation is ongoing with Chemed [phonetic], which prevents us from commenting further other than to say that we believe strongly that the purchase contract is valid, and our rights will ultimately be upheld. [Indiscernible]’s tantalum business earned $10 million in operating profits this quarter, which was $21 million less than the same quarter last year. This was due to lower volumes, resulting from a combination of slower marketing conditions and the contract dispute, which were offset partly by approved margins as a result of lower [indiscernible].

A continuing weakness in the market and the uncertainties surrounding the contract issues caused us to be cautious about the tantalum business for the remainder of the year. While we continue to be optimistic about the earnings growth of this business, current conditions may get very difficult to project its results for the next 18 months.

Our inkjet business continues to make progress, with volume growing in both the OEM and the after-market areas supported by our R&D efforts. Cesium formate is also progressing, and we are seeing continuous success in realizing more value from this product through a trend of increased [indiscernible]. Each of these two businesses will contribute modestly to the earnings of Cabot in the fiscal year.

The company also benefited from a lower tax rate for the quarter of 23 percent as compared to 29 percent for the year-ago quarter. Tax rate was reduced in the third quarter, which brings our year-to-date tax rate down from 28 percent to 27 percent. During the third quarter, the company repurchased approximately one million shares, a portion of which relate to the annual testing of the equity seven [phonetic] plan.

As was the case in the third quarter, over the next few months, some senior officers with the company may be selling shares to satisfy obligations associated with this vesting. We will continue to be in the market, and have approximately five million shares left to repurchase under the board of director authorization. Cabot incurred $31 million in capital expenditures for the quarter, bringing the total year-to-date amount to $208 million, which includes 99 million for the purchase of [indiscernible] Cabot’s super metal.

In 2002, we expect our capital spending to be approximately $280 million. Earlier, I referred to the $5 charge we took during the third quarter to increase our reserve or respirator claims. These claims derived from a safety products business that we owned and operated from 1990 to 1995, at which point, the businesses sold in a leveraged deconsolidation to Aero Corporation. Cabot continues to own 42.5 percent of Aero. The number of respirator cases has increased over the last 18 months, while the cost per claim has remained stable.

At the end of 2002, there were approximately 38,000 respirator claims outstanding against the historical manufacturer of the product. Cabot has typically contributed to the settlement of a substantial fraction of the total claims. The actual number of claims for which Cabot contributes depends on a number of factors, but has historically been well over half of the total claim. Cabot’s contribution level for settlement has averaged approximately $320 per claim. In the month of June, we reached agreement to contribute to the settlement of up to 13,000 claimants in Mississippi at a total cost not to exceed $2 million. We expect a significant number of the 13,000 settled claims to be respirator related and to therefore be included in the outstanding respirator cases I noted earlier. The $5 million charge recorded in the quarter includes the Mississippi settlement, as well as our best estimate based on our experience to date of Cabot’s potential liability for all other respirator-related claims as of June 30, 2002.

Because this is a very unpredictable area, we are unable to estimate the number of future claims on any reasonable basis, and therefore have not reserved for them at this time. While in any given quarter, the impact of these actions may be significant, we continue to believe that this issue will not have a material impact on the company’s financial condition.

On the corporate governance front, Cabot’s management is working to be prepared to implement the various SEC, New York Stock Exchange, and Congressional proposals as they become final. With the support of an independent and excellent board of directors, we believe we are on top of all of the relevant issues. With respect to the company’s financial statement, as John Shaw and I prepare to sign and file with the SEC a statement under oath as to our most recent exchange X [phonetic] filings, we remain comfortable with and confident in our accounting policies and our disclosure practices. This is not an area that I lose sleep over at all.

On the specific issue of accounting for equity-based incentive compensation, Cabot principally issues [indiscernible], and the expense for this is recorded in each period. There are a relatively small number of options, that is we choose to expense, would cost on the order of $2 million per year. Cabot also makes loans to officers principally related to this restricted stock program. These loans are secured by the stock, and employees pay interest on the loan. In addition, we have made a few loans to some senior officers to aid in their relocation, in total, amounting to approximately $2 million.

We are, of course, cautious about our current performance and our short-term outlook. While there were signs during the quarter of recovery in many of the businesses, there were also contradictory sides, particularly in [indiscernible]. These are difficult times, and we are working very hard to strengthen this company and prepare for the future.

Looking further out, there are many things that we feel good about: our [indiscernible], FMO, and channel of businesses are all solidly profitable. We believe that we are beginning to emerge from the trough of the [indiscernible] cycle. We are also seeing signs of improvement in FMO’s markets. Cabot’s Super Metals is beginning to see signs of tantalum capacitor recovery in Asia, and we continue to believe that the global tantalum market will recover, and when it does, we will be well-positioned with our ore position, our contracts, and our manufacturing capacity and capability in the U. S. and Japan.

Finally, we continue to be encouraged by the progress we have made in our developing businesses, cesium formate, inkjet, and nanogel. With that short overview, I will conclude my comments and open the line for questions.

Sylvester, could we open the line for questions?

Thank you, sir. If you’d like to ask a question on today’s call, you may do so by pressing star one on your touchtone telephone. Again, that is star one to ask a question. We’ll pause a moment to assemble our roster.

We’ll take our first question from John Roberts with Buckingham Research.

Good morning, guys.

Good morning, John.

The lag between carbon [indiscernible] prices and feedstocks, could you comment whether the lag increased as the quarter progressed or narrowed as the quarter progressed, so we can get a sense as to how we’re starting the current quarter?

I’ll answer it and then make sure that I give it the right question. I think that if I understand your question correctly, John, do we anticipate with the adjustment following the end of the third quarter, will we be close to parity with our current [indiscernible]? I think the answer to that question is roughly yes, we will be close to parity. Is that fair, Bill?

That’s fair, yeah.

You’re implying it’s actually sort of a step change improvement that occurs at the start of this quarter or just occurred in early July?

Yeah. We will have an adjustment this quarter because of the rapid rise that we saw in the last quarter, and so there will be a margin improvement this quarter.

Your conclusion is accurate.

Okay, thanks. I’ll jump back in the queue for other questions.

Okay.

And we’ll take our next question from Bill [Indiscernible] with Davison.

Two different questions. First of all, closed Ken talking about the inkjet printer market, and there’s been, Thursday, stuff in the news relative to Hewlett Packard and Dell and Dell’s maybe entering into this market. Would you walk us through what you perceive as risks and opportunities with the Dell noisemaking? And then secondarily, in the tantalum arena, I’m curious. What other applications beyond electronics, if any, are beginning to show profit?

Okay. First on the inkjet, it clearly is an interesting time in the inkjet printer market in that we read the same thing you do, and whether the big computer companies are going to try to enter it. I like our position in that we continue to believe that our basic pigment or pigment dispersion is a very, very attractive and powerful product for anybody who wants to make an ink for an inkjet printer.

We’ve seen a very substantial growth rate in what we call our after-market application, where we’re seeing people who are making ink for the inkjet printer market, either for small printers or for the resale market. So if Dell or others decide to go into that business, we think we would be very well-positioned to get that business and be a substantial player. So we feel good. We generally feel very good about our position in that business. We continue to work to try to penetrate into the major OEM, but we’ve seen significant growth in our existing OEM and in the after-market.

With respect to tantalum, we are seeing substantial growth rates in what we know as the thing films sputtering target market. I think I—you and I have talked in the past, Bill. Tantalum is used—tantalum sputtering targets are used in the manufacture of integrated circuits to lay down a very thin layer of tantalum on the chips, on the integrated circuits where copper is used in the interconnect layer. That’s a growing—rapidly-growing technology in the integrated circuits market. Tantalum appears to be the only material that works, and we’ve seen growth rates up in the 20, 25 percent rate, even in this period of—in the electronic slowdown market.

So that’s encouraging for us, and we look forward—we hope that continues.

Is there anything worthy of discussion in the military or other arenas that require very hard surfaces?

We have not seen anything substantial. You know, we’ve—you have an excellent memory. A number of years ago, we had a very strong phase when tantalum was used in the military application and the manufacture of organs, I guess, or bullets. But we have not seen any substantial growth in that at this point.

All right. Thank you.

We’ll take our next question from Jay Harris with Goldsmith and Harris.

Good morning, Jay.

Good morning, Ken. Your comments on tantalum seem to be more subdued than those that were issued with your press release on June 6th when you settled the arrangement with Vishay. Has there been a change?

No, I don’t think there’s been any change at all. We’re very comfortable with the relationship with Vishay. We’re shipping the product, and I think we’ve put that issue behind them. As I think I’ve talked to you, we don’t like the current situation with ChemEd. We’re getting close to an excellent trial here in the fall, and we of course don’t like to be in a dispute of that magnitude with our customers. And that may lead, to some extent, to any attitude that you may sense.

The other thing that of course we all wonder about is how long the electronics industry slowdown is going to go on for. You know, if I look back nine months to a year, there was pretty strong feeling throughout the industry that when we sat here at the end of July, that we’d be looking to a fairly strong fourth quarter, a fourth calendar quarter. And although we are starting to see some signs of growth in the Pacific, you know, we certainly haven’t seen an awful lot of robust growth. I guess there was some in one of our customers. There was some signs that they may have been off the bottom in a teleconference that they had earlier in the week, but the market remains weak. And, you know, how long that general industry slowdown remains, continues, is of concern to us, and it makes it—because of our significant market share that is non-contracted, i. e., the Cabot super metals market share, it makes it very hard for us to project with any degree of accuracy what the market’s going to look like.

Well, but you’ve made a projection on June 6th.

We did make a projection on June 6th, and I’m glad you asked that question. We made a projection for the specific purpose of putting a stake in the ground about the projection we had made a year-and-a-half or two years ago when we entered into the contracts. AS you know, Jay, we don’t like to make projections about earnings. And when we entered into the contracts, we felt we had to because of their materiality.

When we resolved the Vishay contract, it was a great internal debate about whether we had to make a further projection, and the general consensus was that given the fact that we had mentioned the 185 number, we had to put a framework around what the current—the Vishay type—the Vishay settlement-type number would be, assuming the same general conditions.

Our intention going forward is that having told you that, that we’re going to go back to our previous practice of trying to give you information about what we see going on in the market or position in the market, but not trying to project earnings, because so much of our business is not covered by contract.

I understand that, but there was some very specific numbers in your June 6th press release.

That’s a fair comment.

Yeah, and if I could repeat it, you said at that time Cabot now expects earnings before interest and taxes for performance materials division to be about the same in fiscal year ended September 30th. There’s a 78 million in the segment earned in the year earlier period, and I just wondered, given your introductory comments, whether you were backing off on that and saying you didn’t know?

We’re generally comfortable today as we sit with the roughly $75 million number for the fiscal year.

Okay.

The 120 was based on some assumptions about the market and about our ability to resolve ChemEd on a basis that was reasonably similar to the Vishay resolution. We have been unable to do that, and so therefore, you know, you can look at results that would be either substantially above that if we won the litigation, and that they took the full volumes into our first quarter, or it could be substantially below that if we did not win the litigation.

All right. I was just—I understand that, and I was just referring to the fourth quarter.

Well, we’re generally—and I want everybody to be clear, we’re trying to back away from giving specific projections as I trust and hope every other company in America is doing. But we stick today with the roughly $75 million projection for the tantalum business for the fiscal year.

And then we’ll have to see what ChemEd does and how that affects next year.

Right.

So that the shipments that you’re expecting to make to Vishay in the fourth quarter will be a major leg towards that goal?

The shipments that we expect to make to our two contract customers who are honoring your contracts and to the volumes that we are generating in Japan, we believe will supply the earnings that we mentioned.

Good enough. Thank you.

We’ll take our next question from Jeff Dukakis with JP Morgan.

Good morning.

Jeff, how are you?

Good. A couple of questions. I guess just to follow up on Jay for a moment, I wasn’t aware that projection that you guys did for next year in tantalum included settlement with ChemEd, or if it did. I just want to be sure that that’s correct.

We had to put out that number when we put out the Vishay press release, and we had to make an assumption about what was going to happen within the ChemEd dispute.

Right.

And I think we mentioned that in the press release.

Uh-huh.

We made the assumption that ChemEd would be resolved on a similar basis to the resolution with Vishay.

I see. Okay.

So it’s an unknown as we sit here today. I would repeat. We have been unable to reach satisfactory resolution with ChemEd, and so it looks to me like we’re proceeding with litigation, and hopefully it’ll be resolved in our first quarter of 2003.

When we look at the sequential profitability of performance materials, there was some verbiage in the press release about your inventory costs and product mix. Can you kind of disentangle some of the effect and talk about where inventories are, the value of your inventories are for the fourth quarter?

I’ll try. I may need some help. But let me give it a try. I think you’re aware, Jeff, that we, throughout the year, or at least since January 1st, have been in the situation where we would need to be in a position to deliver the contracted volumes to both ChemEd and Vishay at the end of our first fiscal quarter in 2003, i.e., at the end of the calendar year, and so therefore have been building inventory throughout the year. We were making product to be delivered under the contracts that ordinarily would have been shipped throughout the year, but we had to be in a position to ship at the end of the quarter.

That has caused a quite substantial buildup in the tantalum inventory, particularly in the finished product inventory, and a resulting increase in working capital. When we look at our uses of cash, that is a significant portion of the use of cash. The resolution of the Vishay dispute eased that problem significantly. It enabled us to pin down the products that we had to deliver and when we had to deliver, and we were able to slow down production as a result.

With the resumption of shipments to Vishay, we will start to see an inventory work its way down as we make those shipments. The continuation of the ChemEd in the contract dispute leaves us, however, in a similar bind. We do have—we have all the litigation. The judge did issue a specific order saying that, “If you do not settle, here’s the products that Cabot will ship to ChemEd.”

Right.

Which has put us in a situation where we’re no longer at risk as to what we’re making, and that we’ve—so that’s been helpful, but we still need to be in a position if we win the lawsuit to ship them 100,000 pounds in the fourth quarter, and we’ll be in that position in accordance with the contract, so we do have an inventory buildup there. It’s been an awkward problem for us, but I’m confident that we’re in a position to handle whatever will happen here in the next few months.

All right. So if I understood what you’ve said to previous questioners, and in your—you know, in your press release you talk about your expectations and your carbon black margin. You’ve talked about your expectations for performance materials. So all things being equal, the fourth quarter for Cabot, out of the fourth fiscal quarter for Cabot, should be a relatively good quarter in comparison to the previous year. Is that correct?

I think that’s right. We have the potential of reversing our normal seasonality in that, you know, because of the resolution of the Vishay dispute, we should see substantial CPM income much higher than we saw in this quarter, would offset the normal chemical industry slowdown. So yes, we’re modestly optimistic that we would see a stronger fourth quarter than we have historically shown you.

We do remain cautious as I said in my comments about the volume structure and the volume evolution in the chemical business. I want to emphasize for you and everybody, and I think this is—we’re not alone in this—June was a little bit shaky for us.

Right.

And I’ve talked to several other companies like us, and they experienced a similar June, so we’re all sort of sitting here waiting and watching to see what develops.

Okay. Thank you very much.

We’ll take our next question from Bob Goldberg with New Vernon Associates.

Good morning, Ken.

Good morning, Bob, how are you?

I’m doing pretty well. A couple of questions.

You guys all must be feeling better after yesterday.

Well, these rallies haven’t lasted. We’ll see what happens this time.

Yeah, it’ll be nice.

I hope. Special items for the quarter —

Yes.

I was a little confused.

Yeah, let me go through them, and let me simplify it if I can. First of all, from an operating basis, we were engaged in an expansion in Boyer Town [phonetic] in—really required under the contracts to have a specific type of capacity to produce a particular type of powder that was smart under the contracts. When we did the Cabot Super Metals acquisition, they had that type of capacity. It turned out to be a lot less expensive to spend a little bit of money in Japan, rather than complete the project in Boyer Town, and so there’s, I think, $3 million of money that we had expended in Boyer Town that we needed to write off.

It will save us—I forget the exact amount of money, but roughly, $10 million in money that we won’t have to spend because we have the capacity [indiscernible], so that’s one of the items. There was two other sort of insurance-related items. One is we constantly—what I describe as mine, are old insurance policies for recoveries against the various environmental liabilities that we experience. You know, we have—we’ve spent a lot of money, and we have roughly, I think, a $25 million reserve for environmental problems for closed sites, mostly Cabot’s nettles businesses that were disposed of in the mid-1980s.

We have a group of lawyers who examine our insurance, old insurance policies and, you know, negotiate and occasionally sue insurance companies coming out of those policies. It’s turned out to be a very valuable activity for us. We’ve made quite a bit of money over the years, and will continue to work that source to the greatest extent possible. I think that contributed a million dollars this quarter.

The other one was that we had an outstanding insurance claim against some damage to the Matthew, which was the L&G tanker that we owned, and when we sold that business, that insurance claim was retained by Cabot. That paid us a million dollars this quarter, and so that’s related to the non-operating side.

And then the final one, of course, is the respirator litigation, and I can comment in more depth, but maybe you’d like to add a specific question about it. Is that helpful?

Yes. Actually, I want to ask about the charge in the FMO business, the three million charge per canceled projects.

Oh, yes.

That was not a special item.

No. That was in the operating results.

Okay.

We were in, again, a similar situation. We were in a position a year-and-a-half ago, two years ago, where we were seeing substantial growth forecasts coming out of our principal customers, principally CMC, that led us to start to expend substantial capital money to expand our plant in Berry, Wales. And it turned out that that capacity was not needed. The engineering work that was done, the engineering work has been put on a shelf. If we ever need to have an expansion, we can take it off the shelf, but we had to—but we felt we had to write it off because it didn’t look like we were going to build it in there. So it’s mostly a capacity issue. There was also one other inventory situation we built for a particular customer, and the customer is having significant financial troubles and is not going to be able to take [indiscernible].

Okay. And to follow up on the FMO business, Cabot Micro reported quite a positive revenue surprise on earnings as well.

Yeah.

I think they represent 35 or 40 percent sequentially. Are you seeing that sort of increase in the orders from them? Is that what’s driving the higher volume this quarter?

We’ve seen some nice increases in our volumes from Cabot Micro.

Okay. And on the automotive side, the concern, is that mainly a North American issue? What’s happening on a more global basis in terms of carbon black demand?

Bill Noglows, do you want to respond to that?

Well, the June, as Ken mentioned, our caution about what we saw in June is pretty much global with the exception of some countries in Pacific Asia. But we are optimistic in general, but we’re still cautious, because we’ve just come into the summer [indiscernible] and vacation season starting, and we’re trying to sort out inventory corrections and inventory bills versus ongoing business, and it’s still not clear to us, I think. In July, we’ll have a clear view of where the carbon black is going today and where the tires are going. Does that answer your question, Bob?

We are towards the end of July now. Is there anything you can say anecdotally in terms of the beta business? Not yet?

No, we cannot answer anything.

Thanks very much.

Thank you, Bob.

We’ll take our next question from Alan Fornier with Tenet.

Hi, this is [indiscernible] Capital. Just a couple of questions. Can you give us outstanding balances for cash and accounts receivable and inventory for June?

Eddie or Martin, do you have those numbers there?

Yeah. I think cash, we had 190 or so million dollars outstanding at the end of June, and accounts receivable, I don’t have the actual balance. I can tell you that there was an improvement in accounts receivable from last balance sheet of the end of March, and did you have another specific one?

Inventory?

Inventory? There was a slight increase of inventories since the end of March. So accounts receivable, there was a decrease of about 40 million and inventories, an increase of about 20 million.

Okay, great. Thank you very much.

Once again, that is star one if you would like to ask a question. We’ll take a follow-up from John Roberts with Buckingham Research.

Thanks. I don’t know if you can comment on this, Ken, but ChemEd had indicated they had paid you $25 million during the quarter for tantalum they had received last year. I don’t understand quite why they would pay you anything while the litigation was ongoing? They’re already late. Why wouldn’t they have just stayed late?

They clearly owed us some money, John. We have delivered the product. They’ve used the product. The product quality wasn’t in dispute. It was an absolute slam dunk situation, and I think they were probably advised that they ought to at least, you know, do what they could to dress up their situation by not having such an obvious default sitting in the judgment space.

Okay, because it had been a slam-dunk all along.

Yeah, well, I—

For some reason, they all of a sudden changed their mind.

I’d prefer not to comment.

Okay.

You people have all seen the court papers. You can reach your own judgment about the [indiscernible] of the contract.

Okay. Secondly, and this is kind of hypothetical, but would buying in the rest of [indiscernible] give you any additional flexibility in dealing with some of these respirator cases? It’s a highly-leveraged business. I don’t know what the costs would be to bring it back in, but I don’t even know if you—you could maybe even let it go bankrupt if you bought it back in, if you let the debt on it somehow. It’s a separate legal entity, and that might give you access to bankruptcy court in dealing with some of these settlements.

It’s an interesting idea. My initial reaction, of course, is that I don’t want to touch anything that is ever associated with respirators or this problem ever again in my life. The other—the negative comment would be that they have apparently continued to sell this product since we spun it out, and they are participating in the resolution of these cases. We have, as you know, I think only have a five-year window here, or there’s some circumstances it would be a little bit longer.

Okay.

Whether the bankruptcy alternative is attractive or not, we haven’t thought about it.

I mean, it’s not a big number here so far, and do you have an opinion that it’s not likely to become a big-enough number that you’d even look to that kind of flexibility?

I think that’s right. As you know, these things are confusing and unpredictable, but we cannot envision a situation that it becomes a material issue for us, which is why I said what I said in my notes. It’s going to cost us the dribble of a few million dollars every now and then, but it just doesn’t look to be a material problem for us. As you could imagine, in the workup of settling the Mississippi cases, which was the first time we actually put a lot of money on the table, we looked very hard at this whole situation, and it’s—it is what it is, and we think we can work our way through it without it being a significant issue for us as we go forward.

Thank you.

We’ll take our next question from Ravi Pananny [phonetic] with GE Asset Management.

Good morning, gentlemen.

Good morning.

A quick question, a couple of quick numbers questions for you. First on cap ex, what was that in the quarter?

It was about $39.

Okay. And what was the total debt balance at the end of the quarter?

Debt net of cash was about 330 million, roughly.

Okay. And last question, cash flow from operations that you had reported on the cash flow statement?

For the quarter only?

Yes.

About 65 million.

Okay. And that includes working capital and all that other good stuff, right?

Yes.

Okay. Thanks a lot, gentlemen.

[TAPE CHANGED SIDES.]

Very well, thanks. A little better, at least, after yesterday, but who knows whether that’s going to continue?

That’s right.

What was the principal cause of the shift in the tax rate in the quarter anyway?

I think it’s probably fair to say that we had been too conservative, looking at our tax rate in the first two quarters, and it was apparent that we were going to have a 27 instead of a 28 or 29 tax rate, and had to adjust it this quarter.

Fair enough, so for any modeling that we might do, we probably ought to sue the 27 full-year rate?

That’s what it looks like right now. I continue to believe that we can maintain it in the 27, 28 percent rate as we go forward.

Good enough. With respect to the whole respirator thing, if indeed you wind up paying out something on the order of two million for the 13,000 Mississippi claims, that’s somewhat above the historic average, but does it perhaps reflect Mississippi’s special status as a plaintiff-friendly place?

Absolutely. We found ourselves in a situation facing a group of cases that had been consolidated with one of these plaintiff lawyers. It was in front of a judge and jury. The judge was a politically-elected judge, and the jury—you know, juries in the area looked like, you know, one of these things that unfortunately exists in this country today, that their sole purpose is to take money away from corporations and give it to people who don’t even have to prove that they ever used their product.

Exactly. Those guys have raised ambulance chasing to a fine art.

And when you look at the—when you see it, it’s very—particularly for me, George. You know, I used to be a lawyer.

I noticed that, yeah.

And look at the fundamental justice of the situation, and it makes you so mad that you want to fight and prove that this is stupid. But the very, very experience of anybody who’s tried and the very, very strong advice is, look, pay your $300 and go away, so that’s what we did. Fortunately today, there’s not a lot of those jurisdictions in the country, and they’re well known, and you know, to some extent, we would hopefully be able to work our way through the inventory of cases that exists in those jurisdictions.

You note that they don’t get brought in most of the states’ jurisdictions in the country, just in a few.

Exactly.

Absolutely. So you’ve pinpointed the reason why we agreed to pay. It was in front of a jury with a politically-elected judge, and there was nothing we could do about it.

Nothing short of extortion.

Absolute extortion.

Let’s hope there’s some ultimate resolution from the whole thing. Thank you, Ken.

Thank you, George. Have a good day.

Thanks.

We’ll take a follow-up from Jeff Dukakis.

I guess I have two last questions. The first is, I think in the judge’s opinion, as far as enforcement of the contract with ChemEd, the judge rules, and he said something like he intended—he thought the contract would go through as stated unless a material event took place?

I think the phrase was “material information.”

Material information. Does the ChemEd suit against Cabot count as material information as far as you know or does it not?

Well, first of all, the judge will make that decision, but we’re certainly not aware of anything in the dealing with ChemEd that have any bearing on the validity of the contract. Jeff, if you go back and read the contract, you will find the specific clause in there that is a release, a specific release for any prior contractual [indiscernible] for dealings between the parties. And I—you know, when you go read the contract signed by a responsible company with the advice of responsible lawyers, and then go read the ChemEd pleading, you scratch your head and say, “Gee, how can they get this?” One never knows.

Okay. Sort of my last question is say it turns out that, for various reasons, Cabot and ChemEd can’t resolve their disputes for the next 18 months. If demand for tantalum sort of stays around where it is, would your operating earnings in tantalum be down next year?

Well, let me rephrase your hypothetical, and that is that we don’t resolve it and we don’t get a Court opinion, and therefore, we get no revenue out of the tantalum, out of the ChemEd situation.

Right.

Would our earnings for tantalum be down? I have not done that calculation, so I can’t answer the question, but I would—I would think probably down somewhat, assuming that the market for the rest of the business did not recover.

Assuming, okay. If I could, you know, later on if I could follow up with you guys on that issue, that would be great.

Yes, you might call Jim. We’re going to be pretty cautious, generally, about giving those kind of—I want to be clear. We’re going to be very cautious about giving those kind of forward-looking views as we go forward.

Okay, thank you very much.

Mr. Burnes, there appears to be no further questions at this time. I would like to turn the call back over to you, sir.

Thank you very much, Sylvester. Thank you, everybody, for participating. Let’s hope that the market continues to do well and that our markets recover, and that we can show you a better quarter next time. Thank you very much, everybody. Could the Cabot people stay on for a second?

Yes. That concludes today’s conference call. At this time, you may disconnect.