The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
UNAUDITED
A. Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting policies generally accepted in the United States (“U.S.”) and include the accounts of Cabot Corporation (“Cabot” or the “Company”) and its wholly owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights. Intercompany transactions have been eliminated in consolidation.
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 Annual Report on Form 10-K for its fiscal year ended September 30, 2019 (“2019 10-K”).
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, 2019 and 2018. 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.
In June 2019, the Company completed the sale of its Specialty Fluids business. The transaction did not meet the criteria to be reported as a discontinued operation. Therefore, prior periods’ consolidated financial statements and disclosures have not been recast.
Effective October 1, 2019, the Company adopted the accounting standard for leases issued by the Financial Accounting Standards Board (“FASB”) in February 2016. The Company used a modified retrospective optional transition method, which is discussed in detail in Note B.
B. Significant Accounting Policies
Revenue Recognition
Cabot recognizes revenue when its customers obtain control of promised goods or services. The revenue recognized is the amount of consideration that the Company expects to receive in exchange for those goods or services. The Company’s contracts with customers are generally for products only and do not include other performance obligations. Generally, Cabot considers purchase orders, which in some cases are governed by master supply agreements, to be contracts with customers. The transaction price as specified on the purchase order or sales contract is considered the standalone selling price for each distinct product. To determine the transaction price at the time when revenue is recognized, the Company evaluates whether the price is subject to adjustments, such as for returns, discounts or volume rebates, which are stated in the customer contract, to determine the net consideration to which the Company expects to be entitled. Revenue from product sales is recognized based on a point in time model when control of the product is transferred to the customer, which typically occurs upon shipment or delivery of the product to the customer and title, risk and rewards of ownership have passed to the customer. The Company has an immaterial amount of revenue that is recognized over time. Payment terms typically range from zero to ninety days.
Shipping and handling costs incurred after the transfer of control of a product to the customer are billed to the customer and are recorded as sales revenue, as the Company considers these to be fulfillment costs. Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the Consolidated Statement of Operations. Taxes collected on sales to customers are excluded from the transaction price.
The Company generally provides a warranty that its products will substantially conform to the identified specifications. The Company’s liability typically is limited to either a credit equal to the purchase price or replacement of the non-conforming product. Returns under warranty have historically been immaterial.
The Company does not have contract assets or liabilities that are material.
As permitted by the FASB’s revenue recognition standard, Revenue from Contracts with Customers, when the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, the Company does not consider there to be a significant financing component associated with the contract.
10
Intangible Assets and Goodwill Impairment
The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for assets acquired and liabilities assumed in an acquisition are allocated to the assets and liabilities based on their fair values at the date of acquisition. The Company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition.
Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.
Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of August 31, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Reinforcement Materials, and the fumed metal oxides and specialty compounds product lines within Performance Chemicals, which are considered separate reporting units, carry the Company’s goodwill balances as of December 31, 2019.
For the purpose of the goodwill impairment test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result. The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The fair value is also benchmarked against a market approach using the guideline public company method. The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. Based on the Company’s most recent annual goodwill impairment test performed as of August 31, 2019, the fair values of the Reinforcement Materials, Fumed Metal Oxides and Specialty Compounds reporting units were substantially in excess of their carrying values.
Long-lived Assets Impairment
The Company’s long-lived assets primarily include property, plant and equipment, intangible assets and long-term investments. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable.
To test for impairment of assets, the Company generally uses a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.
An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable fair value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separately identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset.
The Company continues to consider strategic options for its Purification Solutions business. Depending on the actions taken, there could be a negative impact on the fair value of the Purification Solutions reporting unit, which may lead to an impairment.
11
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the related assets. The depreciable lives for buildings, machinery and equipment, and other fixed assets are between twenty and twenty-five years, ten and twenty-five years, and three and twenty-five years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in earnings in the Consolidated Statements of Operations. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated.
Income Tax in Interim Periods
The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be recognized and the income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period.
Valuation allowances are provided against the future tax benefits that arise from the deferred tax assets in jurisdictions for which no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. The cost of inventory is determined using the FIFO method.
Cabot periodically reviews inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory, and based on these assumptions estimates the amount of any obsolete, unmarketable, slow moving, or overvalued inventory. Cabot writes down the value of these inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value.
Pensions and Other Postretirement Benefits
The Company recognizes the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. Pension and post-retirement benefit costs other than service cost are included in Other income (expense) in the Consolidated Statement of Operations. The Company is required to recognize as a component of Other comprehensive income (loss), net of tax, the actuarial gains/losses and prior service costs/credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income (loss) is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI”), which is included as a component of stockholders’ equity, includes unrealized gains or losses on derivative instruments, currency translation adjustments in foreign subsidiaries, translation adjustments on foreign equity securities and minimum pension liability adjustments.
Recently Adopted Accounting Standards
In February 2016, the FASB issued a new standard for the accounting for leases. This standard requires lessees to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner that is similar to the historical accounting treatment for leases. The Company adopted the standard on October 1, 2019 using the modified retrospective optional transition method. Accordingly, leases in the prior period continue to be reported and disclosed in accordance with the Company’s historical accounting treatment. The Company elected the package of practical expedients that permits the Company to not reassess the identification, classification and initial direct costs of leases commencing before the October 1, 2019 effective date and to exclude short-term leases from the balance sheet. The Company did not elect the hindsight practical expedient to determine the lease term for existing leases or the practical expedient to not separate lease and non-lease components to existing leases, as well as new leases, through transition. The Company allocates the total consideration to the lease components and non-lease components on an observable stand-alone price basis to all asset classes.
Adoption of the new lease standard resulted in the recognition of operating lease right-of-use (“ROU”) assets and operating lease liabilities of approximately $106 million and $111 million, respectively, as of October 1, 2019. Refer to Note H for further
12
details regarding the balance sheet classification of these items. The difference between the operating lease ROU assets and operating lease liabilities reflects the reclassification of historical deferred rent balances of approximately $5 million. The effects of transition to the new standard resulted in no cumulative adjustment to retained earnings in the period of adoption. The standard did not materially impact the Company’s Consolidated Statement of Operations or Consolidated Statement of Cash Flows. The new standard did not have a material impact on the Company’s liquidity or debt-covenant compliance under its current debt agreements.
In February 2018, the FASB issued a new standard that allows entities to reclassify from AOCI to Retained earnings stranded tax effects resulting from changes made as a result of the Tax Cuts and Jobs Act of 2017 (the “Act”). The Company adopted this standard on October 1, 2019 which resulted in the reclassification of a $2 million net gain from AOCI to Retained earnings. The reclassification was primarily related to the Company’s pension plans and derivative instruments.
Recent Accounting Pronouncements
In June 2016, the FASB issued a new standard on measurement of credit losses. The standard introduces an "expected loss" impairment model that applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables and other financial assets. Entities are required to estimate expected credit losses over the life of financial assets and record an allowance against the assets’ amortized cost basis to present them at the amount expected to be collected. The new standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is evaluating this standard and the timing of its adoption. The Company does not expect the adoption of this standard to materially impact the Company’s consolidated financial statements.
C. Acquisitions
NSCC Carbon (Jiangsu) Co. Ltd
In September 2018, the Company acquired NSCC Carbon (Jiangsu) Co. Ltd, a carbon black manufacturing facility in Pizhou, Jiangsu Province, China for a purchase price of $8 million, subject to certain conditions. The purchase price conditions were satisfied in September 2019 and the purchase price was paid in the first quarter of fiscal 2020. The Company has commenced plans to modify this facility to produce specialty carbons and therefore the plant is temporarily mothballed. The modifications are expected to be completed, and production is expected to commence, in 2021. During the first three months of fiscal 2020 and 2019, the Company incurred less than $1 million and $2 million, respectively, of transition-related costs associated with this acquisition.
Shenzhen Sanshun Nano New Materials Co., Ltd
In December 2019, the Company entered into an agreement to purchase Shenzhen Sanshun Nano New Materials Co., Ltd (SUSN), a leading carbon nanotube producer, for approximately $115 million through cash considerations of $100 million and debt assumed of $15 million. The transaction is expected to close in the second quarter of fiscal 2020 and will be accounted for as a business combination. Upon closing, the operating results of the business will be included in the Company’s Performance Chemicals segment.
D. Employee Benefit Plans
Net periodic defined benefit pension and other postretirement benefit costs include the following:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
(In millions)
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected return on plan assets
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of prior service credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of actuarial loss
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Settlement and curtailment gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Cash Balance Plan Termination
In fiscal 2019, the Company’s Board of Directors approved a resolution to terminate the Company’s U.S. pension plan. The Company commenced the U.S. plan termination process during the third quarter of fiscal 2019 and expects to complete the transfer
13
of the U.S. plan’s assets to participants in fiscal year 2020, pending an Internal Revenue Service (“IRS”) determination letter. The pension liability will be settled through a combination of lump-sum payments and purchased annuities. Upon settlement of the benefit liabilities accrued in the plan, the Company will recognize a loss associated with the release of approximately $13 million from AOCI in the Consolidated Balance Sheet to Other income (expense) in the Consolidated Statement of Operations.
Curtailments and Settlements of Employee Benefit Plans
In fiscal 2019, the Company transferred the majority of the defined benefit obligations and pension plan assets in one of its foreign defined benefit plans to a multi-employer plan. This action moved the administrative, asset custodial, asset investment, actuarial, communication and benefit payment obligations to the multi-employer fund administrator. As a result of the transfer, a pre-tax gain of $6 million was recorded in the first quarter of fiscal 2019, which is included in Other income (expense) in the Consolidated Statement of Operations. In addition, as part of the transfer, the Company recorded a $3 million charge in the first quarter of fiscal 2019 reflecting the Company’s agreement to fund the actuarial loss gap between the terminated plan and the multi-employer plan. This charge is included in Other income (expense) in the Consolidated Statement of Operations.
E. Goodwill and Intangible Assets
The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the three month period ended December 31, 2019 are as follows:
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at September 30, 2019
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
90
|
|
Foreign currency impact
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Balance at December 31, 2019
|
|
$
|
51
|
|
|
$
|
41
|
|
|
$
|
92
|
|
The following table provides information regarding the Company’s intangible assets:
|
|
December 31, 2019
|
|
|
September 30, 2019
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
Assets
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
Assets
|
|
|
|
(In millions)
|
|
Intangible assets with finite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies
|
|
$
|
51
|
|
|
$
|
(5
|
)
|
|
$
|
46
|
|
|
$
|
50
|
|
|
$
|
(5
|
)
|
|
$
|
45
|
|
Trademarks
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Customer relationships
|
|
|
58
|
|
|
|
(15
|
)
|
|
|
43
|
|
|
|
57
|
|
|
|
(14
|
)
|
|
|
43
|
|
Total intangible assets
|
|
$
|
117
|
|
|
$
|
(20
|
)
|
|
$
|
97
|
|
|
$
|
115
|
|
|
$
|
(19
|
)
|
|
$
|
96
|
|
Intangible assets are amortized over their estimated useful lives, which range between twelve and twenty-five years, with a weighted average amortization period of approximately nineteen years. Amortization expense for both of the three month periods ended December 31, 2019 and 2018 was $1 million and is included in Cost of sales, Selling and administrative expenses, and Research and technical expenses in the Consolidated Statements of Operations. Total amortization expense is estimated to be approximately $6 million each year for the next five fiscal years.
14
F. Accumulated Other Comprehensive Income (Loss)
Comprehensive income combines net income (loss) and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets.
Changes in each component of AOCI, net of tax, were as follows:
|
|
Currency
Translation
Adjustment
|
|
|
Unrealized
Gains on
Investments
|
|
|
Pension and Other
Postretirement
Benefit Liability
Adjustments
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at September 30, 2019, attributable to Cabot Corporation
|
|
$
|
(338
|
)
|
|
$
|
1
|
|
|
$
|
(54
|
)
|
|
$
|
(391
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
Amounts reclassified from AOCI
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Adoption of accounting standards
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(3
|
)
|
Less: Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Balance at December 31, 2019, attributable to Cabot Corporation
|
|
$
|
(302
|
)
|
|
$
|
—
|
|
|
$
|
(52
|
)
|
|
$
|
(354
|
)
|
The amounts reclassified out of AOCI and into the Consolidated Statements of Operations in the three months ended December 31, 2019 and 2018 were as follows:
|
|
Affected Line Item in the Consolidated
|
|
Three Months Ended December 31
|
|
|
|
Statements of Operations
|
|
2019
|
|
|
2018
|
|
|
|
|
|
(In millions)
|
|
Derivatives: net investment hedges
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified to interest
expense
|
|
Interest expense
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Pension and other postretirement
benefit liability adjustment
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses
|
|
Net Periodic Benefit Cost - see
Note D for details
|
|
|
1
|
|
|
|
1
|
|
Settlement and curtailment gain
|
|
Net Periodic Benefit Cost - see
Note D for details
|
|
|
—
|
|
|
|
(6
|
)
|
Total before tax
|
|
|
|
|
—
|
|
|
|
(6
|
)
|
Tax impact
|
|
Provision (benefit) for income
taxes
|
|
|
—
|
|
|
|
(3
|
)
|
Total after tax
|
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
G. Commitments and Contingencies
Purchase Commitments
Cabot has entered into long-term purchase agreements primarily for the purchase of raw materials. Under certain of these agreements, the quantity of material being purchased is fixed, but the price paid changes as market prices change. For these purchase commitments, the amounts included in the table below are based on market prices at December 31, 2019, which may differ from actual market prices at the time of purchase.
|
|
Payments Due by Fiscal Year
|
|
|
|
Remainder of
Fiscal 2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In millions)
|
|
Reinforcement Materials
|
|
$
|
174
|
|
|
$
|
132
|
|
|
$
|
117
|
|
|
$
|
107
|
|
|
$
|
106
|
|
|
$
|
1,211
|
|
|
$
|
1,847
|
|
Performance Chemicals
|
|
|
50
|
|
|
|
57
|
|
|
|
55
|
|
|
|
36
|
|
|
|
31
|
|
|
|
405
|
|
|
|
634
|
|
Purification Solutions
|
|
|
3
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Total
|
|
$
|
227
|
|
|
$
|
190
|
|
|
$
|
172
|
|
|
$
|
143
|
|
|
$
|
137
|
|
|
$
|
1,616
|
|
|
$
|
2,485
|
|
15
Guarantee Agreements
Cabot has provided certain indemnities pursuant to which it may be required to make payments to an indemnified party in connection with certain transactions and agreements. In connection with certain acquisitions and divestitures, Cabot has provided routine indemnities with respect to such matters as environmental, tax, insurance, product and employee liabilities. In connection with various other agreements, including service and supply agreements with customers, Cabot has provided indemnities for certain contingencies and routine warranties. Cabot is unable to estimate the maximum potential liability for these types of indemnities as a maximum obligation is not explicitly stated in most cases and the amounts, if any, are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be reasonably estimated. The duration of the indemnities vary, and in many cases are indefinite. Cabot has not recorded any liability for these indemnities in the consolidated financial statements, except as otherwise disclosed.
Contingencies
Cabot is a defendant, or potentially responsible party, in various lawsuits and environmental proceedings wherein substantial amounts are claimed or at issue.
Environmental Matters
As of December 31, 2019 and September 30, 2019, Cabot had $12 million and $13 million, respectively, reserved for environmental matters. These environmental matters mainly relate to former operations. The Company’s reserves for environmental matters represent Cabot’s best estimates of the probable costs to be incurred at those sites where costs are reasonably estimable based on the Company’s analysis of the extent of clean up required, alternative clean-up methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site.
Cash payments related to these environmental matters were $2 million and $1 million in the first three months of fiscal 2020 and fiscal 2019, respectively. Cabot reviews the adequacy of the reserves as circumstances change at individual sites and adjusts the reserves as appropriate. Almost all of Cabot’s environmental issues relate to sites that are mature and have been investigated and studied and, in many cases, are subject to agreed upon remediation plans. However, depending on the results of future testing, changes in risk assessment practices, remediation techniques and regulatory requirements, newly discovered conditions, and other factors, it is reasonably possible that the Company could incur additional costs in excess of environmental reserves currently recorded. Management estimates, based on the latest available information, that any such future environmental remediation costs that are reasonably possible to be in excess of amounts already recorded would be immaterial to the Company’s consolidated financial statements.
Respirator Liabilities
Cabot has exposure in connection with a safety respiratory products business that a subsidiary acquired from American Optical Corporation (“AO”) in an April 1990 asset purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (i) AO’s insurance coverage for the period prior to the 1990 acquisition and (ii) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. As more fully described in the 2019 10-K, the respirator liabilities generally involve claims for personal injury, including asbestosis, silicosis and coal worker’s pneumoconiosis, allegedly resulting from the use of respirators that are alleged to have been negligently designed and/or labeled. Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. At no time did this respiratory product line represent a significant portion of the respirator market.
Cabot has a reserve to cover its expected share of liability for existing and future respirator liability claims, which at December 31, 2019 and September 30, 2019, was $34 million and $35 million, respectively. The Company made payments related to its respirator liability of $1 million in the first three months of both fiscal 2020 and fiscal 2019.
16
The Company’s current estimate of the cost of its share of existing and future respirator liability claims is based on facts and circumstances existing at this time. Developments that could affect the Company’s estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of dismissals without payment of pending claims, (iii) significant changes in the average cost of resolving claims, including potential settlements of groups of claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) trial and appellate outcomes, (vii) changes in the law and procedure applicable to these claims, (viii) the financial viability of the parties that contribute to the settlement of respirator claims, (ix) a change in the availability of insurance coverage maintained by certain of the parties that contribute to the settlement of respirator claims, or the indemnity provided by a former owner of the business, (x) changes in the allocation of costs among the various parties paying legal and settlement costs, and (xi) a determination that the assumptions that were used to estimate Cabot’s share of liability are no longer reasonable. The Company cannot determine the impact of these potential developments on its current estimate of its share of liability for existing and future claims. Accordingly, the actual amount of these liabilities for existing and future claims could be larger than the reserved amount.
Other Matters
The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business and with respect to its divested businesses. The Company does not believe that any of these matters will have a material adverse effect on its financial position; however, litigation is inherently unpredictable. Cabot could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material impact on its results of operations in the period in which the amounts are accrued or its cash flows in the period in which the amounts are paid.
H. Leases
The Company determines if an arrangement is a lease at inception. The Company considers a contract to be or to contain a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
A lease liability is recorded at commencement for the net present value of future lease payments over the lease term. The discount rate used is generally the Company’s estimated incremental borrowing rate based on credit-adjusted and term-specific discount rates, using a third-party yield curve. A ROU asset is recorded and recognized at commencement at the lease liability amount, including initial direct costs incurred, and is reduced for lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
In the normal course of its business, the Company enters into various leases as the lessee, primarily related to certain transportation vehicles, warehouse facilities, office space, and machinery and equipment. These leases have remaining lease terms between 1 and 15 years, some of which may include options to extend the leases for up to 15 years or options to terminate the leases. The Company’s land leases have remaining lease terms up to 70 years.
Some lease arrangements require variable payments that are dependent on usage, output, or index-based adjustments. The Company does not have material variable lease payments.
The Company has elected not to recognize short-term leases on the balance sheet for all underlying asset classes. Short-term leases are leases that, at the commencement date, have a lease term of twelve months or less and do not include a purchase option that the Company is reasonably certain to exercise. Short-term leases are expensed on a straight-line basis over the lease term.
The components of the Company’s lease costs were as follows:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
|
(In millions)
|
|
Operating lease cost
|
|
$
|
6
|
|
Finance lease cost
|
|
|
1
|
|
Total lease cost
|
|
$
|
7
|
|
Short-term and variable lease costs were less than $1 million for the three months ended December 31, 2019.
17
Supplemental cash flow information related to the Company’s leases was as follows:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
|
(In millions)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
6
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
2
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
20
|
|
Supplemental balance sheet information related to the Company’s leases was as follows:
Description
|
|
Balance Sheet Classification
|
|
December 31, 2019
|
|
|
|
|
|
(In millions)
|
|
Lease ROU assets:
|
|
|
|
|
|
|
Operating
|
|
Other assets
|
|
$
|
102
|
|
Finance
|
|
Net property, plant and equipment
|
|
|
46
|
|
Total lease ROU assets
|
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Operating
|
|
Accounts payable and accrued liabilities
|
|
$
|
20
|
|
Finance
|
|
Current portion of long-term debt
|
|
|
3
|
|
Long-term:
|
|
|
|
|
|
|
Operating
|
|
Other liabilities
|
|
|
88
|
|
Finance
|
|
Long-term debt
|
|
|
29
|
|
Total lease liabilities
|
|
|
|
$
|
140
|
|
The following table presents the weighted-average remaining lease term and discount rates for the Company’s leases as of December 31, 2019:
Description
|
|
December 31, 2019
|
|
Weighted-average remaining lease term (years):
|
|
|
|
|
Operating leases
|
|
|
16
|
|
Finance leases
|
|
|
13
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
|
|
2.29
|
%
|
Finance leases
|
|
|
4.55
|
%
|
18
Future minimum lease payments under non-cancelable operating and finance leases as of December 31, 2019 are as follows:
Years Ended September 30
|
|
Operating leases
|
|
|
Finance leases
|
|
|
|
(In millions)
|
|
Remainder of fiscal 2020
|
|
$
|
17
|
|
|
$
|
4
|
|
2021
|
|
|
14
|
|
|
|
4
|
|
2022
|
|
|
10
|
|
|
|
4
|
|
2023
|
|
|
9
|
|
|
|
4
|
|
2024
|
|
|
9
|
|
|
|
4
|
|
2025 and thereafter
|
|
|
69
|
|
|
|
25
|
|
Total lease payments
|
|
|
128
|
|
|
|
45
|
|
Less: imputed interest
|
|
|
20
|
|
|
|
13
|
|
Total
|
|
$
|
108
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
The Company’s future minimum lease payments under noncancelable leases as of September 30, 2019 were as follows:
Years Ended September 30
|
|
Operating leases
|
|
|
Capital leases
|
|
|
|
(In millions)
|
|
2020
|
|
$
|
23
|
|
|
$
|
3
|
|
2021
|
|
|
14
|
|
|
|
3
|
|
2022
|
|
|
9
|
|
|
|
3
|
|
2023
|
|
|
9
|
|
|
|
3
|
|
2024
|
|
|
8
|
|
|
|
2
|
|
2025 and thereafter
|
|
|
68
|
|
|
|
7
|
|
Total lease payments
|
|
|
131
|
|
|
|
21
|
|
Less: imputed interest
|
|
|
—
|
|
|
|
9
|
|
Total
|
|
$
|
131
|
|
|
$
|
12
|
|
I. Income Tax
Effective Tax Rate
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Dollars in millions)
|
|
(Provision) benefit for income taxes
|
|
$
|
(4
|
)
|
|
$
|
7
|
|
Effective tax rate
|
|
|
7
|
%
|
|
|
(10
|
)%
|
For the three months ended December 31, 2019, the tax (provision) benefit for income taxes included a net discrete tax benefit of $10 million, which was primarily related to impacts of Switzerland tax reform legislation of $6 million and changes in uncertain tax positions of $4 million. For the three months ended December 31, 2018, the tax (provision) benefit for income taxes included a net discrete tax benefit of $24 million, of which $17 million was related to impacts of U.S. tax reform legislation described below.
19
Tax Reform
On December 22, 2017, the U.S. enacted significant changes to federal income tax law affecting us, including a permanent reduction of the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018, as well as a 100% dividend received deduction for foreign dividends. Although the passage of the Act reduced the U.S. tax rate and effectively created a participation exemption regime for foreign earnings, certain other aspects of the new legislation, including in particular, immediate U.S. taxation of global intangible low-taxed income (“GILTI”) earned by foreign subsidiaries, had a negative impact on earnings and this is one of the primary drivers of the increase in Cabot’s effective tax rate, prior to consideration of the discrete tax benefits.
Uncertainties
Cabot and certain subsidiaries are under audit in a number of jurisdictions. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a further change in the unrecognized tax benefits may also occur within the next twelve months related to the settlement of one or more of these audits or the lapse of applicable statutes of limitations. However, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time.
Cabot files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The 2016 through 2019 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 2019 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2003 through 2019 remain subject to examination by their respective tax authorities. As of December 31, 2019, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, Switzerland and the Netherlands.
During the three months ended December 31, 2019, Cabot released uncertain tax positions of $6 million due to the expiration of statutes of limitations in various jurisdictions and accrued for an uncertain tax position of $2 million for a potential settlement. During the three months ended December 31, 2018, Cabot released uncertain tax positions of $7 million due to audit settlements and the expiration of statutes of limitations in various jurisdictions.
20
J. Earnings Per Share
The following tables summarize the components of the basic and diluted earnings (loss) per common share (“EPS”) computations:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions, except per share amounts)
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot
Corporation
|
|
$
|
41
|
|
|
$
|
69
|
|
Less: Undistributed earnings allocated to
participating securities(1)
|
|
|
—
|
|
|
|
—
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
41
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
participating securities outstanding
|
|
|
57.7
|
|
|
|
60.8
|
|
Less: Participating securities(1)
|
|
|
0.8
|
|
|
|
0.9
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
56.9
|
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic:
|
|
$
|
0.71
|
|
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
Earnings (loss) allocated to common
shareholders
|
|
$
|
41
|
|
|
$
|
69
|
|
Plus: Earnings (loss) allocated to
participating securities
|
|
|
—
|
|
|
|
1
|
|
Less: Adjusted earnings allocated to
participating securities(2)
|
|
|
—
|
|
|
|
1
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
41
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares outstanding
|
|
|
56.9
|
|
|
|
59.9
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Common shares issuable(3)
|
|
|
0.1
|
|
|
|
0.2
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
57.0
|
|
|
|
60.1
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - diluted:
|
|
$
|
0.70
|
|
|
$
|
1.14
|
|
(1)
|
Participating securities consist of shares underlying: (i) achieved but unvested performance-based restricted stock units, and (ii) unvested time-based restricted stock units. The holders of these units are entitled to receive dividend equivalents payable in cash to the extent dividends are paid on the Company’s outstanding common stock and equal in value to the dividends that would have been paid in respect of the shares underlying such units.
|
21
Undistributed earnings are the earnings which remain after dividends declared during the period are assumed to be distributed to the common and participating shareholders. Undistributed earnings are allocated to common and participating shareholders on the same basis as dividend distributions. The calculation of undistributed earnings is as follows:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions)
|
|
Calculation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot Corporation
|
|
$
|
41
|
|
|
$
|
69
|
|
Less: Dividends declared on common stock
|
|
|
20
|
|
|
|
20
|
|
Undistributed earnings (loss)
|
|
$
|
21
|
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
Undistributed earnings (loss) allocated to
common shareholders
|
|
$
|
21
|
|
|
$
|
49
|
|
Undistributed earnings (loss) allocated to
participating shareholders
|
|
|
—
|
|
|
|
—
|
|
Undistributed earnings (loss)
|
|
$
|
21
|
|
|
$
|
49
|
|
(2)
|
Undistributed earnings are adjusted for the assumed distribution of dividends to the dilutive securities, which are described in (3) below, and then reallocated to participating securities.
|
(3)
|
Represents incremental shares of common stock from the (i) assumed exercise of stock options issued under Cabot’s equity incentive plans; and (ii) assumed issuance of shares to employees pursuant to the Company’s Deferred Compensation and Supplemental Retirement Plan. For the three months ended December 31, 2019, 995,294 incremental shares of common stock were excluded from the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive. For the three months ended December 31, 2018, 687,995 incremental shares of common stock were excluded from the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive.
|
K. Restructuring
Cabot’s restructuring activities were recorded in the Consolidated Statements of Operations in the three months ended December 31, 2019 and 2018 as follows:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions)
|
|
Cost of sales
|
|
$
|
1
|
|
|
$
|
3
|
|
Selling and administrative expenses
|
|
|
7
|
|
|
|
6
|
|
Total
|
|
$
|
8
|
|
|
$
|
9
|
|
Details of all restructuring activities and the related reserves during the three months ended December 31, 2019 were as follows:
|
|
Severance
and Employee
Benefits
|
|
|
Environmental
Remediation
|
|
|
Other
|
|
|
Total
|
|
|
|
(In millions)
|
|
Reserve at September 30, 2019
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
7
|
|
Charges (gain)
|
|
|
7
|
|
|
|
—
|
|
|
|
1
|
|
|
|
8
|
|
Cash paid
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Reserve at December 31, 2019
|
|
|
8
|
|
|
|
4
|
|
|
|
—
|
|
|
|
12
|
|
22
Cabot’s severance and employee benefit reserves and other closure related reserves are reflected in Accounts payable and accrued liabilities on the Company’s Consolidated Balance Sheets. Cabot’s environmental remediation reserves related to restructuring activities are reflected in Other liabilities on the Company’s Consolidated Balance Sheets.
2020 Reorganization
During the first quarter of fiscal 2020, the Company initiated several actions that it believes will enable the Company to perform certain activities more cost-effectively. These actions primarily consist of the reorganization of Cabot’s leadership structure, the creation of a Global Business Services function and other operational efficiency initiatives. As part of the creation of the Global Business Services function, certain business service activities performed at Cabot’s North American business service center will be consolidated into the Company’s European business service center. During the three months ended December 31, 2019, the Company recorded charges of $7 million in the aggregate for these actions, primarily related to severance costs. The Company expects to record additional restructuring charges of approximately $4 million, primarily related to severance costs, in the remainder of fiscal 2020 and thereafter. Cabot paid approximately $1 million related to these activities in the three months ended December 31, 2019 and expects to pay approximately $10 million in the remainder of fiscal 2020 and thereafter. As of December 31, 2019, Cabot had $6 million of accrued severance charges in the Consolidated Balance Sheets related to these actions.
Purification Solutions Transformation Plan
In December 2018, the Company initiated a transformation plan to improve the long-term performance of the Purification Solutions segment. The purpose of the plan is to focus the business’s product portfolio, optimize its manufacturing assets, and streamline its organizational structure to support the new focus. The Company expects to record total charges of $10 million related to this plan, of which approximately $9 million was recorded in fiscal 2019, comprised of severance, employee benefits and professional service fees. The Company recorded charges of less than $1 million and $8 million in the three months ended December 31, 2019 and 2018, respectively. The Company expects to record immaterial charges related to this plan through the rest of fiscal 2020. Cabot paid $8 million related to these activities through December 31, 2019, the majority of which was paid in fiscal 2019, and expects to pay approximately $1 million in the remainder of fiscal 2020. As of December 31, 2019, Cabot had $1 million of accrued severance charges in the Consolidated Balance Sheets related to these actions.
L. Financial Instruments and Fair Value Measurements
The FASB authoritative guidance on fair value measurements defines fair value, provides a framework for measuring fair value, and requires certain disclosures about fair value measurements. The required disclosures focus on the inputs used to measure fair value. The guidance establishes the following hierarchy for categorizing these inputs:
Level 1
|
|
—
|
|
Quoted market prices in active markets for identical assets or liabilities
|
|
|
|
|
|
Level 2
|
|
—
|
|
Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs)
|
|
|
|
|
|
Level 3
|
|
—
|
|
Significant unobservable inputs
|
There were no transfers of financial assets or liabilities measured at fair value between Level 1 and Level 2 and there were no Level 3 investments during the first three months of either fiscal 2020 or 2019.
At December 31, 2019 and September 30, 2019, Cabot had derivatives relating to foreign currency risks, including a net investment hedge and forward foreign currency contracts, carried at fair value. At December 31, 2019, the fair value of these derivatives was a net liability of $3 million and was included in Prepaid expenses and other current assets, Accounts payable and accrued liabilities, and Other liabilities on the Consolidated Balance Sheets. At September 30, 2019, the fair value of these derivatives was a net asset of $1 million and was included in Prepaid expenses and other current assets and Other assets on the Consolidated Balance Sheets. These derivatives are classified as Level 2 instruments within the fair value hierarchy as the fair value determination was based on observable inputs.
At December 31, 2019 and September 30, 2019, the fair value of guaranteed investment contracts, included in Other assets on the Consolidated Balance Sheets, was $11 million and $10 million, respectively. Guaranteed investment contracts were classified as Level 2 instruments within the fair value hierarchy as the fair value determination was based on other observable inputs.
23
At December 31, 2019 and September 30, 2019, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and short-term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments. The carrying value and fair value of the long-term fixed rate debt were $1.08 billion and $1.14 billion, respectively, as of December 31, 2019, and $1.03 billion and $1.10 billion, respectively, as of September 30, 2019. The fair values of Cabot’s fixed rate long-term debt are estimated based on comparable quoted market prices at the respective period ends. The carrying amounts of Cabot’s floating rate long-term debt and capital lease obligations approximate their fair values. All such measurements are based on observable inputs and are classified as Level 2 within the fair value hierarchy. The valuation technique used is the discounted cash flow model.
M. Derivatives
Foreign Currency Risk Management
Cabot’s international operations are subject to certain risks, including currency exchange rate fluctuations and government actions. Cabot endeavors to match the currency in which debt is issued to the currency of the Company’s major, stable cash receipts. In some situations, Cabot has issued debt denominated in U.S. dollars and then entered into cross-currency swaps that exchange the dollar principal and interest payments into Euro-denominated principal and interest payments.
Additionally, the Company has foreign currency exposure arising from its net investments in foreign operations. Cabot may enter into cross-currency swaps to mitigate the impact of currency rate changes on the Company’s net investments.
The Company also has foreign currency exposure arising from the denomination of monetary assets and liabilities in foreign currencies other than the functional currency of a given subsidiary as well as the risk that currency fluctuations could affect the dollar value of future cash flows generated in foreign currencies. Accordingly, Cabot uses short-term forward contracts to minimize the exposure to foreign currency risk. In certain situations where the Company has forecasted purchases under a long-term commitment or forecasted sales denominated in a foreign currency, Cabot may enter into appropriate financial instruments in accordance with the Company’s risk management policy to hedge future cash flow exposures.
The following table provides details of the derivatives held as of December 31, 2019 and September 30, 2019 to manage foreign currency risk.
|
|
|
|
Notional Amount
|
|
|
Description
|
|
Borrowing
|
|
December 31, 2019
|
|
September 30, 2019
|
|
Hedge Designation
|
Cross-Currency Swaps
|
|
3.4% Notes
|
|
USD 250 million swapped to EUR 223 million
|
|
USD 250 million swapped to EUR 223 million
|
|
Net investment
|
Forward Foreign Currency Contracts (1)
|
|
N/A
|
|
USD 43 million
|
|
USD 54 million
|
|
No designation
|
(1)
|
Cabot’s forward foreign exchange contracts are denominated in the Canadian dollar, Indonesian rupiah and Czech koruna.
|
Accounting for Derivative Instruments and Hedging Activities
The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of Cabot or the financial counterparty to perform. For interest rate and cross-currency swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. For forward foreign currency contracts, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows.
Fair Value Hedge
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current period earnings.
Cash Flow Hedge
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded in AOCI and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period earnings.
24
Net Investment Hedge
For net investment hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported as foreign currency translation gains or losses in AOCI while changes in the ineffective portion are reported in earnings. Effectiveness is assessed using the method based on changes in spot exchange rates. The gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period in which earnings are affected by the underlying item, such as a disposal or substantial liquidations of the entities being hedged.
The Company has cross-currency swaps with a notional amount of $250 million, which are designated as hedges of its net investments in certain Euro-denominated subsidiaries. Cash settlements occur semi-annually on March 15th and September 15th for fixed rate interest payments and a cash exchange of the notional currency amount will occur at the end of the term in 2026. As of December 31, 2019, the fair value of these swaps was a net liability of $3 million and was included in Prepaid expenses and other current assets and Other liabilities and the cumulative loss included in AOCI on the Consolidated Balance Sheets was immaterial. As of September 30, 2019, the fair value of these swaps was a net asset of $1 million and was included in Prepaid expenses and other current assets and Other assets and the cumulative gain of $5 million was included in AOCI on the Consolidated Balance Sheets.
The following table summarizes the impact of the cross-currency swaps to AOCI and the Consolidated Statements of Operations:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Description
|
|
Gain/(Loss) Recognized in AOCI
|
|
|
(Gain)/Loss Reclassified from AOCI into Interest Expense in the Consolidated Statements of Operations
|
|
|
(Gain)/Loss Recognized in Interest Expense in the Consolidated Statements of Operations (Amount Excluded from Effectiveness Testing)
|
|
|
|
(In millions)
|
|
Cross-currency swaps
|
|
$
|
(4
|
)
|
|
$
|
8
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Other Derivative Instruments
From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes, which may include cross-currency swaps, foreign currency forward contracts and commodity derivatives. For cross-currency swaps and foreign currency forward contracts not designated as hedges, the Company uses standard models with market-based inputs. The significant inputs to these models are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. In determining the fair value of the commodity derivatives, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. Although these derivatives do not qualify for hedge accounting, Cabot believes that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. The gains or losses from changes in the fair value of derivative instruments that are not accounted for as hedges are recognized in current period earnings.
At both December 31, 2019 and September 30, 2019, the fair value of derivative instruments not designated as hedges were immaterial, and these instruments were presented in Prepaid expenses and other current assets and Accounts payable and accrued liabilities on the Consolidated Balance Sheets.
N. Financial Information by Segment
The Company identifies a business as an operating segment if: (i) it engages in business activities from which it may earn revenues and incur expenses; (ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Cabot’s President and Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and (iii) it has available discrete financial information. The Company has determined that all of its businesses are operating segments. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments are determined to have similar economic characteristics and if the operating segments are similar in the following areas: (i) nature of products and services; (ii) nature of production processes; (iii) type or class of customer for their products and services; (iv) methods used to distribute the products or provide services; and (v) if applicable, the nature of the regulatory environment.
The Company has three reportable segments: Reinforcement Materials, Performance Chemicals and Purification Solutions. The Company’s former Specialty Fluids business was a separate reporting segment. Since the Company divested this business in the third quarter of fiscal 2019, Cabot has been organized into the three reporting business segments named above.
The Reinforcement Materials segment consists of the rubber blacks and elastomer composites product lines.
25
The Performance Chemicals segment combines the specialty carbons, fumed metal oxides and aerogel product lines into the Performance Additives business, and combines the specialty compounds and inkjet colorants product lines into the Formulated Solutions business. These businesses are similar in terms of economic characteristics, nature of products, processes, customer class and product distribution methods, and, therefore, have been aggregated into one reportable segment. The net sales from each of these businesses for the three months ended December 31, 2019 and 2018 were as follows:
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions)
|
|
Performance Additives
|
|
$
|
170
|
|
|
$
|
167
|
|
Formulated Solutions
|
|
|
72
|
|
|
|
64
|
|
Total Performance Chemicals
|
|
$
|
242
|
|
|
$
|
231
|
|
The Purification Solutions segment consists of the Company’s activated carbon business, and the Specialty Fluids segment included the Company’s former cesium formate oil and gas drilling fluids and high-purity fine cesium chemicals product lines.
Income (loss) from continuing operations before income taxes (“Segment EBIT”) is presented for each reportable segment in the table below. Segment EBIT excludes Interest expense, general unallocated income (expense), unallocated corporate costs, and certain items, meaning items management does not consider representative of on-going operating segment results. In addition, Segment EBIT includes Equity in earnings of affiliated companies, net of tax, the full operating results of a contractual joint venture in Purification Solutions, royalties, Net income attributable to noncontrolling interests, net of tax, and discounting charges for certain Notes receivable.
Financial information by reportable segment is as follows:
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Specialty
Fluids(1)
|
|
|
Segment
Total
|
|
|
Unallocated
and Other(2)
|
|
|
Consolidated
Total
|
|
|
|
(In millions)
|
|
Three Months Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(3)
|
|
$
|
379
|
|
|
$
|
242
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
680
|
|
|
$
|
47
|
|
|
$
|
727
|
|
Income (loss) from continuing operations
before income taxes(4)
|
|
$
|
47
|
|
|
$
|
41
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
(36
|
)
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(3)
|
|
$
|
457
|
|
|
$
|
231
|
|
|
$
|
65
|
|
|
$
|
19
|
|
|
$
|
772
|
|
|
$
|
49
|
|
|
$
|
821
|
|
Income (loss) from continuing operations
before income taxes(4)
|
|
$
|
62
|
|
|
$
|
36
|
|
|
$
|
(3
|
)
|
|
$
|
10
|
|
|
$
|
105
|
|
|
$
|
(35
|
)
|
|
$
|
70
|
|
(1)
|
Cabot divested its Specialty Fluids business during the third quarter of fiscal 2019. The agreement to divest this business did not meet the criteria for reporting this business as a discontinued operation, and therefore, the prior period’s financial statements and disclosures have not been recast. For more detail on the sale of the Specialty Fluids business, please refer to the Company's fiscal 2019 10-K filing.
|
(2)
|
Unallocated and Other includes certain items and eliminations necessary to reflect management’s reporting of operating segment results. These items are reflective of the segment reporting presented to the CODM.
|
26
(3)
|
Consolidated Total Revenues from external customers reconciles to Net sales and other operating revenues on the Consolidated Statements of Operations. Revenues from external customers that are categorized as Unallocated and Other reflects royalties, external shipping and handling fees, the impact of unearned revenue, the removal of 100% of the sales of an equity method affiliate, discounting charges for certain Notes receivable, and by-product revenue. Details are provided in the table below:
|
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions)
|
|
Royalties, the impact of unearned revenue, the
removal of 100% of the sales of an equity method
affiliate and discounting charges for certain notes
receivable
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
Shipping and handling fees
|
|
|
31
|
|
|
|
32
|
|
By-product sales
|
|
|
17
|
|
|
|
20
|
|
Total
|
|
$
|
47
|
|
|
$
|
49
|
|
(4)
|
Consolidated Total Income (loss) from continuing operations before income taxes reconciles to Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies on the Consolidated Statements of Operations. Income (loss) from continuing operations before income taxes that are categorized as Unallocated and Other includes:
|
|
|
Three Months Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In millions)
|
|
Interest expense
|
|
$
|
(14
|
)
|
|
$
|
(15
|
)
|
Certain items(a)
|
|
|
|
|
|
|
|
|
Global restructuring activities (Note K)
|
|
|
(8
|
)
|
|
|
(9
|
)
|
Legal and environmental matters and reserves
|
|
|
1
|
|
|
|
—
|
|
Employee benefit plan settlements
|
|
|
(2
|
)
|
|
|
3
|
|
Acquisition and integration-related charges
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Total certain items, pre-tax
|
|
|
(11
|
)
|
|
|
(10
|
)
|
Unallocated corporate costs(b)
|
|
|
(10
|
)
|
|
|
(12
|
)
|
General unallocated income (expense)(c)
|
|
|
(1
|
)
|
|
|
2
|
|
Less: Equity in earnings of affiliated companies, net
of tax(d)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
(36
|
)
|
|
$
|
(35
|
)
|
|
(a)
|
Certain items are items of expense and income that management does not consider representative of the Company’s fundamental on-going segment results and they are, therefore, excluded from Segment EBIT.
|
|
(b)
|
Unallocated corporate costs are costs that are not controlled by the segments and primarily benefit corporate interests.
|
|
(c)
|
General unallocated income (expense) consists of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, Interest and dividend income, the profit or loss related to the corporate adjustment for unearned revenue, the impact of including the full operating results of a contractual joint venture in Purification Solutions Segment EBIT and unrealized holding gains (losses) for equity securities.
|
|
(d)
|
Equity in earnings of affiliated companies, net of tax, is included in Segment EBIT and is removed in Unallocated and other to reconcile to Income (loss) from operations before income taxes and equity in earnings from affiliated companies.
|
27
The Company’s segments operate globally. In addition to presenting Revenue from external customers by reportable segment, the following tables further disaggregate Revenues from external customers by geographic region.
|
|
Three Months Ended December 31, 2019
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
141
|
|
|
$
|
76
|
|
|
$
|
26
|
|
|
$
|
243
|
|
Asia Pacific
|
|
|
170
|
|
|
|
94
|
|
|
|
9
|
|
|
|
273
|
|
Europe, Middle East and Africa
|
|
|
68
|
|
|
|
72
|
|
|
|
24
|
|
|
|
164
|
|
Segment revenues from external customers
|
|
|
379
|
|
|
|
242
|
|
|
|
59
|
|
|
|
680
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
727
|
|
|
|
Three Months Ended December 31, 2018
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Specialty
Fluids
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
167
|
|
|
$
|
72
|
|
|
$
|
29
|
|
|
$
|
2
|
|
|
$
|
270
|
|
Asia Pacific
|
|
|
202
|
|
|
|
85
|
|
|
|
9
|
|
|
|
1
|
|
|
|
297
|
|
Europe, Middle East and Africa
|
|
|
88
|
|
|
|
74
|
|
|
|
27
|
|
|
|
16
|
|
|
|
205
|
|
Segment revenues from external customers
|
|
|
457
|
|
|
|
231
|
|
|
|
65
|
|
|
|
19
|
|
|
|
772
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
821
|
|
28