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 following table presents the Company’s cash, cash equivalents and restricted cash by category within the Consolidated Balance Sheets:
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
MARCH 31, 2020
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 March 31, 2020 and 2019. 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.
Effective October 1, 2019, the Company adopted the accounting standard for leases issued by the Financial Accounting Standards Board (“FASB”) in February 2016.
B. Significant Accounting Policies
Cabot’s significant accounting policies have not substantially changed from those described in the 2019 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on November 22, 2019.
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 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 as of adoption.
In February 2018, the FASB issued a new standard that allows entities to reclassify from Accumulated other comprehensive income (loss) (“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 will
10
adopt this standard effective October 1, 2020. The Company does not expect the adoption of this standard to materially impact the Company’s consolidated financial statements.
C. Acquisitions and Divestitures
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. Transition-related costs associated with this acquisition were less than $1 million and $1 million for the three and six months ended March 31, 2020, respectively, and $1 million and $3 million for the three and six months ended March 31, 2019, respectively.
Shenzhen Sanshun Nano New Materials Co., Ltd
In April 2020, the Company completed the purchase of Shenzhen Sanshun Nano New Materials Co., Ltd (SUSN), a leading carbon nanotube producer, for approximately $105 million through cash consideration of $90 million, of which $5 million represents contingent consideration to be paid out based on certain milestones over the next two years, and debt assumed of $15 million. As of March 31, 2020, the Company had $35 million of cash consideration held in escrow, which was subsequently released to the seller upon completion of the sale in April 2020. This was considered restricted cash as of March 31, 2020 and included in Prepaid expenses and other current assets in the Consolidated Balance Sheet. The transaction will be accounted for as a business combination. Additionally, as of March 31, 2020, the Company had incurred $1 million in acquisition related cost. The operating results of the business will be included in the Company’s Performance Chemicals segment.
Divestitures
Sale of Specialty Fluids Business
In June 2019, the Company completed the sale of its Specialty Fluids business, an operating segment of the Company, to Sinomine (Hong Kong) Rare Metals Resource Co. Limited, a wholly owned subsidiary of Sinomine Resource Group Co., Ltd. (“Sinomine”), for total proceeds of $133 million. The Company recognized a $20 million impairment charge during the second quarter of fiscal 2019 and a pre-tax loss on the sale of the Specialty Fluids business of $9 million in fiscal 2019. The sale was subject to customary post-closing adjustments, which were finalized during the second quarter of fiscal 2020 and resulted in an additional pre-tax loss on sale of $1 million.
D. Employee Benefit Plans
Net periodic defined benefit pension costs include the following:
|
|
Three Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Pension Benefits
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
(In millions)
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
Expected return on plan assets
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Net periodic benefit (credit) cost
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
11
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Pension Benefits
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
(In millions)
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Interest cost
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
Expected return on plan assets
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Amortization of actuarial loss
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Settlement and curtailment gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
Net periodic benefit (credit) cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
Other postretirement benefit costs were less than $1 million and $1 million for the three and six months ended March 31, 2020, respectively. Other postretirement benefit gains were less than $1 million for both the three and six months ended March 31, 2019.
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 of the U.S. plan’s assets to participants by the end of calendar year 2020. 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 six month period ended March 31, 2020 are as follows:
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Total
|
|
|
|
(In millions)
|
|
Balance at September 30, 2019
|
|
$
|
50
|
|
|
$
|
40
|
|
|
$
|
90
|
|
Foreign currency impact
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
$
|
(8
|
)
|
Balance at March 31, 2020
|
|
$
|
44
|
|
|
$
|
38
|
|
|
$
|
82
|
|
The following table provides information regarding the Company’s intangible assets:
|
|
March 31, 2020
|
|
|
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
|
|
$
|
49
|
|
|
$
|
(5
|
)
|
|
$
|
44
|
|
|
$
|
50
|
|
|
$
|
(5
|
)
|
|
$
|
45
|
|
Trademarks
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Customer relationships
|
|
|
48
|
|
|
|
(12
|
)
|
|
|
36
|
|
|
|
57
|
|
|
|
(14
|
)
|
|
|
43
|
|
Total intangible assets(1)
|
|
$
|
105
|
|
|
$
|
(18
|
)
|
|
$
|
87
|
|
|
$
|
115
|
|
|
$
|
(19
|
)
|
|
$
|
96
|
|
(1) The decrease in value of Total intangible assets as of March 31, 2020 was primarily driven by the impact of foreign currency translation, which had a total impact of $7 million.
12
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 the three months ended March 31, 2020 and 2019 was $2 million and is included in Cost of sales, Selling and administrative expenses, and Research and technical expenses in the Consolidated Statements of Operations. Amortization expense for both the six months ended March 31, 2020 and 2019 was $3 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.
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
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
(78
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(78
|
)
|
Less: Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
Balance at March 31, 2020, attributable to Cabot Corporation
|
|
|
(377
|
)
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
(429
|
)
|
The amounts reclassified out of AOCI and into the Consolidated Statements of Operations in the three and six months ended March 31, 2020 and 2019 were as follows:
|
|
Affected Line Item in the Consolidated
|
|
Three Months Ended March 31
|
|
|
Six Months Ended March 31
|
|
|
|
Statements of Operations
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Derivatives: net investment hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified to interest
expense
|
|
Interest expense
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
(Gains) losses excluded from effectiveness testing and amortized to interest expense
|
|
Interest expense
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Pension and other postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses and prior service cost (credit)
|
|
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
|
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
Tax impact
|
|
Provision (benefit) for income
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
Total after tax
|
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
13
G. Commitments and Contingencies
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 durations 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 March 31, 2020 and September 30, 2019, Cabot had $9 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 $5 million and $1 million in the first six 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. In addition to Cabot’s subsidiary, other parties are responsible for significant portions of the costs of these respirator liabilities (as defined in the 2019 10-K, the “Payor Group”)
On February 28, 2020, Cabot, with certain members of the Payor Group, entered into a settlement agreement resolving a large group of claims, including claims alleging serious injury, brought by coal workers in Kentucky and West Virginia represented by common legal counsel. The Company’s share of this liability is $65 million, which, as of March 31, 2020, was included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets. The Company will pay this liability in two equal installments in Cabot’s third quarter of fiscal 2020 and first quarter of fiscal 2021. During the second quarter of fiscal 2020, Cabot recorded a charge of $50 million for this settlement, which was included in Selling and administrative expenses in the Consolidated Statements of Operations.
14
In addition to the February 2020 settlement, Cabot has a reserve to cover its expected share of liabilities for existing and future respirator liability claims, which is included in Other liabilities on the Consolidated Balance Sheets. The Company expects these liabilities to be incurred over a number of years. The reserve was $23 million and $35 million as of March 31, 2020 and September 30, 2019, respectively. 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, including the nature of the remaining claims. Because reserves are limited to amounts that are probable and estimable as of a relevant measurement date, and there is inherent difficulty in projecting the impact of potential developments on Cabot’s share of liability for these existing and future claims, the actual amount of liabilities related to these claims could be different from Cabot’s reserve.
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) exhaustion of the insurance coverage maintained by certain of the parties that contribute to the settlement of respirator claims, or a change in the availability of 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.
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. An 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 one and fifteen years, some of which may include options to extend the leases for up to fifteen years or options to terminate the leases. The Company’s land leases have remaining lease terms up to seventy 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 March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(In millions)
|
|
Operating lease cost
|
|
$
|
8
|
|
|
$
|
14
|
|
Finance lease cost
|
|
|
1
|
|
|
|
2
|
|
Total lease cost
|
|
$
|
9
|
|
|
$
|
16
|
|
15
For the three and six months ended March 31, 2020, short-term and variable lease costs together were less than $1 million and $1 million, respectively.
Supplemental cash flow information related to the Company’s leases was as follows:
|
|
Three Months Ended March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2020
|
|
|
|
(In millions)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
6
|
|
|
$
|
12
|
|
Operating cash flows from finance leases
|
|
|
1
|
|
|
|
1
|
|
Financing cash flows from finance leases
|
|
|
1
|
|
|
|
1
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
3
|
|
|
$
|
5
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
3
|
|
|
$
|
23
|
|
Supplemental balance sheet information related to the Company’s leases was as follows:
Description
|
|
Balance Sheet Classification
|
|
March 31, 2020
|
|
|
|
|
|
(In millions)
|
|
Lease ROU assets:
|
|
|
|
|
|
|
Operating
|
|
Other assets
|
|
$
|
98
|
|
Finance
|
|
Net property, plant and equipment
|
|
|
45
|
|
Total lease ROU assets
|
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Operating
|
|
Accounts payable and accrued liabilities
|
|
$
|
18
|
|
Finance
|
|
Current portion of long-term debt
|
|
|
3
|
|
Long-term:
|
|
|
|
|
|
|
Operating
|
|
Other liabilities
|
|
|
86
|
|
Finance
|
|
Long-term debt
|
|
|
29
|
|
Total lease liabilities
|
|
|
|
$
|
136
|
|
The following table presents the weighted-average remaining lease term and discount rates for the Company’s leases as of March 31, 2020:
Description
|
|
March 31, 2020
|
|
Weighted-average remaining lease term (years):
|
|
|
|
|
Operating leases
|
|
|
16
|
|
Finance leases
|
|
|
13
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
|
|
2.26
|
%
|
Finance leases
|
|
|
4.44
|
%
|
16
Future minimum lease payments under non-cancelable operating and finance leases as of March 31, 2020 were as follows:
Years Ended September 30
|
|
Operating leases
|
|
|
Finance leases
|
|
|
|
(In millions)
|
|
Remainder of fiscal 2020
|
|
$
|
12
|
|
|
$
|
2
|
|
2021
|
|
|
15
|
|
|
|
5
|
|
2022
|
|
|
11
|
|
|
|
4
|
|
2023
|
|
|
10
|
|
|
|
4
|
|
2024
|
|
|
9
|
|
|
|
4
|
|
2025 and thereafter
|
|
|
69
|
|
|
|
25
|
|
Total lease payments
|
|
|
126
|
|
|
|
44
|
|
Less: imputed interest
|
|
|
22
|
|
|
|
12
|
|
Total
|
|
$
|
104
|
|
|
$
|
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 March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in millions)
|
|
(Provision) benefit for income taxes
|
|
$
|
(10
|
)
|
|
$
|
(20
|
)
|
|
$
|
(14
|
)
|
|
$
|
(13
|
)
|
Effective tax rate
|
|
|
81
|
%
|
|
|
41
|
%
|
|
|
22
|
%
|
|
|
11
|
%
|
For the three and six months ended March 31, 2020, the (Provision) benefit for income taxes included a net discrete tax benefit of $1 million and $11 million, respectively. The $11 million was comprised of $5 million related to changes in uncertain tax positions and $6 million related to the impacts of Switzerland tax reform legislation. For the three and six months ended March 31, 2019, the tax (provision) benefit included a net discrete tax expense of less than $1 million and a net discrete tax benefit of $24 million, respectively, of which a nil amount and $17 million, respectively, comprised the impact of the Act.
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.
17
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 March 31, 2020, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, Switzerland and the Netherlands.
During the three and six months ended March 31, 2020, Cabot released uncertain tax positions of $2 million and $8 million, respectively, due to audit settlements and the expiration of statutes of limitations in various jurisdictions. During the three and six months ended months ended March 31, 2019, Cabot released uncertain tax positions of $1 million and $8 million, respectively, due to audit settlements and the expiration of statutes of limitations in various jurisdictions.
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 March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In millions, except per share amounts)
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot
Corporation
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
92
|
|
Less: Undistributed earnings allocated to
participating securities(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
participating securities outstanding
|
|
|
57.3
|
|
|
|
60.0
|
|
|
|
57.5
|
|
|
|
60.4
|
|
Less: Participating securities(1)
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
56.6
|
|
|
|
59.1
|
|
|
|
56.7
|
|
|
|
59.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic:
|
|
$
|
(0.01
|
)
|
|
$
|
0.39
|
|
|
$
|
0.70
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) allocated to common
shareholders
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
92
|
|
Plus: Earnings (loss) allocated to
participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Less: Adjusted earnings allocated to
participating securities(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares outstanding
|
|
|
56.6
|
|
|
|
59.1
|
|
|
|
56.7
|
|
|
|
59.5
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable(3)
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
56.6
|
|
|
|
59.3
|
|
|
|
56.8
|
|
|
|
59.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - diluted:
|
|
$
|
(0.01
|
)
|
|
$
|
0.39
|
|
|
$
|
0.70
|
|
|
$
|
1.53
|
|
18
(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.
|
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 March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In millions)
|
|
Calculation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot Corporation
|
|
$
|
(1
|
)
|
|
$
|
23
|
|
|
$
|
40
|
|
|
$
|
92
|
|
Less: Dividends declared on common stock
|
|
|
20
|
|
|
|
20
|
|
|
|
40
|
|
|
|
40
|
|
Undistributed earnings (loss)
|
|
$
|
(21
|
)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (loss) allocated to
common shareholders
|
|
$
|
(21
|
)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
52
|
|
Undistributed earnings (loss) allocated to
participating shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Undistributed earnings (loss)
|
|
$
|
(21
|
)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
52
|
|
(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 six months ended March 31, 2020, 1,113,013 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 and six months ended March 31, 2019, 987,896 and 845,582 incremental shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive. In addition, for the three months ended March 31, 2020, incremental shares of common stock that were excluded from the calculation of diluted earnings per share because these would have been antidilutive due to the Company’s net loss position were 1,858,582 shares, which also includes shares that are considered participating securities as described in (1) above.
|
K. Restructuring
Cabot’s restructuring activities were recorded in the Consolidated Statements of Operations in the three and six months ended March 31, 2020 and 2019 as follows:
|
|
Three Months Ended March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In millions)
|
|
Cost of sales
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Selling and administrative expenses
|
|
|
1
|
|
|
|
—
|
|
|
|
8
|
|
|
|
6
|
|
Total
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
$
|
11
|
|
19
Details of all restructuring activities and the related reserves during the three and six months ended March 31, 2020 were as follows:
|
|
Severance
and Employee
Benefits
|
|
|
Environmental
Remediation
|
|
|
Accelerated
Depreciation and Idle Asset Depreciation
|
|
|
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
|
|
Charges (gain)
|
|
|
3
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
Costs charged against assets / (liabilities)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Cash paid
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Reserve at March 31, 2020
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
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 six months 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 are being consolidated into the Company’s European business service center. During the three and six months ended March 31, 2020, the Company recorded charges of $5 million and $12 million, respectively, for these actions, primarily related to severance costs. The Company expects to record additional restructuring charges of approximately $4 million, primarily related to severance and other employee benefit costs and depreciation on idled assets, in the remainder of fiscal 2020 and thereafter. Cabot paid approximately $6 million and $7 million related to these activities in the three and six months ended March 31, 2020, respectively, and expects to pay approximately $8 million in the remainder of fiscal 2020 and thereafter. As of March 31, 2020, 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 $1 million in the three and six months ended March 31, 2020, respectively. The Company recorded charges of $1 million and $9 million in the three and six months ended March 31, 2019, respectively. The Company expects to record nominal charges in the future related to this plan. Cabot paid approximately $9 million related to these activities through March 31, 2020, $8 million of which was paid in fiscal 2019, and expects to pay less than $1 million in the remainder of fiscal 2020. As of March 31, 2020, Cabot had less than $1 million of accrued severance and other employee benefit 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
|
20
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 six months of either fiscal 2020 or 2019.
At March 31, 2020 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 March 31, 2020, the fair value of these derivatives was a net asset of $9 million and was included in Prepaid expenses and other current assets, Accounts payable and accrued liabilities, and Other assets 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 March 31, 2020 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.
At March 31, 2020 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 $1.17 billion and $1.29 billion, respectively, as of March 31, 2020, 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 March 31, 2020 and September 30, 2019 to manage foreign currency risk.
|
|
|
|
Notional Amount
|
|
|
Description
|
|
Borrowing
|
|
March 31, 2020
|
|
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 35 million
|
|
USD 54 million
|
|
No designation
|
(1)
|
Cabot’s forward foreign exchange contracts are denominated in the Canadian dollar, Indonesian rupiah and Czech koruna.
|
21
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.
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 March 31, 2020, the fair value of these swaps was a net asset of $9 million and was included in Prepaid expenses and other current assets and Other assets and the cumulative gain of $12 million was included in AOCI on the Consolidated Balance Sheets. 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 March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
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
|
|
$
|
14
|
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
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
|
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
$
|
1
|
|
22
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 March 31, 2020 and September 30, 2019, the fair value of derivative instruments not designated as hedges were nominal, 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 prior to divestiture in the third quarter of fiscal 2019.
The Reinforcement Materials segment consists of the rubber blacks and elastomer composites product lines.
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 and six months ended March 31, 2020 and 2019 were as follows:
|
|
Three Months Ended March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In millions)
|
|
Performance Additives
|
|
$
|
168
|
|
|
$
|
179
|
|
|
$
|
338
|
|
|
$
|
346
|
|
Formulated Solutions
|
|
|
77
|
|
|
|
75
|
|
|
|
149
|
|
|
|
139
|
|
Total Performance Chemicals
|
|
$
|
245
|
|
|
$
|
254
|
|
|
$
|
487
|
|
|
$
|
485
|
|
The Purification Solutions segment consists of the Company’s activated carbon business.
Income (loss) 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.
23
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 March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(3)
|
|
$
|
355
|
|
|
$
|
245
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
664
|
|
|
$
|
46
|
|
|
$
|
710
|
|
Income (loss) before income taxes(4)
|
|
$
|
61
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
(83
|
)
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(3)
|
|
$
|
445
|
|
|
$
|
254
|
|
|
$
|
72
|
|
|
$
|
24
|
|
|
$
|
795
|
|
|
$
|
49
|
|
|
$
|
844
|
|
Income (loss) before income taxes(4)
|
|
$
|
61
|
|
|
$
|
38
|
|
|
$
|
1
|
|
|
$
|
12
|
|
|
$
|
112
|
|
|
$
|
(63
|
)
|
|
$
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(2)
|
|
$
|
734
|
|
|
$
|
487
|
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
1,344
|
|
|
$
|
93
|
|
|
$
|
1,437
|
|
Income (loss) before income taxes(3)
|
|
$
|
108
|
|
|
$
|
72
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
181
|
|
|
$
|
(119
|
)
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers(2)
|
|
$
|
902
|
|
|
$
|
485
|
|
|
$
|
137
|
|
|
$
|
43
|
|
|
$
|
1,567
|
|
|
$
|
98
|
|
|
$
|
1,665
|
|
Income (loss) before income taxes(3)
|
|
$
|
123
|
|
|
$
|
74
|
|
|
$
|
(2
|
)
|
|
$
|
22
|
|
|
$
|
217
|
|
|
$
|
(98
|
)
|
|
$
|
119
|
|
(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 2019 10-K and Note C above.
|
(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.
|
(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 March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(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
|
)
|
|
$
|
(2
|
)
|
|
$
|
(6)
|
|
Shipping and handling fees
|
|
|
30
|
|
|
|
32
|
|
|
|
61
|
|
|
|
64
|
|
By-product sales
|
|
|
17
|
|
|
|
20
|
|
|
|
34
|
|
|
|
40
|
|
Total
|
|
$
|
46
|
|
|
$
|
49
|
|
|
$
|
93
|
|
|
$
|
98
|
|
24
(4)
|
Consolidated Total Income (loss) before income taxes reconciles to Income (loss) before income taxes and equity in earnings of affiliated companies on the Consolidated Statements of Operations. Income (loss) before income taxes that are categorized as Unallocated and Other includes:
|
|
|
Three Months Ended March 31
|
|
|
Six Months Ended March 31
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(In millions)
|
|
Interest expense
|
|
$
|
(14
|
)
|
|
$
|
(14
|
)
|
|
$
|
(28
|
)
|
|
$
|
(29
|
)
|
Certain items(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal and environmental matters and reserves
|
|
|
(51
|
)
|
|
|
(1
|
)
|
|
|
(50
|
)
|
|
|
(1
|
)
|
Global restructuring activities (Note K)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
(11
|
)
|
Employee benefit plan settlements
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
3
|
|
Acquisition and integration-related charges
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Specialty Fluids loss on sale and asset impairment charges
|
|
|
(1
|
)
|
|
|
(20
|
)
|
|
|
(1
|
)
|
|
|
(20
|
)
|
Indirect tax settlement credits
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Equity affiliate investment impairment charge
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(11
|
)
|
Other
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Total certain items, pre-tax
|
|
|
(56
|
)
|
|
|
(37
|
)
|
|
|
(67
|
)
|
|
|
(47
|
)
|
Unallocated corporate costs(b)
|
|
|
(12
|
)
|
|
|
(13
|
)
|
|
|
(22
|
)
|
|
|
(25
|
)
|
General unallocated income (expense)(c)
|
|
|
—
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
3
|
|
Less: Equity in earnings of affiliated companies, net
of tax(d)
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total
|
|
$
|
(83
|
)
|
|
$
|
(63
|
)
|
|
$
|
(119
|
)
|
|
$
|
(98
|
)
|
|
(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.
|
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 March 31, 2020
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
154
|
|
|
$
|
76
|
|
|
$
|
29
|
|
|
$
|
259
|
|
Asia Pacific
|
|
|
122
|
|
|
|
79
|
|
|
|
9
|
|
|
|
210
|
|
Europe, Middle East and Africa
|
|
|
79
|
|
|
|
90
|
|
|
|
26
|
|
|
|
195
|
|
Segment revenues from external customers
|
|
|
355
|
|
|
|
245
|
|
|
|
64
|
|
|
|
664
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
710
|
|
25
|
|
Three Months Ended March 31, 2019
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Specialty
Fluids
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
169
|
|
|
$
|
81
|
|
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
283
|
|
Asia Pacific
|
|
|
180
|
|
|
|
75
|
|
|
|
7
|
|
|
|
—
|
|
|
|
262
|
|
Europe, Middle East and Africa
|
|
|
96
|
|
|
|
98
|
|
|
|
34
|
|
|
|
22
|
|
|
|
250
|
|
Segment revenues from external customers
|
|
|
445
|
|
|
|
254
|
|
|
|
72
|
|
|
|
24
|
|
|
|
795
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
844
|
|
|
|
Six Months Ended March 31, 2020
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
295
|
|
|
$
|
152
|
|
|
$
|
55
|
|
|
$
|
502
|
|
Asia Pacific
|
|
|
292
|
|
|
|
173
|
|
|
|
18
|
|
|
|
483
|
|
Europe, Middle East and Africa
|
|
|
147
|
|
|
|
162
|
|
|
|
50
|
|
|
|
359
|
|
Segment revenues from external customers
|
|
|
734
|
|
|
|
487
|
|
|
|
123
|
|
|
|
1,344
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,437
|
|
|
|
Six Months Ended March 31, 2019
|
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Specialty
Fluids
|
|
|
Consolidated Total
|
|
|
|
(In millions)
|
|
Americas
|
|
$
|
336
|
|
|
$
|
153
|
|
|
$
|
60
|
|
|
$
|
4
|
|
|
$
|
553
|
|
Asia Pacific
|
|
|
382
|
|
|
|
160
|
|
|
|
16
|
|
|
|
1
|
|
|
|
559
|
|
Europe, Middle East and Africa
|
|
|
184
|
|
|
|
172
|
|
|
|
61
|
|
|
|
38
|
|
|
|
455
|
|
Segment revenues from external customers
|
|
|
902
|
|
|
|
485
|
|
|
|
137
|
|
|
|
43
|
|
|
|
1,567
|
|
Unallocated and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Net sales and other operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,665
|
|
26