UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017June 30, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-5667

 

Cabot Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-2271897

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Two Seaport Lane

Boston, Massachusetts

02210-2019

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 345-0100

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $1 par value per share

CBT

The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The Company had 61,807,14756,461,543 shares of common stock, $1.00 par value per share, outstanding as of February 6, 2018.August 4, 2020.

 

 

 


 

INDEX

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Statements of Operations

3

 

 

Consolidated Statements of Comprehensive Income (Loss)

4

 

 

Consolidated Balance Sheets

5

 

 

Consolidated Statements of Cash Flows

7

 

 

Consolidated Statements of Changes in Stockholders’ Equity

8

Notes to the Consolidated Financial Statements

810

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2730

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3742

 

Item 4.

Controls and Procedures

3742

 

 

 

Part II.

Other Information

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

Item 6.

Exhibits

3843

 


Part I. FinancialFinancial Information

Item 1.

Financial Statements

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions, except per share amounts)

 

 

(In millions, except per share amounts)

 

Net sales and other operating revenues

 

$

720

 

 

$

611

 

 

$

518

 

 

$

845

 

 

$

1,955

 

 

$

2,510

 

Cost of sales

 

 

542

 

 

 

452

 

 

 

449

 

 

 

675

 

 

 

1,592

 

 

 

1,996

 

Gross profit

 

 

178

 

 

 

159

 

 

 

69

 

 

 

170

 

 

 

363

 

 

 

514

 

Selling and administrative expenses

 

 

69

 

 

 

63

 

 

 

52

 

 

 

65

 

 

 

230

 

 

 

208

 

Research and technical expenses

 

 

15

 

 

 

12

 

 

 

13

 

 

 

16

 

 

 

41

 

 

 

47

 

Specialty Fluids loss on sale and asset impairment

 

 

 

 

 

8

 

 

 

1

 

 

 

28

 

Income (loss) from operations

 

 

94

 

 

 

84

 

 

 

4

 

 

 

81

 

 

 

91

 

 

 

231

 

Interest and dividend income

 

 

3

 

 

 

2

 

 

 

1

 

 

 

2

 

 

 

7

 

 

 

6

 

Interest expense

 

 

(13

)

 

 

(13

)

 

 

(13

)

 

 

(14

)

 

 

(41

)

 

 

(43

)

Other income (expense)

 

 

8

 

 

 

2

 

 

 

(3

)

 

 

 

 

 

(6

)

 

 

(6

)

Income (loss) from continuing operations before income taxes

and equity in earnings of affiliated companies

 

 

92

 

 

 

75

 

Income (loss) before income taxes

and equity in earnings of affiliated companies

 

 

(11

)

 

 

69

 

 

 

51

 

 

 

188

 

(Provision) benefit for income taxes

 

 

(205

)

 

 

(18

)

 

 

5

 

 

 

(30

)

 

 

(9

)

 

 

(43

)

Equity in earnings of affiliated companies, net of tax

 

 

1

 

 

 

2

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Net income (loss)

 

 

(112

)

 

 

59

 

 

 

(5

)

 

 

40

 

 

 

44

 

 

 

146

 

Net income (loss) attributable to noncontrolling interests, net

of tax

 

 

10

 

 

 

4

 

 

 

1

 

 

 

8

 

 

 

10

 

 

 

22

 

Net income (loss) attributable to Cabot Corporation

 

$

(122

)

 

$

55

 

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

61.9

 

 

 

62.2

 

 

 

56.5

 

 

 

58.2

 

 

 

56.7

 

 

 

59.1

 

Diluted

 

 

61.9

 

 

 

62.8

 

 

 

56.5

 

 

 

58.4

 

 

 

56.7

 

 

 

59.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.98

)

 

$

0.87

 

 

$

(0.12

)

 

$

0.55

 

 

$

0.59

 

 

$

2.08

 

Diluted

 

$

(1.98

)

 

$

0.86

 

 

$

(0.12

)

 

$

0.55

 

 

$

0.59

 

 

$

2.08

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.315

 

 

$

0.30

 

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

UNAUDITED

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Net income (loss)

 

$

(112

)

 

$

59

 

 

$

(5

)

 

$

40

 

 

$

44

 

 

$

146

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax provision (benefit)

of $(2) and $2

 

 

 

 

 

(125

)

Foreign currency translation adjustment, net of tax

 

 

31

 

 

 

1

 

 

 

(4

)

 

 

(15

)

Derivatives: net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Gains) losses reclassified to interest expense, net of tax provision

of $— and $—

 

 

(1

)

 

 

 

Pension and other postretirement benefit liability adjustments

 

 

 

 

 

 

 

 

Amortization of net loss and prior service credit included in

net periodic benefit cost, net of tax

 

 

 

 

 

1

 

(Gains) losses reclassified to interest expense, net of tax

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

(3

)

(Gains) losses excluded from effectiveness testing and amortized to interest expense, net of tax

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

Pension and other postretirement benefit liability adjustments, net of tax

 

 

1

 

 

 

1

 

 

 

2

 

 

 

23

 

Other comprehensive income (loss)

 

 

(1

)

 

 

(124

)

 

 

31

 

 

 

2

 

 

 

(4

)

 

 

6

 

Comprehensive income (loss)

 

 

(113

)

 

 

(65

)

 

 

26

 

 

 

42

 

 

 

40

 

 

 

152

 

Net income (loss) attributable to noncontrolling interests, net

of tax

 

 

10

 

 

 

4

 

 

 

1

 

 

 

8

 

 

 

10

 

 

 

22

 

Foreign currency translation adjustment attributable to

noncontrolling interests, net of tax

 

 

3

 

 

 

(4

)

 

 

2

 

 

 

(2

)

 

 

2

 

 

 

 

Comprehensive income (loss) attributable to noncontrolling

interests, net of tax

 

 

13

 

 

 

 

 

 

3

 

 

 

6

 

 

 

12

 

 

 

22

 

Comprehensive income (loss) attributable to Cabot Corporation

 

$

(126

)

 

$

(65

)

 

$

23

 

 

$

36

 

 

$

28

 

 

$

130

 

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

UNAUDITED

 

 

December 31, 2017

 

 

September 30, 2017

 

 

June 30, 2020

 

 

September 30, 2019

 

 

(In millions)

 

 

(In millions)

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

189

 

 

$

280

 

 

$

162

 

 

$

169

 

Accounts and notes receivable, net of reserve for doubtful

accounts of $10 and $9

 

 

551

 

 

 

527

 

Accounts and notes receivable, net of reserve for doubtful

accounts of $2 and $3

 

 

362

 

 

 

530

 

Inventories:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials

 

 

112

 

 

 

93

 

 

 

88

 

 

 

107

 

Work in process

 

 

2

 

 

 

2

 

Finished goods

 

 

318

 

 

 

293

 

 

 

250

 

 

 

305

 

Other

 

 

46

 

 

 

45

 

 

 

55

 

 

 

54

 

Total inventories

 

 

478

 

 

 

433

 

 

 

393

 

 

 

466

 

Prepaid expenses and other current assets

 

 

63

 

 

 

59

 

 

 

66

 

 

 

45

 

Total current assets

 

 

1,281

 

 

 

1,299

 

 

 

983

 

 

 

1,210

 

Property, plant and equipment, net

 

 

1,329

 

 

 

1,305

 

 

 

1,412

 

 

 

1,348

 

Goodwill

 

 

184

 

 

 

154

 

 

 

130

 

 

 

90

 

Equity affiliates

 

 

54

 

 

 

56

 

 

 

36

 

 

 

39

 

Intangible assets, net

 

 

164

 

 

 

137

 

 

 

102

 

 

 

96

 

Assets held for rent

 

 

104

 

 

 

104

 

Deferred income taxes

 

 

27

 

 

 

237

 

 

 

181

 

 

 

163

 

Other assets

 

 

46

 

 

 

46

 

 

 

175

 

 

 

58

 

Total assets

 

$

3,189

 

 

$

3,338

 

 

$

3,019

 

 

$

3,004

 

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

December 31, 2017

 

 

September 30, 2017

 

 

June 30, 2020

 

 

September 30, 2019

 

 

(In millions, except share

 

 

(In millions, except share

 

 

and per share amounts)

 

 

and per share amounts)

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

$

7

 

 

$

7

 

Short-term borrowings

 

$

13

 

 

$

33

 

Accounts payable and accrued liabilities

 

 

475

 

 

 

457

 

 

 

460

 

 

 

537

 

Income taxes payable

 

 

20

 

 

 

22

 

 

 

14

 

 

 

22

 

Current portion of long-term debt

 

 

286

 

 

 

256

 

 

 

7

 

 

 

7

 

Total current liabilities

 

 

788

 

 

 

742

 

 

 

494

 

 

 

599

 

Long-term debt

 

 

631

 

 

 

661

 

 

 

1,164

 

 

 

1,024

 

Deferred income taxes

 

 

20

 

 

 

38

 

 

 

41

 

 

 

41

 

Other liabilities

 

 

252

 

 

 

245

 

 

 

277

 

 

 

206

 

Redeemable preferred stock

 

 

26

 

 

 

27

 

Commitments and contingencies (Note H)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Commitments and contingencies (Note G)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized: 2,000,000 shares of $1 par value

 

 

 

 

 

 

 

 

 

 

 

 

Issued and Outstanding: None and none

 

 

 

 

 

 

 

 

Issued and Outstanding: NaN and NaN

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized: 200,000,000 shares of $1 par value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued: 61,999,921 and 62,087,627 shares

 

 

 

 

 

 

 

 

Outstanding: 61,796,641 and 61,884,347 shares

 

 

62

 

 

 

62

 

Less cost of 203,280 and 203,280 shares of common treasury stock

 

 

(6

)

 

 

(6

)

Additional paid-in capital

 

 

 

 

 

 

Issued: 56,611,504 and 57,250,454 shares

 

 

 

 

 

 

 

 

Outstanding: 56,460,448 and 57,080,589 shares

 

 

57

 

 

 

57

 

Less cost of 151,056 and 169,865 shares of common treasury stock

 

 

(4

)

 

 

(5

)

Retained earnings

 

 

1,555

 

 

 

1,707

 

 

 

1,277

 

 

 

1,337

 

Accumulated other comprehensive income (loss)

 

 

(263

)

 

 

(259

)

 

 

(400

)

 

 

(391

)

Total Cabot Corporation stockholders' equity

 

 

1,348

 

 

 

1,504

 

 

 

930

 

 

 

998

 

Noncontrolling interests

 

 

124

 

 

 

121

 

 

 

113

 

 

 

136

 

Total stockholders' equity

 

 

1,472

 

 

 

1,625

 

 

 

1,043

 

 

 

1,134

 

Total liabilities and stockholders’ equity

 

$

3,189

 

 

$

3,338

 

Total liabilities and stockholders' equity

 

$

3,019

 

 

$

3,004

 

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

Three Months Ended December 31

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(112

)

 

$

59

 

 

$

44

 

 

$

146

 

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39

 

 

 

38

 

 

 

117

 

 

 

110

 

Specialty Fluids loss on sale and asset impairment

 

 

 

 

 

28

 

Impairment of investment in equity affiliate

 

 

 

 

 

11

 

Deferred tax provision (benefit)

 

 

186

 

 

 

(1

)

 

 

(20

)

 

 

(20

)

Gain on sale of investments

 

 

(10

)

 

 

 

Equity in net income of affiliated companies

 

 

(1

)

 

 

(2

)

Employee benefit plan settlement

 

 

 

 

 

6

 

Equity in earnings of affiliated companies

 

 

(2

)

 

 

(1

)

Non-cash compensation

 

 

6

 

 

 

5

 

 

 

5

 

 

 

11

 

Other non-cash (income) expense

 

 

4

 

 

 

(2

)

Cash dividends received from equity affiliates

 

 

1

 

 

 

2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

(19

)

 

 

28

 

 

 

172

 

 

 

6

 

Inventories

 

 

(41

)

 

 

(36

)

 

 

74

 

 

 

(14

)

Prepaid expenses and other current assets

 

 

(4

)

 

 

2

 

Prepaid expenses and other assets

 

 

(25

)

 

 

(1

)

Accounts payable and accrued liabilities

 

 

10

 

 

 

22

 

 

 

(68

)

 

 

(65

)

Income taxes payable

 

 

(3

)

 

 

(4

)

 

 

(10

)

 

 

(24

)

Other liabilities

 

 

(10

)

 

 

(7

)

 

 

(14

)

 

 

(27

)

Cash dividends received from equity affiliates

 

 

4

 

 

 

3

 

Cash provided by operating activities

 

 

45

 

 

 

107

 

 

 

 

 

 

 

 

 

Cash provided (used) by operating activities

 

 

278

 

 

 

166

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(52

)

 

 

(22

)

 

 

(162

)

 

 

(155

)

Cash paid for acquisition of business, net of cash acquired of $1

 

 

(64

)

 

 

 

Proceeds from sale of investments

 

 

10

 

 

 

 

Change in assets held for rent

 

 

 

 

 

(1

)

Proceeds from sale of business, net of cash held in escrow of $— and $5

 

 

 

 

 

130

 

Acquisitions of businesses, net of cash acquired of $1 and $—

 

 

(92

)

 

 

(3

)

Other

 

 

5

 

 

 

 

 

 

2

 

 

 

(5

)

Cash used in investing activities

 

 

(101

)

 

 

(23

)

 

 

 

 

 

 

 

 

Cash provided (used) by investing activities

 

 

(252

)

 

 

(33

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under financing arrangements

 

 

 

 

 

29

 

Repayments under financing arrangements

 

 

 

 

 

(4

)

 

 

 

 

 

(18

)

Increase in notes payable, net

 

 

 

 

 

4

 

Proceeds from issuance (repayments) of commercial paper, net

 

 

(20

)

 

 

(176

)

Proceeds from long-term debt

 

 

444

 

 

 

344

 

Repayments of long-term debt

 

 

(334

)

 

 

(75

)

Repayments of redeemable preferred stock

 

 

 

 

 

(25

)

Purchases of common stock

 

 

(16

)

 

 

(16

)

 

 

(44

)

 

 

(144

)

Proceeds from sales of common stock

 

 

 

 

 

3

 

 

 

3

 

 

 

2

 

Cash dividends paid to noncontrolling interests

 

 

(26

)

 

 

(23

)

Cash dividends paid to common stockholders

 

 

(20

)

 

 

(19

)

 

 

(60

)

 

 

(60

)

Cash used in financing activities

 

 

(36

)

 

 

(32

)

Cash provided (used) by financing activities

 

 

(37

)

 

 

(146

)

Effects of exchange rate changes on cash

 

 

1

 

 

 

(63

)

 

 

4

 

 

 

(15

)

Increase (decrease) in cash and cash equivalents

 

 

(91

)

 

 

(11

)

 

 

(7

)

 

 

(28

)

Cash and cash equivalents at beginning of period

 

 

280

 

 

 

200

 

 

 

169

 

 

 

175

 

Cash and cash equivalents at end of period

 

$

189

 

 

$

189

 

 

$

162

 

 

$

147

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

Common Stock, Net of Treasury Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Cabot Corporation Stockholders’

 

 

Noncontrolling

 

 

Total Stockholders’

 

 

 

Shares

 

 

Cost

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

 

 

(In millions, except share amounts)

 

Balance at September 30, 2019

 

 

57,081

 

 

$

52

 

 

$

 

 

$

1,337

 

 

$

(391

)

 

$

998

 

 

$

136

 

 

$

1,134

 

Adoption of accounting standards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

 

41

 

 

 

5

 

 

 

46

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

40

 

 

 

3

 

 

 

43

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.35 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Cash dividends declared to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

(19

)

Issuance of stock under equity compensation plans

 

 

273

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Purchase and retirement of common stock

 

 

(699

)

 

 

 

 

 

(2

)

 

 

(32

)

 

 

 

 

 

 

(34

)

 

 

 

 

 

 

(34

)

Balance at December 31, 2019

 

 

56,655

 

 

 

52

 

 

 

 

 

 

1,329

 

 

 

(354

)

 

 

1,027

 

 

 

125

 

 

 

1,152

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

(1

)

 

 

4

 

 

 

3

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(75

)

 

 

(75

)

 

 

(3

)

 

 

(78

)

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.35 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Cash dividends declared to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

(16

)

Issuance of stock under equity compensation plans

 

 

30

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Purchase and retirement of common stock

 

 

(241

)

 

 

 

 

 

(4

)

 

 

(6

)

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

(10

)

Balance at March 31, 2020

 

 

56,444

 

 

 

52

 

 

 

 

 

 

1,302

 

 

 

(429

)

 

 

925

 

 

 

110

 

 

 

1,035

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

(6

)

 

 

1

 

 

 

(5

)

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

29

 

 

 

2

 

 

 

31

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.35 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Issuance of stock under equity compensation plans

 

 

18

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Purchase and retirement of common stock

 

 

(2

)

 

 

 

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2020

 

 

56,460

 

 

$

53

 

 

$

 

 

$

1,277

 

 

$

(400

)

 

$

930

 

 

$

113

 

 

$

1,043

 

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

Common Stock, Net of Treasury Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Accumulated Other Comprehensive

 

 

Total Cabot Corporation Stockholders’

 

 

Noncontrolling

 

 

Total Stockholders’

 

 

 

Shares

 

 

Cost

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

Interests

 

 

Equity

 

 

 

(In millions, except share amounts)

 

Balance at September 30, 2018

 

 

60,367

 

 

$

54

 

 

$

 

 

$

1,417

 

 

$

(317

)

 

$

1,154

 

 

$

125

 

 

$

1,279

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69

 

 

 

 

 

 

 

69

 

 

 

8

 

 

 

77

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

 

 

 

 

 

(3

)

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.33 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Issuance of stock under equity compensation plans

 

 

344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

5

 

Purchase and retirement of common stock

 

 

(1,201

)

 

 

(1

)

 

 

(5

)

 

 

(56

)

 

 

 

 

 

 

(62

)

 

 

 

 

 

 

(62

)

Balance at December 31, 2018

 

 

59,510

 

 

 

53

 

 

 

 

 

 

1,410

 

 

 

(320

)

 

 

1,143

 

 

 

133

 

 

 

1,276

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

23

 

 

 

6

 

 

 

29

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

 

 

2

 

 

 

7

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.33 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

Cash dividend declared to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

Issuance of stock under equity compensation plans

 

 

41

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Purchase and retirement of common stock

 

 

(1,101

)

 

 

(2

)

 

 

(2

)

 

 

(46

)

 

 

 

 

 

 

(50

)

 

 

 

 

 

 

(50

)

Balance at March 31, 2019

 

 

58,450

 

 

 

52

 

 

 

 

 

 

1,367

 

 

 

(315

)

 

 

1,104

 

 

 

128

 

 

 

1,232

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

32

 

 

 

8

 

 

 

40

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

4

 

 

 

(2

)

 

 

2

 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.33 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

(20

)

 

 

 

 

 

(20

)

Issuance of stock under equity compensation plans

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of share-based compensation

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

4

 

Purchase and retirement of common stock

 

 

(747

)

 

 

 

 

 

(4

)

 

 

(28

)

 

 

 

 

 

 

(32

)

 

 

 

 

 

 

(32

)

Balance at June 30, 2019

 

 

57,759

 

 

$

52

 

 

$

 

 

$

1,351

 

 

$

(311

)

 

$

1,092

 

 

$

134

 

 

$

1,226

 

The accompanying notes are an integral part of these consolidated financial statements.


CABOT CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017June 30, 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, 20172019 (“20172019 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, 2017June 30, 2020 and 2016.2019. 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, 2017,2019, the Company changed its method ofadopted the accounting standard for its U.S. carbon black inventories fromleases issued by the last-in, first-outFinancial Accounting Standards Board (“LIFO”FASB”) method to the first-in, first-out (“FIFO”) method. The Company applied this change retrospectively to all prior periods presented, which is discussed in further detail in Note B.February 2016.

As discussed in Note C, in November 2017,effective April 1, 2020, the Company acquired all of the issued and outstanding shares of 8755329 Canada Inc.Shenzhen Sanshun Nano New Materials Co., Ltd (“Tech Blend”SUSN”), a North American producer of black masterbatches.leading carbon nanotube producer. The financial position, results of operations, and cash flows, of Tech BlendSUSN are included in the Company’s consolidated financial statements from the date of acquisition.

 

 

B. Significant Accounting Policies

Revenue Recognition and Accounts Receivable

Cabot recognizes revenue when persuasive evidenceits customers obtain control of an arrangement exists, delivery has occurredpromised goods or services have been rendered,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 fixedsubject to adjustments, such as for returns, discounts or determinable and collectability is reasonably assured. Cabot generally is ablevolume rebates, which are stated in the customer contract, to ensure that products meet customer specifications priordetermine the net consideration to shipment. Ifwhich the Company expects to be entitled. Revenue from product sales is unable to determine thatrecognized based on a point in time model when control of the product has metis transferred to the specified objective criteria prior tocustomer, which typically occurs upon shipment or ifdelivery of the product to the customer and title, risk and rewards of ownership have passed to the customer. The Company has not transferred becausean immaterial amount of salesrevenue that is recognized over time. Payment terms the revenue is considered “unearned” and is deferred until the revenue recognition criteria are met.typically range from zero to ninety days.

Shipping and handling charges relatedcosts incurred after the transfer of control of a product to sales transactionsthe customer are billed to the customer and are recorded as sales revenue, when billedas the Company considers these to customers orbe fulfillment costs. Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the sales price.Consolidated Statement of Operations. Taxes collected on sales to customers are excluded from revenues.the transaction price.

The following table showsCompany generally provides a warranty that its products will substantially conform to the relative sizeidentified 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 recognized in eachrecognition standard, Revenue from Contracts with Customers, when the period of time between the transfer of control of the Company’s reportable segments.

 

 

Three Months Ended December 31

 

 

 

2017

 

 

2016

 

Reinforcement Materials

 

 

56

%

 

 

51

%

Performance Chemicals

 

 

33

%

 

 

35

%

Purification Solutions

 

 

10

%

 

 

12

%

Specialty Fluids

 

 

1

%

 

 

2

%

Cabot derives the substantial majority of its revenues from the sale of products in its Reinforcement Materials, Performance Chemicals,goods and Purification Solutions segments. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. The Company offers certain of its customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenuethe customer pays for the goods is recognized and are estimated based on historical experience and contractual obligations. Cabot periodically reviewsone year or less, the assumptions underlying its estimates of discounts and volume rebates and adjusts its revenues accordingly.

For major activated carbon injection systems projects in Purification Solutions, revenue is recognized usingCompany does not consider there to be a significant financing component associated with the percentage-of-completion method.contract.


Revenue in Specialty Fluids arises primarily from the rental of cesium formate. This revenue is recognized throughout the rental period based on the contracted rental terms. Customers are also billed and revenue is recognized, typically at the end of the job, for cesium formate product that is not returned. The Company also generates revenues from cesium formate sold outside of the rental process and from the sale of fine cesium chemicals. This revenue is recognized upon delivery of the product.

Cabot maintains allowances for doubtful accounts based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable and other economic information on both a historical and prospective basis. Customer account balances are charged against the allowance when it is probable the receivable will not be recovered. There were no material changes in the allowance for any of the periods presented. There is no material off-balance sheet credit exposure related to customer receivable balances.

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 acquired and liabilities assumed 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. The Company acquired Tech Blend in November 2017, which included separately identifiable intangible assets of $31 million as part of the preliminary purchase price allocation as discussed in Note C.

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 MayAugust 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. As part of the Tech Blend acquisition, goodwill of $31 million was generated and is reflected in the Specialty Compounds reporting unit. The other reporting units with goodwill balances are Reinforcement Materials, Purification Solutions and Fumed Metal Oxides. The separate businesses includedthe fumed metal oxides, specialty compounds and specialty carbons product lines within Performance Chemicals, which are considered separate reporting units. As such,units, carry the Company’s goodwill balances relative to Performance Chemicals are recorded in the Fumed Metal Oxides and Specialty Compounds reporting units.as of June 30, 2020.

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 companiescompany 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 MayAugust 31, 2017,2019, the fair values of the Reinforcement Materials, and Fumed Metal Oxides and Specialty Compounds reporting units were substantially in excess of their carrying values. The fair value of the Purification Solutions reporting unit exceeded its carrying amount by 13%. The fair value of the Purification Solutions reporting unit includes certain growth assumptions that are primarily dependent on: (1) growth in demand for Cabot’s existing portfolio of activated carbon products and new products developed for environmental and specialty applications; and (2) stable demand in the mercury removal related portion of the business, which is largely dependent on the amount of coal-based power generation used in the United States and the continued regulation of those utilities under the U.S. Mercury and Air Toxics Standards regulation (“MATS”). In April 2017, the U.S. Environmental Protection Agency (“EPA”) indicated that it intends to review the cost benefit analysis previously prepared by the EPA in support of MATS to determine if the EPA should reconsider MATS or some part of it. This analysis continues to be under review by the EPA.In addition, the Company continues to review its strategic options for this business and look for opportunities to better position the business for growth and long-term value enhancement.  Failure to achieve the Company’s projected growth in environmental or specialty applications, actions taken by the EPA related to MATS that decrease demand for the Company’s products, or the result of the strategic options or opportunities the Company may pursue could have a negative impact on the fair value of the Purification Solutions reporting unit, which may lead to impairment.

Long-lived Assets Impairment

The Company’s long-lived assets primarily include property, plant and equipment, intangible assets and long-term investments and assets held for rent.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 marketfair 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.


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.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 market. Effective October 1, 2017, the Company changed its method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method. Total U.S. inventories accounted for utilizing the LIFO cost flow assumption represented 7% of the Company’s total worldwide inventories as of September 30, 2017 prior to this change in method. The Company believes the FIFO method is preferable because it: (i) conforms the accounting for U.S. carbon black inventories to the Company’s inventory valuation methodology for the majority of its other inventories; (ii) better represents how management assesses and reports on the performance of the Reinforcement Materials and Performance Chemicals operating segments that carry the Company’s U.S. carbon black inventories, as the impact of accounting for this inventory on a LIFO basis has historically been excluded from segment results; (iii) better aligns the accounting for U.S. carbon black inventories with the physical flow of that inventory; and (iv) improves comparability with many of the Company’s peers.

The Company applied this change retrospectively to all prior periods presented. This change resulted in a $17 million increase in retained earnings as of October 1, 2016, from $1,544 million to $1,561 million. In addition, the following financial statement line items in the Company’s Consolidated Balance Sheets as of September 30, 2017 and its Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three months ended December 31, 2016 were adjusted as follows:

Consolidated Statements of Operations

 

Three Months Ended December 31

 

 

 

2016

 

 

 

As Originally Reported

 

 

Effect of Change

 

 

As Adjusted

 

 

 

(In millions, except per share amounts)

 

Cost of sales

 

$

454

 

 

$

(2

)

 

$

452

 

Income (loss) from continuing operations before income taxes

   and equity in earnings of affiliated companies

 

$

73

 

 

$

2

 

 

$

75

 

(Provision) benefit for income taxes

 

$

(17

)

 

$

(1

)

 

$

(18

)

Net income (loss)

 

$

58

 

 

$

1

 

 

$

59

 

Net income (loss) attributable to Cabot Corporation

 

$

54

 

 

$

1

 

 

$

55

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

$

0.85

 

 

$

0.02

 

 

$

0.87

 

   Diluted

 

$

0.85

 

 

$

0.01

 

 

$

0.86

 

Consolidated Balance Sheets

 

September 30, 2017

 

 

 

As Originally Reported

 

 

Effect of Change

 

 

As Adjusted

 

 

 

(In millions)

 

Inventories

 

$

396

 

 

$

37

 

 

$

433

 

Deferred income taxes (assets)

 

$

250

 

 

$

(13

)

 

$

237

 

Retained earnings

 

$

1,683

 

 

$

24

 

 

$

1,707

 

Consolidated Statements of Cash Flows

 

Three Months Ended December 31

 

 

 

2016

 

 

 

As Originally Reported

 

 

Effect of Change

 

 

As Adjusted

 

 

 

(In millions)

 

Net income (loss)

 

$

58

 

 

$

1

 

 

$

59

 

Deferred tax provision (benefit)

 

$

(2

)

 

$

1

 

 

$

(1

)

Inventories

 

$

(34

)

 

$

(2

)

 

$

(36

)

If the Company had continued to account for its U.S. carbon black inventories under LIFO, there would have been an impact of less than $1 million to Cost of sales, (Provision) for income taxes and Net (loss) attributable to Cabot Corporation, and an increase of $0.01 in both basic and diluted loss per common share in the Consolidated Statements of Operations for the three months ended December 31, 2017. The impact to the Consolidated Balance Sheets as of December 31, 2017 would have been a decrease of $37 million in Inventories, an increase of $13 million in Deferred income taxes, and a decrease of $24 million in Retained earnings.

net realizable value. The cost of Specialty Fluids inventories that are classified as assets held for rent is determined using the average cost method. The cost of all other inventoriesinventory 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 otherOther 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 available-for-sale marketable securities and derivative instruments, currency translation adjustments in foreign subsidiaries, translation adjustments on foreign equity securities and minimum pension liability adjustments.

Recently Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that amends the accounting standard for stock compensation by simplifying several aspects of the accounting for employee share-based payment transactions, including the related accounting for income taxes, forfeitures, and the withholding of shares to satisfy the employer’s tax withholding requirements, as well as classification in the statements of cash flows. The Company adopted the standard on October 1, 2017. The following guidance was updated under the new standard, and its impact to Cabot is described below:

When accounting for forfeitures the Company may elect to estimate the number of forfeitures to be recognized over the term of an award, which was also permitted under the previous guidance, or account for forfeitures as they occur. The Company elected to modify its accounting policy and account for forfeitures as they occur. The Company applied the accounting change on a modified retrospective basis, which resulted in a cumulative-effect charge of less than $1 million to Retained earnings as of October 1, 2017.

Excess tax benefits or deficiencies related to stock compensation that were previously recorded to Additional paid-in capital are now recognized as a discrete tax benefit or expense in (Provision) benefit for income taxes within the Consolidated Statements of Operations. The impact on the (Provision) benefit for income taxes was a discrete tax benefit of $1 million during the first three months of fiscal 2018.

Excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the Consolidated Statement of Cash Flows. The Company elected to apply this cash flow presentation requirement retrospectively, which resulted in the reclassification of $5 million of tax benefit from share-based compensation awards from cash flows from financing activities to cash flows from operating activities in the Consolidated Statements of Cash Flows for the three months ended December 31, 2016.

Cash paid by an employer when directly withholding shares for tax withholding purposes are required to be classified as a financing activity in the Consolidated Statements of Cash Flows. This method of presentation is consistent with the Company's historical presentation.

In August 2017, the FASB issued a new standard that amends the hedge accounting recognition and presentation requirements under hedge accounting. The new standard will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and simplifies how companies assess effectiveness. The Company adopted the standard on October 1, 2017. The adoption of this standard did not impact the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new standard that amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017. The Company has completed its preliminary assessment of the new standard, which included reviewing a sample of contracts across the Company’s four business segments. Based on this assessment, the Company does not expect adoption of this standard to have a material impact on how it recognizes revenue. The Company is continuing its assessment of the new standard and preparing to implement the updates that will be necessary to its revenue recognition policy, internal controls, processes and financial statement disclosures. The Company will adopt this standard on October 1, 2018 and expects to apply a modified retrospective approach.


In February 2016, the FASB issued a new standard for the accounting for leases. This new 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 currenthistorical 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 0 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 applicableeffective for fiscal years beginning after December 15, 2018 and for interim periods within those years,2019 and early adoption is permitted. The Company expectswill adopt this standard effective October 1, 2020. The Company does not expect the adoption of this standard to adoptmaterially impact the Company’s consolidated financial statements.

In March 2020, the FASB issued a new standard on October 1, 2019. Reference Rate Reform, which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and may generally be applied through December 31, 2022 to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The Company is currently evaluating the timing of adoption and the impact of the adoption of this standard on its consolidated financial statements.

In August 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows, such as distributions received from equity method investees, proceeds from the settlement of insurance claims, and proceeds from the settlement of corporate-owned life insurance policies. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and early adoption is permitted. The Company is evaluating this standard and the timing of its adoption. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.

In March 2017, the FASB issued a new standard that amends the requirements on the presentation of net periodic pension and postretirement benefit cost. Currently, net benefit costs are reported as employee costs within operating income. The new standard requires the service cost component to be presented with other employee compensation costs. The other components will be reported separately outside of operations. The new standard is effective for fiscal years beginning after December 15, 2017. The Company will adopt this standard on October 1, 2018. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.statements.

 

 

C. Acquisition of Tech BlendAcquisitions and Divestitures

Acquisitions

NSCC Carbon (Jiangsu) Co. Ltd

In November 2017,September 2018, the Company acquired all of the issued and outstanding shares and cash of Tech Blend,NSCC Carbon (Jiangsu) Co. Ltd, a North American producer ofcarbon black masterbatches,manufacturing facility in Pizhou, Jiangsu Province, China for a preliminary purchase price of $65$8 million, subject to certain conditions. The purchase price conditions were satisfied in September 2019 and the purchase price was paid in cash.the first quarter of fiscal 2020. The preliminaryCompany 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 2022. Transition-related costs associated with this acquisition were $1 million and $2 million for the three and nine months ended June 30, 2020, respectively, and $1 million and $4 million for the three and nine months ended June 30, 2019, respectively.

Shenzhen Sanshun Nano New Materials Co., Ltd

On April 1, 2020, the Company purchased Shenzhen Sanshun Nano New Materials Co., Ltd (SUSN), a leading carbon nanotube producer, for an estimated purchase price is subjectof $100 million, consisting of: (i) cash consideration of $84 million, net of $1 million acquired (ii) contingent consideration of $3 million to a working capital adjustment, which has not been finalized.be paid over the two-year period ending March 31, 2022 upon the satisfaction of certain milestones, and (iii) the assumed debt of $13 million. The debt the Company assumed in the transaction was repaid in June 2020. The operating results of the business areSUSN were included in the Company’sresults of the Company's Performance Chemicals segment. The acquisition extendssegment beginning in the Company’s global footprint in black masterbatchthird quarter of fiscal 2020, and compounds and provides a platform to serve global customers and grow in conductive formulations. Since the acquisition, Tech Blend revenues totaled approximately $4$6 million of revenue in the two month period ended December 31, 2017.quarter.

The Company incurred acquisition and integration costs of less than $1$2 million through December 31, 2017June 30, 2020 associated with the transaction, which are included in Selling and administrative expenses and Cost of Sales in the Consolidated Statements of Operations.

The provisional allocation of the preliminary purchase price set forth below was based on preliminary estimates of the fair value of assets acquired and liabilities assumed. The Company is continuing to obtain information to complete its valuationassumed as of these accounts and the associated tax accounting.

 

 

(In millions)

 

Assets

 

 

 

 

Cash

 

$

1

 

Accounts Receivable

 

 

5

 

Inventories

 

 

3

 

Property, plant and equipment

 

 

7

 

Intangible assets

 

 

31

 

Goodwill

 

 

31

 

Total assets acquired

 

 

78

 

 

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

(3

)

Deferred tax liabilities

 

 

(10

)

Total liabilities assumed

 

 

(13

)

 

 

 

 

 

Cash consideration paid

 

$

65

 

April 1, 2020.


 

 

(In millions)

 

Assets

 

 

 

 

Cash

 

$

1

 

Accounts Receivable

 

 

8

 

Inventories

 

 

4

 

Prepaid expenses and other current assets

 

 

2

 

Property, plant and equipment

 

 

38

 

Intangible assets

 

 

15

 

Goodwill

 

 

45

 

Deferred tax asset

 

 

1

 

Other assets

 

 

2

 

Total assets acquired

 

 

116

 

 

 

 

 

 

Liabilities

 

 

 

 

Accounts payable and accrued liabilities

 

 

(12

)

Income taxes payable

 

 

(2

)

Long-term debt

 

 

(13

)

Other liabilities

 

 

(4

)

 

 

 

 

 

Total liabilities assumed

 

 

(31

)

 

 

 

 

 

Cash consideration paid

 

$

85

 

As part of the preliminary purchase price allocation, the Company determined the separately identifiable intangible assets are comprised of developed technologies of $21$9 million, which will be amortized over 2510 years, customer relationships of $4 million, which will be amortized over 20 years, and trademarks of $2 million, which will be amortized over 10 years, and customer relationships of $8 million, which will be amortized over 12 years. The Company estimated the fair values of the identifiable acquisition-related intangible assets based on projections of cash flows that will arise from those assets. The projected cash flows arewere discounted to determine the fair value of the assets at the date of acquisition. The determination of the fair value of the intangible assets acquired required the use of significant judgment with regard to (i) assumptions in the discounted cash flow model used and (ii) determination of the useful lives of the developed technologies, trademarks,customer relationships and customer relationships.trademarks.

The excess of the preliminary purchase price over the fair value of the tangible net assets and intangible assets acquired was recorded as goodwill. The goodwill recognized is attributable to the growth and operating synergies that the Company expects to realize from this acquisition. Goodwill generated from the acquisition will not be deductible for tax purposes.

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 and other postretirement benefit costs include the following:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

Pension Benefits

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

(In millions)

 

 

(In millions)

 

Service cost

 

$

 

 

$

2

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1

 

 

$

1

 

 

$

2

 

Interest cost

 

 

1

 

 

 

2

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

Expected return on plan assets

 

 

(2

)

 

 

(4

)

 

 

(3

)

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(2

)

 

 

(2

)

 

 

(2

)

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Amortization of actuarial loss

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service costs (credit)

 

 

 

 

 

 

 

 

 

 

 

2

 

Amortization of actual loss

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Net periodic benefit (credit) cost

 

$

(1

)

 

$

1

 

 

$

(2

)

 

$

1

 

 

$

(1

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1

 

 

$

 

 

$

4

 

 

 

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2019

 

 

 

Pension Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(In millions)

 

Service cost

 

$

1

 

 

$

4

 

 

$

1

 

 

$

5

 

Interest cost

 

 

3

 

 

 

3

 

 

 

4

 

 

 

4

 

Expected return on plan assets

 

 

(3

)

 

 

(7

)

 

 

(7

)

 

 

(8

)

Amortization of prior service cost (credit)

 

 

 

 

 

 

 

 

 

 

 

2

 

Amortization of actuarial loss

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Settlement and curtailment gain

 

 

 

 

 

 

 

 

 

 

 

(6

)

Net periodic benefit (credit) cost

 

$

1

 

 

$

2

 

 

$

(2

)

 

$

(1

)

Other postretirement benefit costs were less than $1 million and $1 million for the three and nine months ended June 30, 2020, respectively. Other postretirement benefit gains were less than $1 million for both the three and nine months ended June 30, 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 and will also recognize in Other income (expense) any additional gain or loss between the fair value of plan assets and the benefit plan liability on the date of settlement.

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 1 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 threenine month period ended December 31, 2017June 30, 2020 are as follows:

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Total

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Total

 

 

(In millions)

 

 

(In millions)

 

Balance at September 30, 2017

 

$

53

 

 

$

9

 

 

$

92

 

 

$

154

 

Balance at September 30, 2019

 

$

50

 

 

$

40

 

 

$

90

 

Goodwill acquired(1)

 

 

 

 

 

31

 

 

 

 

 

 

31

 

 

 

 

 

 

45

 

 

 

45

 

Foreign currency impact

 

 

(2

)

 

 

1

 

 

 

 

 

 

(1

)

 

 

(5

)

 

 

 

 

 

(5

)

Balance at December 31, 2017

 

$

51

 

 

$

41

 

 

$

92

 

 

$

184

 

Balance at June 30, 2020

 

$

45

 

 

$

85

 

 

$

130

 

 

(1)

(1)            Consists of goodwill acquired in the acquisition of SUSN as described in Note C.

Consists of goodwill acquired in the acquisition of Tech Blend as described in Note C.

The following table provides information regarding the Company’s intangible assets:

 

 

December 31, 2017

 

 

September 30, 2017

 

 

June 30, 2020

 

 

September 30, 2019

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net

Intangible

Assets

 

 

(In millions)

 

 

(In millions)

 

Intangible assets with finite lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technologies(1)

 

$

72

 

 

$

(7

)

 

$

65

 

 

$

49

 

 

$

(7

)

 

$

42

 

 

$

58

 

 

$

(7

)

 

$

51

 

 

$

50

 

 

$

(5

)

 

$

45

 

Trademarks(1)

 

 

18

 

 

 

(2

)

 

 

16

 

 

 

16

 

 

 

(1

)

 

 

15

 

 

 

11

 

 

 

(1

)

 

 

10

 

 

 

8

 

 

 

 

 

 

8

 

Customer relationships(1)

 

 

98

 

 

 

(15

)

 

 

83

 

 

 

94

 

 

 

(14

)

 

 

80

 

 

 

54

 

 

 

(13

)

 

 

41

 

 

 

57

 

 

 

(14

)

 

 

43

 

Total intangible assets(1)

 

$

188

 

 

$

(24

)

 

$

164

 

 

$

159

 

 

$

(22

)

 

$

137

 

 

$

123

 

 

$

(21

)

 

$

102

 

 

$

115

 

 

$

(19

)

 

$

96

 

 

(1)            Total intangible assets as of June 30, 2020 includes $15 million of intangible assets from the acquisition of SUSN as described in Note C and an unfavorable impact of foreign currency translation of $4 million.

(1)

The changes in the gross carrying value of the Developed technologies, Trademarks, and Customer relationships intangible assets are primarily due to the acquisition of Tech Blend as described in Note C.


Intangible assets are amortized over their estimated useful lives, which range between ten and twenty-five years, with a weighted average amortization period of approximately nineteeneighteen years. Amortization expense for both of the three month periodsmonths ended December 31, 2017June 30, 2020 and 20162019 was $2 million and $1 million, respectively, and for the nine months ended June 30, 2020 and 2019 was $5 million and $4 million, respectively.  Amortization expense is included in Cost of sales, and Selling and administrative expenses, and Research and technical expenses in the Consolidated Statements of Operations.Total amortization expense is estimated to be approximately $10$7 million each year for the next five fiscal years.


F. Stockholders’ Equity

In January 2015, the Board of Directors authorized Cabot to repurchase up to five million shares of its common stock in the open market or in privately negotiated transactions. As of December 31, 2017, under the current authorization, Cabot has repurchased 3,491,902 shares of its common stock and 1,508,098 shares remain available for repurchase. The Company retired the repurchased shares and recorded the excess of the purchase price over par value to additional paid-in capital until such amount was reduced to zero and then charged the remainder against retained earnings.

During the first three months of fiscal 2018 and 2017, Cabot paid cash dividends in the amount of $0.315 and $0.30, respectively, per share of common stock, with a total cost of $20 million and $19 million, respectively.

Noncontrolling Interest

The following table illustrates the noncontrolling interest activity for the periods presented:

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Balance at September 30

 

$

121

 

 

$

98

 

Net income (loss) attributable to noncontrolling interests

 

 

10

 

 

 

4

 

Foreign currency translation adjustment attributable to

   noncontrolling interests, net of tax

 

 

3

 

 

 

(4

)

Dividends declared to noncontrolling interests

 

 

(10

)

 

 

(7

)

Balance at December 31

 

$

124

 

 

$

91

 

None of the dividends declared to noncontrolling interests during the three months ended December 31, 2017 were paid during the period. All of the dividends declared to noncontrolling interests during the three months ended December 31, 2016 were paid later in the fiscal year.

G. 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

 

 

Currency

Translation

Adjustment

 

 

Unrealized

Gains on

Investments

 

 

Pension and Other

Postretirement

Benefit Liability

Adjustments

 

 

Total

 

 

(In millions)

 

 

(In millions)

 

Balance at September 30, 2017, attributable to Cabot Corporation

 

$

(204

)

 

$

2

 

 

$

(57

)

 

$

(259

)

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

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

 

 

 

(1

)

 

 

30

 

Amounts reclassified from AOCI

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

 

 

 

2

 

 

 

1

 

Less: Other comprehensive income (loss) attributable to

noncontrolling interests

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Balance at December 31, 2017, attributable to Cabot Corporation

 

$

(208

)

 

$

2

 

 

$

(57

)

 

$

(263

)

Balance at June 30, 2020, attributable to Cabot Corporation

 

$

(349

)

 

$

 

 

$

(51

)

 

$

(400

)

 


The amounts reclassified out of AOCI and into the Consolidated Statements of Operations in the three and nine months ended December 31, 2017June 30, 2020 and 20162019 were as follows:

 

 

Affected Line Item in the Consolidated

 

Three Months Ended December 31

 

 

Affected Line Item in the Consolidated

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

Statements of Operations

 

2017

 

 

2016

 

 

Statements of Operations

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

(In millions)

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Derivatives: net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Gains) losses reclassified to interest expense

 

 

 

$

(1

)

 

$

 

 

Interest expense

 

$

(2

)

 

$

(1

)

 

$

(4

)

 

$

(4

)

Pension and other postretirement

benefit liability adjustment

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial losses

 

Net Periodic Benefit Cost - see

   Note D for details

 

 

1

 

 

 

1

 

Amortization of prior service credit

 

Net Periodic Benefit Cost - see

   Note D for details

 

 

(1

)

 

 

 

(Gains) losses excluded from effectiveness testing and amortized to interest expense

 

Interest expense

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Pension and other postretirement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial losses and prior service cost (credit)

 

Net Periodic Benefit Cost - see

   Note D for details

 

 

2

 

 

 

2

 

 

 

3

 

 

 

2

 

Settlement and curtailment gain

 

Net Periodic Benefit Cost - see

   Note D for details

 

 

 

 

 

 

 

 

 

 

 

(6

)

Total before tax

 

 

 

 

(1

)

 

 

1

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

(7

)

Tax impact

 

Provision (benefit) for income

   taxes

 

 

 

 

 

 

 

Provision (benefit) for income

   taxes

 

 

1

 

 

 

1

 

 

 

1

 

 

 

(2

)

Total after tax

 

 

 

$

(1

)

 

$

1

 

 

 

 

$

1

 

 

$

2

 

 

$

1

 

 

$

(9

)

 

 


H.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, 2017, which may differ from actual market prices at the time of purchase.

 

 

Payments Due by Fiscal Year

 

 

 

Remainder of

Fiscal 2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

 

 

(In millions)

 

Reinforcement Materials

 

$

253

 

 

$

264

 

 

$

153

 

 

$

114

 

 

$

114

 

 

$

1,537

 

 

$

2,435

 

Performance Chemicals

 

 

48

 

 

 

58

 

 

 

55

 

 

 

54

 

 

 

43

 

 

 

468

 

 

 

726

 

Purification Solutions

 

 

7

 

 

 

7

 

 

 

6

 

 

 

1

 

 

 

 

 

 

 

 

 

21

 

Total

 

$

308

 

 

$

329

 

 

$

214

 

 

$

169

 

 

$

157

 

 

$

2,005

 

 

$

3,182

 

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 both December 31, 2017 and September 30, 2017, Cabot had $12 million reserved for environmental matters. These environmental matters mainly relate to former operations. These reserves 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 less than $1 million in the first three months of both fiscal 2018 and fiscal 2017. 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 20172019 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”).

As On February 28, 2020, Cabot, with certain members of both December 31, 2017the 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 SeptemberWest Virginia represented by common legal counsel. The Company’s share of this liability is $65.2 million, and 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.  The Company paid $32.6 million of the settlement during the third quarter of fiscal 2020 and the remaining $32.6 million, which is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets as of June 30, 2017, there were approximately 37,000 claimants2020, will be paid in pending cases asserting claims against AO in connection with respiratory products.the first quarter of fiscal 2021.

In addition to the February 2020 settlement, Cabot has a reserve to cover its expected share of liabilityliabilities for existing and future respirator liability claims. At December 31, 2017claims, which is included in Other liabilities and Accounts payable and accrued liabilities on the Consolidated Balance Sheets. The Company expects these liabilities to be incurred over a number of years. The reserve was $21 million and $35 million as of June 30, 2020 and September 30, 2017, the reserve was $17 million and $18 million,2019, respectively. The Company made payments related to its respirator liability of less than $1 million and $1 million in the first three months of fiscal 2018 and fiscal 2017, 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. 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, (vii)(viii) the financial viability of otherthe parties that contribute to the settlement of respirator claims, (viii) a change in(ix) exhaustion of the availability of insurance coverage maintained by certain of the other 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, (ix)(x) changes in the allocation of costs among the various parties paying legal and settlement costs, and (x)(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 different 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. 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 nineteen 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 June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2020

 

 

 

(In millions)

 

Operating lease cost

 

$

7

 

 

$

24

 

Finance lease cost

 

 

2

 

 

 

4

 

Total lease cost

 

$

9

 

 

$

28

 

For the three and nine months ended June 30, 2020, short-term lease costs were $1 million and $5 million, respectively. For both the three and nine months ended June 30, 2020, variable lease costs were less than $1 million.

Supplemental cash flow information related to the Company’s leases was as follows:

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2020

 

 

 

(In millions)

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

7

 

 

$

19

 

Operating cash flows from finance leases

 

 

 

 

 

1

 

Financing cash flows from finance leases

 

 

1

 

 

 

2

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

8

 

 

$

13

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 

$

 

 

$

23

 


Supplemental balance sheet information related to the Company’s leases was as follows:

Description

 

Balance Sheet Classification

 

June 30, 2020

 

 

 

 

 

(In millions)

 

Lease ROU assets:

 

 

 

 

 

 

Operating

 

Other assets

 

$

102

 

Finance

 

Net property, plant and equipment

 

 

45

 

Total lease ROU assets

 

 

 

$

147

 

 

 

 

 

 

 

 

Lease liabilities:

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Operating

 

Accounts payable and accrued liabilities

 

$

17

 

Finance

 

Current portion of long-term debt

 

 

3

 

Long-term:

 

 

 

 

 

 

Operating

 

Other liabilities

 

 

91

 

Finance

 

Long-term debt

 

 

28

 

Total lease liabilities

 

 

 

$

139

 

The following table presents the weighted-average remaining lease term and discount rates for the Company’s leases as of June 30, 2020:

Description

June 30, 2020

Weighted-average remaining lease term (years):

Operating leases

16

Finance leases

12

Weighted-average discount rate:

Operating leases

2.21

%

Finance leases

4.44

%

Future minimum lease payments under non-cancelable operating and finance leases as of June 30, 2020 were as follows:

Years Ended September 30

 

Operating leases

 

 

Finance leases

 

 

 

(In millions)

 

Remainder of fiscal 2020

 

$

6

 

 

$

1

 

2021

 

 

16

 

 

 

5

 

2022

 

 

12

 

 

 

4

 

2023

 

 

10

 

 

 

4

 

2024

 

 

10

 

 

 

4

 

2025 and thereafter

 

 

75

 

 

 

25

 

Total lease payments

 

 

129

 

 

 

43

 

Less: imputed interest

 

 

21

 

 

 

12

 

Total

 

$

108

 

 

$

31

 

 

 

 

 

 

 

 

 

 


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

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(Dollars in millions)

 

 

(Dollars in millions)

 

Provision (benefit) for income taxes

 

$

205

 

 

$

18

 

(Provision) benefit for income taxes

 

$

5

 

 

$

(30

)

 

$

(9

)

 

$

(43

)

Effective tax rate

 

 

224

%

 

 

24

%

 

 

51

%

 

 

43

%

 

 

17

%

 

 

23

%

 

For the three and nine months ended December 31, 2017,June 30, 2020, the tax provision included net discrete tax expense of $188 million, of which $185 million comprised the impact of the enactment of H.R. 1 (the “Act”), commonly referred to as the Tax Cuts and Jobs Act of 2017. For the three months ended December 31, 2016, the tax provision(Provision) benefit for income taxes included a net discrete tax benefit of less than $1$2 million primarilyand $14 million, respectively. The $14 million was comprised of a benefit from releases of reserves for$8 million related to changes in uncertain tax positions partially offset by a net charge from excludible foreign exchange gains and losses.

Tax Reform

On December 22, 2017, the U.S. enacted significant changes to federal income tax law affecting the Company, including a permanent reduction of the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Cabot expects that these changes will positively impact the Company's future after-tax earnings in the U.S., primarily due to the lower federal statutory tax rate and the establishment of a full participation exemption regime for foreign earnings. In transitioning to this new full participation exemption regime for foreign earnings, Cabot is subject to a one-time tax for the deemed repatriation of certain foreign earnings. A discussion of certain provisions of the Act and the Company’s preliminary assessment of the impact of such provisions on its consolidated financial statements is set forth below.

Uncertain Impacts of the Act

The accounting standard for income taxes (“ASC 740”) requires the Company to recognize the effect of the tax law changes under the Act in the first quarter of fiscal 2018. However, due to the potential uncertainty or diversity of views in accounting for the impact of the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.

In particular, SAB 118 clarifies that the impact of the Act must be accounted for and reported in one of three ways: (1) by reflecting the tax effects of the Act for which the accounting is complete; (2) by reporting provisional amounts for those specific income tax effects of the Act for which the accounting is incomplete but a reasonable estimate can be determined, with such provisional amounts (or adjustments to provisional amounts) identified in the measurement period, as defined therein, being included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined; or (3) where the income tax effects cannot be reasonably estimated, no provisional amounts should be reported and the registrant should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Act. The measurement period begins in the reporting period that includes the Act’s enactment date and ends when the accounting has been completed, but not beyond one year from the enactment date.

Due to various uncertainties as described below, the Company has not completed its accounting for certain tax impacts of the Act. However, as provided in SAB 118, reasonable estimates have been made and recorded as provisional amounts in its financial results for the first quarter of fiscal 2018. A discussion of the material impacts of tax law changes under the Act for which the accounting is incomplete follows:

Revaluation of Deferred Tax Assets: Due to the Company’s September 30 fiscal year-end, the reduction in the corporate tax rate to 21% effective January 1, 2018 will apply on a pro-rata basis for fiscal 2018, resulting in a U.S. federal statutory tax rate of 24.53% for the fiscal year. The reduction requires the Company to revalue its deferred tax assets and liabilities to account for the future financial impact of these amounts.

As of December 31, 2017, the accounting for this item was incomplete. Additional information is necessary in order to complete the accounting for this item, including: (1) further analysis regarding the impact of the reduced rate on the reversal of deferred tax assets and liabilities for the full fiscal 2018 at the pro-rata rate, and (2) the true-up of deferred tax assets and liabilities upon the filing of the U.S. income tax return for fiscal 2017. However, a provisional tax expense of $13$6 million has been recorded in the first quarter of fiscal 2018 related to the impactimpacts of Switzerland tax reform legislation. For the rate change on deferred tax balances.


Deemed Repatriation: In general, the Act provides that U.S. shareholders of a “specified foreign corporation”, as defined in the Act, must include in U.S. taxable income its pro-rata share of certain undistributed and previously untaxed post-1986 foreign earnings and profits (“E&P”). The amount of E&P taken into account is the amount determined either as of November 2, 2017 or December 31, 2017, whichever is greater. This inclusion is offset by a deduction that results in an effective U.S. federal income tax rate of either 15.5% or 8%. The 15.5% rate applies to the “aggregate cash position”, as defined in the Act, of the specified foreign corporations and the 8% rate applies to the extent that the income inclusion exceeds the aggregate cash position. The aggregate cash position is determined as the cash position either as of September 30, 2018, or the average of September 30, 2016 and September 30, 2017, whichever is greater. Finally, the U.S. cash tax impact of the deemed repatriation inclusion may be offset by the utilization of foreign tax credits, which are pro-rated to reflect the deduction described above.

As of December 31, 2017, the accounting for this item is incomplete. Significant additional information will need to be obtainedthree and analyzed in order to complete the accounting for this item. This includes: (1) the determination of the full fiscal 2018 E&P and foreign tax credits of the specified foreign corporations; (2) the true-up of the pre-fiscal 2018 E&P and foreign tax credits of the specified foreign corporations upon the filing of the U.S. income tax return for fiscal 2017 (tax year 2016); (3) establishing the appropriate foreign exchange rate for the full fiscal year 2018 used to translate foreign taxes; (4) clarification of the state income tax impact of the repatriation, including guidance from states in which Cabot has a taxable presence on the extent to which the state will conform with the provisions of the Act, as well as determination of the apportionment of the Company’s income for the full fiscal year 2018; (5) uncertainty as to which of the alternative aggregate cash position measurement dates will apply to the Company; and (6) further guidance from the U.S. Treasury Department on the interpretation and application of the rules.

In the absence of such additional information, Cabot has made a reasonable estimate of the financial impact of this item. The Company has recorded a provisional charge of $149 million during the first quarter of fiscal 2018 tonine months ended June 30, 2019, the (Provision) benefit for income taxes for deemed repatriation. This amount is expected to beincluded a fully non-cash charge due to the Company’s existing tax attributes.

Deferred Tax Liability on Unremitted Earnings: In addition to the deemed repatriation of foreign earnings, going forward, the Act effectively establishes a participation exemption system of taxation that, in general, provides a 100% deduction for dividends from specified foreign corporations. However, the Company is still required to provide non-U.S. withholding taxes, as well as other potential tax impacts, on undistributed earnings of non-U.S. subsidiaries that it does not consider to be indefinitely reinvested.

As of December 31, 2017, the accounting for this item is incomplete. Additional information necessary to complete the accounting includes: (1) finalization of U.S. previously taxed income resulting from the deemed repatriation of foreign earnings; (2) further analysis of the amount of distributable reserves, including treatment thereof under local law, available in various non-U.S. subsidiaries; (3) clarification of the state income tax impact of unremitted earnings that are not indefinitely reinvested; and (4) evolving interpretations of the U.S. GAAP rules applicable to the Act. As a result of the Act, the Company has made certain changes to its indefinite reinvestment assertion and has made a reasonable estimate of the financial impact of this item. The Company has recorded a provisional amount of $23 million during the first quarter of fiscal 2018 to itsnet discrete tax expense for this item.

The Company will continue to evaluate the impact of the Act on its business$13 million and consolidated financial statementsa net discrete tax benefit of $11 million, respectively. Of these amounts, a net tax expense of $17 million and will make any adjustments to its provisional amounts in subsequent reporting periods upon obtaining, preparing or analyzing additional information affecting the income tax effects initially reported as a provisional amount.

Accounting for the Global Intangible Low-Taxed Income Tax

Under the Act, Cabot may be subject to a tax on global intangible low-taxed income (“GILTI”) in future years. In general, GILTI is a 10.5% tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. This tax is effective for taxable years beginning after December 31, 2017. The Company has not yet adopted an accounting policy with respect to whether (i) to recognize deferred taxes for temporary differences (including outside basis differences) expected to reverse as GILTI or (ii) to recognize these temporary differences as period costs if and when incurred.


Other Material Provisions of the Act Effective in Future Periods

The Act also contains a number of other provisions that may have a material financial impact on the Company in the future. These include base erosion anti-abuse tax, foreign derived intangible income and the interest expense limitation under Internal Revenue Code section 163(j). These tax law changes apply only to tax years beginning after December 31, 2017. Therefore, the Company has not and will not record any amountsnil amount, respectively, are related to these items in its fiscal 2018 financial results.U.S. tax reform legislation.

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 20132016 through 20152019 tax years generally remain subject to examination by the United States Internal Revenue ServiceIRS and various tax years from 2005 through 20152019 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 20022003 through 20162019 remain subject to examination by their respective tax authorities. As of December 31, 2017,June 30, 2020, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, Switzerland and the Netherlands.

During the three and nine months ended December 31, 2017June 30, 2020, Cabot released uncertain tax positions of $3 million and 2016,$11 million, respectively, due to audit settlements and the expiration of statutes of limitations in various jurisdictions. During the three and nine months ended June 30, 2019, Cabot released uncertain tax positions of $1 million and $2$9 million, respectively, due to audit settlements and the expirationsexpiration 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 December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions, except per share amounts)

 

 

(In millions, except per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot

Corporation

 

$

(122

)

 

$

55

 

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

Less: Dividends and dividend equivalents

to participating securities

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) allocated to common

shareholders (numerator)

 

$

(122

)

 

$

55

 

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares and

participating securities outstanding

 

 

62.6

 

 

 

62.7

 

 

 

57.2

 

 

 

59.0

 

 

 

57.4

 

 

 

59.9

 

Less: Participating securities(1)

 

 

0.7

 

 

 

0.5

 

 

 

0.7

 

 

 

0.8

 

 

 

0.7

 

 

 

0.8

 

Adjusted weighted average common

shares (denominator)

 

 

61.9

 

 

 

62.2

 

 

 

56.5

 

 

 

58.2

 

 

 

56.7

 

 

 

59.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share - basic:

 

$

(1.98

)

 

$

0.87

 

 

$

(0.12

)

 

$

0.55

 

 

$

0.59

 

 

$

2.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) allocated to common

shareholders

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

Plus: Earnings allocated to

participating securities

 

 

 

 

 

 

 

 

 

 

 

1

 

Less: Adjusted earnings allocated to

participating securities(2)

 

 

 

 

 

 

 

 

 

 

 

1

 

Earnings (loss) allocated to common

shareholders (numerator)

 

$

(122

)

 

$

55

 

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted average common

shares outstanding

 

 

61.9

 

 

 

62.2

 

 

 

56.5

 

 

 

58.2

 

 

 

56.7

 

 

 

59.1

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares issuable(3)

 

 

 

 

 

0.6

 

 

 

 

 

 

0.2

 

 

 

 

 

 

0.1

 

Adjusted weighted average common

shares (denominator)

 

 

61.9

 

 

 

62.8

 

 

 

56.5

 

 

 

58.4

 

 

 

56.7

 

 

 

59.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share - diluted:

 

$

(1.98

)

 

$

0.86

 

 

$

(0.12

)

 

$

0.55

 

 

$

0.59

 

 

$

2.08

 


 

(1)

Participating securities consist of shares underlying outstanding andunderlying: (i) achieved but unvested performance-based restricted stock units, issued during and after fiscal 2017 and all(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 December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Calculation of undistributed earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot Corporation

 

$

(122

)

 

$

55

 

 

$

(6

)

 

$

32

 

 

$

34

 

 

$

124

 

Less: Dividends declared on common stock

 

 

20

 

 

 

19

 

 

 

20

 

 

 

20

 

 

 

60

 

 

 

60

 

Less: Dividends declared on participating

securities

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings (loss)

 

$

(142

)

 

$

36

 

 

$

(26

)

 

$

12

 

 

$

(26

)

 

$

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of undistributed earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings (loss) allocated to

common shareholders

 

$

(142

)

 

$

36

 

 

$

(26

)

 

$

12

 

 

$

(26

)

 

$

64

 

Undistributed earnings allocated to

participating shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed earnings (loss)

 

$

(142

)

 

$

36

 

 

$

(26

)

 

$

12

 

 

$

(26

)

 

$

64

 

 

(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; and (iii) assumed issuancePlan. For the nine months ended June 30, 2020, 1,223,055 incremental shares of common stock were excluded from the calculation of diluted earnings per share because the inclusion of these shares for outstanding and achieved performance-based restricted stock unit awards issued before fiscal 2017 under Cabot’s equity incentive plans using the treasury stock method.would have been antidilutive. For the three months ended December 31, 2017 and 2016, respectively, 764,077 and 173,927June 30, 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 1,853,427 shares, which also includes shares that are considered participating securities as described in (1) above. For the three and nine months ended June 30, 2019, 983,081 and 945,246 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.

 

 

K. Restructuring

CabotCabot’s restructuring activities were recorded charges of approximately $1 million and a net benefit of less than $1 million related to restructuring activity in Cost of sales in itsthe Consolidated Statements of Operations forin the three and nine months ended December 31, 2017June 30, 2020 and 2016, respectively.2019 as follows:

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In millions)

 

Cost of sales

 

$

 

 

$

2

 

 

$

5

 

 

$

7

 

Selling and administrative expenses

 

 

3

 

 

 

2

 

 

 

11

 

 

 

8

 

Total

 

$

3

 

 

$

4

 

 

$

16

 

 

$

15

 


Details of all restructuring activities and the related reserves during the three and nine months ended December 31, 2017June 30, 2020 were as follows:

 

 

Severance

and Employee

Benefits

 

 

Environmental

Remediation

 

 

Other

 

 

Total

 

 

 

(In millions)

 

Reserve at September 30, 2017

 

$

1

 

 

$

2

 

 

$

 

 

$

3

 

Charges

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Cash paid

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Reserve at December 31, 2017

 

$

1

 

 

$

2

 

 

$

 

 

$

3

 

 

 

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

 

Charges (gain)

 

 

1

 

 

 

 

 

 

 

 

 

2

 

 

 

3

 

Cash paid

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

 

 

(4

)

Reserve at June 30, 2020

 

$

5

 

 

$

4

 

 

$

 

 

$

 

 

$

9

 

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.

Marshall, Texas Plan2020 Reorganization

In October 2017, Cabot indefinitely idled threeDuring the first nine 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 seven production unitsreorganization 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 its activated carbon manufacturing facility in Marshall, Texas. The decision, affecting approximately 40 local employees, was driven byCabot’s North American business service center are being consolidated into the need to better matchCompany’s European business service center. During the business’ production capacitythree and cost structure withnine months ended June 30, 2020, the current demandCompany recorded charges of $3 million and $15 million, respectively, for powdered activated carbon in North America. Total coststhese actions, primarily related to this plan are expected to be approximately $8 million, comprised of approximately $8 million of non-cash accelerated depreciation costs and less than $1 million of severance costs. The Company recordedexpects to record additional restructuring charges, primarily related to site demolition and clearing costs associated with the Company’s other operational efficiency initiatives, of less thanapproximately $1 million in the three months ended December 31, 2017, comprised mainly of accelerated depreciation charges. The Company anticipates chargesfiscal 2020 and $5 million thereafter. Cabot paid approximately $3 million and $10 million related to these actions ofactivities in the three and nine months ended June 30, 2020, respectively, and expects to pay approximately $1$3 million in the remainder of fiscal 20182020 and approximately $7 million thereafter.


2016 Plan

In October 2015, in response to challenging macroeconomic conditions, the Company announced its intention to restructure its operations subject to local consultation requirements and processes in certain locations. Cabot’s plan resulted in the termination of employment for approximately 300 employees across the Company’s global locations.

Most of the charges and cash outlays related to this plan were recorded in fiscal 2016. The Company recorded pre-tax cash charges related to plan of less than $1 million in the first three months of both fiscal 2018 and 2017, and expects to record approximately $2 million of cash charges in the remainder of fiscal 2018. The charges recorded and anticipated are comprised of severance, employee benefits and other transition costs. As of December 31, 2017,June 30, 2020, Cabot has less than $1had $5 million of accrued severance charges in the Consolidated Balance Sheets related to these actions.

Additionally, in fiscal 2016 Cabot closed its carbon black manufacturing facility in Merak, IndonesiaPurification Solutions Transformation Plan

In December 2018, the Company initiated a transformation plan to consolidate production in Asia usingimprove the Company’s Cilegon, Indonesia and other Asian and global carbon black production sites to meet regional demand. The decision was driven by the financiallong-term performance at the Merak facility in the years preceding the closure. Manufacturing operations ceased at the end of January 2016.

Most 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 and cash outlaysof $10 million related to the Merak closure werethis plan, of which approximately $9 million was recorded in fiscal 2016.2019, comprised of severance, employee benefits and professional service fees. The Company recorded a pre-tax cash benefitnominal charges in the three months ended June 30, 2020 and $1 million of charges in the nine months ended June 30, 2020. The Company recorded charges of less than $1 million and $9 million in the first quarter of fiscal 2017.

three and nine months ended June 30, 2019, respectively. The Company entered into an agreementexpects to sell the land in Merak on which the facility is located. The sale is anticipated to be completedrecord nominal charges in the second quarter of fiscal 2018 for approximately $14 million, resulting in a net gain of approximately $11 million. The Company received a refundable deposit of $4 million in cashfuture related to this transactionplan. Cabot paid approximately $9 million related to these activities through June 30, 2020, $8 million of which was paid in fiscal 2019, and expects to pay $1 million in the first quarterremainder of fiscal 2018 that is recorded in Accounts payable and accrued liabilities on the Consolidated Balance Sheets.

2020. As of December 31, 2017,June 30, 2020, Cabot hashad less than $1 million of accrued severance costs in the Consolidated Balance Sheets related to the Merak facility closure.

Other Actions

Cabot has recorded less than $1 million of severance charges in the three months ended December 31, 2017, nearly all of which has been paid in the first quarter of fiscal 2018.

Additionally, in previous years, the Company has entered into other various restructuring actions that have been substantially completed, other than the sale of assets from certain closed sites that remain to be completed. The Company has recorded a net benefit of less than $1 million in the three months ended December 31, 2016, driven by gains from the sale of certain assets related to these actions.

Cabot expects to pay approximately $3 million related to these activities in the remainder of fiscal 2018 and thereafter, mainly for accrued environmental and other closure related costs. As of December 31, 2017, Cabot has approximately $2 million of accrued environmental costs and approximately $1 million of accrued severance costsemployee 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

 

There were no0 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 threenine months of either fiscal 20182020 or 2017.2019.


At December 31, 2017June 30, 2020 and September 30, 2017,2019, 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, 2017 and SeptemberJune 30, 2017,2020, the fair value of these derivatives was a net liabilityasset of $18$10 million and $13was 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 respectively, and was included in Prepaid expenses and other current assets and Other liabilitiesassets 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 both December 31, 2017June 30, 2020 and September 30, 2017,2019, the fair value of guaranteed investment contracts, included in Other assets on the Consolidated Balance Sheets, was $12 million.$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 December 31, 2017June 30, 2020 and September 30, 2017,2019, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and notes payableshort-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 $0.91$1.15 billion and $0.93$1.27 billion, respectively, as of December 31, 2017June 30, 2020, and $0.91$1.03 billion and $0.94$1.10 billion, respectively, as of September 30, 2017.2019. 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 capitalfinance and operating 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 denominatedEuro-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, 2017June 30, 2020 and September 30, 20172019 to manage foreign currency risk.

 

 

 

 

 

Notional Amount

 

 

Description

 

Borrowing

 

December 31, 2017June 30, 2020

 

September 30, 20172019

 

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 1132 million

 

USD 554 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.

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 based on the hypothetical derivative method. 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. Effective October 1, 2017, the Company elected to de-designate its existing net investment hedge instruments in which hedge effectiveness was assessed using the method based on changes in forward exchange rates and re-designate the net investment hedges in which hedge effectiveness will be assessed using the method based on changes in spot exchange rates.

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 denominatedEuro-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, 2017,June 30, 2020, the fair value of these swaps was a net liabilityasset of $18$10 million and was included in Prepaid expenses and other current assets and Other liabilitiesassets and the cumulative lossgain of $15$13 million was included in AOCI on the Consolidated Balance Sheets. As of September 30, 2017,2019, the fair value of these swaps was a net liabilityasset of $13$1 million and was included in Prepaid expenses and other current assets and Other Liabilitiesassets and the cumulative lossgain of $9$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

 

 

Three Months Ended June 30

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

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)

 

 

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)

 

 

(In millions)

 

Cross-currency swaps (1)

 

$

(5

)

 

$

7

 

 

$

(1

)

 

$

 

 

$

 

 

$

 

 

$

1

 

 

$

(1

)

 

$

(2

)

 

$

(1

)

 

$

 

 

$

 

 

(1)

As noted above, effective October 1, 2017, the Company changed the method it uses to assess effectiveness from the method based on changes in forward exchange rates, in which all gains/losses were recognized in AOCI, to the method based on changes in spot exchange rates.

 

 

Nine Months Ended June 30

 

 

 

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

 

$

11

 

 

$

12

 

 

$

(4

)

 

$

(4

)

 

$

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, 2017June 30, 2020 and September 30, 2017,2019, the fair value of derivative instruments not designated as hedges were immaterialnominal, and these instruments were presented in Prepaid expenses and other current assets and Accounts payable and accrued liabilities on the Consolidated Balance Sheets.

 

 


N. Venezuela

Cabot owns 49% of a carbon black operating affiliate in Venezuela, which is accounted for as an equity affiliate, through wholly-owned subsidiaries that carry the investment and receive its dividends. As of December 31, 2017, these subsidiaries carried the operating affiliate investment of $14 million.

During the three months ended December 31, 2017 and 2016, the Company received dividends in the amounts of $2 million and $1 million, respectively, which were paid in U.S. dollars.

A significant portion of the Company’s operating affiliate’s sales are exports denominated in U.S. dollars. The Venezuelan government mandates that a certain percentage of the dollars collected from these sales be converted into bolivars. The exchange rate made available to the Company as of December 31, 2017 was 3,345 bolivars to the U.S. dollar, which was unchanged from the exchange rate available to the Company as of September 30, 2017.

The operating entity has generally been profitable. The Company continues to closely monitor developments in Venezuela and their potential impact on the recoverability of its equity affiliate investment. Any future change in the exchange rate made available to the Company could cause the Company to change the exchange rate it uses and result in gains or losses on the bolivar denominated assets held by its operating affiliate and wholly-owned subsidiaries.

O. 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 four3 reportable segments: Reinforcement Materials, Performance Chemicals and Purification Solutions andSolutions. The Company’s former Specialty Fluids.Fluids business was a separate reporting segment prior to divestiture in the third quarter of fiscal 2019.

The Reinforcement Materials segment representsconsists of the rubber blacks and elastomer composites product lines.

The Performance Chemicals segment combines the specialty carbons, and compounds and inkjet colorants product lines into the Specialty Carbons and Formulations business, and combines the fumed metal oxides and aerogel product lines into the Metal OxidesPerformance 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 one1 reportable segment. The net sales from each of these businesses for the three and nine months ended December 31, 2017June 30, 2020 and 20162019 were as follows:

 

 

 

Three Months Ended December 31

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Specialty Carbons and Formulations

 

$

160

 

 

$

138

 

Metal Oxides

 

 

69

 

 

 

67

 

Total Performance Chemicals

 

$

229

 

 

$

205

 

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In millions)

 

Performance Additives

 

$

151

 

 

$

172

 

 

$

489

 

 

$

518

 

Formulated Solutions

 

 

69

 

 

 

79

 

 

 

218

 

 

 

218

 

Total Performance Chemicals

 

$

220

 

 

$

251

 

 

$

707

 

 

$

736

 

 

The Purification Solutions segment representsconsists of the Company’s activated carbon business and the Specialty Fluids segment includes cesium formate oil and gas drilling fluids and high-purity fine cesium chemicals product lines.business.

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, but excludes Interest expense, foreign currency transaction gains and losses, interest income, dividend income, unearned revenue, general unallocated expense and unallocated corporate costs.receivable.


Financial information by reportable segment is as follows:

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Specialty

Fluids

 

 

Segment

Total

 

 

Unallocated

and Other(1)

 

 

Consolidated

Total

 

 

 

(In millions)

 

Three Months Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(2)

 

$

387

 

 

$

229

 

 

$

70

 

 

$

6

 

 

$

692

 

 

$

28

 

 

$

720

 

Income (loss) from continuing operations

   before income taxes(3)

 

$

62

 

 

$

47

 

 

$

6

 

 

$

(2

)

 

$

113

 

 

$

(21

)

 

$

92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(2)

 

$

295

 

 

$

205

 

 

$

69

 

 

$

11

 

 

$

580

 

 

$

31

 

 

$

611

 

Income (loss) from continuing operations

   before income taxes(3)

 

$

40

 

 

$

49

 

 

$

4

 

 

$

2

 

 

$

95

 

 

$

(20

)

 

$

75

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Specialty

Fluids(1)

 

 

Segment

Total

 

 

Unallocated

and Other(2)

 

 

Consolidated

Total

 

 

 

(In millions)

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(3)

 

$

197

 

 

$

220

 

 

$

63

 

 

$

 

 

$

480

 

 

$

38

 

 

$

518

 

Income (loss) before income taxes(4)

 

$

(5

)

 

$

21

 

 

$

2

 

 

$

 

 

$

18

 

 

$

(29

)

 

$

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(3)

 

$

461

 

 

$

251

 

 

$

73

 

 

$

13

 

 

$

798

 

 

$

47

 

 

$

845

 

Income (loss) before income taxes(4)

 

$

72

 

 

$

37

 

 

$

1

 

 

$

2

 

 

$

112

 

 

$

(43

)

 

$

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(3)

 

$

931

 

 

$

707

 

 

$

186

 

 

$

 

 

$

1,824

 

 

$

131

 

 

$

1,955

 

Income (loss) before income taxes(4)

 

$

103

 

 

$

93

 

 

$

3

 

 

$

 

 

$

199

 

 

$

(148

)

 

$

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers(3)

 

$

1,363

 

 

$

736

 

 

$

210

 

 

$

56

 

 

$

2,365

 

 

$

145

 

 

$

2,510

 

Income (loss) before income taxes(4)

 

$

195

 

 

$

111

 

 

$

(1

)

 

$

24

 

 

$

329

 

 

$

(141

)

 

$

188

 


 

(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.

(2)(3)

Consolidated Total Revenues from external customers reconciles to Net sales and other operating revenues on the Consolidated StatementStatements 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, and discounting charges for certain Notes receivable. receivable, and by-product revenue.Details are provided in the table below:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(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

 

 

$

5

 

 

$

4

 

 

$

(3

)

 

$

2

 

 

$

(9

)

Shipping and handling fees

 

 

27

 

 

 

26

 

 

 

22

 

 

 

32

 

 

 

83

 

 

 

96

 

By-product sales

 

 

12

 

 

 

18

 

 

 

46

 

 

 

58

 

Total

 

$

28

 

 

$

31

 

 

$

38

 

 

$

47

 

 

$

131

 

 

$

145

 

 

(3)(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 StatementStatements of Operations.Income (loss) from continuing operations before income taxes that are categorized as Unallocated and Other includes:

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Interest expense

 

$

(13

)

 

$

(13

)

 

$

(13

)

 

$

(14

)

 

$

(41

)

 

$

(43

)

Certain items (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global restructuring activities

 

 

(1

)

 

 

 

Legal and environmental matters and reserves

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(51

)

 

 

(1

)

Gains (losses) on sale of investments

 

 

10

 

 

 

 

Global restructuring activities (Note K)

 

 

(3

)

 

 

(4

)

 

 

(16

)

 

 

(15

)

Employee benefit plan settlements

 

 

(2

)

 

 

 

 

 

(5

)

 

 

3

 

Acquisition and integration-related charges

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

(5

)

Indirect tax settlement credits

 

 

 

 

 

 

 

 

3

 

 

 

 

Specialty Fluids loss on sale and asset impairment charge (Note C)

 

 

 

 

 

(8

)

 

 

(1

)

 

 

(28

)

Equity affiliate investment impairment charge

 

 

 

 

 

 

 

 

 

 

 

(11

)

Other

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(4

)

Total certain items, pre-tax

 

 

7

 

 

 

 

 

 

(7

)

 

 

(14

)

 

 

(74

)

 

 

(61

)

Unallocated corporate costs(b)

 

 

(14

)

 

 

(12

)

 

 

(10

)

 

 

(14

)

 

 

(32

)

 

 

(39

)

General unallocated income (expense)(c)

 

 

 

 

 

7

 

 

 

2

 

 

 

 

 

 

1

 

 

 

3

 

Less: Equity in earnings of affiliated

companies, net of tax(d)

 

 

1

 

 

 

2

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Total

 

$

(21

)

 

$

(20

)

 

$

(29

)

 

$

(43

)

 

$

(148

)

 

$

(141

)

 

 

(a)

Certain items areitems 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, and the impact of including the full operating results of a contractual joint venture in Purification Solutions Segment EBIT. Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accountingEBIT and unrealized holding gains (losses) for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in a decrease in General unallocated income (expense) of $2 million.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 June 30, 2020

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Consolidated Total

 

 

 

(In millions)

 

Americas

 

$

59

 

 

$

54

 

 

$

28

 

 

$

141

 

Asia Pacific

 

 

106

 

 

 

98

 

 

 

8

 

 

 

212

 

Europe, Middle East and Africa

 

 

32

 

 

 

68

 

 

 

27

 

 

 

127

 

Segment revenues from external customers

 

 

197

 

 

 

220

 

 

 

63

 

 

 

480

 

Unallocated and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

Net sales and other operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

$

518

 

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Specialty

Fluids

 

 

Consolidated Total

 

 

 

(In millions)

 

Americas

 

$

179

 

 

$

69

 

 

$

33

 

 

$

2

 

 

$

283

 

Asia Pacific

 

 

191

 

 

 

93

 

 

 

10

 

 

 

 

 

 

294

 

Europe, Middle East and Africa

 

 

91

 

 

 

89

 

 

 

30

 

 

 

11

 

 

 

221

 

Segment revenues from external customers

 

 

461

 

 

 

251

 

 

 

73

 

 

 

13

 

 

 

798

 

Unallocated and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

Net sales and other operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

845

 

 

 

Nine Months Ended June 30, 2020

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Consolidated Total

 

 

 

(In millions)

 

Americas

 

$

354

 

 

$

206

 

 

$

83

 

 

$

643

 

Asia Pacific

 

 

398

 

 

 

271

 

 

 

26

 

 

 

695

 

Europe, Middle East and Africa

 

 

179

 

 

 

230

 

 

 

77

 

 

 

486

 

Segment revenues from external customers

 

 

931

 

 

 

707

 

 

 

186

 

 

 

1,824

 

Unallocated and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

131

 

Net sales and other operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,955

 

 

 

Nine Months Ended June 30, 2019

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Specialty

Fluids

 

 

Consolidated Total

 

 

 

(In millions)

 

Americas

��

$

515

 

 

$

222

 

 

$

93

 

 

$

6

 

 

$

836

 

Asia Pacific

 

 

573

 

 

 

253

 

 

 

26

 

 

 

1

 

 

 

853

 

Europe, Middle East and Africa

 

 

275

 

 

 

261

 

 

 

91

 

 

 

49

 

 

 

676

 

Segment revenues from external customers

 

 

1,363

 

 

 

736

 

 

 

210

 

 

 

56

 

 

 

2,365

 

Unallocated and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145

 

Net sales and other operating revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,510

 


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with accounting policies generally accepted in the United States (“GAAP”). The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements. On an ongoing basis, we evaluate our estimates and the application of our policies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies have not substantially changed from those described in the 2017 Form2019 10-K. We have updated

Recently Issued Accounting Pronouncements

Refer to the discussion ofunder the Inventory Valuationheadings “Recently Adopted Accounting Standards” and Intangible Asset and Goodwill Impairment policies included below to reflect recent events.

Inventory Valuation

Effective October 1, 2017, we changed our method of accounting for U.S. carbon black inventories from the LIFO method to the FIFO method. Total U.S. inventories accounted for utilizing the LIFO cost flow assumption represented 7% of total worldwide inventories as of September 30, 2017 prior to this change in method. We believe the FIFO method is preferable because it: (i) conforms the accounting for U.S. carbon black inventories to the inventory valuation methodology for the majority of our other inventories; (ii) better represents how management assesses and reports on the performance of the Reinforcement Materials and Performance Chemicals operating segments that carry U.S. carbon black inventories, as the impact of accounting for this inventory on a LIFO basis has historically been excluded from segment results; (iii) better aligns the accounting for U.S. carbon black inventories with the physical flow of that inventory; and (iv) improves comparability with many of our peers. We applied this change retrospectively to all prior periods presented for which details are presented“Recent Accounting Pronouncements” in Note B of our Notes to the Consolidated Financial Statements (“Note B”).

The cost of Specialty Fluids inventories that are classified as assets held for rent is determined using the average cost method. The cost of all other inventories is determined using the FIFO method.

We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory, and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Historically, such write-downs have not been material. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our gross profit and our earnings.

Intangible Assets and Goodwill Impairment

We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We use 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. We estimate 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. As discussed in Note C of our Notes to the Consolidated Financial Statements, we acquired Tech Blend in November 2017, and the preliminary purchase price allocation included separately identifiable intangible assets of $31 million.

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 May 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. As part of the Tech Blend acquisition, goodwill of $31 million was generated and is reflected in the Specialty Compounds reporting unit. The other reporting units with goodwill balances are Reinforcement Materials, Purification Solutions, and Fumed Metal Oxides. The separate businesses included within Performance Chemicals are considered separate reporting units. As such, the goodwill balance relative to Performance Chemicals is recorded in the Fumed Metal Oxides and Specialty Compounds reporting units.

For the purpose of the goodwill impairment test, we first assess 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, we 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 companies 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 our most recent annual goodwill impairment test performed as of May 31, 2017, the fair values of the Reinforcement Materials and Fumed Metal Oxides reporting units were substantially in excess of their carrying values. The fair value of the Purification Solutions reporting unit exceeded its carrying amount by 13%. The fair value of the Purification Solutions reporting unit includes certain growth assumptions that are primarily dependent on: (1) growth in demand for our existing portfolio of activated carbon products and new products developed for environmental and specialty applications; and (2) stable demand in the mercury removal related portion of the business, which is largely dependent on the amount of coal-based power generation used in the U.S. and the continued regulation of those utilities under the U.S. Mercury and Air Toxics Standards regulation (“MATS”). In April 2017, the U.S. Environmental Protection Agency (“EPA”) indicated that it intends to review the cost benefit analysis previously prepared by the EPA in support of MATS to determine if the EPA should reconsider MATS or some part of it. This analysis continues to be under review by the EPA. In addition, we continue to review our strategic options for this business and look for opportunities to better position the business for growth and long-term value enhancement.  Failure to achieve our projected growth in environmental or specialty applications, actions taken by the EPA related to MATS that decrease demand for our products, or the result of the strategic options or opportunities we may pursue could have a negative impact on the fair value of the Purification Solutions reporting unit, which may lead to impairment.Statements.

 

 

Results of Operations

Cabot iswas organized into four reportable business segments:segments through June 28, 2019: Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The Specialty Fluids business was divested as of June 28, 2019 and since that time Cabot has been organized into the three remaining reportable business segments. Cabot is also organized for operational purposes into three geographic regions: the Americas; Europe, Middle East and Africa; and Asia Pacific. The discussionsdiscussion of our results of operations for the periods presented reflect these structures.

Our analysis of our financial condition and operating results should be read with our consolidated financial statements and accompanying notes.

Definition of Terms and Non-GAAP Financial Measures

When discussing our results of operations, we use several terms as described below.

The term “product mix” refers to the mix of types and grades of products sold or the mix of geographic regions where products are sold, and the positive or negative impact this has on the revenue or profitability of the business and/or segment.


Our discussion under the heading “Provision (Benefit)“(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate” includes a discussion and reconciliation of our “effective tax rate” and our “operating tax rate” and includes a reconciliationfor the periods presented, as well as management’s projection of our operating tax rate range for the two rates.full fiscal year. Our operating tax rate is a non-GAAP financial measure and should not be considered as an alternative to our effective tax rate, the most comparable GAAP financial measure. In calculating our operating tax rate, we exclude discrete tax items, which include: (i) unusual or infrequent items, such as a significant release or establishment of a valuation allowance, (ii) items related to uncertain tax positions, such as the tax impact of audit settlements, interest on tax reserves, and the release of tax reserves from the expiration of statutes of limitations, and (iii) other discrete tax items, such as the tax impact of legislative changes and, on a quarterly basis, the timing of losses in certain jurisdictions and the cumulative rate adjustment, if applicable. We also exclude the tax impact of certain items, as defined below in the discussion of Total segment EBIT, on both operating income and the tax provision. When the tax impact of a certain item is also a discrete tax item, it is classified as a certain item for our definition of operating tax rate. Our definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that this non-GAAP financial measure is useful supplemental information because it helps our investors compare our tax rate year to year on a consistent basis and to understand what our tax rate on current operations would be without the impact of these items.

Our discussion under the heading “First“Third Quarter and First Nine Months of Fiscal 20182020 versus Third Quarter and First QuarterNine Months of Fiscal 2017—2019—By Business Segment” includes a discussion ofTotal segment EBIT, which is a non-GAAP financial measure defined as Income (loss) from continuing operations before income taxes and equity in earnings from affiliated companies less certain items and other unallocated items. Our Chief Operating Decision Maker, who is our President and Chief Executive Officer, uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT, which reflects the sum of EBIT from our four reportable segments, provides useful supplemental information for our investors as it is an important indicator of our operational strength and performance, allows investors to see our results through the eyes of management, and provides context for our discussion of individual business segment performance. Total segment EBIT should not be considered an alternative for Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, which is the most directly comparable GAAP financial measure. A reconciliation of Total segment EBIT to Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies is provided under the heading “First Quarter“Third quarter of Fiscal 20182020 versus First QuarterThird quarter of Fiscal 2017—2019—By Business Segment”. Investors should consider the limitations associated with this non-GAAP measure, including the potential lack of comparability of this measure from one company to another.


In calculating Total segment EBIT, we exclude from our Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies (i) items of expense and income that management does not consider representative of our fundamental on-going segment results, which we refer to as “certain items”, and (ii) items that, because they are not controlled by the business segments and primarily benefit corporate objectives, are not allocated to our business segments, such as interest expenseand other corporate costs, which include unallocated corporate overhead expenses such as certain corporate salaries and headquarter expenses, plus costs related to special projects and initiatives, which we refer to as “other unallocated items”. Management believes excluding the items identified as certain items facilitates operating performance comparisons from period to period by eliminating differences caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a GAAP basis and also facilitates an evaluation of our operating performance without the impact of these costs or benefits. The items of income and expense that we have excludedexclude from Total segment EBIT as applicable, but that are included in our GAAP Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, as applicable in a particular reporting period, include, but are described below.

Global restructuring activities, which include costs or benefits associated with cost reduction initiatives or plant closures and are primarily related to (i) employee termination costs, (ii) asset impairment charges associated with restructuring actions, (iii) costs to close facilities, including environmental costs and contract termination penalties and (iv) gains realized on the sale of land or equipment associated with restructured plants or locations.

Non-recurring gains (losses) on foreign exchange, which primarily relatenot limited to, the impact of controlled currency devaluations on our net monetary assets denominated in that currency.following:

Legal and environmental reserves and matters, which consist of costs or benefits for matters typically related to former businesses or that are otherwise incurred outside of the ordinary course of business.

Executive transition costs, which include incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.

Asset impairment charges, which primarily include charges associated with an impairment of goodwill or other long-lived assets.

Acquisition and integration-related charges, which include transaction costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to our processes.


Asset impairment charges, which primarily include charges associated with an impairment of goodwill or other long-lived assets.

 

Inventory reserve adjustment, which generally result from an evaluation performed as part of an impairment analysis.

Global restructuring activities, which include costs or benefits associated with cost reduction initiatives or plant closures and are primarily related to (i) employee termination costs, (ii) asset impairment charges associated with restructuring actions, (iii) costs to close facilities, including environmental costs and contract termination penalties and (iv) gains realized on the sale of land or equipment associated with restructured plants or locations.

Indirect tax settlement credits, which includes favorable settlements resulting in the recoveries of indirect taxes.

Acquisition and integration-related charges, which include transaction costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to our processes.

Legal and environmental matters and reserves, which consist of costs or benefits for matters typically related to former businesses or that are otherwise incurred outside of the ordinary course of business.

Gains (losses) on sale of investments, which primarily relate to the sale of investments accounted for using the cost method.

Gains (losses) on sale of businesses.

Non-recurring gains (losses) on foreign exchange, which primarily relate to the impact of controlled currency devaluations on our net monetary assets denominated in that currency.

Executive transition costs, which include incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.

Employee benefit plan settlements, which consist of either charges or benefits associated with the termination of a pension plan or the transfer of a pension plan to a multi-employer plan.

Overview

During the firstthird quarter of fiscal 2018,2020, Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies increaseddecreased compared to the firstthird quarter of fiscal 2017,2019. The decrease primarily due to higher unit marginsreflects the decrease in Total Segment EBIT of $94 million. Total Segment EBIT in the Reinforcement Materials segment from favorable spot pricingthird quarter of fiscal 2019 included $2 million related to our Specialty Fluids business, which we divested in Asia andthe third quarter of fiscal 2019. Excluding the impact from the calendar year 2017divestiture of our Specialty Fluids business, Total Segment EBIT decreased $92 million driven by lower volumes in all segments and lower margins in Reinforcement Materials and Performance Chemicals, partially offset by lower fixed costs due to cost reduction activities.

COVID-19Impact and Outlook

In December 2019, a novel coronavirus disease (“COVID-19”) was first reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern.  On March 11, 2020, the WHO characterized COVID-19 as a global pandemic, due to the continued increase in the number of cases and affected countries. In an effort to contain COVID-19 or slow its spread, governments around the world enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents in their places of residence, and practice social distancing when engaging in essential activities. The coronavirus pandemic and the associated containment efforts have had a serious adverse impact on the economy, the severity and duration of which are uncertain.  Government stabilization efforts will only partially mitigate the consequences.


The coronavirus pandemic has adversely affected and is expected to continue to adversely affect, our business, results of operations and cash flows. While most of our facilities have remained open given the “essential” status of many of our end-markets, such as infrastructure, agriculture and pharmaceutical production, we have operated at low production and utilization rates beginning late in the second fiscal quarter due to declined demand from the halt of customer operations within the tire and automotive sectors. Beginning during our second fiscal quarter, as the virus spread in China, we experienced volume declines principally in our Reinforcement Materials segment as operations at many of our customers’ plants in China were completely or partially curtailed. As the COVID-19 pandemic began to further spread around the globe, on the recommendation or mandate of public health officials, a number of our key customers, notably most automotive and tire manufacturers in the Americas and Europe, temporarily closed their manufacturing operations beginning in March 2020. As a result, in the third fiscal quarter, we experienced further volume declines in our Reinforcement Materials segment as well as volume declines and weaker product mix in our Performance Chemicals and Purification Solutions segments.  In the third quarter, we also operated at significantly lower manufacturing levels at many of our plants and temporarily suspended operations or idled production lines at certain facilities to comply with government mandates to cease operations. Beginning at the end of March, the domestic automotive and tire end-markets in China began to restart operations, and in the months of May and June 2020, our major tire customers in the Americas and Europe slowly restarted their operations although, at lower than normal operating rates.  Along with these improvements, volumes in our Reinforcement Materials segment improved from May to June, and continued to improve in July.  Based on volumes to date in the fourth quarter, we expect improved results in our Reinforcement Materials segment for the quarter, as well as improved production and utilization rates, although not to normal levels.  We also expect volumes in our Performance Chemicals segment to improve modestly in the fourth fiscal quarter from those in the third fiscal quarter. Despite certain indications that demand for our products is improving from the low demand levels we experienced in our third fiscal quarter, because the duration and scope of the COVID-19 pandemic continue to be uncertain we are unable to predict with certainty the speed and shape of a recovery to more normal customer agreements.demand levels for our products or more normal manufacturing operating levels at our facilities.

First QuarterTo date, the coronavirus pandemic has not affected our ability to adequately staff and maintain our operations and we have been able to continue to supply our customers around the globe. However, a prolonged duration of the pandemic could materially impair our ability to do so in the future. This is, particularly the case as the spread of the virus increases in certain geographies and with the possibility that government authorities may impose further mandatory closures, extend work-from-home orders and social distancing protocols, and seek voluntary facility closures and impose other restrictions to mitigate the further spread of the virus. Further, because we reduced inventory to respond to an unusually low customer demand environment, a prolonged duration of any future interruption in our manufacturing operations could impair our ability to meet customer demand in the future.  

We took a number of actions during the third fiscal quarter to mitigate the impact of the coronavirus on our cash flow and results of operations and financial condition.  While manufacturing operations were curtailed, we managed inventory levels, and reduced our manufacturing costs. We also reduced discretionary spending and net working capital with lower raw material costs and reductions in our accounts receivable and inventories.  While our liquidity position remains strong, effective June 8, 2020, we amended our revolving credit agreements to temporarily increase the maximum leverage ratio permitted under those agreements to provide incremental headroom in light of the uncertainty in demand due to the coronavirus pandemic, as described in detail below under the heading “Cash Flow and Liquidity”. In addition, we have reduced our planned capital expenditures in fiscal 2020 to approximately $200 million, prioritizing growth projects in our Performance Additives business as well as necessary sustaining and compliance projects.  We also suspended our share repurchases and do not anticipate repurchasing shares for the remainder of the fiscal year.  

We expect COVID-19 to continue to have an adverse impact on our revenue as well as our overall profitability and may lead to an increase in inventory reserves, allowances for doubtful accounts, and valuation allowances on certain of our deferred tax assets. Additionally, if the business impacts of the COVID-19 pandemic carry on for an extended period, it could cause us to recognize impairments for certain long-lived assets including goodwill, intangible assets or property, plant and equipment.

Third quarter of Fiscal 20182020 versus First QuarterThird quarter of Fiscal 2017—2019—Consolidated

Net Sales and Other Operating Revenues and Gross Profit

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Net sales and other operating revenues

 

$

720

 

 

$

611

 

 

$

518

 

 

$

845

 

 

$

1,955

 

 

$

2,510

 

Gross profit

 

$

178

 

 

$

159

 

 

$

69

 

 

$

170

 

 

$

363

 

 

$

514

 

 


Net sales in the third quarter of fiscal 2020 decreased by $327 million compared to the third quarter of fiscal 2019. The $109third quarter of fiscal 2019 included $13 million increaseof revenue for our Specialty Fluids business. The remaining $314 million decline in net sales in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 was primarily driven by lower volumes ($221 million), a moreless favorable price and product mix (combined $80$65 million) predominantly in Reinforcement Materials, higher volumes ($20 million), and the favorableunfavorable impact from foreign currency translation ($1318 million). The increaselower volumes were driven by our Reinforcement Materials segment due to weaker demand related to declines in automotive and tire production resulting from the impact of the COVID-19 pandemic. Declines in automotive production also adversely impacted volumes in Specialty Carbons. The less favorable price and product mix was due to lower prices from lower feedstock costs that are passed through to our customers in the Reinforcement Materials segment and unfavorable product mix in the Performance Chemicals segment due to more competitive pricing and weaker product mix in the fumed metal oxides product line in China and Europe and the less favorable product mix in the specialty carbons product line from lower demand in automotive applications.

Net sales in the first nine months of fiscal 2020 declined by $555 million compared to the first nine months of fiscal 2019. The first nine months of fiscal 2019 included $56 million of revenue for our Specialty Fluids business. The remaining $499 million decline in net sales was driven by lower volumes primarily in Reinforcement Materials and Purification Solutions ($285 million), a less favorable price and product mix (combined $162 million), and the unfavorable impact from foreign currency translation ($38 million). The less favorable price and product mix was due to lower prices in Reinforcement Materials due to the pass through of lower feedstock costs and a weaker product mix in the Performance Chemicals segment due to the more competitive pricing and weaker product mix in the fumed metal oxides product line in China and Europe and the less favorable product mix in our specialty carbons product line from lower demand in automotive applications. The lower volumes were driven by our Reinforcement Materials segment due to weak automotive and tire demand and the impact of the COVID-19 pandemic on demand. The lower volumes in the Purification Solutions segment was due to lower sales in mercury removal and other industrial gas and air applications, due to historically low natural gas prices, and lower demand for automotive applications related to impacts from COVID-19.

Gross profit decreased by $101 million in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. Excluding the impact of the divestiture of our Specialty Fluids business, the gross profit decline was primarily due to volume increaseslower volumes from Reinforcement Materials ($9 million)due to declining demand from weaker automotive and Performance Chemicals ($16 million), partially offset by a decrease in volumes from Specialty Fluids ($5 million).

tire production related to the impacts of the COVID-19 pandemic on demand. Gross profit increaseddecreased by $19$151 million in the first quarternine months of fiscal 20182020 compared to the first quarternine months of fiscal 2017,2019. Excluding the impact of the divestiture of our Specialty Fluids business, the gross profit decline was primarily due to higherlower volumes in Reinforcement Materials and Performance ChemicalsPurification Solutions and higherlower unit margins in Reinforcement Materials, partially offset by an unfavorable impact from changing inventory levels and higher fixed costs.the Performance Chemicals segments.

Selling and Administrative Expenses

 

 

 

Three Months Ended December 31

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Selling and administrative expenses

 

$

69

 

 

$

63

 

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In millions)

 

Selling and administrative expenses

 

$

52

 

 

$

65

 

 

$

230

 

 

$

208

 

 

Selling and administrative expenses increaseddecreased by $6$13 million in the firstthird quarter of fiscal 20182020 compared to the same period of fiscal 2017,2019, primarily due to ongoing Corporate projectsa decrease in the accrual for incentive compensation and higher personnel costs.other cost reduction activities in the current fiscal year. Selling and administrative expense increased by $22 million in the first nine months of fiscal 2020 compared to the same period of fiscal 2019, primarily due to the $50 million charge related to a legal settlement recorded during the second quarter of fiscal 2020, partially offset by a decrease in the accrual for incentive compensation and other cost reduction activities in the current fiscal year.

Research and Technical Expenses

 

 

 

Three Months Ended December 31

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Research and technical expenses

 

$

15

 

 

$

12

 

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In millions)

 

Research and technical expenses

 

$

13

 

 

$

16

 

 

$

41

 

 

$

47

 


 

Research and technical expenses increaseddecreased by $3 million and $6 million in the third quarter and the first quarternine months of fiscal 20182020, respectively, compared to the same periodperiods of fiscal 2017, primarily2019, due to higher spending on growth projects acrosscost reduction activities in the Company.current fiscal year.

Interest and Dividend Income, Interest Expense and Other Income (Expense)

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Interest and dividend income

 

$

3

 

 

$

2

 

 

$

1

 

 

$

2

 

 

$

7

 

 

$

6

 

Interest expense

 

$

(13

)

 

$

(13

)

 

$

(13

)

 

$

(14

)

 

$

(41

)

 

$

(43

)

Other income (expense)

 

$

8

 

 

$

2

 

 

$

(3

)

 

$

 

 

$

(6

)

 

$

(6

)

 

Interest and dividend income increased bydecreased $1 million in the firstthird quarter of fiscal 20182020 compared to the same period of fiscal 20172019, primarily due to lower interest rates. For the nine months ended June 30, 2020, Interest and dividend income increased $1 million primarily due to interest earned from higher interest rates on higher cash balances.deposits in South America.

Interest expense was flatdecreased $1 million in the firstthird quarter of fiscal 20182020 compared to the same period inof fiscal 2017.2019 primarily due to lower interest rates. For the nine months ended June 30, 2020, interest expense decreased $2 million as compared to the same period of fiscal 2019, primarily due to lower average debt balances.


Other income (expense) changed by $6$3 million in the firstthird quarter of fiscal 20182020 compared to the firstthird quarter of fiscal 2017,2019, primarily due to the gains on sale of cost-method investments, partially offset by an unfavorable comparisonimpact of foreign currency movements.translation. Other income (expense) remained consistent in the first nine months of fiscal 2020 compared to the same period of fiscal 2019.

Provision (Benefit)(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(Dollars in millions)

 

 

(Dollars in millions)

 

Provision (benefit) for income taxes

 

$

205

 

 

$

18

 

(Provision) benefit for income taxes

 

$

5

 

 

$

(30

)

 

$

(9

)

 

$

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

224

%

 

 

24

%

 

 

51

%

 

 

43

%

 

 

17

%

 

 

23

%

Impact of discrete tax items(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unusual or infrequent items

 

 

(200

)%

 

 

(1

)%

 

 

%

 

 

(22

)%

 

 

11

%

 

 

3

%

Items related to uncertain tax positions

 

 

(1

)%

 

 

2

%

 

 

(27

)%

 

 

%

 

 

16

%

 

 

2

%

Other discrete tax items

 

 

(1

)%

 

 

(1

)%

 

 

11

%

 

 

4

%

 

 

3

%

 

 

%

Impact of certain items

 

 

(1

)%

 

 

%

 

 

(6

)%

 

 

(2

)%

 

 

(18

)%

 

 

(5

)%

Operating tax rate

 

 

21

%

 

 

24

%

 

 

29

%

 

 

23

%

 

 

29

%

 

 

23

%

 

(1)

For the three and nine months ended December 31, 2017June 30, 2020, the impact of discrete tax items included a net discrete tax benefit of $2 million and 2016, Impact$15 million, respectively. For the three and nine months ended June 30, 2019, the impact of discrete tax items included a net discrete tax expense of $185$14 million and a net discrete tax benefit of less than $1$10 million, respectively. The nature of the discrete tax items for the periods ended December 31, 2017June 30, 2020 and 20162019 were as follows:

 

(a)

Unusual or infrequent items during the three and nine months ended December 31, 2017 consistsJune 30, 2020 consisted of the net tax impacts resulting from the enactmentimpact of H.R. 1 (the “Act”) as discussed further belowSwitzerland tax reform legislation (net tax benefit of a nil amount and in the discussion under the heading “Tax Reform” in Note I of our Notes to the Consolidated Financial Statements (“Note I”) ($185$6 million), as well as immaterial impacts related to stock compensation deductions. Additionally, unusual. Unusual or infrequent items during the three and nine months ended December 31,June 30, 2019 consisted of the net tax impacts of the Tax Cuts and Jobs Act of 2017 (net tax expense of $17 million and 2016 included thea nil amount), changes in valuation allowances on beginning of year tax impact ofbalances, excludible foreign exchange gains and losses in certain jurisdictions;jurisdictions, impacts related to stock compensation deductions, and the tax impacts of a pension settlement;

 

(b)

Items related to uncertain tax positions during the three and nine months ended December 31, 2017June 30, 2020 and 20162019 included net tax benefitsimpacts from the reversal of accruals for uncertain tax positions due to the expiration of statutes of limitations, and the settlement of tax audits, the accrual of interest on uncertain tax positions, and, for fiscal 2018 only, the refinement of the accrual for existingof an uncertain tax positions;position (fiscal 2020 only) and the settlement of tax audits;

 

(c)

Other discrete tax items during the three and nine months ended December 31, 2017June 30, 2020 and 20162019 included net tax impacts from variousas a result of changes in non-U.S. tax laws, return to provision adjustments related to tax return filings, and for fiscal 2018 only, changes in non-U.S. tax laws.other items.


For fiscal 2018, ouryear 2020, the Operating tax rate is expected to be in the range of 29% to 30%. We are not providing a forward-looking reconciliation of the operating tax rate is reconciledrange with an effective tax rate range because, without unreasonable effort, we are unable to our expectedpredict with reasonable certainty the matters we would allocate to “certain items,” including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on the effective tax rate in the table below.

Forecast for the Year Ended September 30, 2018

Effective tax rate

74

%

Impact of discrete tax items:

Unusual or infrequent items

(52

)%

Items related to uncertain tax positions

%

Other discrete tax items

%

Impact of certain items

(1

)%

Operating tax rate

21

%

future periods.

We file U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. We are under audit in a number of jurisdictions. It is possible that some of these audits will be resolved in fiscal 20182020 and could impact our anticipated effective tax rate. We have filed our tax returns in accordance with the tax laws, in all material respects, in each jurisdiction and maintain tax reserves for uncertain tax positions.


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. We expect that these changes will positively impact our future after-tax earnings in the U.S., primarily due to the lower federal statutory tax rate and the establishment of a full participation exemption regime for foreign earnings. In transitioning to this new full participation exemption regime for foreign earnings, we are subject to a one-time tax for the deemed repatriation of certain foreign earnings. Refer to the discussion under the heading “Tax Reform” in Note I.

Equity in Earnings of Affiliated Companies and Net Income (Loss) Attributable to Noncontrolling Interests

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Equity in earnings of affiliated companies, net

of tax

 

$

1

 

 

$

2

 

 

$

1

 

 

$

1

 

 

$

2

 

 

$

1

 

Net income (loss) attributable to

noncontrolling interests, net of tax

 

$

10

 

 

$

4

 

 

$

1

 

 

$

8

 

 

$

10

 

 

$

22

 

 

Equity in earnings of affiliated companies, net of tax, decreased $1 millionremained consistent in the firstthird quarter of fiscal 20182020 compared to the same period of fiscal 2017, primarily due2019. Equity in earnings of affiliated companies, net of tax, increased by $1 million in the first nine months of fiscal 2020 compared to lower earningsthe same period of fiscal 2019. The $2 million of income in the first nine months of fiscal 2020 relates to income from our Venezuelan equity affiliate.affiliates in India and Mexico. In fiscal 2019, this income was consistent with fiscal 2020, but also included losses from our equity affiliate in Venezuela, which has since been impaired.

Net income (loss) attributable to noncontrolling interests, net of tax, increased $6decreased by $7 million in the third quarter of fiscal 2020 and $12 million in the first quarternine months of fiscal 2018 as2020 compared to the same periodperiods of fiscal 2017,2019, primarily due to the higherlower profitability offrom our joint ventures in China and the Czech Republic.

Net Income Attributable to Cabot Corporation

In the third quarter and first quarternine months of fiscal 2018,2020, we reported net income (loss) attributable to Cabot Corporation of ($122)$(6) million and $34 million or ($1.98)$(0.12) and $0.59 per diluted common share.share, respectively. This compares to net income (loss) attributable to Cabot Corporation of $55$32 million and $124 million, or $0.86$0.55 and $2.08 per diluted common share, respectively, in the third quarter and first quarternine months of fiscal 2017.2019. The net loss in the third quarter of fiscal 20182020 is primarily due to a tax charge recorded of $185 million in connection withlower Segment EBIT due to the enactmentimpact of the tax Act.COVID-19 pandemic on demand. The lower net income in the first nine months of fiscal 2020 is primarily due to lower Segment EBIT due to the impact of the COVID-19 pandemic on demand and a $50 million charge related to a legal settlement recorded in the second quarter of fiscal 2020.

First QuarterThe net income (loss) attributable to Cabot Corporation for the third quarter and first nine months of fiscal 2019 includes impairment charges associated with our divested Specialty Fluids business which did not recur in fiscal 2020.

Third quarter of Fiscal 20182020 versus First QuarterThird quarter of Fiscal 2017—2019—By Business Segment

Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, certain items, other unallocated items, and Total segment EBIT for the three and nine months ended December 31, 2017June 30, 2020 and 20162019 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note ON of our Notes to the Consolidated Financial Statements.

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Income (loss) from continuing operations

before income taxes and equity in

earnings of affiliated companies

 

$

92

 

 

$

75

 

Income (loss) before income taxes and

equity in earnings of affiliated companies

 

$

(11

)

 

$

69

 

 

$

51

 

 

$

188

 

Less: Certain items

 

 

7

 

 

 

 

 

 

(7

)

 

 

(14

)

 

 

(74

)

 

 

(61

)

Less: Other unallocated items

 

 

(28

)

 

 

(20

)

 

 

(22

)

 

 

(29

)

 

 

(74

)

 

 

(80

)

Total segment EBIT

 

$

113

 

 

$

95

 

 

$

18

 

 

$

112

 

 

$

199

 

 

$

329

 

 


In the firstthird quarter of fiscal 2018,2020, Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies increaseddecreased by $17$80 million and Total segment EBIT decreased by $94 million. Included in the third quarter of fiscal 2019 is $2 million of EBIT related to our Specialty Fluids business, which we divested in the third quarter of fiscal 2019. Excluding the Specialty Fluids impact, Total Segment EBIT decreased $92 million. The decrease in Total segment EBIT is driven by lower volumes in each of our three segments and lower margins in Reinforcement Materials and Performance Chemicals, partially offset by lower fixed costs. Lower volumes in Reinforcement Materials ($75 million) were primarily due to weaker automotive and tire demand and lower volumes in Performance Chemicals ($7 million) were primarily due to weaker automotive demand, in each case related to the impacts from the COVID-19 pandemic. Lower volumes in Purification Solutions ($8 million) were due to weaker demand in mercury removal applications and the impact of the COVID-19 pandemic on the demand for automotive applications. Lower margins in Reinforcement Materials ($17 million) were primarily due to the rapid decline of global feedstock costs, which resulted in a temporary pricing and cost mismatch, and regional mix, partially offset by lower raw material costs. Lower margins in Performance Chemicals ($9 million) were primarily due to lower pricing in our fumed metal oxides product line and a less favorable product mix in our specialty carbons product line. Lower fixed costs ($32 million) were driven by lower production volumes and other cost reduction actions.

In the first nine months of fiscal 2020, Income (loss) before income taxes and equity in earnings of affiliated companies decreased $137 million and total Segment EBIT decreased by $130 million. Included in the first nine months of fiscal 2019 is $24 million of EBIT related to our Specialty Fluids business, which we divested in the third quarter of fiscal 2019. Excluding the Specialty Fluids impact, Total segment EBIT increased by $18 million when compared to the same period of fiscal 2017.decreased $106 million. The increases were primarilydecrease in Total segment EBIT was driven by higherlower volumes ($8 million), higher unitin Reinforcement Materials and Purification Solutions and lower margins ($19 million) and a favorable impact from foreign currency translation ($1 million),in Performance Chemicals, partially offset by an unfavorablelower fixed costs. Lower volumes in Reinforcement Materials ($101 million) were primarily due to weaker automotive and tire demand and the impacts of the COVID-19 pandemic on demand while lower volumes in Purification Solutions ($20 million) were due to lower volumes in mercury removal applications and the impact from changing inventory levels ($6 million) and higherof the COVID-19 pandemic on demand for automotive applications. Lower fixed costs ($630 million). Higher unit margins were primarily driven by lower production volumes and other cost reduction actions. The decrease in Income (loss) before income taxes and equity earnings of affiliated companies also reflects a better spot pricing environment in Asia and product mix in Reinforcement Materials.$50 million charge related to a legal settlement entered into during the nine months of fiscal 2020.


Certain Items

Details of the certain items for the third quarter and first quarternine months of fiscal 20182020 and fiscal 2019 are as follows:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Global restructuring activities

 

$

(1

)

Legal and environmental matters and reserves

 

 

(1

)

 

$

(1

)

 

$

 

 

$

(51

)

 

$

(1

)

Gains (losses) on sale of investments

 

 

10

 

Global restructuring activities (Note K)

 

 

(3

)

 

 

(4

)

 

 

(16

)

 

 

(15

)

Employee benefit plan settlements

 

 

(2

)

 

 

 

 

 

(5

)

 

 

3

 

Acquisition and integration-related charges

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

(5

)

Specialty Fluids loss on sale and asset impairment charge (Note C)

 

 

 

 

 

(8

)

 

 

(1

)

 

 

(28

)

Indirect tax settlement credits

 

 

 

 

 

 

 

 

3

 

 

 

 

Equity affiliate investment impairment charge

 

 

 

 

 

 

 

 

 

 

 

(11

)

Other

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(1

)

 

 

(4

)

Total certain items, pre-tax

 

 

7

 

 

 

(7

)

 

 

(14

)

 

 

(74

)

 

 

(61

)

Tax-related certain items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax impact of certain items

 

 

(2

)

 

 

2

 

 

 

1

 

 

 

12

 

 

 

4

 

Discrete tax items

 

 

(185

)

 

 

2

 

 

 

(14

)

 

 

15

 

 

 

10

 

Total tax-related certain items

 

 

(187

)

 

 

4

 

 

 

(13

)

 

 

27

 

 

 

14

 

Total certain items, after tax

 

$

(180

)

 

$

(3

)

 

$

(27

)

 

$

(47

)

 

$

(47

)

 

Certain items for the first quarter of fiscal 2017 included charges of less than $1 million.

The tax impact of certain items is determined by (1) starting with the current and deferred income tax expense or benefit included in Net income (loss) attributable to Cabot Corporation, and (2) subtracting the tax expense or benefit on “adjusted earnings”. Adjusted earnings is defined as the pre-tax income attributable to Cabot Corporation excluding certain items. The tax expense or benefit on adjusted earnings is calculated by applying the operating tax rate, as defined under the heading “Definition of Terms and Non-GAAP Financial Measures”, to adjusted earnings.


Other Unallocated Items

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Interest expense

 

$

(13

)

 

$

(13

)

 

$

(13

)

 

$

(14

)

 

$

(41

)

 

$

(43

)

Unallocated corporate costs

 

 

(14

)

 

 

(12

)

 

 

(10

)

 

 

(14

)

 

 

(32

)

 

 

(39

)

General unallocated income (expense)

 

 

 

 

 

7

 

 

 

2

 

 

 

 

 

 

1

 

 

 

3

 

Less: Equity in earnings of affiliated

companies, net of tax

 

 

1

 

 

 

2

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Total other unallocated items

 

$

(28

)

 

$

(20

)

 

$

(22

)

 

$

(29

)

 

$

(74

)

 

$

(80

)

 

A discussion of items that we refer to as “other unallocated items” can be found under the heading “Definition of Terms and Non-GAAP Financial Measures”. The balances of unallocated corporate costs are primarily comprised of expenditures related to managing a public company that are not allocated to the segments and corporate business development costs related to ongoing corporate projects. The balances of General unallocated income (expense) consist of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, the profit or loss related to the corporate adjustment for unearned revenue, and the impact of including the full operating results of a contractual joint venture in Purification Solutions segment EBIT.

Total other unallocated items changed by $8 million in the first quarter of fiscal 2018 as compared to the same period in fiscal 2017, primarily due to the unfavorable impact of foreign currency translation which is included in General unallocated income (expense) and an increase in Unallocated corporate costs for corporate projects.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for the third quarter and first quarternine months of fiscal 20182020 and fiscal 20172019 were as follows:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Reinforcement Materials Sales

 

$

387

 

 

$

295

 

 

$

197

 

 

$

461

 

 

$

931

 

 

$

1,363

 

Reinforcement Materials EBIT

 

$

62

 

 

$

40

 

 

$

(5

)

 

$

72

 

 

$

103

 

 

$

195

 

 


Sales in Reinforcement Materials increaseddecreased by $92$264 million in the firstthird quarter of fiscal 20182020 compared to the same period of fiscal 2017,2019, primarily due to lower volumes ($195 million), a moreless favorable price and product mix (combined $78$56 million), higherand the unfavorable impact from foreign currency translation ($13 million). The lower volumes ($9 million)were primarily due to weaker automotive and tire demand resulting from the impact of the COVID-19 pandemic. The less favorable pricing was primarily due to the pass-through of lower feedstock prices.

In the first nine months of fiscal 2020, sales in Reinforcement Materials decreased by $432 million when compared to the first nine months of fiscal 2019. The decrease was primarily driven by lower volumes ($273 million), a less favorable price and product mix (combined $133 million), and the unfavorable impact from foreign currency translation ($26 million). The lower volumes were primarily due to weaker automotive and tire demand and the impacts of the COVID-19 pandemic on demand. The less favorable price and product mix was due to the pass-through of lower feedstock prices.

EBIT in Reinforcement Materials decreased $77 million in the third quarter of fiscal 2020 compared to the same period of fiscal 2019. During the third quarter of fiscal 2020, the segment had 42% lower volumes ($75 million), lower unit margins ($18 million), and an unfavorable impact from foreign currency translation ($4 million), partially offset by lower fixed costs ($20 million). The lower volumes were primarily due to weaker tire and automotive demand resulting from the impacts of COVID-19. Unit margins were negatively impacted by slower turns of inventory and lower energy center revenue as a result of reduced sales volumes and lower feedstock prices offset by favorable pricing from 2020 tire customer agreements. Lower fixed costs were driven by lower production volumes and other cost reduction actions.

EBIT in Reinforcement Materials decreased $92 million in the first nine months of fiscal 2020 compared to the same period of fiscal 2019. The decrease was driven by lower volumes ($101 million), lower unit margins ($6 million), and an unfavorable impact from foreign currency translation ($5 million), which were partially offset by lower fixed costs ($20 million). The favorable price and product mix impact wasLower volumes were primarily due to higher selling prices in the quarter from price adjustments to customers for increases in raw material costs, price improvements in calendar year 2017 customer agreementsweaker automotive and higher spot prices in Asia.

EBIT in Reinforcement Materials increased by $22 million in the first quarter of fiscal 2018 compared to the same period of fiscal 2017, primarily due to higher unit margins ($21 million), higher volumes ($4 million)tire demand and the favorable impactimpacts from foreign currency translation ($1 million), partiallyCOVID-19. Unit margins were negatively impacted by slower turns of inventory and lower energy center revenue as a result of reduced sales volumes and lower feedstock prices offset by higherfavorable pricing from 2020 tire customer agreements. Lower fixed costs ($2 million) and an unfavorable impact from changing inventory levels ($2 million). Higher unit margins were driven by price improvements in calendar year 2017 customer agreements, a more favorable product mix,lower production volumes and spot pricing in Asia.other cost reduction actions.


Performance Chemicals

Sales and EBIT for Performance Chemicals for the third quarter and first quarternine months of fiscal 20182020 and fiscal 20172019 were as follows:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Specialty Carbons and Formulations Sales

 

$

160

 

 

$

138

 

Metal Oxides Sales

 

 

69

 

 

 

67

 

Performance Additives Sales

 

$

151

 

 

$

172

 

 

$

489

 

 

$

518

 

Formulated Solutions Sales

 

 

69

 

 

 

79

 

 

 

218

 

 

 

218

 

Performance Chemicals Sales

 

$

229

 

 

$

205

 

 

$

220

 

 

$

251

 

 

$

707

 

 

$

736

 

Performance Chemicals EBIT

 

$

47

 

 

$

49

 

 

$

21

 

 

$

37

 

 

$

93

 

 

$

111

 

 

Sales in Performance Chemicals increaseddecreased by $24$31 million in the firstthird quarter of fiscal 20182020 compared to the same period of fiscal 2017,2019, primarily due to highera less favorable price and product mix (combined $15 million), lower volumes ($1612 million), a favorableand the unfavorable impact from foreign currency translation ($54 million) and a more. The less favorable price and product mix (combined $3 million). The increase in volumes was primarily due to highera more competitive pricing environment and weaker product mix in the fumed metal oxides product line in China and Europe and weaker product mix in our specialty carbons product line from lower demand in automotive applications. The lower volumes were driven by the specialty carbons and specialty compounds product lines due to lower demand in automotive applications driven by the impact of COVID-19 on demand.

In the first nine months of fiscal 2020, sales volumes in EuropePerformance Chemicals decreased $29 million when compared to the same period of fiscal 2017.2019. The decrease was primarily due to a less favorable price and product mix (combined $46 million) and the unfavorable impact from foreign currency translation ($10 million), partially offset by higher volumes ($27 million). The less favorable price and product mix was primarily due to a more competitive pricing environment and weaker product mix in the fumed metal oxides product line in China and Europe and weaker product mix in our specialty carbons product line from lower demand in automotive applications. The higher volumes were primarily due to higher demand in the specialty carbons and specialty compounds product lines in the first two quarters of the fiscal year.

EBIT in Performance Chemicals decreased by $2$16 million in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 primarily  due to lower unit margins ($9 million) driven by a more competitive pricing environment and weaker product mix in the fumed metal oxides product line in China and Europe and lower volumes ($7 million) in the specialty carbons and specialty compounds product lines due to lower demand in automotive applications driven by the impact of COVID-19 on demand.

EBIT in Performance Chemicals decreased by $18 million in the first quarternine months of fiscal 20182020 when compared to the same period of fiscal 2017,2019 primarily due to higher fixed costs ($6 million), an unfavorable impact from changing inventory levels ($3 million) and lower unit margins ($115 million), and the unfavorable impact of inventory comparisons ($10 million), partially offset by higher volumes ($7 million) and a favorable impact from foreign currency translation ($110 million). Higher fixed costsLower unit margins were primarily driven by increased spending on maintenancedue to a more competitive pricing environment and sellingweaker product mix in the fumed metal oxides product line in China and administrative costs.Europe and weaker product mix in our specialty carbons product line due to lower demand in automotive applications. The higher volumes during the quarter were primarilydriven by our specialty carbons and specialty compounds product lines due to higher salesdemand in the specialty carbons and specialty compounds product lines in the first two quarters of the fiscal year and higher volumes aligned with new capacity in Europe.our fumed metal oxides product line.

Purification Solutions

Sales and EBIT for Purification Solutions for the third quarter and first quarternine months of fiscal 20182020 and fiscal 20172019 were as follows:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Purification Solutions Sales

 

$

70

 

 

$

69

 

 

$

63

 

 

$

73

 

 

$

186

 

 

$

210

 

Purification Solutions EBIT

 

$

6

 

 

$

4

 

 

$

2

 

 

$

1

 

 

$

3

 

 

$

(1

)

 

Sales in Purification Solutions decreased by $10 million in the third quarter of fiscal 2020 compared to the same period of fiscal 2019 due to lower volumes ($15 million), partially offset by improved pricing and a more favorable product mix (combined $5 million). The lower volumes were primarily due to lower sales in mercury removal, other industrial gas and air applications and automotive applications impacted by lower demand due to COVID-19.

Sale in Purification Solutions decreased $24 million in the first nine months of fiscal 2020 when compared to the same period of fiscal 2019 due to lower volumes ($39 million) and the unfavorable impact from foreign currency translation ($2 million), partially offset by improved pricing and a more favorable product mix (combined $17 million). The lower volumes were primarily due to lower sales in mercury removal, other industrial gas and air applications and automotive applications impacted by lower demand due to COVID-19.


EBIT in Purification Solutions increased by $1 million in the first quarter of fiscal 20172020 compared to the third quarter of fiscal 2019 due to higher unit margins ($3 million), and lower fixed costs ($6 million) as a result of prior year restructuring activities and an insurance recovery of approximately $1 million, partially offset by lower volumes ($8 million). The higher unit margins were primarily due to an improved product mix and higher prices. The lower volumes were primarily due to lower sales in mercury removal, other industrial gas and air applications and automotive applications impacted by lower demand due to COVID-19.

EBIT in Purification Solutions improved by $4 million in the first nine months of fiscal 2020 when compared to the same period of fiscal 20172019 due to higher volumesunit margins ($113 million) and, lower fixed costs ($11 million) as a favorable impact from foreign currency translation ($2 million),result of prior year restructuring activities, partially offset by a less favorable price and product mix (combined $2lower volumes ($20 million).

EBIT in Purification Solutions increased by $2 million in the first quarter of fiscal 2018 compared to the same period of fiscal 2017, The higher unit margins were primarily due to an improved product mix and higher prices while the lower volumes ($1 million) and the accelerated receipt of royalty payments ($3 million), partially offset by an unfavorable impact from changing inventory levels ($2 million). The royalty payment received in the quarter consists of all the remaining paymentswere primarily due to the Company under that royalty arrangement.lower sales in mercury removal, other industrial gas and air applications and automotive applications impacted by lower demand due to COVID-19.

Specialty Fluids

We divested our Specialty Fluids business on June 28, 2019. Refer to our fiscal 2019 10-K filing for further details. Sales and EBIT for Specialty Fluids for the third quarter and first quarternine months of fiscal 20182020 and 20172019 were as follows:

 

 

Three Months Ended December 31

 

 

Three Months Ended June 30

 

 

Nine Months Ended June 30

 

 

2017

 

 

2016

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(In millions)

 

 

(In millions)

 

Specialty Fluids Sales

 

$

6

 

 

$

11

 

 

$

 

 

$

13

 

 

$

 

 

$

56

 

Specialty Fluid EBIT

 

$

(2

)

 

$

2

 

 

$

 

 

$

2

 

 

$

 

 

$

24

 

 


Sales in Specialty Fluids decreased by $5 million in the first quarter of fiscal 2018 compared to the same period of fiscal 2017 primarily due to lower volumes from reduced project activity.

EBIT in Specialty Fluids decreased by $4 million in the first quarter of fiscal 2018 compared to the same period of fiscal 2017 primarily due to lower volumes from reduced project activity.

Outlook

During the second quarter, we anticipate that Reinforcement Materials will benefit from the calendar year 2018 customer agreements along with a firm spot market in Europe and Asia. In Performance Chemicals we are expecting an improvement sequentially due to higher seasonal volumes and the positive impact from price increases, but anticipate margins will be impacted somewhat by rising feedstock costs in specialty carbons and higher costs to support growth investments. We also expect Purification Solutions to benefit from continued momentum in the specialty applications but it will be challenged by continued competitive pricing in the mercury removal application. In Specialty Fluids, we expect a similar level of project activity for the next quarter with an uptick in activity in the second half of the year.

 

 

Cash Flows and Liquidity

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by $91$97 million during the first threenine months of fiscal 2018,2020, which was largely attributable to acapital expenditures, the acquisition of Shenzhen Sanshun Nano New Materials Co., Ltd (“SUSN”), share repurchases and cash dividends, partially offset by lower cash balance at December 31, 2017.net working capital. As of December 31, 2017,June 30, 2020, we had cash and cash equivalents of $189$162 million and borrowing availability under our revolving credit agreementagreements of $1$1.2 billion. Our revolving

We have access to borrowings under the following three credit agreement, which was amended in October 2017 to extend the maturity to October 2022, supports our commercial paper program and may be used for working capital, letters of credit and other general corporate purposes.agreements:

$1 billion unsecured revolving credit agreement (the “JPM Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and the other lenders party thereto, which matures in October 2022. The JPM Credit Agreement provides liquidity for working capital and general corporate purposes and supports our commercial paper program.

$100 million unsecured revolving credit agreement (the “Canadian Credit Agreement”) with TD Bank, NA, as Administrative Agent and the other lenders party thereto, which matures in September 2021. The Canadian Credit Agreement provides liquidity for working capital and general corporate purposes for certain of ourCanadian subsidiaries.

€300 million unsecured revolving credit agreement (the “Euro Credit Agreement”, and together with the JPM Credit Agreement and the Canadian Credit Agreement, the “Credit Agreements”), with Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, which matures in May 2024 or earlier upon maturity of the JPM Credit Agreement. Borrowings under the Euro Credit Agreement may be used for the repatriation of earnings of our foreign subsidiaries to the United States, the repayment of indebtedness of our foreign subsidiaries owing to us or any of our subsidiaries and for working capital and general corporate purposes.

At December 31, 2017,our election, loans under the Credit Agreements bear interest at LIBOR plus an applicable margin of between 0.68% and 1.20%, depending on our credit ratings, or at the prime rate plus an applicable margin of between 0.00% and 0.20%, depending on our credit ratings, and at similar applicable rates for foreign currency borrowings.


As of June 30, 2020, we were in compliance with allour debt covenants under our revolving credit facility, including the Credit Agreements, which, with limited exceptions, generally require us to comply on a quarterly basis with a leverage test requiring consolidated total consolidated debt not to exceed consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) covenant.for the four quarters then ending by more than 3.50 to 1.00. Because of the uncertainty of the overall financial impact of the COVID-19 pandemic and to increase our financial flexibility, we amended the Credit Agreements as of June 8, 2020 to, among other things: (a) set the consolidated total debt to consolidated EBITDA ratio at 4.50 to 1.00 for the fiscal quarters ending September 30, 2020 through June 30, 2021, and (b) reduce the lien basket for other permitted liens securing Indebtedness (as defined in the Credit Agreements) in an aggregate amount at any time outstanding to 5% of Consolidated Tangible Net Worth (as defined in the Credit Agreements), at any time through and including June 30, 2021. As part of these amendments, we agreed to pay a 10 basis point fee on the consenting lenders’ commitments under the JPM Credit Agreement and the Euro Credit Agreement.

A significant portion of our business occurs outside the U.S. and our cash generation does not always align geographically with our cash needs. The vast majority of our cash and cash equivalent holdings tend to be held outside the U.S. Cash held by foreign subsidiaries is generally used to finance the subsidiaries’ operational activities and future investments. We usetypically issue commercial paper throughout the year to manage our short-term U.S. cash needs. TheDuring the second quarter of fiscal 2020, one of our short-term credit ratings was downgraded, which temporarily decreased our access to, and increased our cost to borrow through, the commercial paper market, and we instead borrowed under our revolving credit agreements. During the third quarter of fiscal 2020, the commercial paper market stabilized and we are currently using a combination of commercial paper and revolving credit facility borrowings to meet our U.S. cash needs. We generally reduce our commercial paper balance is generally paid downand, if applicable, borrowings under the Credit Agreements, at quarter-end using cash derived from customer collections, settlement of intercompany balances and short-term intercompany loans. In the unusual event that additional funds are needed in the U.S., we have the abilityexpect to be able to repatriate funds or to access additional funds.

We do not expect Tax Reform, discussed in more detail in Note I, to have a material impactdebt under our revolving credit facilities. As of June 30, 2020, our borrowings on the JPM Credit Agreement totaled $75 million, and we had $13 million of commercial paper outstanding. As of June 30, 2020, our liquidity position due to our existing tax attributes. We are evaluatingborrowings under the impact of tax reform on our opportunities to repatriate some portion of our foreign cash balances toEuro Credit Agreement totaled $144 million, and there were no borrowings outstanding under the U.S.Canadian Credit Agreement.

We generally manage our cash and debt on a global basis to provide for working capital requirements as needed by region or site. Cash and debt are generally denominated in the local currency of the subsidiary holding the assets or liabilities, except where there are operational cash flow reasons to hold non-functional currency or debt.

WeIn light of the uncertain economic environment created by the COVID-19 pandemic, among other actions we have taken to preserve our liquidity position, we have deferred capital spending where possible and delayed spending on some of our growth projects. With these decisions, we currently expect our capital expenditures for fiscal 2020 to be approximately $200 million in the aggregate to be used primarily for sustaining and compliance capital projects at our operating facilities as well as for growth projects in Performance Chemicals. In addition, during the second quarter of fiscal 2020, we suspended our share repurchase activity, and we do not anticipate repurchasing our shares for the remainder of fiscal 2020.

Although we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, we are actively managing the business to maintain cash flow and we anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from our revolving credit agreement and our commercial paper programfacilities to meet our operational and capital investment needs and financial obligations for the foreseeable future. The liquidity we derive from cash flows from operations is, to a large degree, predicated on our ability to collect our receivables in a timely manner, the cost of our raw materials, and our ability to manage inventory levels.

We issued $250 million of 2.55% fixed rate debt in fiscal 2012 that matured on January 15, 2018. This debt was repaid using a combination of foreign cash and commercial paper borrowings.

We issued $30 million of 7.42% medium term notes in fiscal 1999 that mature on December 11, 2018 and are included in Current portion of long-term debt on the Consolidated Balance Sheets as of December 31, 2017. We intend to pay off these notes at maturity with cash on hand and/or commercial paper borrowings.

The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows.

Cash Flows from Operating Activities

Cash provided by operating activities, which consists of net income adjusted for the various non-cash items included in income, changes in working capital and changes in certain other balance sheet accounts, totaled $45$278 million in the first threenine months of fiscal 20182020 compared to $107$166 million of cash provided by operating activities during the same period of fiscal 2017.


Cash provided by operating activities in the first three months of fiscal 2018 was driven primarily by the non-cash impacts of depreciation and amortization of $39 million and an increase in our deferred tax provision of $186 million, which more than offset our net loss. In addition, there was an increase in Accounts payable and accrued liabilities. Partially offsetting these cash inflows was an increase in Accounts and notes receivable and Inventories.2019.

Cash provided by operating activities in the first threenine months of fiscal 20172020 was driven primarily by our net income excludingof $44 million, a decrease in Accounts and notes receivable of $172 million, the non-cash impact of depreciation and amortization of $38 million. In addition, there was$117 million and a decrease in Accounts receivable and an increaseour Inventories of $74 million, partially offset by a decrease in Accounts payable and accrued liabilities.liabilities of $68 million, an increase in Prepaid expenses and other assets of $25 million and the non-cash impact of a deferred tax benefit of $20 million.


Cash provided by operating activities in the first nine months of fiscal 2019 was driven primarily by our net income of $146 million, the non-cash impacts of depreciation and amortization of $110 million, the loss on the sale of the Specialty Fluids business of $28 million and the impairment of our investment in our Venezuelan equity affiliate of $11 million. Partially offsetting these factors were a decrease in Accounts payable and accrued liabilities of $65 million, a decrease in Income taxes payable of $24 million, a decrease in Other liabilities of $27 million and the non-cash impact of a deferred tax benefit of $20 million.

In addition to the factors noted above, the following other elements of operations have a bearing on operating cash inflows was an increaseflows:

Restructurings — As of June 30, 2020, we had $9 million of total restructuring costs in Inventories.accrued expenses in the Consolidated Balance Sheets related to certain of our global restructuring activities. In the first nine months of fiscal 2020, we paid $13 million related to these restructuring activities, and we expect to make additional cash payments of approximately $4 million in fiscal 2020 and $11 million thereafter.

Legal Matters — As of June 30, 2020, we had a $21 million reserve for existing and future respirator claims that we expect to pay over multiple years. During the second quarter of fiscal 2020, we settled a large group of respirator claims for $65.2 million. We paid $32.6 million related to these settled claims during the third quarter of fiscal 2020, and the remaining $32.6 million payable will be paid in the first quarter of fiscal 2021. We also have other lawsuits, claims and contingent liabilities arising in the ordinary course of business.

Cash Flows from Investing Activities

In the three months ended December 31, 2017, investingInvesting activities consumed $101$252 million of cash which was primarily driven by $64in the first nine months of fiscal 2020 compared to $33 million of cash paid for our acquisitionconsumed during the same period of Tech Blend, netfiscal 2019. In the first nine months of cash acquiredfiscal 2020, investing activities primarily consisted of $1$162 million andof capital expenditures of $52 million. These capital expenditures were for sustaining and compliance capital projects at our operating facilities as well as capacity expansion capital expenditures. expenditures in Reinforcement Materials and Performance Chemicals, $84 million, net of cash acquired for the SUSN acquisition in April 2020 and $8 million for the plant that we acquired from NSCC in September 2018.

In the threenine months ended December 31, 2016,June 30, 2019, investing activities consumed $23$33 million of cash, which was primarily driven by $155 million of capital expenditures of $22 million. These capital expenditures were primarily for sustaining and compliance capital projects at our operating facilities.

Capital expenditures for fiscal 2018 are expected to be approximately $250 million. Our planned capital spending program for fiscal 2018 is primarily for sustaining, compliance and improvement capital projects at our operating facilities as well as capacity expansion capital expenditures primarily forin Reinforcement Materials and Performance Chemicals, partially offset by proceeds from the constructionsale of our fumed silica manufacturing plantsthe Specialty Fluids business of $130 million, net of cash held in Carrollton, Kentucky and Wuhai, China.escrow of $5 million.

Cash Flows from Financing Activities

Financing activities consumed $36$37 million of cash in the first threenine months of fiscal 20182020 compared to $32$146 million of cash consumed induring the same period of fiscal 2019. In the first threenine months of fiscal 2017. 2020, financing activities primarily consisted of the repayment of $15 million of other long-term debt, share repurchases of $44 million, dividend payments to stockholders of $60 million, dividend payments to noncontrolling interests of $26 million and the repayment of $20 million of commercial paper, partially offset by the net proceeds from borrowings under our revolvers of $125 million.

In the first threenine months of both fiscal 2018 and 2017, these2019, financing activities primarily consisted of share repurchases andof $144 million, dividend payments to stockholders.

Purchase Commitments

We have entered intostockholders of $60 million, the repayment of $75 million of long-term purchase agreements primarily fordebt, the purchaserepayment of raw materials. Under certain$176 million of these agreementscommercial paper, and the quantityredemption of material being purchased is fixed, but$25 million of preferred stock held by our former NHUMO joint venture partner, partially offset by the price paid changes as market prices change. For those commitments,proceeds from the amounts includedissuance of our registered notes and borrowing under our European revolver in the table below are based on market prices at December 31, 2017, which may differ from actual market prices at the timeaggregate of purchase.

 

 

Payments Due by Fiscal Year

 

 

 

Remainder of

Fiscal 2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

 

 

(In millions)

 

Reinforcement Materials

 

$

253

 

 

$

264

 

 

$

153

 

 

$

114

 

 

$

114

 

 

$

1,537

 

 

$

2,435

 

Performance Chemicals

 

 

48

 

 

 

58

 

 

 

55

 

 

 

54

 

 

 

43

 

 

 

468

 

 

 

726

 

Purification Solutions

 

 

7

 

 

 

7

 

 

 

6

 

 

 

1

 

 

 

 

 

 

 

 

 

21

 

Total

 

$

308

 

 

$

329

 

 

$

214

 

 

$

169

 

 

$

157

 

 

$

2,005

 

 

$

3,182

 

$344 million.

Off-Balance Sheet Arrangements

As of December 31, 2017,June 30, 2020, we had no material transactions that meet the definition of an off-balance sheet arrangement.


Forward-Looking Information

This report on Form 10-Q contains “forward-looking statements” under the Federal securities laws. These forward-looking statements address expectations or projections about the future, including our expectations for future financial performance;performance and the factors we expect to impact our results of operations, including how we expect the COVID-19 pandemic to impact demand for our products;products, our results of operations and our cash flows and our related mitigation efforts; growth in the battery market; when we expect the NSCC Carbon plant upgrades to be completed; the amount and the timing of the contingent consideration we expect to pay related to the SUSN acquisition; the amount and timing of the charge to earnings we will record and the cash outlays we will make in connection with our reorganization and the closing of certain manufacturing facilities, restructuring initiatives and restructuring initiatives;under our transformation plan for our Purification Solutions business; our estimated future amortization expenses for our intangible assets; when we expect to make payments under the settlement agreement we entered into settling certain respirator liability claims; the timing of expected payments from our reserve for existing and future respirator claims; the amount of any future gain or loss we may record upon the settlement, and the timing of the completion, of certain defined benefit obligations and pension plan terminations; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit facilities to fund our cash requirements, including for the repayment of the current portion of our long-term debt;requirements; uses of available cash including anticipated capital spending, share repurchases, and future cash outlays associated with long-term contractual obligations; the impact we expect tax reform legislation in the U.S. to have on our future after-tax earnings and liquidity position, and our expected tax rate for fiscal 2018;2020; and the possible outcome of legal and environmental proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers.


Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control or difficult to predict. If known or unknown risks materialize, our actual results could differ materially from those expressed in the forward-looking statements. Importantly, as we cannot predict the duration or scope of the COVID-19 pandemic, the negative impact to our results cannot be estimated. Factors that will influence the impact on our business and operations include the duration and extent of the pandemic, the extent of imposed or recommended containment and mitigation measures, and the general economic consequences of the pandemic.

In addition to factors described elsewhere in this report, the following are some of the factors that could cause our actual results to differ materially from those expressed in theour forward-looking statements: changes in raw material costs; lower than expected demand for our products; changes in environmental requirements in the U.S.; the loss of one or more of our important customers; our inability to complete capacity expansions or other development projects; the availability of raw materials; our failure to develop new products or to keep pace with technological developments; fluctuations in currency exchange rates; patent rights of others; stock and credit market conditions; the timely commercialization of products under development (which may be disrupted or delayed by technical difficulties, market acceptance, competitors’ new products, as well as difficulties in moving from the experimental stage to the production stage); demand for our customers’ products; competitors’ reactions to market conditions; unanticipated disruptions or delays in plant operations or development projects; delays in the successful integration of structural changes, including acquisitions or joint ventures; severe weather events that cause business interruptions, including plant and power outages or disruptions in supplier or customer operations; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations or global health matters; the accuracy of the assumptions we used in establishing reserves for environmental matters and for our share of liability for respirator claims; and the outcome of pending litigation. OtherThese other factors and risks are discussed more fully in our 2017 10-K.

Recently Issued Accounting Pronouncements

Refer to2019 10-K, our Quarterly Report for the discussion under the headings “Recently Adopted Accounting Standards”quarterly period ended March 31, 2020 and “Recent Accounting Pronouncements” in Note B.our subsequent SEC filings.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the period ended December 31, 2017June 30, 2020 does not differ materially from that discussed under Item 7A of our 20172019 10-K.

Item 4.

Controls and Procedures

As of December 31, 2017,June 30, 2020, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officerprincipal executive officer and our Executive Vice President and Chief Financial Officer,principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).amended. Based upon that evaluation, our Principal Executive Officerprincipal executive officer and our Executive Vice President and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were effective as of that date.

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended December 31, 2017June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of the COVID-19 pandemic, certain of our employees have been working remotely and certain manufacturing sites have been operating with limited personnel on-site. We have not identified any material changes in our internal control over financial reporting as a result of these changes to the working environment. We are continually monitoring and assessing the COVID-19 situation to determine any potential impacts on the design and operating effectiveness of our internal controls over financial reporting.


Part II. Other Information

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The table below sets forth information regarding Cabot’s purchases of its equity securities during the quarter ended December 31, 2017:

Period

 

Total Number of

Shares

Purchased(1)(2)

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans or

Programs(1)

 

 

Maximum Number (or

Approximate Dollar

Value) of Shares that

May Yet Be Purchased

Under the Plans or

Programs(1)

 

October 1, 2017- October 31, 2017

 

 

 

 

$

 

 

 

 

 

 

1,715,824

 

November 1, 2017- November 30, 2017

 

 

140,500

 

 

$

60.70

 

 

 

140,500

 

 

 

1,575,324

 

December 1, 2017- December 31, 2017

 

 

67,226

 

 

$

58.33

 

 

 

67,226

 

 

 

1,508,098

 

Total

 

 

207,726

 

 

 

 

 

 

 

207,726

 

 

 

 

 

(1)

On January 13, 2015, the Company announced that the Board of Directors authorized us to repurchase up to five million shares of our common stock on the open market or in privately negotiated transactions. This authorization does not have a set expiration date.

(2)

Total number of shares purchased does not include 56,995 shares withheld to pay taxes on the vesting of equity awards made under the company's equity incentive plans or to pay the exercise price of options exercised during the period.

Item 6.

Exhibits

 

Exhibit No.

 

Description

 

 

 

Exhibit 3.1

 

Restated Certificate of Incorporation of Cabot Corporation effective January 9, 2009 (incorporated herein by reference to Exhibit 3.1 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008, file reference 1-5667, filed with the SEC on February 9, 2009).

 

 

 

Exhibit 3.2

 

The By-laws of Cabot Corporation as amended January 8, 2016 (incorporated herein by reference to Exhibit 3.1 of Cabot Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2015, file reference 1-5667, filed with the SEC on February 5, 2016).

 

 

 

Exhibit 10.1*

 

Extension AgreementFirst Amendment, dated October 6, 2017June 8, 2020, to the Credit Agreement dated October 23, 2015 among Cabot Corporation, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLS,LLC, Citigroup Global Markets Inc., Citibank, N.A., Bank of America, N.A., Mizuho Bank, Ltd., TD Bank, N.A., and Wells Fargo Bank, National Association, and the other lenders party thereto.

 

Exhibit 18.1*10.2*

 

Preferability letter regarding LIFO First Amendment, dated June 8, 2020,to FIFO change in inventory accounting.Credit Agreement dated May 22, 2019 among Cabot Corporation, certain subsidiaries of Cabot, the lenders referred to therein, Wells Fargo Bank, National Association, Wells Fargo Securities, LLV, PNC Bank, National Association, U.S. Bank National Association and Mizuho Bank, Ltd.

 

Exhibit 31.1*

 

Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

Exhibit 31.2*

 

Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

 

 

Exhibit 32**

 

Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

 

 

 

Exhibit 101.INS*

 

Inline XBRL Instance Document.Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

Exhibit 101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

Exhibit 101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

Exhibit 101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

Exhibit 101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

Exhibit 101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Exhibit 104*

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (included in Exhibit 101).

 

*Filed herewith.

**Furnished herewith.

*

Filed herewith.

**

Furnished herewith.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

CABOT CORPORATION

 

 

 

 

Date: February 8, 2018August 7, 2020

 

By:

/s/ Eduardo E. CordeiroErica McLaughlin

 

 

 

Eduardo E. CordeiroErica McLaughlin

 

 

 

ExecutiveSenior Vice President and Chief Financial Officer

 

 

 

(Duly Authorized Officer)

 

 

 

 

 

 

 

 

Date: February 8, 2018August 7, 2020

 

By:

/s/ James P. KellyLisa m. Dumont

 

 

 

James P. KellyLisa M. Dumont

 

 

 

Vice President and Controller

(Chief Accounting Officer)

 

3944