10-K 1 d805901d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

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

For the fiscal year ended September 30, 2014

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, Suite 1300  
Boston, Massachusetts   02210
(Address of Principal Executive Offices)   (Zip Code)

(617) 345-0100

(Registrant’s telephone number, including area code)

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common stock, $1.00 par value per share

  New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  x    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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

Large accelerated filer  x                         Accelerated filer  ¨

Non-accelerated filer  ¨  (Do not check if a smaller reporting company)    Smaller reporting company  ¨

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

As of the last business day of the Registrant’s most recently completed second fiscal quarter (March 31, 2014), the aggregate market value of the Registrant’s common stock held by non-affiliates was $3,774,867,798. As of November 19, 2014, there were 64,047,874 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III of this annual report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I   

ITEM 1.

  

Business

     3   

ITEM 1A.

  

Risk Factors

     13   

ITEM 1B.

  

Unresolved Staff Comments

     20   

ITEM 2.

  

Properties

     20   

ITEM 3.

  

Legal Proceedings

     22   

ITEM 4.

  

Mine Safety Disclosures

     24   
PART II   

ITEM 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   
     

ITEM 6.

  

Selected Financial Data

     26   

ITEM 7.

  

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

     30   
     

ITEM 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     51   

ITEM 8.

  

Financial Statements and Supplementary Data

     52   

ITEM 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     114   
     

ITEM 9A.

  

Controls and Procedures

     114   

ITEM 9B.

  

Other Information

     115   
PART III   

ITEM 10.

  

Directors, Executive Officers and Corporate Governance

     116   

ITEM 11.

  

Executive Compensation

     116   

ITEM 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     116   
     

ITEM 13.

  

Certain Relationships and Related Transactions, and Director Independence

     117   

ITEM 14.

  

Principal Accounting Fees and Services

     117   
PART IV   

ITEM 15.

  

Exhibits, Financial Statement Schedules

     118   

Signatures

     121   

Exhibit Index

     123   

 

2


Table of Contents

Information Relating to Forward-Looking Statements

This annual report on Form 10-K contains “forward-looking statements” under the Federal securities laws. These forward-looking statements include statements relating to our expectations regarding our future business performance and overall prospects; demand for our products; the availability of raw materials for our Specialty Fluids business and the life of our pollucite ore reserves; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit and commercial paper facilities to fund our cash requirements; anticipated capital spending, including environmental-related capital expenditures; cash requirements and uses of available cash, including future cash outlays associated with long-term contractual obligations, restructurings, contributions to employee benefit plans, environmental remediation costs and future respirator liabilities; development plans for our cesium mining operations; when we expect to complete the move of our EMEA business service center to Riga, Latvia; when we expect construction of a new multi-hearth furnace at our activated carbon joint venture operations in Canada will be completed; exposure to interest rate and foreign exchange risk; future benefit plan payments we expect to make; the charge we expect to take in connection with the transfer of certain defined benefit plan obligations and assets; our expected tax rate for fiscal 2015; our ability to recover deferred tax assets; 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 based on our current expectations, assumptions, estimates and projections about Cabot’s businesses and strategies, market trends and conditions, economic conditions and other factors. These 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 and difficult to predict. If known or unknown risks materialize, or should underlying assumptions prove inaccurate, our actual results could differ materially from past results and from those expressed in the forward-looking statements. Important factors that could cause our actual results to differ materially from those expressed in our forward-looking statements are described in Item 1A in this report.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Investors are advised, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports filed with the Securities and Exchange Commission (the “SEC”).

PART I

 

Item 1. Business

General

Cabot is a global specialty chemicals and performance materials company headquartered in Boston, Massachusetts. Our principal products are rubber and specialty grade carbon blacks, fumed metal oxides, inkjet colorants, aerogel, cesium formate drilling fluids and activated carbon. Cabot and its affiliates have manufacturing facilities and operations in the United States and over 20 other countries. Cabot’s business was founded in 1882 and incorporated in the State of Delaware in 1960. The terms “Cabot”, “Company”, “we”, and “our” as used in this report refer to Cabot Corporation and its consolidated subsidiaries.

Our strategy is to deliver earnings growth through leadership in performance materials. We intend to achieve this goal by focusing on margin improvement, capacity expansion and emerging market growth, developing new products and businesses and actively managing our portfolio of businesses. In support of this strategy, during fiscal 2014 we acquired our joint venture partner’s interest in NHUMO, S.A. de C.V. (“NHUMO”), our carbon black manufacturing joint venture in Altamira, Mexico, and sold our Security Materials business. Results of operations for the Security Materials business prior to the sale and the gain on the sale are reported in discontinued operations.

Our products are generally based on technical expertise and innovation in one or more of our three core competencies: making and handling very fine particles; modifying the surfaces of very fine particles to

 

3


Table of Contents

alter their functionality; and designing particles to impart specific properties to a composite. We focus on creating particles with the composition, morphology, surface functionalities and formulations to support our customers’ existing and emerging applications.

We are organized into four business segments: Reinforcement Materials; Performance Materials; Advanced Technologies; and Purification Solutions. The business segments are discussed in more detail later in this section. Financial information about our business segments appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below (“MD&A”) and in Note U of the Notes to our Consolidated Financial Statements in Item 8 below (“Note U”).

For operational purposes, we are also organized into three geographic regions: The Americas; Europe, Middle East and Africa; and Asia Pacific. Financial information about our sales and long-lived assets in certain geographic areas appears in Note U.

Our internet address is www.cabotcorp.com. We make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. Information appearing on our website is not a part of, and is not incorporated in, this Annual Report on Form 10-K.

Reinforcement Materials

Products

Carbon black is a form of elemental carbon that is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Rubber grade carbon blacks are used to enhance the physical properties of the systems and applications in which they are incorporated.

Our rubber blacks products are used in tires and industrial products. Rubber blacks have traditionally been used in the tire industry as a rubber reinforcing agent and are also used as a performance additive. In industrial products such as hoses, belts, extruded profiles and molded goods, rubber blacks are used to improve the physical performance of the product.

Sales and Customers

Sales of rubber blacks products are made by Cabot employees and through distributors and sales representatives. Sales to three major tire customers represent a material portion of Reinforcement Materials’ total net sales and operating revenues. The loss of any of these customers could have a material adverse effect on the Segment.

Under appropriate circumstances, we have entered into supply contracts with certain customers, many of which have durations of at least one year. Many of these contracts provide for sales price adjustments to account for changes in relevant feedstock indices and, in some cases, changes in other relevant costs (such as the cost of natural gas). In fiscal 2014, approximately half of our rubber blacks volume was sold under supply agreements with an initial term of at least one year. The majority of the volumes sold under these agreements are sold to customers in North America and Western Europe.

Much of the rubber blacks we sell is used in automotive products and, therefore, our financial results may be affected by the cyclical nature of the automotive industry. However, a large portion of the market for our products is in replacement tires that historically have been less subject to automotive industry cycles.

Competition

We are one of the leading manufacturers of carbon black in the world. We compete in the manufacture of carbon black primarily with two companies with a global presence and several other companies that have a regional presence, some of which export product outside their region. Competition

 

4


Table of Contents

for products within Reinforcement Materials is based on product performance, quality, reliability, service, technical innovation, price, and logistics. We believe our product differentiation, technological leadership, global manufacturing presence, operations and logistics excellence and customer service provide us with a competitive advantage.

Raw Materials

The principal raw material used in the manufacture of carbon black is a portion of the residual heavy oils derived from petroleum refining operations and from the distillation of coal tars and the production of ethylene throughout the world. Natural gas is also used in the production of carbon black. Raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, and related transportation costs. Importantly, movements in the market price for crude oil typically affect carbon black feedstock costs.

Operations

We own, or have a controlling interest in, and operate plants that produce rubber blacks in Argentina, Brazil, Canada, China, Colombia, the Czech Republic, France, Indonesia, Italy, Japan, Mexico, The Netherlands and the United States. Our equity affiliate operates a carbon black plant in Venezuela.

The following table shows our ownership interest as of September 30, 2014 in rubber blacks operations in which we own less than 100% of the common equity:

 

Location

  

Percentage Interest

Shanghai, China

   70% (consolidated subsidiary)

Tianjin, China

   70% (consolidated subsidiary)

Xingtai City, China

   60% (consolidated subsidiary)

Valasske Mezirici (Valmez), Czech Republic

   52% (consolidated subsidiary)

Cilegon and Merak, Indonesia

   97% (consolidated subsidiary)

Valencia, Venezuela

   49% (equity affiliate)

Performance Materials

Performance Materials is comprised of two businesses that sell the following products: specialty grades of carbon black and thermoplastic concentrates and compounds (our Specialty Carbons and Compounds business); and fumed silica, fumed alumina and dispersions thereof (our Fumed Metal Oxides business). In each business, we design, manufacture and sell materials that deliver performance in a broad range of customer applications across the automotive, construction and infrastructure, electronics and consumer products sectors.

Products

Carbon black is a form of elemental carbon that is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Our specialty grades of carbon black are used to impart color, provide rheology control, enhance conductivity and static charge control, provide UV protection, enhance mechanical properties, and provide formulation flexibility through surface treatment. These products are used in a wide variety of applications, such as inks, coatings, cables, pipes, toners and electronics. In addition, we manufacture and source thermoplastic concentrates and compounds (which we refer to as “specialty compounds”) that are marketed to the plastics industry.

Fumed silica is an ultra-fine, high-purity particle used as a reinforcing, thickening, abrasive, thixotropic, suspending or anti-caking agent in a wide variety of products for the automotive, construction, microelectronics, and consumer products industries. These products include adhesives, sealants, cosmetics, inks, toners, silicone rubber, coatings, polishing slurries and pharmaceuticals. Fumed alumina,

 

5


Table of Contents

also an ultra-fine, high-purity particle, is used as an abrasive, absorbent or barrier agent in a variety of products, such as inkjet media, lighting, coatings, cosmetics and polishing slurries.

Sales and Customers

Sales of these products are made by Cabot employees and through distributors and sales representatives. In our Specialty Carbons and Compounds business, sales are to a broad number of customers. Sales under long-term contracts with two customers account for a substantial portion of the revenue of our Fumed Metal Oxides business.

Competition

We are one of the leading manufacturers of carbon black in the world. We compete in the manufacture of carbon black primarily with two companies with a global presence and several other companies that have a regional presence, some of which export product outside their region. We are also a leading producer of specialty compounds in Europe, the Middle East and Asia. We are a leading producer and seller of fumed silica and compete primarily with three companies with a global presence and numerous other companies which have a regional presence.

Competition for these products is based on product performance, quality, reliability, service, technical innovation and price. We believe our product differentiation, technological leadership, global manufacturing presence, operations excellence and customer service provide us with a competitive advantage.

Raw Materials

The principal raw material used in the manufacture of carbon black is a portion of the residual heavy oils derived from petroleum refining operations and from the distillation of coal tars and the production of ethylene throughout the world. Natural gas is also used in the production of carbon black. Raw material costs generally are influenced by the availability of various types of carbon black feedstock and natural gas, and related transportation costs. Importantly, movements in the market price for crude oil typically affect carbon black feedstock costs.

Other than carbon black feedstock, the primary materials used for our specialty compounds are thermoplastic resins and mineral fillers. Raw materials for these compounds are, in general, readily available.

Raw materials for the production of fumed silica are various chlorosilane feedstocks. We purchase feedstocks and for some customers convert their feedstock to product on a fee-basis (so called “toll conversion”). We also purchase aluminum chloride as feedstock for the production of fumed alumina. We have long-term procurement contracts or arrangements in place for the purchase of fumed silica feedstock, which we believe will enable us to meet our raw material requirements for the foreseeable future. In addition, we buy some raw materials in the spot market to help ensure flexibility and minimize costs.

Operations

We own, or have a controlling interest in, and operate plants that produce specialty grades of carbon black primarily in China, The Netherlands and the United States. Our specialty compounds are produced in facilities that we own, or have a controlling interest in, located in Belgium, China and the United Arab Emirates. We also own, or have a controlling interest in, manufacturing plants that produce fumed metal oxides in the United States, China, the United Kingdom, and Germany. An equity affiliate operates a fumed metal oxides plant in Mettur Dam, India.

 

6


Table of Contents

The following table shows our ownership interest as of September 30, 2014 in these segment operations in which we own less than 100%:

 

Location

  

Percentage Interest

Tianjin, China (Specialty Carbons and Compounds business)

   90% (consolidated subsidiary)

Jiangxi Province, China (Fumed Metal Oxides business)

   90% (consolidated subsidiary)

Mettur Dam, India (Fumed Metal Oxides business)

   50% (equity affiliate)

Advanced Technologies

Advanced Technologies is comprised of our Inkjet Colorants, Aerogel, Elastomer Composites and Specialty Fluids businesses. A discussion of each of these businesses follows.

Inkjet Colorants Business

Products

We produce and sell aqueous inkjet colorants primarily to the inkjet printing market. Our inkjet colorants are high-quality pigment-based black and color dispersions based on our patented surface modification technology. The dispersions are used in aqueous inkjet inks to impart color (optical density or chroma), sharp print characteristics and durability (waterfastness, lightfastness and rub resistance) while maintaining high printhead reliability. Our inkjet colorants serve various inkjet printing applications, including commercial printing, small office/home office and corporate office, as well as other niche applications that require a high level of dispersibility and colloidal stability. We also sell inks with our pigment-based colorant dispersions into the emerging commercial printing segment for digital print.

Sales and Customers

Sales of inkjet colorants and inks are made by Cabot employees to inkjet printer manufacturers and to suppliers of inkjet inks in the inkjet cartridge aftermarket. Sales to three customers account for a substantial portion of the revenue of our Inkjet Colorants business. Many of our commercialized products have been developed through joint research and development initiatives with inkjet printer manufacturers and press integrators. These initiatives have led to the development of exclusive differentiated products for these inkjet customers.

Competition

Our inkjet colorants and inks are designed to replace traditional pigment dispersions and dyes used in inkjet printing applications. Competitive products for inkjet colorants are organic dyes and other dispersed pigments manufactured and marketed by large chemical companies and small independent producers. Competition is based on product performance, technical innovation, quality, reliability, service and price. We believe our commercial strengths include technical innovation, strong customer partnerships, product performance and service.

Raw Materials

Raw materials for inkjet colorants include carbon black sourced from our carbon black plants, organic pigments and other treating agents available from various sources. Raw materials for inkjet inks include pigment dispersions, solvents and other additives. We believe that all raw materials to produce inkjet colorants and inks are in adequate supply.

Operations

Our inkjet colorants and inks are manufactured at our facility in Haverhill, Massachusetts.

 

7


Table of Contents

Aerogel Business

Products

Aerogel is a hydrophobic, silica-based particle with a high surface area that is used in a variety of thermal insulation and specialty chemical applications. In the building and construction industry, the product is used in insulative sprayable plasters and composite building products, as well as translucent skylight, window, wall and roof systems for insulating eco-daylighting applications. In the oil and gas industry, aerogel is used to insulate subsea pipelines. In the specialty chemicals industry, the product is used to provide matte finishing, insulating and thickening properties for use in a variety of applications. These applications include incorporation of aerogel into highly thermal insulative coatings formulations for safe touch, anti-condensation, architectual thermal breaks and improved energy efficiency. We continue to focus on application and market development activities for use of aerogel in these and other new applications.

Sales and Customers

Sales of aerogel products are made principally by Cabot employees to engineering procurement and installation companies, traditional insulation manufacturers, building and construction materials companies, and specialty chemical and coatings producers and distributors.

Competition

Although the manufacturing processes used are different, in certain insulation applications, our aerogel products compete principally with aerogel products manufactured by one company. We also compete with non-aerogel insulation products manufactured by primarily regional companies throughout the world.

Competition is based on product performance, price, quality, reliability and service. We believe our commercial strengths include technical innovation, product performance, quality and service.

Raw Materials

The principal raw materials for the production of aerogel are silica sol and/or sodium silicate, which we believe are in adequate supply.

Operations

We manufacture our aerogel products at our facility in Frankfurt, Germany using a unique and patented manufacturing process.

Elastomer Composites Business

We have licensed our patented elastomer composites manufacturing process to Manufacture Francaise des Pneumatiques Michelin (“Michelin”) for their exclusive use in tire applications. This liquid phase process is used to manufacture compounds of natural latex rubber and carbon black that improve abrasion/wear resistance, reduce fatigue and reduce rolling resistance compared to natural rubber/carbon black compounds made by conventional methods. In consideration, we are entitled to receive payments upon the achievement of multiple development and technical milestones, as well as quarterly royalty payments. Under this agreement, quarterly royalty payments extend through fiscal 2022 in accordance with a pre-determined schedule linked to Michelin’s installed capacity.

Specialty Fluids Business

Products

Our Specialty Fluids business principally produces and markets cesium formate as a drilling and completion fluid for use primarily in high pressure and high temperature oil and gas well construction. Cesium formate products are solids-free, high-density fluids that have a low viscosity, enabling safe and efficient well construction and workover operations. The fluid is resistant to high temperatures, minimizes damage to producing reservoirs and is readily biodegradable in accordance with the testing guidelines set

 

8


Table of Contents

by the Organization for Economic Cooperation and Development. In a majority of applications, cesium formate is blended with other formates or products. We also manufacture and sell fine cesium chemicals that are used in a wide range of applications, including catalysts and brazing fluxes.

Sales, Rental and Customers

Sales of our cesium formate products are made to oil and gas operating companies directly by Cabot employees and sales representatives and indirectly through oil field service companies. We generally rent cesium formate to our customers for use in drilling operations on a short-term basis and we also make direct sales of cesium formate outside of the rental process. After completion of a job under our rental process, the customer returns the remaining fluid to Cabot and it is reprocessed for use in subsequent well operations. Any fluid that is lost during use and not returned to Cabot is paid for by the customer.

A large portion of our fluids have been used for drilling and completion of wells in the North Sea, where we have been supplying cesium formate-based fluids for both reservoir drilling and completion activities on large gas and condensate field projects in the Norwegian Continental Shelf. Although we have expanded the use of our fluids to drilling operations outside of the North Sea, an important portion of our business continues to be with a limited number of customers for drilling and completion operations in that geography.

Competition

Formate fluids compete mainly with traditional drilling fluid technologies. Competition in the well fluids business is based on product performance, quality, reliability, service, technical innovation, price, and proximity of inventory to customers’ drilling operations. We believe our commercial strengths include our unique product offerings and their performance, and our customer service.

Raw Materials

The principal raw material used in this business is pollucite (cesium ore), the vast majority of which we obtain from our mine in Manitoba, Canada, a portion of which is located under Bernic Lake. We own a substantial portion of the world’s known pollucite reserves. In 2013, after indications of structural instability in a portion of the mine that contains significant cesium reserves, we began to assess the technical and economic feasibility of development alternatives at the mine to enable us to continue to access our pollucite reserves. We recently began a development project in a portion of the mine unaffected by the instability. If this project is successfully implemented, taking into account inventory on hand and our expected consumption rate (both fluid lost and sold), we expect our supply of cesium products to last approximately five years, excluding the potential for additional cesium supply from other projects that we are currently pursuing. We will continue to assess options to access the additional reserves in the mine, assess various technologies to augment our cesium supply, seek alternative sources of ore, and be more selective in the projects we supply to minimize our annual consumption of cesium. The risks and uncertainties associated with the mine development project and the availability of raw materials for this business are described in the Risk Factor discussion in Item 1A below.

Most jobs for which cesium formate is used require a large volume of the product. Accordingly, the Specialty Fluids business maintains a large inventory of fluid.

Operations

Our mine and cesium formate manufacturing facility are located in Manitoba, Canada, and we have fluid blending and reclamation facilities in Aberdeen, Scotland and in Bergen and Kristiansund, Norway. In addition, we warehouse fluid at various locations around the world to support existing and potential operations.

 

9


Table of Contents

Purification Solutions

Products

Activated carbon is a porous material consisting mainly of elemental carbon treated with heat, steam and/or chemicals to create high internal porosity, resulting in a large internal surface area that resembles a sponge. It is generally produced in two forms, powdered and granular, and is manufactured in different sizes, shapes and levels of purity and using a variety of raw materials for a wide variety of applications. Activated carbon is used to remove contaminants from liquids and gases using a process called adsorption, whereby the interconnected pores of activated carbon trap contaminants.

Our activated carbon products are used for the purification of water, air, food and beverages, pharmaceuticals and other liquids and gases, as either a colorant or a decolorizing agent in the production of products for food and beverage applications and as a chemical carrier in slow release applications. In gas and air applications, one of the uses of activated carbon is for the removal of mercury in flue gas streams. In certain applications, used activated carbon can be reactivated for further use by removing the contaminants from the pores of the activated carbon product. The most common applications for our reactivated carbon are water treatment and food and beverage purification. In addition to our activated carbon production and reactivation, we also provide activated carbon solutions through on-site equipment and services, including delivery systems for activated carbon injection in coal-fired utilities, mobile water filter units and carbon reactivation services.

Sales and Customers

Sales of activated carbon are made by Cabot employees and through distributors and sales representatives to a broad range of customers, including coal-fired utilities, food and beverage processors, water treatment plants, pharmaceutical companies and catalyst producers. Some of our sales of activated carbon are made under annual contracts or longer-term agreements, particularly in mercury removal applications.

Competition

We are one of the leading manufacturers of activated carbon in the world. We compete in the manufacture of activated carbon with a number of companies, some of whom have a global presence and others who have a regional or local presence, although not all of these companies manufacture activated carbon for the range of applications for which we sell our products.

Competition for activated carbon and activated carbon equipment and services is based on quality, performance, price and supply-chain stability. We believe our product and application diversity, product differentiation, technological leadership, quality, cost-effective access to raw materials, and scalable manufacturing capabilities provide us with a competitive advantage.

Raw Materials

The principal raw materials we use in the manufacture of activated carbon are various forms of coal, including lignite, wood and other carbonaceous materials, which are, in general, readily available and we believe we have in adequate supply. We also own a lignite mine that is operated by Caddo Creek Resources Company, LLC, a subsidiary of the North American Coal Company. The mine began operations in November 2014 and will supply our Marshall, Texas facility.

Operations

We own, or have a controlling interest in, and operate plants that produce activated carbon in the United States, the United Kingdom, The Netherlands and Italy. Our affiliates operate activated carbon plants in Canada and Mexico. In fiscal 2014, we announced the construction of an additional multi-hearth

 

10


Table of Contents

furnace that will double the capacity at our joint venture manufacturing facility in Canada, which is expected to be completed in 2016. The following table shows our ownership interest as of September 30, 2014 in activated carbon operations in which we own less than 100%:

 

Location

  

Percentage Interest

Estevan, Saskatchewan, Canada

   50% (contractual joint venture)

Atitalaquia, Hidalgo, Mexico

   49% (equity affiliate)

Patents and Trademarks

We own and are a licensee of various patents, which expire at different times, covering many of our products as well as processes and product uses. Although the products made and sold under these patents and licenses are important to Cabot, the loss of any particular patent or license would not materially affect our business, taken as a whole. In Purification Solutions, we sell products under the Norit trademark. While we take appropriate steps to protect our various trademarks, if we lost all rights to this trademark, our Purification Solutions business could be materially adversely affected. We also sell our products in Purification Solutions and our other businesses under a variety of other trademarks, the loss of any one of which would not materially affect our business, taken as a whole.

Seasonality

Our businesses are generally not seasonal in nature, although we may experience some regional seasonal declines during holiday periods and some weather-related seasonality in Purification Solutions.

Backlog

We do not consider backlog to be a significant indicator of the level of future sales activity. In general, we do not manufacture our products against a backlog of orders. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is not material to understanding our overall business and is not a reliable indicator of our ability to achieve any particular level of revenue or financial performance.

Employees

As of September 30, 2014, we had 4,737 employees. Some of our employees in the United States and abroad are covered by collective bargaining or similar agreements. We believe that our relations with our employees are generally satisfactory.

Research and Development

Cabot develops new and improved products and higher efficiency processes through Company-sponsored research and technical service activities, including those initiated in response to customer requests. Our expenditures for such activities generally are spread among our businesses and are shown in the consolidated statements of operations. Further discussion of our research and technical expenses incurred in each of our last three fiscal years appears in MD&A in Item 7 below.

Safety, Health and Environment (“SH&E”)

Cabot has been named as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (the “Superfund law”) and comparable state statutes with respect to several sites primarily associated with our divested businesses. (See “Legal Proceedings” below.) During the next several years, as remediation of various environmental sites is carried out, we expect to spend against our $17 million environmental reserve for costs associated with such remediation. Adjustments are made to the reserve based on our continuing analysis of our share of costs likely to be incurred at each site. Inherent uncertainties exist in these estimates due to unknown conditions at the various sites, changing governmental regulations and legal standards regarding liability, and changing technologies for handling site investigation and remediation. While the reserve represents our best

 

11


Table of Contents

estimate of the costs we expect to incur, the actual costs to investigate and remediate these sites may exceed the amounts accrued in the environmental reserve. While it is always possible that an unusual event may occur with respect to a given site and have a material adverse effect on our results of operations in a particular period, we do not believe that the costs relating to these sites, in the aggregate, are likely to have a material adverse effect on our consolidated financial position. Furthermore, it is possible that we may also incur future costs relating to environmental liabilities not currently known to us or as to which it is currently not possible to make an estimate.

Our ongoing operations are subject to extensive federal, state, local, and foreign laws, regulations, rules, and ordinances relating to safety, health, and environmental matters (“SH&E Requirements”). These SH&E Requirements include requirements to obtain and comply with various environmental-related permits for constructing any new facilities and operating all of our existing facilities and for product registrations. We have expended and will continue to expend considerable sums to construct, maintain, operate, and improve facilities for safety, health and environmental protection and to comply with SH&E Requirements. We spent approximately $14 million in environmental-related capital expenditures at existing facilities in fiscal 2014 and anticipate spending approximately $42 million for such matters in fiscal 2015. The expected increase in spending in fiscal 2015 is primarily for air pollution control projects in the United States and China and for wastewater system improvement projects in the United States.

In recognition of the importance of compliance with SH&E Requirements to Cabot, our Board of Directors has a Safety, Health, and Environmental Affairs Committee. The Committee, which is comprised of independent directors, meets at least three times a year and provides oversight and guidance to Cabot’s safety, health and environmental management programs. In particular, the Committee reviews Cabot’s environmental reserve, safety, health and environmental risk assessment and management processes, environmental and safety audit reports, performance metrics, performance as benchmarked against industry peer groups, assessed fines or penalties, site security and safety issues, health and environmental training initiatives, and the SH&E budget. The Committee also consults with our outside and internal advisors regarding management of Cabot’s safety, health and environmental programs.

The International Agency for Research on Cancer (“IARC”) classifies carbon black as a Group 2B substance (known animal carcinogen, possible human carcinogen). We have communicated IARC’s classification of carbon black to our customers and employees and have included that information in our safety data sheets and elsewhere, as appropriate. We continue to believe that the available evidence, taken as a whole, indicates that carbon black is not carcinogenic to humans, and does not present a health hazard when handled in accordance with good housekeeping and safe workplace practices as described in our safety data sheets.

The California Office of Environmental Health Hazard Assessment (“OEHHA”) published a notice adding “carbon black (airborne, unbound particles of respirable size)” to the California Safe Drinking Water and Toxic Enforcement Act, commonly referred to as Proposition 65, in 2003. Proposition 65 requires businesses to warn individuals before they knowingly or intentionally expose them to chemicals subject to its requirements, and it prohibits businesses from knowingly discharging or releasing the chemicals into water or onto land where they could contaminate drinking water. We worked with the International Carbon Black Association, as well as various customers and carbon black user groups, to ensure our compliance with the requirements associated with the Proposition 65 listing of carbon black, which became effective in February 2004. OEHHA is reportedly considering certain changes that may result in removing the “airborne, unbound particles of respirable size” qualifying language from its listing of carbon black. If this change is adopted by OEHHA, it would result in increased labeling and other requirements for our customers under Proposition 65.

REACH (Registration, Evaluation and Authorization of Chemicals), the European Union (“EU”) regulatory framework for chemicals developed by the European Commission (“EC”), applies to all chemical substances produced or imported into the EU in quantities greater than one metric ton a year.

 

12


Table of Contents

Manufacturers or importers of these chemical substances are required to submit specified health, safety, risk and use information about the substance to the European Chemical Agency. We have completed all required registrations under REACH to date and will continue to complete the registrations under REACH for our products in accordance with future registration deadlines. We will also continue to work with the manufacturers and importers of our raw materials, including our feedstocks, to ensure their registration prior to the applicable deadlines. In addition, the EC has adopted a harmonized definition of “nanomaterial” to be used in the EU to identify materials for which special provisions may apply, such as risk assessment and ingredient labeling. The EC definition is broad and applies to many of our existing products, including carbon black, fumed silica and alumina. Country-specific product registration and assessment programs have been implemented in some countries and are being developed by others. We will continue to address these requirements.

Environmental agencies worldwide are increasingly implementing regulations and other requirements resulting in more restrictive air emission limits globally, particularly as they relate to nitrogen oxide, sulphur dioxide and particulate matter emissions. In addition, global efforts to reduce greenhouse gas emissions impact the carbon black and activated carbon industries as carbon dioxide is emitted from those manufacturing processes. The EU Emissions Trading Scheme applies to our carbon black and activated carbon facilities in Europe. We generally expect to purchase emission credits where necessary to respond to allocation shortfalls. There are also ongoing regulatory developments in other regions and countries, including the U.S., Canada, China, and Brazil, regarding greenhouse gas emission reduction programs. Those programs have not yet been fully defined and their impact on Cabot cannot be estimated at this time.

A number of organizations and regulatory agencies have become increasingly focused on the issue of water scarcity and water quality, particularly in certain geographic regions. We are engaged in various activities to promote water conservation and wastewater recycling. The costs associated with these activities are not expected to have a material adverse effect on our operations.

Various U.S. agencies and international bodies have adopted security requirements applicable to certain manufacturing and industrial facilities and marine port locations. These security-related requirements involve the preparation of security assessments and security plans in some cases, and in other cases the registration of certain facilities with specified governmental authorities. We closely monitor all security-related regulatory developments and believe we are in compliance with all existing requirements. Compliance with such requirements is not expected to have a material adverse effect on our operations.

Foreign and Domestic Operations and Export Sales

A significant portion of our revenues and operating profits is derived from overseas operations. The profitability of our segments is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. (See MD&A and the Geographic Information portion of Note U for further information relating to sales and long-lived assets by geographic area.) Currency fluctuations, nationalization and expropriation of assets are risks inherent in international operations. We have taken steps we deem prudent in our international operations to diversify and otherwise to protect against these risks, including the use of foreign currency financial instruments to reduce the risk associated with changes in the value of certain foreign currencies compared to the U.S. dollar. (See the risk management discussion contained in “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A below and Note K of the Notes to the Company’s Consolidated Financial Statements).

 

Item 1A. Risk Factors

In addition to factors described elsewhere in this report, the following are important factors that could cause our actual results to differ materially from those expressed in our forward-looking statements. The risks described below are not the only risks we face. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations and financial results.

 

13


Table of Contents

Negative or uncertain worldwide or regional economic conditions may adversely impact our business.

Our operations and performance are affected by worldwide and regional economic conditions. Continued uncertainty or a deterioration in the economic conditions affecting the businesses to which, or geographic areas in which, we sell products could reduce demand for our products. We may also experience pricing pressure on products and services, which could decrease our revenues and have an adverse effect on our financial condition and cash flows. In addition, during periods of economic uncertainty, our customers may temporarily pursue inventory reduction measures that exceed declines in the actual underlying demand. Our businesses are sensitive to industry capacity utilization, particularly Reinforcement Materials. As a result, pricing tends to fluctuate when capacity utilization changes occur, which could affect our financial performance.

As a chemical manufacturing company, our operations are subject to operational risks and have the potential to cause environmental or other damage as well as personal injury, which could adversely affect our business, results of operations and cash flows.

The operation of a chemical manufacturing business as well as the sale and distribution of chemical products involve safety, health and environmental risks. For example, the production and/or processing of carbon black, fumed metal oxides, aerogel, activated carbon and other chemicals involve the handling, transportation, manufacture or use of certain substances or components that may be considered toxic or hazardous. Our manufacturing processes and the transportation of chemical products entail risks such as leaks, fires, explosions, toxic releases, mechanical failures or unscheduled downtime. If operational risks materialize, they could result in injury or loss of life, damage to the environment, or damage to property. In addition, the occurrence of material operating problems at our facilities may result in loss of production, which, in turn, may make it difficult for us to meet customer needs. Accordingly, these events and their consequences could negatively impact the Company’s results of operations and cash flows, both during and after the period of operational difficulties, and could harm our reputation.

The strategic growth plan of the mercury removal products portion of our Purification Solutions business relies significantly on the enforcement of environmental laws and regulations, and if our assumptions about future sales and profitability prove incorrect, we may be required to impair or write off certain assets.

The strategic growth plan for the mercury removal products portion of our Purification Solutions business relies significantly upon the enforcement of environmental laws and regulations, particularly those that would require industrial facilities to reduce the quantity of air pollutants they release. In particular, we expect demand for our activated carbon products to increase as coal fired utilities in the U.S. enhance their emission control systems in order to comply with the U.S. Mercury and Air Toxics Standards (MATS), which sets forth federal mercury emission levels. Utilities are required to comply with these standards beginning in April 2015, although state permitting agencies that enforce these standards are authorized to allow a one-year extension of time for compliance. Recently, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. This appeal follows the U.S. Court of Appeals for the District of Columbia Circuit decision in April 2014, which considered this issue and upheld the MATS regulation. It is not possible to predict the outcome of the Supreme Court’s review of this matter. Our growth assumptions for this business also include assumptions about the amount of activated carbon that is needed to effectively reduce mercury emissions to the levels required by MATS. If our assumptions concerning sales volumes or margins are incorrect, or there is a change in the implementation of or requirements under MATS, as a result of the Supreme Court’s review or otherwise, our actual results for our activated carbon business could be less than expected. If that were the case, we may not be able to realize the value of the assets of this business, which could lead to an impairment or write-off of certain assets. Our Purification Solutions business had $458 million of goodwill and $289 million of intangible assets at September 30, 2014.

 

14


Table of Contents

Our mining operations have the potential to cause safety issues, including those that could result in significant personal injury, and a disruption in our cesium mining operations could disrupt our supply of raw materials for our Specialty Fluids business.

We have underground cesium mining operations in Manitoba, Canada, and own an above-ground lignite mine close to our Marshall, Texas facility which is operated by a subsidiary of The North American Coal Company. Mining operations by their nature are activities that involve a high level of uncertainty and are often affected by risks and hazards outside of our control. These operational risks include, but are not limited to, industrial accidents; unexpected geological conditions; fall of ground accidents or structural collapses at underground mines; and lower than expected quality, ore grades or recovery rates. The failure to adequately manage these risks could result in significant personal injury, loss of life, damage to mineral properties, production facilities or mining equipment, damage to the environment, delays in or reduced production, and potential legal liabilities.

The principal raw material used by our Specialty Fluids business is pollucite (cesium ore), the vast majority of which we obtain from our mine in Manitoba, a portion of which is located under Bernic Lake. In 2013, following a fall of ground in a portion of the mine that contains significant cesium reserves, we implemented additional safety measures and several types of monitoring devices in the mine, based on the advice of our third-party mining consultants. Since their implementation in July 2013, the monitoring devices have indicated good structural stability in the mine, and we have resumed normal mining activities with respect to the areas not affected by the fall of ground. The structural stability may be subject to change at any time, including the potential for further deterioration and flooding, even in the near term. After the fall of ground in 2013, we began to assess the technical and economic feasibility of development alternatives at the mine to enable us to continue to access our pollucite reserves, and recently began a development project in a portion of the mine unaffected by the instability. If this project is successfully implemented, taking into account inventory on hand and our expected consumption rate, we expect our supply of cesium products to last approximately five years. We expect this development project will take approximately one year to complete, and there remains a risk of further deterioration of the mine over that period of time that could limit our ability to complete this project. Further, this project could experience unexpected cost increases or other problems or delays. If we are unable to continue mining or unwilling to incur the costs associated with further developing the mine, we may be unable to obtain additional raw material for our Specialty Fluids business at an acceptable cost or at all.

A significant adverse change in a customer relationship or the failure of a customer to perform its obligations under agreements with us could harm our business or cash flows.

Our success in strengthening relationships and growing business with our largest customers and retaining their business over extended time periods could affect our future results. We have a group of key customers across our businesses that together represent a significant portion of our total net sales and operating revenues. The loss of any of our important customers, or a reduction in volumes sold to them, including because of a work stoppage or other disruption, could adversely affect our results of operations until such business is replaced or the disruption ends. Any deterioration in the financial condition of any of our customers or the industries they serve that impairs our customers’ ability to make payments to us also could increase our uncollectible receivables and could affect our future results and financial condition. In addition, we have significant receivables from a limited number of customers, which could create a concentration of credit risk.

Any failure to realize benefits from acquisitions, alliances or joint ventures could adversely affect future financial results.

Attainment of our strategic plan objectives requires, in part, strategic acquisitions or joint ventures intended to complement or expand our businesses globally or add product technology that accelerates our specialization strategy, or both. The success of acquisitions of businesses, new technologies and products,

 

15


Table of Contents

or arrangements with third parties is not always predictable and we may not be successful in realizing our objectives as anticipated. We may not be able to integrate any acquired businesses successfully into our existing businesses, make such businesses profitable, or realize anticipated cost savings or synergies, if any, from these acquisitions, which could adversely affect our business results.

Plant capacity expansions and site development projects may be delayed and/or not achieve the expected benefits.

Our ability to complete capacity expansions and other site development projects as planned may be delayed or interrupted by the need to obtain environmental and other regulatory approvals, unexpected cost increases, availability of labor and materials, unforeseen hazards such as weather conditions, and other risks customarily associated with construction projects. Moreover, the cost of these activities could have a negative impact on the financial performance of the relevant business, and in the case of capacity expansion projects, until capacity utilization at the particular facility is sufficient to absorb the incremental costs associated with the expansion. In addition, our ability to expand capacity in emerging regions depends in part on economic and political conditions in these regions and, in some cases, on our ability to establish operations, construct additional manufacturing capacity or form strategic business alliances.

An interruption in our operations as a result of fence-line arrangements could disrupt our manufacturing operations and adversely affect our financial results.

At certain of our facilities we have fence-line arrangements with adjacent third party manufacturing operations (“fence-line partners”), who provide raw materials for our manufacturing operations and/or take by-products generated from our operations. Accordingly, any unplanned disruptions or curtailments in a fence-line partner’s production facilities that impacts their ability to supply us with raw materials or to take our manufacturing by-products could disrupt our manufacturing operations or cause us to incur increased operating costs to mitigate such disruption.

Volatility in the price of energy and raw materials could decrease our margins.

Our manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond our control. Dramatic increases in such costs or decreases in the availability of raw materials at acceptable costs could have an adverse effect on our results of operations. For example, movements in the market price for crude oil typically affect carbon black feedstock costs. Significant movements in the market price for crude oil tend to create volatility in our carbon black feedstock costs, which can affect our working capital and results of operations. Certain of our carbon black supply contracts contain provisions that adjust prices to account for changes in a relevant feedstock price index. We attempt to offset the effects of increases in raw material costs through selling price increases in our non-contract sales, productivity improvements and cost reduction efforts. Success in offsetting increased raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the segment served. Such increases may not be accepted by our customers, may not be sufficient to compensate for increased raw material and energy costs or may decrease demand for our products and our volume of sales. If we are not able to fully offset the effects of increased raw material or energy costs, it could have a significant impact on our financial results.

We are exposed to political or country risk inherent in doing business in some countries.

Sales outside of the U.S. constituted a majority of our revenues in fiscal 2014. Although much of our international business is currently in regions where the political and economic risk levels and established legal systems are similar to those in the U.S., we also conduct business in countries that have less stable legal systems and financial markets, and potentially more corrupt business environments than the U.S. Our operations in some countries may be subject to the following risks: changes in the rate of economic

 

16


Table of Contents

growth; unsettled political or economic conditions; possible expropriation or other governmental actions; corruption by government officials and other third parties; social unrest, war, terrorist activities or other armed conflict; confiscatory taxation or other adverse tax policies; deprivation of contract rights; trade regulations affecting production, pricing and marketing of products; reduced protection of intellectual property rights; restrictions on the repatriation of income or capital; exchange controls; inflation; currency fluctuations and devaluation; the effect of global health, safety and environmental matters on economic conditions and market opportunities; and changes in financial policy and availability of credit. We have an equity method investment in Venezuela, a country that has established rigid controls over the ability of foreign companies to repatriate cash and which, during the last year, effectively devalued its currency. Such exchange controls could potentially impact our ability, in both the short and long term, to recover both the cost of our investment and earnings from that investment.

We face competition from other specialty chemical companies.

We operate in a highly competitive marketplace. Our ability to compete successfully depends in part upon our ability to maintain a superior technological capability and to continue to identify, develop and commercialize new and innovative, high value-added products for existing and future customers. Increased competition from existing or newly developed products offered by our competitors or companies whose products offer a similar functionality as our products may negatively affect demand for our products. In addition, actions by our competitors could affect our ability to maintain or raise prices, successfully enter new markets or maintain or grow our market position.

Litigation or legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

As more fully described in “Item 3—Legal Proceedings”, we are a party to or the subject of lawsuits, claims, and proceedings, including, but not limited to, those involving environmental, and health and safety matters as well as product liability and personal injury claims relating to asbestosis, silicosis, and coal worker’s pneumoconiosis. We are also a potentially responsible party in various environmental proceedings and remediation matters wherein substantial amounts are at issue. Adverse rulings, judgments or settlements in pending or future litigation (including liabilities associated with respirator claims) or in connection with environmental remediation activities could cause our results to differ materially from those expressed or forecasted in any forward-looking statements.

Fluctuations in foreign currency exchange and interest rates could affect our financial results.

We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar. In fiscal 2014, we derived a majority of our revenues from sales outside the U.S. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other currencies in countries where we operate will affect our results of operations and the value of balance sheet items denominated in foreign currencies. Due to the geographic diversity of our operations, weaknesses in some currencies might be offset by strengths in others over time. In addition, we are exposed to adverse changes in interest rates. We manage both these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative instruments as well as foreign currency debt. We cannot be certain, however, that we will be successful in reducing the risks inherent in exposures to foreign currency and interest rate fluctuations.

There are also instances where we have direct current exposures to foreign currency movements because settlement back into a different currency is intended. These situations can have a direct impact on our cash flows.

 

17


Table of Contents

Our tax rate is dependent upon a number of factors, a change in any of which could impact our future tax rates and net income.

Our future tax rates may be adversely affected by a number of factors, including changes in tax laws or the interpretation of such tax laws; changes in the estimated realization of our net deferred tax assets; the jurisdictions in which profits are determined to be earned and taxed; the repatriation of non-U.S. earnings for which we have not previously provided for U.S. income and non-U.S. withholding taxes; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses that are not deductible for tax purposes, including impairment of goodwill in connection with acquisitions; changes in available tax credits; and the resolution of issues arising from tax audits with various tax authorities. Losses for which no tax benefits can be recorded could materially impact our tax rate and its volatility from one quarter to another. Any significant change in our jurisdictional earnings mix or in the tax laws in those jurisdictions could impact our future tax rates and net income in those periods.

We may be subject to information technology systems failures, network disruptions and breaches of data security.

We depend on integrated information systems to conduct our business. Information technology systems failures, including risks associated with upgrading our systems or in successfully integrating information technology and other systems in connection with the integration of businesses we acquire, network disruptions and breaches of data security could disrupt our operations by impeding our processing of transactions, our ability to protect customer or company information and our financial reporting. Our computer systems, including our back-up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, events such as fires, earthquakes, floods, tornadoes and hurricanes, and/or errors by our employees. Although we have taken steps to address these concerns by implementing sophisticated network security and internal control measures and back-up systems at multiple sites, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and results of operations.

Our operations are subject to extensive safety, health and environmental requirements, which could increase our costs and/or reduce our profit.

Our ongoing operations are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to safety, health and environmental matters, many of which provide for substantial monetary fines and criminal sanctions for violations. These requirements include requirements to obtain and comply with various environmental-related permits for constructing any new facilities and operating all of our existing facilities, and, in certain geographic areas, to pay emissions-related fees based on certain emissions levels. The enactment of new environmental laws and regulations and/or the more aggressive interpretation of existing requirements could require us to incur significant costs for compliance or capital improvements or limit our current or planned operations, any of which could have a material adverse effect on our earnings or cash flow. We attempt to offset the effects of these compliance costs through price increases, productivity improvements and cost reduction efforts. See “Item 3 Legal Proceedings—Environmental Proceedings”.

Regulations requiring a reduction of greenhouse gas emissions impact our carbon black and activated carbon operations.

Global efforts to reduce greenhouse gas emissions impact the carbon black and activated carbon industries as carbon dioxide is emitted from those manufacturing processes. The European Commission’s Emissions Trading Scheme applies to our carbon black and activated carbon facilities in Europe, and we generally expect to purchase emission credits where necessary to respond to allocation shortfalls. However, if our carbon black or activated carbon operations generate more carbon dioxide than our allocations permit,

 

18


Table of Contents

the cost to purchase allocation credits at that time may be unacceptable to us. There are also regulatory developments in other regions and countries, including the U.S., Canada, China and Brazil, regarding greenhouse gas emission reduction programs. Those programs have not yet been defined and their potential impact on our manufacturing operations or financial results cannot be estimated at this time.

Our restructuring activities and cost saving initiatives may not achieve the results we anticipate.

We have undertaken and expect to continue to undertake cost reduction initiatives and organizational restructurings to improve operating efficiencies, optimize our asset base and generate cost savings. For example, we are currently moving our European business service center operations from Leuven, Belgium to Riga, Latvia. We cannot be certain that we will be able to complete these initiatives as planned or without business interruption, or that the estimated operating efficiencies or cost savings from such activities will be fully realized or maintained over time.

The money we spend developing new businesses and technologies may not result in a proportional increase in our revenues or profits.

We cannot be certain that the costs we incur investing in new businesses and technologies will result in a proportional increase in revenues or profits. In addition, the timely commercialization of products that we are developing may be disrupted or delayed by manufacturing or other technical difficulties, market acceptance or insufficient market size to support a new product, competitors’ new products, and difficulties in moving from the experimental stage to the production stage. These disruptions or delays could affect our future business results.

The reduction or elimination of tariffs placed on U.S. imports of Chinese activated carbon could have a material adverse effect on our Purification Solutions business.

Purification Solutions faces pressure and competition in its U.S. markets from low-priced imports of activated carbon products that are frequently sold at less than fair value in the U.S. If the amounts of these low-priced imports increase, especially if they are sold at less than fair value, our sales of competing products could decline, which could have an adverse effect on the earnings of Purification Solutions. In addition, sales of these low-priced imports may negatively impact our pricing. To limit these activities, regulators in the U.S. have enacted antidumping duties on steam activated carbon products that are set to expire in 2017, subject to provisions for renewal. The amount of these antidumping duties are reviewed annually, and the lower the tariff, the less effective they may be in reducing the volume of low-priced activated carbon imports in the U.S., which could negatively effect demand or pricing for our products.

The continued protection of our patents, trade secrets and other proprietary intellectual property rights are important to our success.

Our patents, trade secrets and other intellectual property rights are important to our success and competitive position. We own various patents and other intellectual property rights in the U.S. and other countries covering many of our products, as well as processes and product uses. Where we believe patent protection is not appropriate or obtainable, we rely on trade secret laws and practices to protect our proprietary technology and processes, such as physical security, limited dissemination and access and confidentiality agreements with our employees, customers, consultants, business partners, potential licensees and others to protect our trade secrets and other proprietary information. However, trade secrets can be difficult to protect and the protective measures we have put in place may not prevent disclosure or unauthorized use of our proprietary information or provide an adequate remedy in the event of misappropriation or other violations of our proprietary rights. In addition, we are a licensee of various patents and intellectual property rights belonging to others in the U.S. and other countries. Because the laws and enforcement mechanisms of some countries may not allow us to protect our proprietary rights to

 

19


Table of Contents

the same extent as we are able to do in the U.S., the strength of our intellectual property rights will vary from country to country.

Irrespective of our proprietary intellectual property rights, we may be subject to claims that our products, processes or product uses infringe the intellectual property rights of others. These claims, even if they are without merit, could be expensive and time consuming to defend and if we were to lose such claims, we could be enjoined from selling our products or using our processes and/or be subject to damages, or be required to enter into licensing agreements requiring royalty payments and/or use restrictions. Licensing agreements may not be available to us, or if available, may not be available on acceptable terms.

Natural disasters could affect our operations and financial results.

We operate facilities in areas of the world that are exposed to natural hazards, such as floods, windstorms and earthquakes. Such events could disrupt our supply of raw materials or otherwise affect production, transportation and delivery of our products or affect demand for our products.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Cabot’s corporate headquarters are in leased office space in Boston, Massachusetts. We also own or lease office, manufacturing, storage, distribution, marketing and research and development facilities in the United States and in foreign countries. The locations of our principal manufacturing and/or administrative facilities are set forth in the table below. Unless otherwise indicated, all the properties are owned.

 

Location by Region

   Reinforcement
Materials
   Performance
Materials
   Advanced
Technologies
   Purification
Solutions

Americas Region

           

Alpharetta, GA*(1)

   X    X    X    X

Tuscola, IL

      X      

Canal, LA

   X    X      

Ville Platte, LA

   X         

Billerica, MA

   X    X    X    X

Haverhill, MA

         X   

Midland, MI

      X      

Pryor, OK

            X

Marshall, TX

            X

Pampa, TX

   X    X      

Campana, Argentina

   X         

Maua, Brazil

   X    X      

Sao Paulo, Brazil*(1)

   X    X    X    X

Cartagena, Colombia

   X         

Lac du Bonnet, Manitoba**

         X   

Altamira, Mexico

   X         

Sarnia, Ontario

   X    X      

 

(1) 

Business service center

* Leased premises
** Building(s) owned by Cabot on leased land

 

20


Table of Contents

Location by Region

   Reinforcement
Materials
   Performance
Materials
   Advanced
Technologies
     Purification
Solutions

EMEA Region

           

Loncin, Belgium

      X      

Leuven, Belgium*(1)(2)

   X    X      X       X

Pepinster, Belgium

      X      

Valasske Mezirici (Valmez), Czech Republic**

   X         

Port Jerome, France**

   X         

Frankfurt, Germany*

           X      

Rheinfelden, Germany

      X      

Ravenna, Italy (2 plants)

   X          X

Riga, Latvia*(1)(2)

   X    X      X       X

Bergen, Norway*

           X      

Kristiansund, Norway*

           X      

Schaffhausen, Switzerland*

   X    X      X       X

Botlek, The Netherlands**

   X    X      

Amersfoort, The Netherlands*

            X

Klazienaveen, The Netherlands

            X

Zaandam, The Netherlands

            X

Dubai, United Arab Emirates*

      X      

Purton, United Kingdom (England)

            X

Aberdeen, United Kingdom (Scotland)*

           X      

Glasgow, United Kingdom (Scotland)

            X

Barry, United Kingdom (Wales)**

      X      

Asia Pacific Region

           

Jiangxi Province, China**

      X      

Tianjin, China**

   X    X      

Shanghai, China*(1)

   X    X      X       X

Shanghai, China** (plant)

   X         

Xingtai City, China**

   X         

Mumbai, India*

   X    X      

Cilegon, Indonesia**

   X         

Jakarta, Indonesia*(1)

   X    X      

Merak, Indonesia

   X         

Chiba, Japan

   X         

Shimonoseki, Japan**

   X         

Tokyo, Japan*(1)

   X    X      X       X

Port Dickson, Malaysia**

           X      

 

(1) 

Business service center

(2) 

We began transitioning our EMEA business service center from Leuven, Belgium to Riga, Latvia during fiscal 2014. We expect to complete these actions by the end of fiscal 2015.

* Leased premises
** Building(s) owned by Cabot on leased land

We conduct research and development for our various businesses primarily at facilities in Billerica, MA; Amersfoort, The Netherlands; Pampa, TX; Pepinster, Belgium; Frankfurt and Rheinfelden, Germany; and Shanghai, China.

Our existing manufacturing plants will generally have sufficient production capacity to meet current requirements and expected near-term growth. These plants are generally well maintained, in good

 

21


Table of Contents

operating condition and suitable and adequate for their intended use. Our administrative offices and other facilities are generally suitable and adequate for their intended purposes.

 

Item 3. Legal Proceedings

Cabot is a party in various lawsuits and environmental proceedings wherein substantial amounts are claimed. The following is a description of the significant proceedings pending on September 30, 2014, unless otherwise specified.

Environmental Proceedings

In November 2013, Cabot entered into a Consent Decree with the United States Environmental Protection Agency (“EPA”) and the Louisiana Department of Environmental Quality (“LDEQ”) regarding Cabot’s three carbon black manufacturing facilities in the United States. This settlement is related to EPA’s national enforcement initiative focused on the U.S. carbon black manufacturing sector alleging non-compliance with certain regulatory and permitting requirements under The Clean Air Act, including the New Source Review (“NSR”) construction permitting requirements. Pursuant to this settlement, which was approved by the U.S. District Court for the Western District of Louisiana in March, 2014, Cabot paid a combined $975,000 civil penalty to EPA and LDEQ, will fund $450,000 in environmental mitigation projects in the three communities where the plants are located, and will install technology controls for sulfur dioxide and nitrogen oxide. We expect that the capital costs to install these controls will total approximately $85 million and be incurred through calendar year 2020. In addition, Cabot has agreed to certain best management practices (“BMPs”) to control emissions of particulate matter at the three locations. It is expected that other carbon black manufacturers will also be required to install technology controls and agree to adopt BMPs at their U.S. facilities in connection with this initiative and are also likely to pay a civil penalty and fund mitigation projects.

In 1986, Cabot sold a beryllium manufacturing facility in Reading, Pennsylvania to NGK Metals, Inc. (“NGK”). In doing so, we agreed to share with NGK the costs of certain environmental remediation of the Reading plant site. After the sale, the EPA issued an order to NGK pursuant to the Resource Conservation and Recovery Act (“RCRA”) requiring NGK to address soil and groundwater contamination at the site. Soil remediation at the site has been completed and the groundwater remediation activities are ongoing pursuant to the RCRA order. We are contributing to the costs of the groundwater remediation activities pursuant to the cost-sharing agreement with NGK. Cabot and NGK also pursued various legal claims against the U.S. for cost recovery and participation in future remediation activities based on the U.S.’s previous involvement at the site and contractual arrangements, beginning in World War II and continuing thereafter. Those claims were recently settled by the U.S. Government with a cash payment toward past costs and a commitment to pay a designated share of future costs to be incurred at the site.

We continue to perform certain sampling and remediation activities at a former pine tar manufacturing site in Gainesville, Florida that we sold in the 1960s. Those activities are pursuant to a formal Record of Decision and 1991 Consent Decree with EPA. Cabot installed a groundwater treatment system at the site in the early 1990s, and that system is still in operation. We have also been requested by EPA and other stakeholders to carry out various other additional work at the site, the scope of which has yet to be determined. We continue to work cooperatively with EPA, the Florida Department of Environmental Protection and the local authorities on this matter.

As of September 30, 2014, we had a $17 million reserve, substantially all of which is accounted for on an undiscounted basis, for environmental remediation costs at various sites. The operation and maintenance component of this reserve was $3 million, on both a discounted and undiscounted basis. The $17 million reserve represents our current best estimate of costs likely to be incurred for remediation based on our analysis of the extent of cleanup required, alternative cleanup methods available, the ability of other responsible parties to contribute and our interpretation of laws and regulations applicable to each of our sites.

 

22


Table of Contents

Other Proceedings

Respirator Liabilities

We have 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.

Generally, these respirator liabilities 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.

The subsidiary transferred the business to Aearo Corporation (“Aearo”) in July 1995. Cabot agreed to have the subsidiary retain certain liabilities associated with exposure to asbestos and silica while using respirators prior to the 1995 transaction so long as Aearo paid, and continues to pay, Cabot an annual fee of $400,000. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify Cabot against those liabilities which Cabot’s subsidiary had agreed to retain. We anticipate that we will continue to receive payment of the $400,000 fee from Aearo and thereby retain these liabilities for the foreseeable future. We have no liability in connection with any products manufactured by Aearo after 1995.

In addition to Cabot’s subsidiary and as described above, other parties are responsible for significant portions of the costs of respirator liabilities, leaving Cabot’s subsidiary with a portion of the liability in only some of the pending cases. These parties include Aearo, AO, AO’s insurers, another former owner and its insurers, and a third-party manufacturer of respirators formerly sold under the AO brand (collectively, with Cabot’s subsidiary, the “Payor Group”).

As of September 30, 2014 and 2013, there were approximately 41,000 and 42,000 claimants, respectively, in pending cases asserting claims against AO in connection with respiratory products. Cabot has contributed to the Payor Group’s defense and settlement costs with respect to a percentage of pending claims depending on several factors, including the period of alleged product use. In order to quantify our estimated share of liability for pending and future respirator liability claims, we have engaged, through counsel, the assistance of Hamilton, Rabinovitz & Alschuler, Inc. (“HR&A”), a leading consulting firm in the field of tort liability valuation. The methodology used by HR&A addresses the complexities surrounding our potential liability by making assumptions about future claimants with respect to periods of asbestos, silica and coal mine dust exposure and respirator use. Using those and other assumptions, HR&A estimates the number of future asbestos, silica and coal mine dust claims that will be filed and the related costs that would be incurred in resolving both currently pending and future claims. On this basis, HR&A then estimates the value of the share of these liabilities that reflect our period of direct manufacture and our contractual obligations. Based on the HR&A estimates, we have recorded a $13 million reserve for our estimated share of liability for pending and future respirator claims. We made payments related to our respirator liability of $2 million in each of fiscal 2014, 2013 and 2012.

Our current estimate of the cost of our share of existing and future respirator liability claims is based on facts and circumstances existing at this time. Developments that could affect our estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of

 

23


Table of Contents

dismissals without payment of pending silica and non-malignant asbestos claims, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of members of the Payor Group, (viii) a change in the availability of AO’s insurance coverage or the indemnity provided by AO’s former owner, (ix) changes in the allocation of costs among the Payor Group, and (x) a determination that the assumptions that were used to estimate our share of liability are no longer reasonable. We cannot determine the impact of these potential developments on our current estimate of our share of liability for these 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

We have various other lawsuits, claims and contingent liabilities. In our opinion, although final disposition of some or all of these other suits and claims may impact our financial statements in a particular period, they should not, in the aggregate, have a material adverse effect on our consolidated financial position.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

24


Table of Contents

Executive Officers of the Registrant

Set forth below is certain information about Cabot’s executive officers as of November 26, 2014.

Patrick M. Prevost, age 59, is President and Chief Executive Officer and a member of Cabot’s Board of Directors, positions he has held since joining Cabot in January 2008. Prior to joining Cabot, since October 2005, Mr. Prevost served as President, Performance Chemicals, of BASF AG, an international chemical company. Prior to that, he was responsible for BASF Corporation’s Chemicals and Plastics business in North America. Prior to joining BASF in 2003, he held senior management positions at BP plc and Amoco.

Eduardo E. Cordeiro, age 47, is Executive Vice President and Chief Financial Officer and provides leadership to the Americas region. Mr. Cordeiro joined Cabot in 1998 and has served in a variety of leadership positions, including Corporate Controller, General Manager of the Fumed Metal Oxides business and General Manager of the Supermetals business. He was responsible for Corporate Strategy from May 2008 until February 2009, when he became Cabot’s Chief Financial Officer. Mr. Cordeiro was appointed Vice President in March 2003 and Executive Vice President in March 2009.

Sean D. Keohane, age 47, is Executive Vice President and President of Reinforcement Materials. Mr. Keohane joined Cabot in August 2002 and was named General Manager of Performance Materials in May 2008. From March 2012 until November 2014, he was Senior Vice President and President of Performance Materials and in November 2014 he was appointed President of Reinforcement Materials. He was appointed Vice President in March 2005, Senior Vice President in March 2012 and Executive Vice President in November 2014.

Nicholas S. Cross, age 53, is Executive Vice President and President of Performance Materials and Advanced Technologies and provides leadership to the Europe, Middle East and Africa (“EMEA”) region. Mr. Cross joined Cabot in September 2009 as President of the EMEA region and was appointed President of Advanced Technologies in January 2012 and President of Performance Materials in November 2014. He was appointed Vice President upon joining Cabot in 2009, Senior Vice President in March 2012 and Executive Vice President in November 2014. Prior to joining Cabot, Mr. Cross held a variety of leadership positions in BP plc’s Chemicals, Oil and Gas businesses, including Director of Chemicals Strategy and Head of International NGLs.

Brian A. Berube, age 52, is Senior Vice President and General Counsel. Mr. Berube joined Cabot in 1994 as an attorney in Cabot’s law department and became Deputy General Counsel in June 2001, business General Counsel in March 2002, and General Counsel in March 2003. Mr. Berube was appointed Vice President in March 2002 and Senior Vice President in March 2012.

 

25


Table of Contents

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Cabot’s common stock is listed for trading (symbol CBT) on the New York Stock Exchange. As of November 19, 2014, there were 836 holders of record of Cabot’s common stock. The tables below show the high and low sales price for Cabot’s common stock for each of the fiscal quarters ended December 31, March 31, June 30, and September 30 and the quarterly cash dividend paid on Cabot’s common stock for the past two fiscal years.

Stock Price and Dividend Data

 

     Quarters Ended  
     December 31      March 31      June 30      September 30  

Fiscal 2014

           

Cash dividends per share

   $ 0.20      $ 0.20      $ 0.22      $ 0.22  

Price range of common stock:

           

High

   $ 51.72      $ 59.28      $ 61.46      $ 59.12  

Low

   $ 41.59      $ 46.24      $ 55.05      $ 50.36  

Fiscal 2013

           

Cash dividends per share

   $ 0.20      $ 0.20      $ 0.20      $ 0.20  

Price range of common stock:

           

High

   $ 40.95      $ 44.16      $ 41.38      $ 43.36  

Low

   $ 32.57      $ 33.00      $ 32.13      $ 37.18  

Issuer Purchases of Equity Securities

The table below sets forth information regarding Cabot’s purchases of its equity securities during the quarter ended September 30, 2014:

 

Period

   Total Number
of Shares
Purchased(1)
     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)
 

July 1, 2014—July 31, 2014

          $               1,635,788  

August 1, 2014—August 31, 2014

     211,394      $ 52.70        211,394        1,424,394  

September 1, 2014—September 30, 2014

          $               1,424,394  
  

 

 

       

 

 

    

Total

     211,394           211,394     

 

(1) 

On May 11, 2007, we publicly announced that the Board of Directors authorized us to repurchase five million shares of our common stock on the open market or in privately negotiated transactions. On September 14, 2007, the Board of Directors increased the share repurchase authorization to 10 million shares (the “2007 Authorization”). This authorization does not have a set expiration date. In the fourth quarter of 2014, we repurchased 211,394 shares under this authorization.

 

Item 6. Selected Financial Data

On July 31, 2012, Cabot completed the purchase of Norit N.V. (“Purification Solutions”). The operating results and ratios presented below for fiscal 2012 include two months of results of Purification Solutions. Beginning September 30, 2012 the balance sheet items presented below include those of Purification Solutions.

On November 18, 2013, Cabot purchased all of its joint venture partner’s common stock in NHUMO, S.A. de C.V. (“NHUMO”), which represented approximately 60% of the outstanding common stock of the

 

26


Table of Contents

joint venture. Prior to this transaction, the Company owned approximately 40% of the outstanding common stock of NHUMO, and the NHUMO entity was accounted for as an equity affiliate of the Company. The results of fiscal 2014 in the table below include 11 months of results at 100% consolidation and one month of results accounted for under the equity method at 40%. Results for all years prior to fiscal 2014 are reported under the equity method at 40%.

The Company completed the sales of its Supermetals business and Security Materials business on January 20, 2012 and July 31, 2014, respectively. The results of operations for both businesses for all periods presented are reflected as discontinued operations in the Consolidated Statements of Operations.

 

     Years Ended September 30  
         2014             2013             2012             2011             2010      
    (Dollars in millions, except per share amounts and ratios)  

Consolidated Net Income

         

Net sales and other operating revenues

  $ 3,647     $ 3,456     $ 3,291     $ 3,091     $ 2,710  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    721       633       644       553       507  

Selling and administrative expenses

    326       297       281       247       240  

Research and technical expenses

    60       68       72       63       63  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations(1)

    335       268       291       243       204  

Net interest expense and other charges(2)

    (27     (58     (45     (40     (38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    308       210       246       203       166  

Provision for income taxes(3)

    (92     (60     (55     (6     (30

Equity in earnings of affiliated companies

          11       11       8       7  

Income from discontinued operations, net of tax

    2       (1     204       53       26  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    218       160       406       258       169  

Net income attributable to noncontrolling interests, net of tax

    19       7       18       22       15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Cabot Corporation

  $ 199     $ 153     $ 388      $ 236     $ 154  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common Share Data

         

Diluted net income attributable to Cabot Corporation:

         

Income from continuing operations

  $ 3.01      $ 2.37      $ 2.84     $ 2.77     $ 1.94  

Income (loss) from discontinued operations

    0.02        (0.01     3.15       0.80       0.41  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Cabot Corporation

  $ 3.03      $ 2.36      $ 5.99     $ 3.57     $ 2.35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends

  $ 0.84      $ 0.80      $ 0.76     $ 0.72     $ 0.72  

Closing prices

  $ 50.77      $ 42.71      $ 36.57     $ 24.78     $ 32.57  

Weighted-average diluted shares outstanding—millions

    65.1        64.5        64.2       65.4       64.3  

Shares outstanding at year end—millions

    64.4        64.0        63.3       63.9       65.4  

Consolidated Financial Position

         

Current assets

  $ 1,364     $ 1,495     $ 1,443     $ 1,555     $ 1,438  

Net property, plant, and equipment

    1,581       1,600       1,547       1,031       933  

Other assets

    1,139       1,138       1,409       555       515  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 4,084     $ 4,233     $ 4,399     $ 3,141     $ 2,886  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current liabilities

  $ 630     $ 844     $ 919     $ 656     $ 539  

Long-term debt

    1,004       1,020       1,172       556       600  

Other long-term liabilities

    386       286       369       313       330  

Cabot Corporation stockholders’ equity

    1,942       1,951       1,813       1,487       1,302  

Noncontrolling interests

    122       132       126       129       115  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 4,084     $ 4,233     $ 4,399     $ 3,141     $ 2,886  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Financial Ratios

         

Adjusted return on invested capital(4)

    9     8     12     16     14

Net debt to capitalization ratio(5)

    33     36     40     20     16

Adjusted return on net assets(6)

    10     9     12     14     13

 

27


Table of Contents

 

(1) 

Income from operations includes certain items as presented in the table below:

 

      Years Ended September 30  
          2014             2013             2012             2011             2010      
     (Dollars in millions)  

Global restructuring activities

   $ (29   $ (35   $ (17   $ (18   $ (46

Legal and environmental matters and reserves

     (18     (1     (8     (1     (5

Acquisition and integration-related charges

     (7     (21     (26            

Long-lived asset impairment

                             (2

Foreign currency (loss) gain on revaluations

     (3     3                    

Gain on existing investment in NHUMO

     29                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Certain items, pre-tax

   $ (28   $ (54   $ (51   $ (19   $ (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(2) 

Net interest expense and other charges include a foreign currency loss of $2 million for fiscal 2014, a foreign currency gain of $2 million for fiscal 2013, and losses of $2 million and $6 million for fiscal 2012 and 2011, respectively. Net interest expense and other charges for fiscal 2010 includes foreign currency gains of less than $1 million.

(3) 

The Company’s effective tax rate for fiscal 2014 was a provision of 30% which included net discrete charges of $17 million, composed of a $20 million charge for a valuation allowance, offset by $3 million of net tax benefit primarily related to tax settlements. The Company’s effective tax rate for fiscal 2013 was a provision of 28% which included net discrete charges of $3 million, composed of a $13 million foreign currency related charge, offset by $10 million of net tax benefit related to tax settlements, renewal of the U.S. research and experimentation (“R&E”) credit, and other miscellaneous tax items in the tax provision. The Company’s effective tax rate for fiscal 2012 was a provision of 22% which includes net discrete tax benefits of $8 million from the release of a valuation allowance and $3 million from settlements and miscellaneous tax items. The Company’s effective tax rate for fiscal 2011 was a provision of 3% which includes net tax benefits of $24 million from the repatriation of high taxed income, $10 million from the settlements of various tax audits, $2 million from the renewal of the R&E credit and $2 million for investment incentive tax credits recognized in China. The Company’s effective tax rate for fiscal 2010 was a provision of 18% which includes net tax benefits of $15 million from the settlements of various tax audits and $2 million for investment incentive tax credits.

(4)

Adjusted return on invested capital (“Adjusted ROIC”) is a non-GAAP financial measure that management believes is useful to investors as a measure of performance and the effectiveness of our use of capital. We use Adjusted ROIC as one measure to monitor and evaluate performance. ROIC is not a measure of financial performance under GAAP and may not be defined and calculated by other companies in the same manner. Adjusted ROIC, which excludes items management does not consider representative of the Company’s segment results, is calculated as follows.

Numerator (four quarter rolling):

Net income (loss) attributable to Cabot Corporation

Less the after-tax impact of:

Noncontrolling interest in net income

Interest expense

Interest income

Certain items

 

28


Table of Contents

Denominator:

Previous five quarter average ending invested capital calculated as follows:

Total Cabot Corporation stockholders’ equity

 

  Plus:     Noncontrolling interests’ equity

Long-term debt

Current portion of long-term debt

Notes payable

 

  Less:     Cash and cash equivalents

Less the four quarter rolling impact of after tax certain items.

 

(5)

Net debt to capitalization ratio is calculated by dividing total debt (the sum of short-term and long-term debt less cash and cash equivalents) by total capitalization (the sum of Total stockholders’ equity plus total Debt).

(6)

Adjusted return on net assets (“Adjusted RONA”) is a non-GAAP financial measure that management believes is useful to investors as a measure of performance and the effectiveness of our use of capital. We use Adjusted RONA as one measure to monitor and evaluate performance. RONA is not a measure of financial performance under GAAP and may not be defined and calculated by other companies in the same manner. Adjusted RONA, which excludes items management does not consider representative of the Company’s segment results, is calculated as follows.

Numerator (four quarter rolling):

Net income (loss) attributable to Cabot Corporation

Less the after-tax impact of:

Noncontrolling interest in net income

Certain items

Denominator:

Previous five quarter average ending net asset balance calculated as follows:

Net Working Capital (Accounts Receivable plus Inventory less Accounts Payable and Accruals)

 

  Plus:     Property Plant & Equipment (net of depreciation)

Assets held for rent

External investments, including Equity affiliates

 

29


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

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 under different assumptions or conditions. The policies that we believe are critical to the preparation of the Consolidated Financial Statements are presented below.

Revenue Recognition and Accounts and Notes Receivable

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We generally are able to ensure that products meet customer specifications prior to shipment. If we are unable to determine that the product has met the specified objective criteria prior to shipment or if title has not transferred because of sales terms, the revenue is considered “unearned” and is deferred until the revenue recognition criteria are met.

Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price.

The following table shows the relative size of the revenue recognized in each of the Company’s reportable segments:

 

     Years ended September 30  
     2014     2013     2012(1)  

Reinforcement Materials

     58     57     63

Performance Materials

     27     27     29

Advanced Technologies

     6     6     6

Purification Solutions

     9     10     2

 

(1) 

Fiscal 2012 consists of two months of revenues for Purification Solutions, which was acquired on July 31, 2012.

We derive the substantial majority of revenues from the sale of products in Reinforcement Materials and Performance Materials. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized and are estimated based on historical experience and contractual obligations. We periodically review the assumptions underlying estimates of discounts and volume rebates and adjust revenues accordingly.

Revenue in Advanced Technologies, excluding the Specialty Fluids business, is typically recognized when the product is shipped and title and risk of loss have passed to the customer. Depending on the nature of the contract with the customer, a portion of the revenue may be recognized using proportional performance.

 

30


Table of Contents

A significant portion of the revenue in the Specialty Fluids business, included in Advanced Technologies, arises 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. We also generate revenues from cesium formate sold outside of a rental process and revenue is recognized upon delivery of the fluid.

Revenue in Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. For major activated carbon injection systems projects, revenue is recognized using the percentage-of-completion method.

We maintain 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. Changes in the allowance during fiscal 2014 and 2013 were immaterial. There is no material off-balance sheet credit exposure related to customer receivable balances.

Inventory Valuation

The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. Total U.S. inventories utilizing this cost flow assumption was $28 million at September 30, 2014 and $24 million at September 30, 2013. These inventories represent 5% of total worldwide inventories at both September 30, 2014 and 2013. Had we used the first-in, first-out (“FIFO”) method instead of the LIFO method for such inventories, the value of those inventories would have been $52 million and $55 million higher as of September 30, 2014 and 2013, respectively. The cost of Specialty Fluids inventories, which are classified as assets held for rent, is determined using the average cost method. The cost of other U.S. and all non-U.S. inventories is determined using the FIFO method. In periods of rapidly rising or declining raw material costs, the inventory method we employ can have a significant impact on our profitability. Under our current LIFO method, when raw material costs are rising, our most recent higher priced purchases are the first to be charged to Cost of sales. If, however, we were using a FIFO method, our purchases from earlier periods, which were at lower prices, would instead be the first charged to Cost of sales. The opposite result could occur during a period of rapid decline in raw material costs.

At certain times, we may decrease inventory levels to the point where layers of inventory recorded under the LIFO method that were purchased in preceding years are liquidated. The inventory in these layers may be valued at an amount that is different than our current costs. If there is a liquidation of an inventory layer, there may be an impact to our Cost of sales and Net income for that period. If the liquidated inventory is at a cost lower than our current cost, there would be a reduction in our Cost of sales and an increase to our Net income during the period. Conversely, if the liquidated inventory is at a cost higher than our current cost, there will be an increase in our Cost of sales and a reduction to our net income during the period.

During fiscal 2013 and 2012, inventory quantities carried on a LIFO basis were decreased at the Company’s U.S. carbon black sites. These reductions led to liquidations of LIFO inventory quantities and resulted in a decrease in Cost of sales of $1 million and an increase in consolidated Net income of $1 million ($0.01 per diluted common share) in both fiscal years. No such reductions occurred in fiscal 2014.

We review inventory for both potential obsolescence and potential declines in anticipated selling prices periodically. 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 inventory and the estimated market value. Historically, such write-downs have not been significant. 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.

 

31


Table of Contents

Goodwill and Long-Lived Assets

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. 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. The separate businesses included within Performance Materials are considered separate reporting units. The goodwill balance relative to this segment is recorded in the Fumed Metal Oxides reporting unit within Performance Materials.

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 under the two-step impairment test. 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, we perform an analysis of the fair value of all assets and liabilities of the reporting unit. If the implied fair value of the reporting unit’s goodwill is determined to be less than its carrying amount, an impairment is recognized for the difference. 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. Should the fair value of any of our reporting units decline because of reduced operating performance, market declines, changes in the discount rate, or other indicators of impairment, charges for impairment may be necessary. Based on our most recent annual goodwill impairment test performed as of May 31, 2014, 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 value by approximately 9%. At September 30, 2014, the Purification Solutions reporting unit had the most significant goodwill balance, in the amount of $458 million. The future growth in the Purification Solutions business is highly dependent on achieving expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and our successful realization of our anticipated share of volumes in this segment over the next 3 years. The demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those that would require U.S. based coal fired electrical utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards that become effective beginning in April 2015 and (2) other factors such as the anticipated usage of activated carbon in the coal fired energy units. Recently, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. It is not possible to predict the outcome of the Supreme Court’s review of this matter.

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.

 

32


Table of Contents

Definite-lived intangible assets, which are comprised of 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. We evaluate indefinite-lived intangible assets, which are comprised of the trademarks of Purification Solutions, for impairment annually or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. The annual review is performed as of May 31. We may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. The quantitative impairment test is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates and discount rates over an estimate of the remaining operating period at the unit of accounting level. These future growth rates depend on achieving the expected volumes and pricing levels of the products of Purification Solutions.

Our long-lived assets primarily include property, plant and equipment, long-term investments and assets held for rent. 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. An asset impairment is recognized when the carrying value of the asset is not recoverable based on the probability-weighted undiscounted estimated future cash flows to be generated by the asset. Our estimates reflect management’s assumptions about selling prices, production and sales volumes, costs and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. The key inputs to the discounted cash flow would be the same as the undiscounted cash flow noted above, with the addition of the discount rate used. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when we no longer intend to use the asset.

To test for impairment of assets we generally use 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.

Pensions and Other Postretirement Benefits

We maintain both defined benefit and defined contribution plans for our employees. In addition, we provide certain postretirement health care and life insurance benefits for our retired employees. Plan obligations and annual expense calculations are based on a number of key assumptions. The assumptions, which are specific for each of our U.S. and foreign plans, are related to both the assets we hold to fund our plans (where applicable) and the characteristics of the benefits that will ultimately be provided to our employees. The most significant assumptions relative to our plan assets include the anticipated rates of return on these assets. Assumptions relative to our pension obligations are more varied; they include estimated discount rates, rates of compensation increases for employees, mortality, employee turnover and other related demographic data. Projected health care and life insurance obligations also rely on the above mentioned demographic assumptions and assumptions surrounding health care cost trends. Actual results that differ from the assumptions are generally accumulated and amortized over future periods and could therefore affect the recognized expense and recorded obligation in such future periods. However, cash flow requirements may be different from the amounts of expense that are recorded in the consolidated financial statements.

Litigation and Contingencies

We are involved in litigation in the ordinary course of business, including personal injury and environmental litigation. After consultation with counsel, as appropriate, we accrue a liability for litigation

 

33


Table of Contents

when it is probable that a liability has been incurred and the amount can be reasonably estimated. The estimated reserves are recorded based on our best estimate of the liability associated with such matters or the low end of the estimated range of liability if we are unable to identify a better estimate within that range. Our best estimate is determined through the evaluation of various information, including claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience. Litigation is highly uncertain and there is always the possibility of an unusual result in any particular case that may reduce our earnings and cash flows.

The most significant reserves that we have established are for environmental remediation and respirator litigation claims. The amount accrued for environmental matters reflects our assumptions about remediation requirements at the contaminated sites, the nature of the remedies, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. A portion of the reserve for environmental matters is recognized on a discounted basis, which requires the use of an estimated discount rate and estimates of future cash flows associated with the liability. These liabilities can be affected by the availability of new information, changes in the assumptions on which the accruals are based, unanticipated government enforcement action or changes in applicable government laws and regulations, which could result in higher or lower costs.

Our current estimate of the cost of our share of existing and future respirator liability claims is based on facts and circumstances existing at this time. Developments that could affect our 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 silica and non-malignant asbestos claims, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of other parties which contribute to the settlement of respirator claims, (viii) a change in the availability of insurance coverage maintained by the entity from which we acquired the safety respiratory products business or the indemnity provided by its former owner, (ix) changes in the allocation of costs among the various parties paying legal and settlement costs and (x) a determination that the assumptions that were used to estimate our share of liability are no longer reasonable. We cannot determine the impact of these potential developments on our current estimate of our share of liability for these existing and future claims. Accordingly, the actual amount of these liabilities for existing and future claims could be different than the reserved amount.

Income Taxes

Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws.

Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations which make the ultimate tax determination uncertain. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. We have recorded reserves for taxes and associated interest and penalties that may become payable in future years as a result of audits by tax authorities. Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, and/or our cash flow.

We record benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the

 

34


Table of Contents

largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities’ full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. We also accrue for interest and penalties on these uncertain tax positions and include such charges in the income tax provision in the Consolidated Statements of Operations.

Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carry-forwards, foreign tax credits, and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. Failure to achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense, while a release of valuation allowances in periods when these tax attributes become realizable would reduce our income tax expense. During the fourth quarter of 2014, the Company recorded a $20 million increase in the valuation allowance on deferred tax assets of a foreign jurisdiction that incurred cumulative losses for the current year and prior two years.

Significant Accounting Policies

We have other significant accounting policies that are discussed in Note A of the Notes to our Consolidated Financial Statements in Item 8 below. Certain of these policies include the use of estimates, but do not meet the definition of critical because they generally do not require estimates or judgments that are as difficult or subjective to measure. However, these policies are important to an understanding of the Consolidated Financial Statements.

Results of Operations

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 or segment.

The term “LIFO” includes two factors: (i) the impact of current inventory costs being recognized immediately in Cost of sales under a last-in first-out method, compared to the older costs that would have been included in Cost of sales under a first-in first-out method (“Cost of sales impact”); and (ii) the impact of reductions in inventory quantities, causing historical inventory costs to flow through Cost of sales (“liquidation impact”).

The discussion under the heading “Provision for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate” includes a discussion of our “effective tax rate” and our “operating tax rate” and includes a reconciliation of the two rates. 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 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. Our

 

35


Table of Contents

definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that the 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 understand what our tax rate on current operations would be without the impact of these items which we do not believe are reflective of the underlying business results.

Total segment EBIT is a non-GAAP performance measure, and should not be considered an alternative for Income from continuing operations before taxes, the most directly comparable GAAP financial measure. In calculating Total segment EBIT, we make certain adjustments such as excluding certain items, meaning items that management does not consider representative of our fundamental segment results, as well as items that are not allocated to our business segments, such as interest expense and other corporate costs. Our Chief Operating Decision Maker uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT provides useful supplemental information for our investors as it is an important indicator of the Company’s operational strength and performance. 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. A reconciliation of Total segment EBIT to Income from continuing operations before income taxes and equity in earnings of affiliated companies is provided in Note T of our consolidated financial statements.

Cabot is organized into four reportable business segments: Reinforcement Materials, Performance Materials, Advanced Technologies and Purification Solutions. Cabot is also organized for operational purposes into three geographic regions: the Americas; Europe, Middle East and Africa; and Asia Pacific. Discussions of all periods reflect these structures.

Our analysis of financial condition and operating results should be read with our consolidated financial statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to our fiscal years ended September 30.

On July 31, 2012, we purchased all of the issued and outstanding shares of Norit N.V., the business of which we renamed and report as Purification Solutions. Our results for the twelve month period ended September 30, 2012 include two months of results for Purification Solutions.

Drivers of Demand and Key Factors Affecting Profitability

Drivers of demand and key factors affecting our profitability differ by segment. In Reinforcement Materials, demand is influenced on a long-term basis primarily by: i) the number of vehicle miles driven globally; ii) the number of original equipment and replacement tires produced; and iii) the number of automotive builds. Over the past several years, operating results have been driven by a number of factors, including: i) increases or decreases in sales volumes; ii) changes in raw material costs and our ability to obtain sales price increases for our products commensurate with increases in raw material costs; iii) changes in pricing and product mix; iv) global and regional capacity utilization; v) fixed cost savings achieved through restructuring and other cost saving activities; vi) the growth of our volumes and market position in emerging economies; and vii) capacity management and technology investments, including the impact of energy utilization and yield improvement technologies at our manufacturing facilities.

In Performance Materials, longer term demand is driven primarily by the construction and infrastructure, automotive, electronics and consumer products industries. In recent years, operating results in Performance Materials have been driven by: i) increases or decreases in sales volumes; ii) our ability to deliver differentiated products that drive enhanced performance in customers’ applications; iii) our ability to obtain value pricing for this differentiation; and iv) the cost of new capacity.

In Advanced Technologies, drivers of demand are specific to the various businesses. In the Inkjet Colorants business, demand has been driven by a relative increase of printer platforms using our pigments at both new and existing customers and the broader adoption of inkjet technology in office and commercial printing applications. Demand in the Aerogel business has been driven by the adoption of

 

36


Table of Contents

aerogel products for daylighting and insulation for building, construction and industrial applications, and insulation products used in the oil and gas industry. In the Elastomer Composites business, operating results have been driven by sales of elastomer composites as well as royalties and technology payments related to our patented technology that is used in tire applications. During fiscal 2014, we fully transitioned into the royalty phase of our exclusive licensing agreement for our patented elastomer composites manufacturing process with Michelin. Under our current agreement, in future years, revenues will be driven by royalties and technology payments in accordance with this agreement based on a pre-determined schedule linked to Michelin’s installed elastomer composites manufacturing capacity. In our Specialty Fluids business, demand for cesium formate is primarily driven by the level of drilling activity for high pressure oil and gas wells and by the petroleum industry’s acceptance of our product as a drilling and completion fluid for this application. Operating results in Advanced Technologies have been influenced by: i) the rate at which we commercialize new technology; ii) our ability to select the highest value opportunities and work with lead users in the appropriate markets; iii) our ability to appropriately size the overall cost platform for the opportunities; iv) the timing of royalty and technology payments in our Elastomer Composites and Aerogel businesses; and v) the size, type and duration of drilling jobs in our Specialty Fluids business.

In Purification Solutions, longer term demand is driven primarily by the demand for activated carbon based solutions for water, gas and air, pharmaceuticals, food and beverages, catalysts and other chemical applications. Operating results in Purification Solutions have been influenced by i) changes in volume in the various applications previously noted, ii) the amount of coal-based power generation utilized in the U.S., iii) elevated maintenance activity and higher maintenance costs, iv) changes in price and product mix, and v) industry capacity utilization.

Overview of Results for Fiscal 2014

During fiscal 2014, Income from continuing operations before income taxes and equity in (loss) earnings of affiliated companies increased compared to fiscal 2013 largely due to higher volumes from improved demand in our key end markets, the addition of new carbon black capacity in China, and from our acquisition of Grupo Kuo S.A.B. de C.V.’s common stock interest in our carbon black joint venture in Mexico (“NHUMO”). In addition, raw material purchasing savings and the benefits from energy efficiency investments in Reinforcement Materials contributed to the improvement in earnings. In fiscal 2014, we recognized a gain on our pre-existing equity investment in NHUMO upon our acquisition of KUO’s common stock interest in NHUMO. See Note C to our consolidated financial statements for details of the NHUMO transaction.

Fiscal 2014 compared to Fiscal 2013 and Fiscal 2013 compared to Fiscal 2012—Consolidated

Net Sales and other operating revenue and Gross Profit

 

     Years ended September 30  
     2014      2013      2012  
     (Dollars in millions)  

Net sales and other operating revenues

   $ 3,647       $ 3,456       $ 3,291   

Gross profit

   $ 721       $ 633       $ 644   

The $191 million increase in net sales from fiscal 2013 to fiscal 2014 was due primarily to an increase in volumes ($247 million). The improvement was partially offset by lower prices and a less favorable product mix (combined $57 million). The $165 million increase in net sales from fiscal 2012 to fiscal 2013 was due primarily to the addition of Purification Solutions (approximately $267 million). The improvement was partially offset by lower prices and a less favorable product mix (combined $50 million), the unfavorable impact of foreign currency translation ($50 million), and lower volumes ($29 million).

Gross profit increased by $88 million in fiscal 2014 when compared to fiscal 2013 driven by higher volumes, raw material purchasing savings, and the benefits from energy efficiency investments. Gross

 

37


Table of Contents

profit decreased by $11 million in fiscal 2013 when compared to fiscal 2012 driven by lower unit margins that resulted from price decreases and a less favorable product mix, and lower volumes.

Selling and Administrative Expenses

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Selling and administrative expenses

   $ 326       $ 297       $ 281   

Selling and administrative expenses increased by $29 million in fiscal 2014 when compared to fiscal 2013. The increase was principally driven by higher expenses related to restructuring actions taken in our Europe, Middle East and Africa (“EMEA”) business service center, the addition of NHUMO, and higher costs associated with corporate projects. Selling and administrative expenses increased by $16 million in fiscal 2013 when compared to fiscal 2012. The comparative increase was principally driven by the addition of Purification Solutions and restructuring-related charges.

Research and Technical Expenses

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Research and technical expenses

   $ 60       $ 68       $ 72   

Research and technical expenses decreased $8 million in fiscal 2014 when compared to fiscal 2013 and decreased $4 million in fiscal 2013 when compared to fiscal 2012. The reduction in both periods was primarily due to lower costs from the benefits associated with restructuring-related activities as we focus on activities that are closer to our existing businesses.

Interest and Dividend Income

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Interest and dividend income

   $ 3       $ 5       $ 4   

Interest and dividend income decreased $2 million in fiscal 2014 when compared to fiscal 2013 due to lower interest earned on cash balances. Interest and dividend income increased $1 million in fiscal 2013 when compared to fiscal 2012 due to higher interest earned on cash balances.

Interest Expense

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Interest expense

   $ 55       $ 62       $ 46   

Interest expense decreased $7 million in fiscal 2014 as compared to fiscal 2013. The decrease was due to the maturity of long-term debt in the fourth quarter of fiscal 2013 that was refinanced with commercial paper carrying a lower interest rate. Interest expense increased $16 million in fiscal 2013 as compared to fiscal 2012. The increase was due to a higher debt balance as a result of the financing of the Purification Solutions acquisition, which was partially offset by lower interest expense related to the use of commercial paper in fiscal 2013.

 

38


Table of Contents

Other (Income) Expense

 

     Years Ended September 30  
       2014         2013          2012    
     (Dollars in millions)  

Other (income) expense

   $ (25   $ 1       $ 3   

Other (income) expense during fiscal 2014 increased by $26 million as compared to fiscal 2013 due primarily to a gain recognized on our existing equity investment in NHUMO ($29 million) as a result of the NHUMO transaction. This gain was partially offset by an unfavorable comparison of foreign currency movements. Other expense decreased by $2 million in fiscal 2013 compared to fiscal 2012 due to a favorable comparison of foreign currency movements.

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

 

     Years Ended September 30  
       2014         2013         2012    
     (Dollars in millions)  

Provision for income taxes

   $     92        $     60        $     55     

Effective tax rate

     30%        28%        22%   

Impact of discrete tax items:

      

Unusual or infrequent items

     (7%     (3%     3%   

Items related to uncertain tax positions

     3%        2%        1%   

Other discrete tax items

     (2%     1%          

Impact of certain items

     3%        (2%     (1%
  

 

 

   

 

 

   

 

 

 

Operating tax rate

     27%        26%        25%   

The provision for income taxes was $92 million for fiscal 2014, resulting in an effective tax rate of 30%. This amount included net discrete charges of $17 million, principally comprised of a $20 million valuation allowance, partially offset by a non-taxable gain of $29 million recognized on the Company’s pre-existing investment in NHUMO as a result of the NHUMO transaction. This gain is reported as a certain item. See Note C of the consolidated financial statements for details of the transaction. The operating tax rate for fiscal 2014 was 27%.

The provision for income taxes was $60 million for fiscal 2013, resulting in an effective tax rate of 28%. The increase in the effective tax rate for fiscal 2013, as compared to fiscal 2012, is due to a change in our geographic mix of earnings and an increase in losses from jurisdictions for which no benefit can be recognized. This amount included net discrete charges of $3 million composed of $13 million foreign currency related charge, offset by $10 million of net tax benefit related to tax settlements, renewal of the U.S. research and experimentation credit, and other miscellaneous tax items in the tax provision. The operating tax rate for fiscal 2013 was 26%.

The provision for income taxes was $55 million for fiscal 2012, resulting in an effective tax rate of 22%. This amount included net discrete tax benefits of $8 million from the release of a Cabot state tax valuation allowance as a result of the Purification Solutions acquisition and from settlements and miscellaneous tax items. The operating tax rate for fiscal 2012 was 25%.

Our anticipated operating tax rate for fiscal 2015 is between 26% and 28%. The IRS has not yet commenced the audit of our 2007 and later tax years and certain Cabot subsidiaries are under audit in a number of jurisdictions outside of the U.S. It is possible that some of these audits will be resolved in fiscal 2015 and could impact our anticipated effective tax rate. We have filed our tax returns in accordance with the tax laws in each jurisdiction and maintain tax reserves for uncertain tax positions.

 

39


Table of Contents

Equity in Earnings of Affiliated Companies and Net Income Attributable to Noncontrolling Interest, net of tax

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Equity in earnings of affiliated companies, net of tax

   $       $ 11       $ 11   

Net income attributable to noncontrolling interests, net of tax

   $ 19       $ 7       $ 18   

Equity in earnings of affiliated companies, net of tax, decreased $11 million in fiscal 2014 compared fiscal 2013. The decline was primarily due to the consolidation of the earnings of NHUMO following the NHUMO transaction and lower earnings from our Venezuelan equity affiliate, including the unfavorable impact from the devaluation of the Venezuelan bolivar. Equity in earnings of affiliated companies, net of tax, in fiscal 2013 was consistent with fiscal 2012.

For fiscal 2014, net income attributable to noncontrolling interests, net of tax, increased $12 million due to higher profitability of our joint ventures and charges associated with our 2013 restructuring in Malaysia that did not repeat in fiscal 2014. For fiscal 2013, net income attributable to noncontrolling interests, net of tax, decreased $11 million due to charges associated with our restructuring in Malaysia and lower profitability of our joint ventures in China.

Income from Discontinued Operations, net of tax

During fiscal 2014, we divested our Security Materials business, and during fiscal 2012, we divested our Supermetals business. Accordingly, for all periods we have classified the income or loss from the Security Materials and Supermetals businesses as Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, increased $3 million in fiscal 2014 when compared to fiscal 2013 due to a gain recognized on the sale of the Security Materials business in fiscal 2014. Income from discontinued operations, net of tax, decreased $205 million in fiscal 2013 when compared to fiscal 2012 because we recognized the gain on the sale of the Supermetals business in fiscal 2012 and no longer operated the business in fiscal 2013.

Net Income Attributable to Cabot Corporation

In fiscal 2014, we reported net income of $199 million ($3.03 per diluted common share). This is compared to net income of $153 million ($2.36 per diluted common share) in fiscal 2013 and net income of $388 million ($5.99 per diluted common share) in fiscal 2012.

Fiscal 2014 compared to Fiscal 2013 and Fiscal 2013 compared to Fiscal 2012—By Business Segment

Total segment EBIT, certain items, other unallocated items and Income from continuing operations before income taxes and equity in earnings of affiliated companies for fiscal 2014, 2013 and 2012 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note U of our Consolidated Financial Statements.

 

     Years Ended September 30  
       2014         2013         2012    
     (Dollars in millions)  

Total segment EBIT

   $ 447      $ 386      $ 410   

Certain items

     (28     (54     (51

Other unallocated items

     (111     (122     (113
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes and equity in earnings of affiliated companies

   $ 308      $ 210      $ 246   
  

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

In fiscal 2014, total segment EBIT increased by $61 million when compared to fiscal 2013. The increase was driven by higher volumes ($84 million), higher unit margins ($23 million) that resulted from raw material purchasing savings and the benefits from energy efficiency investments, a favorable comparison of foreign currency movements ($15 million), and higher royalty and technology payments in Elastomer Composites ($11 million). The increase was partially offset by higher fixed costs ($73 million) driven by costs from new capacity in the Reinforcement Materials segment and higher maintenance costs in the Purification Solutions segment.

In fiscal 2013, total segment EBIT decreased by $24 million when compared to fiscal 2012. The decrease was principally driven by lower volumes ($8 million), lower unit margins ($8 million) that resulted from price decreases and a less favorable product mix, and the unfavorable impact of foreign currency translation ($7 million).

Certain Items:

Details of the certain items for fiscal 2014, 2013, and 2012 are as follows:

 

     Years Ended September 30  
       2014         2013         2012    
     (Dollars in millions)  

Global restructuring activities

   $ (29   $ (35   $ (17

Acquisition and integration-related charges

     (7     (21     (26

Foreign currency (loss) gain on revaluations

     (3     3          

Gain on existing investment in NHUMO

     29                 

Legal and environmental matters and reserves

     (18     (1     (8
  

 

 

   

 

 

   

 

 

 

Total certain items, pre-tax

   $ (28   $ (54   $ (51
  

 

 

   

 

 

   

 

 

 

Tax-related certain items

      

Tax impact of certain items

   $ 17      $ 10      $ 9   

Tax impact of certain foreign exchange (losses) gains

            (12     1   

Tax impact of non-deductible interest expense

                   (2

Discrete tax items

     (17     11        11   
  

 

 

   

 

 

   

 

 

 

Total tax-related certain items

            9        19   

Total certain items after tax

   $ (28   $ (45   $ (32
  

 

 

   

 

 

   

 

 

 

Certain items for fiscal 2014 include charges related to restructuring activities, acquisition and integration-related charges, foreign currency impacts on revaluations, a gain recognized on our existing equity investment in NHUMO, legal and environmental matters and reserves and tax certain items. Details of restructuring activities are included in Note O of the Consolidated Financial Statements. Acquisition and integration-related charges include legal and professional fees, the incremental value of inventory as a result of purchase accounting adjustments and other expenses related to the completion of the acquisitions and the integrations of Purification Solutions and NHUMO. Details of the gain recognized on our existing equity investment in NHUMO are included in Note C of the consolidated financial statements. A discussion of legal and environmental matters and reserves is included in Note S of the consolidated financial statements. Tax-related certain items include discrete tax items, which are unusual and infrequent, and the tax impact of certain foreign exchange losses.

 

41


Table of Contents

Other Unallocated Items:

 

     Years Ended September 30  
     2014     2013     2012  
     (Dollars in millions)  

Interest expense

   $ (55   $ (62   $ (46

Equity in earnings of affiliated companies, net of tax

            (11     (11

Unallocated corporate costs

     (54     (48     (56

General unallocated expense

     (2     (1       
  

 

 

   

 

 

   

 

 

 

Total other unallocated items

   $ (111   $ (122   $ (113
  

 

 

   

 

 

   

 

 

 

Other unallocated items include Interest expense, Equity in earnings of affiliated companies, net of tax, Unallocated corporate costs, and General unallocated expense. 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 new technology efforts. The balances of General unallocated expense primarily include foreign currency transaction gains (losses), interest income, dividend income, the elimination of profit related to unearned revenue, and the COGS impact of LIFO accounting.

In fiscal 2014, costs from total other unallocated items decreased by $11 million when compared to fiscal 2013. The decrease was driven by $11 million of lower Equity in earnings of affiliated companies, net of tax, due to the consolidation of the earnings of NHUMO following the NHUMO transaction and lower earnings from our Venezuelan equity affiliate. Interest expense also decreased by $7 million due to the maturity of long-term debt in the fourth quarter of fiscal 2013 that was refinanced with commercial paper carrying a lower interest rate. These decreases were partially offset by a $6 million increase in Unallocated corporate costs primarily associated with spending for corporate projects and higher expenses related to incentive compensation.

In fiscal 2013, costs from total other unallocated items increased by $9 million when compared to fiscal 2012. The increase was primarily driven by a $16 million increase in Interest expense due to a higher debt balance as a result of the financing of the Purification Solutions acquisition. The increase was partially offset by an $8 million decrease in Unallocated corporate costs due to lower expenses related to incentive compensation.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for fiscal 2014, 2013 and 2012 are as follows:

 

     Years Ended September 30  
     2014      2013      2012  
     (Dollars in millions)  

Reinforcement Materials Sales

   $ 2,076       $ 1,902       $ 2,019   
  

 

 

    

 

 

    

 

 

 

Reinforcement Materials EBIT

   $ 242       $ 188       $ 227   
  

 

 

    

 

 

    

 

 

 

In fiscal 2014, sales in Reinforcement Materials increased by $174 million when compared to fiscal 2013. The increase was principally driven by 13% higher volumes ($254 million). The increase was offset by a less favorable price and product mix (combined $67 million) and an unfavorable comparison of foreign currency translation ($14 million). Higher volumes were due to improved carbon black demand, the addition of new capacity in China, and the acquisition of NHUMO. The less favorable price and product mix was primarily due to price adjustments to customers for decreases in raw material costs.

In fiscal 2013, sales in Reinforcement Materials decreased by $117 million when compared to fiscal 2012. The decrease was principally driven by a less favorable price and product mix (combined $54 million), the unfavorable impact of foreign currency translation ($41 million), and 1% lower volumes

 

42


Table of Contents

($23 million). The less favorable price and product mix was primarily due to price adjustments to customers for decreases in raw material costs and lower prices as a result of a more competitive market environment in Asia and Europe. Lower volumes were primarily due to a weak economic environment in Europe and a supply disruption at one of our plants in Japan.

In fiscal 2014, Reinforcement Materials EBIT increased by $54 million when compared to fiscal 2013 driven principally by higher volumes ($85 million), higher unit margins ($16 million) from raw material purchasing savings and the benefit from energy efficiency investments, and a favorable comparison of foreign currency translation ($12 million). The increase was partially offset by higher fixed costs ($58 million). Higher volumes were due to improved carbon black demand, the addition of new capacity in China and the acquisition of NHUMO. Higher fixed costs were primarily associated with new carbon black capacity in China and the acquisition of NHUMO.

In fiscal 2013, Reinforcement Materials EBIT decreased by $39 million when compared to fiscal 2012 driven principally by lower unit margins ($27 million) that resulted from lower prices and a less favorable product mix, lower volumes ($7 million), and higher fixed manufacturing costs ($7 million) primarily from higher utility costs. Lower unit margins were driven by lower prices as a result of a more competitive market environment in Asia and Europe.

Performance Materials

Sales and EBIT for Performance Materials for fiscal 2014, 2013 and 2012 are as follows:

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Specialty Carbons and Compounds Sales

   $ 647       $ 622       $ 664   

Fumed Metal Oxides Sales

     300         282         250   
  

 

 

    

 

 

    

 

 

 

Performance Materials Sales

   $ 947       $ 904       $ 914   
  

 

 

    

 

 

    

 

 

 

Performance Materials EBIT

   $ 158       $ 132       $ 128   
  

 

 

    

 

 

    

 

 

 

In fiscal 2014, sales in Performance Materials increased $43 million when compared to fiscal 2013 due to higher volumes ($49 million) and a favorable comparison of foreign currency translation ($11 million), offset by a less favorable price and product mix (combined $17 million). During fiscal 2014, volumes in Specialty Carbons and Compounds increased by 6% and volumes in Fumed Metal Oxides increased by 5%. Higher volumes were due to improved demand in our key end markets. The change in price and product mix was driven by a less favorable product mix and price adjustments to customers that coincided with decreases in raw material costs.

In fiscal 2013, sales in Performance Materials decreased $10 million when compared to fiscal 2012 due to a less favorable price and product mix (combined $9 million) driven by lower prices that coincided with lower raw material costs and a less favorable mix of products sold. During fiscal 2013, volumes in Specialty Carbons and Compounds decreased by 5% due to lower demand in our key end markets and volumes in Fumed Metal Oxides increased by 14% due to new product introductions and the successful commercialization of new capacity.

In fiscal 2014, EBIT in Performance Materials was $26 million higher when compared to fiscal 2013 due to higher volumes ($26 million) as demand improved in our key end markets.

In fiscal 2013, EBIT in Performance Materials was $4 million higher when compared to fiscal 2012 due to higher volumes ($11 million) driven by an increase in Fumed Metal Oxides due to new product introductions and the successful commercialization of new capacity. The higher volumes were partially offset by a less favorable price and product mix (combined $2 million) and higher costs associated with the reduction of inventory levels ($8 million).

 

43


Table of Contents

Advanced Technologies

Sales and EBIT for Advanced Technologies for fiscal 2014, 2013 and 2012 are as follows:

 

     Years Ended September 30  
       2014          2013          2012    
     (Dollars in millions)  

Inkjet Colorants

   $ 62       $ 64       $ 66   

Aerogel

     13         21         18   

Elastomer Composites

     32         29         23   

Specialty Fluids

     98         101         94   
  

 

 

    

 

 

    

 

 

 

Advanced Technologies Sales

   $ 205       $ 215       $ 201   
  

 

 

    

 

 

    

 

 

 

Advanced Technologies EBIT

   $ 66       $ 70       $ 50   
  

 

 

    

 

 

    

 

 

 

Sales in Advanced Technologies decreased by $10 million in fiscal 2014 when compared to fiscal 2013. The decrease was primarily due to lower volumes ($25 million), most notably in the Specialty Fluids and Elastomer Composites businesses, lower Aerogel royalties ($8 million), and the unfavorable impact of foreign currency translation ($2 million). These decreases were partially offset by higher pricing and a more favorable product mix (combined $14 million) driven by price increases implemented in the Specialty Fluids business, and higher royalties and technology payments in the Elastomer Composites business ($11 million).

Sales in Advanced Technologies increased by $14 million in fiscal 2013 when compared to fiscal 2012. The increase was primarily due to higher pricing and a favorable product mix ($15 million) driven by price increases implemented in the Specialty Fluids business, partially offset by unfavorable foreign currency translation ($3 million). Higher royalties and technology payments in the Elastomer Composites business offset lower volumes in the segment.

EBIT in Advanced Technologies decreased by $4 million in fiscal 2014 when compared to fiscal 2013. The decrease is primarily due to lower volumes ($10 million), lower Aerogel royalties ($8 million), higher fixed costs ($4 million) driven by higher mine-related costs in the Specialty Fluids business, and the unfavorable impact of foreign currency translation ($1 million). These decreases were partially offset by higher pricing and a more favorable product mix (combined $8 million) driven by price increases implemented in the Specialty Fluids business, and higher royalties and technology payments in the Elastomer Composites business ($11 million).

EBIT in Advanced Technologies increased by $20 million in fiscal 2013 when compared to fiscal 2012. The increase was driven by cost savings from restructuring activities in the segment ($10 million) and higher royalties and technology payments in the Elastomer Composites business ($9 million). Higher prices and a favorable product mix were largely offset by lower volumes.

The main raw material source for our Specialty Fluids business is our cesium mine in Canada. After a fall of ground in 2013 in a portion of the mine that contains significant cesium reserves, we began to assess the technical and economic feasibility of development alternatives at the mine to enable us to continue to access our pollucite reserves, and recently began a development project in a portion of the mine unaffected by the instability. If this project is successfully implemented, taking into account inventory on hand and our expected consumption rate, we expect our supply of cesium products to last approximately five years, excluding the potential for additional cesium supply from other projects that we are currently pursuing. We will continue to assess options to access the additional reserves in the mine, assess various technologies to augment our cesium supply, seek alternative sources of ore, and be more selective in the projects we supply to minimize our annual consumption of cesium. These actions will likely affect costs, pricing and volumes in the Specialty Fluids business.

 

44


Table of Contents

Purification Solutions

Sales and EBIT for Purification Solutions for fiscal 2014, 2013 and 2012 are as follows:

 

     Years Ended September 30  
       2014         2013         2012    
     (Dollars in millions)  

Purification Solutions Sales

   $ 315      $ 328      $ 61   
  

 

 

   

 

 

   

 

 

 

Purification Solutions EBIT

   $ (19   $ (4   $ 5   
  

 

 

   

 

 

   

 

 

 

Sales in Purification Solutions decreased by $13 million in fiscal 2014 when compared to fiscal 2013 due to lower volumes ($31 million) partially offset by a more favorable price and product mix (combined $13 million) and a favorable comparison of foreign currency movements ($5 million). Lower volumes were driven by a decline in demand in the air and gas sector. The more favorable price and product mix was primarily due to the implementation of price increases.

The acquisition of Purification Solutions was completed on July 31, 2012. Sales in Purification Solutions increased by $267 million in fiscal 2013 when compared to fiscal 2012 because our results for the twelve month period ended September 30, 2012 included two months of results.

EBIT in Purification Solutions decreased by $15 million in fiscal 2014 when compared to fiscal 2013 driven by lower volumes ($17 million) and higher fixed costs ($10 million). These declines were partially offset by higher unit margins ($2 million) due to price increases, and the benefit from insurance proceeds ($9 million). Lower volumes were primarily due to a decline in demand in the air and gas sector. Higher fixed costs were primarily related to higher maintenance costs and higher allocation of certain functional and indirect costs. The insurance proceeds were related to business interruption and property damage insurance recoveries for operating issues experienced in late fiscal 2013 and early fiscal 2014.

EBIT in Purification Solutions decreased by $9 million in fiscal 2013 when compared to fiscal 2012. During fiscal 2013, the business experienced lower volumes and pricing in the gas and air purification end market. In addition, the segment has incurred higher costs associated with plant unit outages, the reduction of inventory levels, and the allocation of certain functional and indirect costs.

Cash Flows and Liquidity

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, increased by $184 million during fiscal 2014. The increase was largely attributable to the receipt, during fiscal 2014, of the final cash payment for the sale of the Supermetals business, partially offset by cash used for the NHUMO acquisition. At September 30, 2014, we had cash and cash equivalents of $67 million, and current availability under our revolving credit agreement of $720 million. Our revolving credit agreement, which has a $750 million limit, supports our commercial paper program. The outstanding balance of commercial paper as of September 30, 2014 was $30 million and is included within the Notes payable caption on our Consolidated Balance Sheets. At September 30, 2014, we were in compliance with all applicable covenants including interest coverage, debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) and subsidiary debt to total capitalization ratios.

Effective October 3, 2014, we entered into a new revolving credit agreement that amended and extended our $750 million revolving credit agreement (which was scheduled to mature on August 25, 2016). The new revolving credit agreement, which matures on October 3, 2019, subject to two one-year options to extend after the first and second anniversaries of the effective date, continues to support our commercial paper program. Borrowings under the new revolving credit agreement may be used for working capital, letters of credit and other general corporate purposes. The new revolving credit agreement contains affirmative and negative covenants, a single financial covenant (debt-to-EBITDA) and events of default customary for financings of this type.

 

45


Table of Contents

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. As of September 30, 2014, our cash and cash equivalent holdings included $4 million in the U.S. and $63 million internationally.

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 program to meet our operational and capital investment needs and financial obligations for the foreseeable future. Our liquidity derived 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.

Discontinued Operations

Our Consolidated Statements of Cash Flows have been presented to include discontinued operations with continuing operations. Therefore, unless noted otherwise, the following discussion of our cash flows and liquidity position include both continuing and discontinued operations.

In January 2012, we completed the sale of our Supermetals business, which we classified as discontinued operations beginning in the fourth quarter of fiscal 2011 when we entered into the sale and purchase agreement. In connection with the sale, we received $175 million on the closing date and notes for additional minimum consideration totaling approximately $277 million payable at various dates through March 2014. Total cash proceeds collected were $452 million, of which the final payment of $215 million was received in fiscal 2014.

In July 2014, we completed the sale of our Security Materials business, which we classified as discontinued operations. In connection with the sale, we received approximately $20 million in cash proceeds.

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 (inventories plus accounts and notes receivable, less accounts payable and accrued liabilities) and changes in certain other balance sheet accounts, totaled $315 million in fiscal 2014. Operating activities provided $419 million and $415 million in fiscal 2013 and 2012, respectively.

Cash provided from operating activities in fiscal 2014 was driven primarily by net income of $218 million plus $201 million of depreciation and amortization and $25 million of dividends from equity affiliates. These sources of cash were partially offset by a net increase in working capital. Our working capital increase during fiscal 2014 was driven primarily by higher Accounts receivable and Inventories.

Cash provided from operating activities in fiscal 2013 was driven primarily by net income of $160 million plus $190 million of depreciation and amortization and a decrease in working capital. The increase in fiscal 2013 depreciation and amortization when compared to fiscal 2012 was driven primarily by higher amortization of intangible assets related to the fiscal 2012 acquisition of Norit N.V. Our fiscal 2013 working capital decrease when compared to fiscal 2012 was primarily driven by lower Accounts receivable and lower Inventories partially offset by lower Accounts payable and accrued liabilities.

Cash generated from operating activities in fiscal 2012 was driven primarily by net income of $406 million plus $154 million of depreciation and amortization and a decrease in working capital. Our

 

46


Table of Contents

fiscal 2012 working capital decrease when compared to fiscal 2011 was primarily driven by higher Accounts payable and accrued liabilities partially offset by higher Inventories.

In addition to the working capital movements noted above, the following other elements of operations have had a bearing on operating cash flows:

Restructurings—As of September 30, 2014, we had $19 million of total restructuring costs in accrued expenses in the consolidated balance sheet related to our global restructuring activities. We made cash payments of $15 million during fiscal 2014 related to these restructuring plans. We expect to make cash payments related to these restructuring activities of approximately $32 million in fiscal 2015 and thereafter (which includes the $19 million already accrued in the consolidated balance sheet as of September 30, 2014). We may receive cash in the future from the sale of certain assets and land relating to restructured sites, which is not included in these amounts.

Environmental Reserves and Litigation Matters—As of September 30, 2014, we have recorded a $17 million reserve, substantially all of which is accounted for on an undiscounted basis for environmental remediation costs at various sites. These sites are primarily associated with businesses divested in prior years. We anticipate that the expenditures at these sites will be made over a number of years, and will not be concentrated in any one year. Additionally, as of September 30, 2014 we have recorded a $13 million reserve for respirator claims. These expenditures will be incurred over many years. We also have other litigation costs arising in the ordinary course of business.

The following table represents the estimated future payments related to our environmental reserve.

 

     Future Payments by Fiscal Year  
     2015      2016      2017      2018      2019      Thereafter      Total  
     (Dollars in millions)  

Environmental

   $ 4      $ 6      $ 1      $ 1      $ 1      $ 4      $ 17  

Cash Flows from Investing Activities

In fiscal 2014, capital expenditures of $171 million and cash paid for NHUMO of $73 million (net of cash acquired of $7 million) were partially offset by the receipt of the final cash payment for the sale of the Supermetals business of $215 million. In fiscal 2013, investing activities consumed $227 million of cash and were primarily driven by capital expenditures of $264 million partially offset by cash received from the notes receivable from the sale of the Supermetals business ($40 million in total, comprised of $39 million of principal and $1 million of interest).

Capital expenditures totaled $171 million, $264 million and $281 million in fiscal 2014, 2013 and 2012, respectively. In each of these years, expenditures were primarily related to expansion of our manufacturing footprint in the Asia Pacific region, the development of our lignite mine in Texas, sustaining and compliance capital projects at our operating facilities, investments in energy recovery technology, and capital spending required for process technology and product differentiation projects.

Capital expenditures for fiscal 2015 are expected to be between $200 million and $250 million. Our planned capital spending program for fiscal 2015 is primarily for sustaining and compliance capital projects at our operating facilities, investments in energy related projects, and site-development initiatives.

Cash Flows from Financing Activities

Financing activities consumed $302 million of cash in fiscal 2014 compared to consuming $206 million of cash in fiscal 2013 and providing $606 million in fiscal 2012. During fiscal 2014, our overall debt balance decreased by $226 million. The decrease was driven primarily by our repayment of commercial paper using the cash received from the sale of the Supermetals business. As of September 30, 2014, we had outstanding notes under our commercial paper program in an aggregate amount of $30 million, with a weighted average interest rate of 0.25%. In fiscal 2013, our overall debt balance decreased by $123 million

 

47


Table of Contents

primarily driven by cash generated from operations which was used to repay short-term debt offset by dividend payments to our stockholders of $51 million. Long-term debt of $175 million with an interest rate of 5.25% matured during fiscal 2013, and was repaid using our commercial paper program. In addition, derivatives related to this debt were settled at the time of maturity and consumed $31 million of cash. As of September 30, 2013, we had outstanding notes under our commercial paper program in an aggregate amount of $241 million with a weighted average interest rate of 0.32%.

Debt

The following table provides a summary of our outstanding debt.

 

     September 30  
         2014             2013      
     (Dollars in millions)  

Notes payable

   $ 44     $ 264  

Variable rate debt

     28       47  
  

 

 

   

 

 

 

Total variable rate debt

     72       311  

Fixed rate debt, net of discount

     984       971  
  

 

 

   

 

 

 

Unamortized bond discounts

     (1     (2

Capital leases

     17       18  
  

 

 

   

 

 

 

Total debt

   $ 1,072     $ 1,298  
  

 

 

   

 

 

 

At September 30, 2014, we had $720 million of availability under our credit agreement.

Our long-term total debt, of which $24 million is current, matures at various times as presented in Note I. The weighted-average interest rate on our fixed rate long-term debt was 4.07% as of September 30, 2014. The weighted-average interest rate on variable interest rate long-term debt was 6.67% as of September 30, 2014.

At September 30, 2014, we have provided standby letters of credit totaling $10 million, which expire throughout fiscal 2015.

Share repurchases

During fiscal 2014 and fiscal 2012, we repurchased approximately 0.2 million and 1.1 million shares of our common stock on the open market for an aggregate purchase price of $11 million and $36 million, respectively. We did not make any repurchases on the open market in fiscal 2013. As of September 30, 2014, we had approximately 1.4 million shares available for repurchase under the Board of Directors’ share repurchase authorization.

Dividend payments

In fiscal 2014, 2013 and 2012, we paid cash dividends on our common stock of $0.84, $0.80 and $0.76 per share, respectively. These cash dividend payments totaled $54 million in fiscal 2014, $51 million in fiscal 2013, and $49 million in fiscal 2012.

Venezuela

We own 49% of an operating carbon black 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 September 30, 2014, these subsidiaries carried the operating affiliate investment of $17 million and held 19 million bolivars (less than $1 million) in cash.

 

48


Table of Contents

During fiscal 2014, 2013 and 2012, the operating affiliate declared dividends in the amounts of $5 million, $3 million and $6 million, respectively, which were paid in U.S. dollars and repatriated to our wholly-owned subsidiaries.

During the second quarter of fiscal 2014, the Venezuelan government enacted several changes to Venezuela’s foreign exchange regime, introducing a multi-tier foreign exchange system whereby there are now three exchange rate mechanisms available to convert Venezuelan bolivars to U.S. dollars. In March 2014, the Venezuelan government created a currency exchange mechanism referred to as SICAD 2 (Supplementary System for the Administration of Foreign Currency) and allowed its use by all entities for all transactions. The exchange rate on March 31, 2014 under SICAD 2 was 50.8 bolivars to the U.S. dollar (B/$) compared to the previously used official exchange rate of 6.3 B/$. A significant portion of our 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. Since the exchange rate that was made available to us when converting these dollars into bolivars was the SICAD 2 exchange rate, the operating affiliate remeasured its bolivar denominated monetary accounts at that rate. The negative impact of the exchange rate devaluation on the operating affiliate’s results was $8 million, of which our share was $4 million as of September 30, 2014. The SICAD 2 rate at September 30, 2014 was 50.0 B/$.

In addition, in the second quarter of fiscal 2014, we remeasured the bolivar denominated monetary accounts in our wholly-owned subsidiaries at the SICAD 2 rate as it was determined that this exchange mechanism is applicable to these subsidiaries. This resulted in the recognition of a $2 million loss which was recorded within Other income (expense) within the Consolidated Statements of Operations. We also recognized a tax benefit of $2 million from a reduction in its bolivar denominated deferred tax liability due to the impact of the devaluation of the bolivar on unremitted earnings.

The operating entity has generally been profitable and has significant export operations from which it is entitled to retain a certain percentage of the foreign currency that it collects, which is principally the U.S. dollar. We continue to closely monitor developments in Venezuela and their potential impact on the recoverability of our equity affiliate investment.

We closely monitor our ability to convert our bolivar holdings into U.S. dollars, as we intend to convert substantially all bolivars held by our wholly-owned subsidiaries in Venezuela to U.S. dollars as soon as practical. Any future change in the SICAD 2 rate or opening of additional parallel markets could cause us to change the exchange rate we use and result in gains or losses on the bolivar denominated assets held by our wholly-owned subsidiaries.

Employee Benefit Plans

As of September 30, 2014, we had a consolidated pension obligation, net of the fair value of plan assets, of $176 million, comprised of $109 million for pension benefit plan liabilities and $67 million for postretirement benefit plan liabilities.

The $109 million of unfunded pension benefit plan liabilities is derived as follows:

 

     U.S.     Foreign     Total  
     (Dollars in millions)  

Fair Value of Plan Assets

   $ 167     $ 388     $ 555  

Benefit Obligation

     (173     (491     (664
  

 

 

   

 

 

   

 

 

 

Unfunded Status

   $ (6   $ (103   $ (109
  

 

 

   

 

 

   

 

 

 

In fiscal 2014, we made cash contributions totaling approximately $10 million to our foreign pension benefit plans and $3 million to a U.S. pension plan. For fiscal 2015, we expect to make cash contributions of less than $1 million to our U.S. pension plan and approximately $9 million to our foreign pension plans.

 

49


Table of Contents

Effective October 1, 2014, we transferred the defined benefit obligations and pension plan assets in one of our foreign defined benefit plans to a multi-employer plan. As a result of the transfer an estimated pre-tax charge of $18 million will be recorded in the first quarter of fiscal 2015.

The $67 million of unfunded postretirement benefit plan liabilities is comprised of $50 million for our U.S. and $17 million for our foreign postretirement benefit plans. These postretirement benefit plans provide certain health care and life insurance benefits for retired employees. Typical of such plans, our postretirement plans are unfunded and, therefore, have no plan assets. We fund these plans as claims or insurance premiums come due. In fiscal 2014, we paid postretirement benefits of $4 million under our U.S. postretirement plans and less than $1 million under our foreign postretirement plans. For fiscal 2015, we expect to make benefit payments of approximately $4 million under our U.S. postretirement plans and $1 million under our foreign postretirement plans.

Off-balance sheet arrangements

We had no material transactions that meet the definition of an off-balance sheet arrangement.

Contractual Obligations

The following table sets forth our long-term contractual obligations. Variable interest is based on the variable debt outstanding and prevailing variable interest rates as of September 30, 2014.

 

     Payments Due by Fiscal Year  
     2015      2016      2017      2018      2019      Thereafter      Total  
     (Dollars in millions)  

Contractual Obligations(1)

                    

Purchase Commitments

   $ 368      $ 302      $ 274      $ 267      $ 259      $ 2,490      $ 3,960  

Long-term debt

     23         7         314         265         30         373         1,012   

Capital lease obligations(2)

     4         4         4         3         3         21         39   

Fixed interest on long-term debt

     40         40         25         19         15         59         198   

Variable interest on long-term debt

     1                                                 1   

Operating leases

     24         19         13         11         10         70         147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 460       $ 372       $ 630       $ 565       $ 317       $ 3,013       $ 5,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

We are unable to estimate the timing of potential future payments related to our accrual for uncertain tax positions in the amount of $38 million at September 30, 2014.

(2) 

Capital lease obligations include executory costs and interest.

Purchase commitments

We have entered into long-term, volume-based purchase agreements primarily for the purchase of raw materials and natural gas with various key suppliers in Reinforcement Materials, Performance Materials, and Purification Solutions. Under certain of these agreements the quantity of material being purchased is fixed, but the price we pay changes as market prices change. For purposes of the table above, current purchase prices have been used to quantify total commitments.

Capital Leases

We have capital lease obligations primarily for certain equipment and buildings. These obligations are payable over the next 17 years.

Operating Leases

We have operating leases primarily comprised of leases for transportation vehicles, warehouse facilities, office space, and machinery and equipment.

 

50


Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through long- and short-term borrowings and denominate our transactions in a variety of foreign currencies. Changes in these rates may have an impact on future cash flows and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.

We have policies governing our use of derivative instruments, and we do not enter into financial instruments for trading or speculative purposes.

By using derivative instruments, we are subject to credit and market risk. The derivative instruments are booked to our balance sheet at fair market value and reflect the asset or (liability) position as of September 30, 2014. If a counterparty fails to fulfill its performance obligations under a derivative contract, our exposure will equal the fair value of the derivative. Generally, when the fair value of a derivative contract is positive, the counterparty owes Cabot, thus creating a payment risk for Cabot. We minimize counterparty credit (or repayment) risk by entering into these transactions with major financial institutions of investment grade credit rating. As of September 30, 2014, the counterparties that we have executed derivatives with were rated between A- and AA-, inclusive, by Standard and Poor’s. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow.

Foreign Currency Risk

Our international operations are subject to certain risks, including currency exchange rate fluctuations and government actions. Foreign currency exposures also relate to assets and liabilities denominated 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, we use short-term forward contracts to minimize the exposure to foreign currency risk. At September 30, 2014, we had $32 million in net notional foreign currency contracts, which were denominated in British pound sterling, Brazilian real, and Czech koruna. These forwards had a fair value of less than $1 million as of September 30, 2014.

In certain situations where we have a long-term commitment denominated in a foreign currency we may enter into appropriate financial instruments in accordance with our risk management policy to hedge future cash flow exposures.

 

51


Table of Contents
Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

 

Description

   Page  
(1)   

Consolidated Statements of Operations for each of the fiscal years ended September 30, 2014, 2013, and 2012

     53   
(2)   

Consolidated Statements of Comprehensive Income for each of the fiscal years ended September 30, 2014, 2013, and 2012

     54   
(3)   

Consolidated Balance Sheets at September 30, 2014 and 2013

     55   
(4)   

Consolidated Statements of Cash Flows for each of the fiscal years ended September 30, 2014, 2013, and 2012

     57   
(5)   

Consolidated Statements of Changes in Stockholders’ Equity for each of the fiscal years ended September 30, 2014, 2013, and 2012

     58   
(6)   

Notes to the Consolidated Financial Statements

     61   
(7)   

Report of Independent Registered Public Accounting Firm

     112   

 

52


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Years Ended September 30  
         2014             2013             2012      
     (In millions, except per share amounts)  

Net sales and other operating revenues

   $ 3,647     $ 3,456     $ 3,291  

Cost of sales

     2,926       2,823       2,647  
  

 

 

   

 

 

   

 

 

 

Gross profit

     721       633       644  

Selling and administrative expenses

     326       297       281  

Research and technical expenses

     60       68       72  
  

 

 

   

 

 

   

 

 

 

Income from operations

     335       268       291  

Interest and dividend income

     3       5       4  

Interest expense

     (55     (62     (46

Other income (expense)

     25       (1     (3
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes and equity in earnings of affiliated companies

     308       210       246  

Provision for income taxes

     (92     (60     (55

Equity in earnings of affiliated companies, net of tax

           11       11  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     216       161       202  

Income (loss) from discontinued operations, net of tax of $2, $(6) and $116

     2       (1     204  
  

 

 

   

 

 

   

 

 

 

Net income

     218       160       406  

Net income attributable to noncontrolling interests, net of tax of $5, $5 and $7

     19       7       18  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Cabot Corporation

   $ 199      $ 153     $ 388  
  

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, in millions:

      

Basic

     64.4       63.8        63.4   
  

 

 

   

 

 

   

 

 

 

Diluted

     65.1       64.5        64.2   
  

 

 

   

 

 

   

 

 

 

Income per common share:

      

Basic:

      

Income from continuing operations attributable to Cabot Corporation

   $ 3.04     $ 2.39     $ 2.88  

Income (loss) from discontinued operations

     0.02       (0.01     3.19  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Cabot Corporation

   $ 3.06     $ 2.38     $ 6.07  
  

 

 

   

 

 

   

 

 

 

Diluted:

      

Income from continuing operations attributable to Cabot Corporation

   $ 3.01     $ 2.37     $ 2.84  

Income (loss) from discontinued operations

     0.02       (0.01     3.15   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Cabot Corporation

   $ 3.03     $ 2.36     $ 5.99  
  

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.84     $ 0.80      $ 0.76   
  

 

 

   

 

 

   

 

 

 

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

 

53


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Years Ended September 30  
         2014             2013             2012      
     (In millions)  

Net income

   $ 218     $ 160     $ 406  

Other comprehensive (loss) income, net of tax

      

Foreign currency translation adjustment (net of tax (benefit) provision of $(10), $(12), $2)

     (131     (10     3  

Unrealized holding gains (losses) arising during the period (net of tax provision of $—, $1, $—)

           2       (1

Pension and other postretirement benefit liability adjustments

      

Pension and other postretirement benefit liability adjustments arising during the period (net of tax (benefit) provision of $(1), $13, $(9))

     (40     20       (18

Amortization of net loss and prior service credit included in net periodic pension cost (net of tax provision of $—, $—, $—)

           2       1  
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (171     14       (15
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     47       174       391  

Net income attributable to noncontrolling interests, (net of tax provision of $5, $5, $7)

     19       7       18  

Noncontrolling interests foreign currency translation adjustment

     (4     3       (1
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to noncontrolling interests

     15       10       17  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Cabot Corporation

   $ 32     $ 164     $ 374  
  

 

 

   

 

 

   

 

 

 

 

 

 

 

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

 

54


Table of Contents

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

 

     September 30  
             2014                     2013          
     (In millions, except
share and per share amounts)
 

Current assets:

    

Cash and cash equivalents

   $ 67     $ 95  

Accounts and notes receivable, net of reserve for doubtful accounts of $7 and $8

     688       633  

Inventories

     498       455  

Prepaid expenses and other current assets

     69       58  

Notes receivable from sale of business

           214  

Deferred income taxes

     42       36  

Current assets held for sale

           4  
  

 

 

   

 

 

 

Total current assets

     1,364       1,495  
  

 

 

   

 

 

 

Property, plant and equipment

     3,710       3,663  

Accumulated depreciation

     (2,129     (2,063
  

 

 

   

 

 

 

Net property, plant and equipment

     1,581       1,600  
  

 

 

   

 

 

 

Goodwill

     536       502  

Equity affiliates

     68       119  

Intangible assets, net

     347       308  

Assets held for rent

     56       49  

Deferred income taxes

     80       68  

Other assets

     52       83  

Noncurrent assets held for sale

           9  
  

 

 

   

 

 

 

Total assets

   $ 4,084     $ 4,233  
  

 

 

   

 

 

 

 

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

 

55


Table of Contents

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

     September 30  
             2014                     2013          
    

(In millions, except

share and per share amounts)

 

Current liabilities:

    

Notes payable

   $ 44     $ 264  

Accounts payable and accrued liabilities

     512       534  

Income taxes payable

     49       30  

Deferred income taxes

     1       2  

Current portion of long-term debt

     24       14  
  

 

 

   

 

 

 

Total current liabilities

     630       844  
  

 

 

   

 

 

 

Long-term debt

     1,004       1,020  

Deferred income taxes

     68       21  

Other liabilities

     291       265  

Redeemable Preferred Stock

     27        

Commitments and contingencies (Note S)

    

Stockholders’ equity:

    

Preferred stock:

    

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

    

Issued and Outstanding: None and none

              

Common stock:

    

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

    

Issued: 64,634,731 and 64,223,985 shares

    

Outstanding: 64,382,366 and 63,970,502 shares

     64       64  

Less cost of 252,365 and 253,483 shares of common treasury stock

     (7     (8

Additional paid-in capital

     49       39  

Retained earnings

     1,900       1,755  

Deferred employee benefits

            (2

Accumulated other comprehensive (loss) income

     (64     103  
  

 

 

   

 

 

 

Total Cabot Corporation stockholders’ equity

     1,942       1,951  

Noncontrolling interests

     122       132  
  

 

 

   

 

 

 

Total stockholders’ equity

     2,064       2,083  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,084     $ 4,233  
  

 

 

   

 

 

 

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

 

56


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

 

     Years Ended September 30  
         2014             2013             2012      
     (In millions)  

Cash Flows from Operating Activities:

      

Net income

   $ 218     $ 160     $ 406  

Adjustments to reconcile net income to cash provided by operating activities:

      

Depreciation and amortization

     201       190       154  

Impairment of assets

     4       16       2  

Deferred tax provision (benefit)

     8       (9     (6

Gain on existing investment in NHUMO

     (29              

Gain on sale of business

     (4            (191

Equity in earnings of affiliated companies

            (11     (11

Non-cash compensation

     14       16       18  

Other, net

     18       2       4  

Changes in assets and liabilities:

      

Accounts and notes receivable

     (54     34       6  

Inventories

     (56     64       (30

Prepaid expenses and other assets

     2        5       26  

Accounts payable and accrued liabilities

     (29     (18     100  

Income taxes payable

     15       (29     (13

Other liabilities

     (14     (11     (38

Cash dividends received from equity affiliates

     25       8       6  

Other

     (4 )     2       (18
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     315       419       415  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Additions to property, plant and equipment

     (171     (264     (281

Proceeds from sale of business

     20              181  

Receipts from notes receivable from sale of business

     215       39       23  

Acquisition of business, net of cash acquired

     (73            (1,104

Proceeds from sales of property, plant and equipment

                  2  

Change in assets held for rent

     (7     (2     (1
  

 

 

   

 

 

   

 

 

 

Cash used in investing activities

     (16     (227     (1,180
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Borrowings under financing arrangements

     13       6       84  

Repayments under financing arrangements

     (17     (33     (88

(Repayment) Proceeds from issuance of commercial paper, net

     (211     241         

Proceeds from long-term debt, net of issuance costs

     17       117       911  

Repayments of long-term debt

     (23     (442     (172

Decrease in notes payable, net

     (4     (12     (42

Settlement of derivatives

            (31       

Proceeds from cash contributions received from noncontrolling stockholders

            13       4  

Purchases of common stock

     (18     (6     (36

Proceeds from sales of common stock

     14       9       10  

Cash dividends paid to noncontrolling interests

     (19     (17     (16

Cash dividends paid to common stockholders

     (54     (51     (49
  

 

 

   

 

 

   

 

 

 

Cash (used in) provided by financing activities

     (302     (206     606  
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (25     (11     (7
  

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (28     (25     (166

Cash and cash equivalents at beginning of year

     95       120       286  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 67     $ 95     $ 120  
  

 

 

   

 

 

   

 

 

 

Income taxes paid

   $ 53     $ 84     $ 73  

Interest paid

     47       51       39  

Non-cash additions to property, plant and equipment

                   4  

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

 

57


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended September 30

(In millions, except shares in thousands)

 

2012   Common Stock,
Net of Treasury
Stock
    Additional
Paid-in

Capital
    Retained
Earnings
    Deferred
Employee

Benefits
    Accumulated
Other
Comprehensive

Income
    Total Cabot
Corporation
Stockholders’

Equity
    Non-
controlling

Interests
    Total
Stockholders’

Equity
 
    Shares     Cost                

Balance at September 30, 2011

    63,861     $ 63      $ 18      $ 1,314      $ (14   $ 106      $ 1,487      $ 129      $ 1,616   

Net income attributable to Cabot Corporation

          388           388         388  

Net Income attributable to non-controlling interests

                  18        18  

Total other comprehensive income

              (14     (14     (1     (15

Noncontrolling interest—other

                  4       4  

Noncontrolling interest—dividends

                  (24     (24

Cash dividends paid to common stockholders

          (49         (49       (49

Issuance of stock under employee compensation plans

    611       2       13             15         15  

Amortization of share-based compensation

        15             15         15  

Purchase and retirement of common and treasury stock

    (1,124     (9     (27           (36       (36

Principal payment by Employee Stock Ownership Plan under guaranteed loan

            6         6         6  

Notes receivable for restricted stock—payments

        1             1         1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    63,348     $ 56      $ 20      $ 1,653      $ (8   $ 92      $ 1,813      $ 126      $ 1,939   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

 

58


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended September 30

(In millions, except shares in thousands)

 

2013   Common Stock,
Net of Treasury
Stock
    Additional
Paid-in

Capital
    Retained
Earnings
    Deferred
Employee

Benefits
    Accumulated
Other
Comprehensive

Income
    Total Cabot
Corporation
Stockholders’

Equity
    Non-
controlling

Interests
    Total
Stockholders’

Equity
 
    Shares     Cost                

Balance at September 30, 2012

    63,348     $ 56      $ 20      $ 1,653      $ (8   $ 92      $ 1,813      $ 126      $ 1,939   

Net income attributable to Cabot Corporation

          153           153         153  

Net Income attributable to non-controlling interests

                  7       7  

Total other comprehensive income

              11       11       3       14  

Contribution from noncontrolling interests

                  13       13  

Noncontrolling interest—dividends

                  (17     (17

Cash dividends paid to common stockholders

          (51         (51       (51

Issuance of stock under employee compensation plans

    784             12             12         12  

Amortization of share-based compensation

        13             13         13  

Purchase and retirement of common stock

    (161       (6           (6       (6

Principal payment by Employee Stock Ownership Plan under guaranteed loan

            6         6         6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    63,971     $ 56      $ 39      $ 1,755      $ (2   $ 103      $ 1,951      $ 132      $ 2,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

 

59


Table of Contents

CABOT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended September 30

(In millions, except shares in thousands)

 

2014   Common Stock,
Net of Treasury
Stock
    Additional
Paid-in

Capital
    Retained
Earnings
    Deferred
Employee

Benefits
    Accumulated
Other
Comprehensive

Income
    Total Cabot
Corporation
Stockholders’

Equity
    Non-
controlling

Interests
    Total
Stockholders’

Equity
 
    Shares     Cost                

Balance at September 30, 2013

    63,971     $ 56      $ 39      $ 1,755      $ (2   $ 103      $ 1,951      $ 132      $ 2,083   

Net income attributable to Cabot Corporation

          199            199         199  

Net Income attributable to non-controlling interests

                  19       19  

Total other comprehensive loss

              (167     (167     (4     (171

Noncontrolling interest—other

                  (1     (1

Noncontrolling interest—dividends

                  (24     (24

Cash dividends paid to common stockholders

          (54         (54       (54

Issuance of stock under employee compensation plans

    758       1       13             14         14  

Amortization of share-based compensation

        14             14         14  

Purchase and retirement of common stock

    (346       (17           (17       (17

Principal payment by Employee Stock Ownership Plan under guaranteed loan

            2         2         2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

    64,383     $ 57      $ 49      $ 1,900      $      $ (64   $ 1,942      $ 122      $ 2,064   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

 

60


Table of Contents

Notes to Consolidated Financial Statements

Note A. Significant Accounting Policies

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The significant accounting policies of Cabot Corporation (“Cabot” or “the Company”) are described below.

In January 2012, the Company completed the sale of its Supermetals business and in July 2014, the Company completed the sale of its Security Materials business. The results of these businesses for all periods presented are reflected as discontinued operations in the Consolidated Statements of Operations.

In July 2012, the Company completed the acquisition of Norit N.V. (“Purification Solutions”). The financial position, results of operations and cash flows of Purification Solutions are included in the Consolidated Financial Statements from the date of acquisition.

In November 2013, the Company purchased all of Grupo Kuo S.A.B. de C.V.’s (“KUO”) common stock in NHUMO, S.A. de C.V. (“NHUMO”), a carbon black joint venture between the Company and KUO in Mexico, which represented approximately 60% of the outstanding common stock of NHUMO (the “NHUMO transaction”). Prior to this transaction, the Company owned approximately 40% of the outstanding common stock of NHUMO, and the NHUMO entity was accounted for as an equity affiliate of the Company. The financial position, results of operations and cash flows of NHUMO are included in the Company’s consolidated financial statements from the date of acquisition.

Unless otherwise indicated, all disclosures and amounts in the Notes to Consolidated Financial Statements relate to the Company’s continuing operations.

Principles of Consolidation

The consolidated financial statements include the accounts of Cabot 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, of which there were none in the periods presented. Intercompany transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash equivalents include all highly liquid investments with a maturity of three months or less at date of acquisition. Cabot continually assesses the liquidity of cash equivalents and, as of September 30, 2014, has determined that they are readily convertible to cash.

Inventories

Inventories are stated at the lower of cost or market. The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. The cost of Specialty Fluids inventories, which are classified as assets held for rent, is determined using the average cost method. The cost of other U.S. and non-U.S. inventories is determined using the first-in, first-out (“FIFO”) method.

Cabot 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 market value.

Investments

The Company has investments in equity affiliates and marketable securities. As circumstances warrant, all investments are subject to periodic impairment reviews. Unless consolidation is required, investments in equity affiliates, where Cabot generally owns between 20% and 50% of the affiliate, are

 

61


Table of Contents

accounted for using the equity method. Cabot records its share of the equity affiliate’s results of operations based on its percentage of ownership of the affiliate. Dividends declared from equity affiliates are a return on investment and are recorded as a reduction to the equity investment value. At September 30, 2014 and 2013, Cabot had equity affiliate investments of $68 million and $119 million, respectively. Dividends declared and received from these investments were $25 million, $8 million and $6 million in fiscal 2014, 2013 and 2012, respectively.

All investments in marketable securities are classified as available-for-sale and are recorded at fair value with the corresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of Other comprehensive income (loss) within stockholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected market conditions, are recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities sold is determined by the specific identification method. The Company’s investment in marketable securities was immaterial as of both September 30, 2014 and 2013.

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. The depreciable lives for buildings, machinery and equipment, and other fixed assets are twenty to twenty-five years, ten to twenty-five years, and three to 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.

Cabot capitalizes interest costs when they are part of the historical cost of acquiring and constructing certain assets that require a period of time to prepare for their intended use. During fiscal 2014, 2013 and 2012, Cabot capitalized $3 million, $5 million and $4 million of interest costs, respectively. These amounts will be amortized over the lives of the related assets.

Intangible Assets and Goodwill

The Company records 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. 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. The separate businesses included within Performance Materials are considered separate reporting units. The goodwill balance relative to this segment is recorded in the Fumed Metal Oxides reporting unit within Performance Materials.

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 under the two-step impairment test. Alternatively, the Company may elect to proceed directly to the

 

62


Table of Contents

quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, the Company performs an analysis of the fair value of all assets and liabilities of the reporting unit. If the implied fair value of the reporting unit’s goodwill is determined to be less than its carrying amount, an impairment is recognized for the difference. 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. Should the fair value of any of the Company’s reporting units decline because of reduced operating performance, market declines, changes in the discount rate, or other indicators of impairment, charges for impairment may be necessary. Based on the Company’s most recent annual goodwill impairment test performed as of May 31, 2014, 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 value by approximately 9%. At September 30, 2014, the Purification Solutions reporting unit had the most significant goodwill balance, in the amount of $458 million. The future growth in the Purification Solutions business is highly dependent on achieving the expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and the Company’s successful realization of its anticipated share of volumes in this segment over the next 3 years. The demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those that would require U.S. based coal fired electrical utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards that become effective beginning in April 2015 and (2) other factors such as the anticipated usage of activated carbon in the coal fired energy units. Recently, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. It is not possible to predict the outcome of the Supreme Court’s review of this matter.

The Company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition.

Definite-lived intangible assets, which are comprised of 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. The Company evaluates indefinite-lived intangible assets, which are comprised of the trademarks of Purification Solutions, for impairment annually or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. The annual review is performed as of May 31. The Company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. The quantitative impairment test is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates and discount rates over an estimate of the remaining operating period at the unit of accounting level. These future growth rates depend on achieving the expected volumes and pricing levels of the products of Purification Solutions.

Assets Held for Rent

Assets held for rent represent Specialty Fluids cesium formate product that is available to customers in the normal course of business. Assets held for rent are stated at average cost.

 

63


Table of Contents

Asset Retirement Obligations

Cabot estimates incremental costs for special handling, removal and disposal of materials that may or will give rise to conditional asset retirement obligations (“ARO”) and then discounts the expected costs back to the current year using a credit adjusted risk free rate. Cabot recognizes ARO liabilities and costs when the timing and/or settlement can be reasonably estimated. The ARO reserves were $15 million and $16 million at September 30, 2014 and 2013, respectively.

Impairment of Long-Lived Assets

Cabot’s long-lived assets primarily include property, plant and equipment, long-term investments, and assets held for rent and sale. 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 we generally use 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. Cabot’s estimates reflect management’s assumptions about selling prices, production and sales volumes, costs and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. The key inputs to the discounted cash flow would be the same as the undiscounted cash flow noted above, with the addition of the discount rate used. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when Cabot no longer intends to use the asset.

Foreign Currency Translation

The functional currency of the majority of Cabot’s foreign subsidiaries is the local currency in which the subsidiary operates. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet dates. Income and expense items are translated at average monthly exchange rates during the year. Unrealized currency translation adjustments are included as a separate component of Accumulated other comprehensive (loss) income within stockholders’ equity.

Realized and unrealized foreign currency gains and losses arising from transactions denominated in currencies other than the subsidiary’s functional currency are reflected in earnings with the exception of (i) intercompany transactions considered to be of a long-term investment nature; and (ii) foreign currency borrowings designated as net investment hedges. Gains or losses arising from these transactions are included as a component of other comprehensive income. In fiscal 2014, 2013 and 2012, net foreign currency transaction losses of $2 million, gains of $2 million, and losses of $2 million, respectively, are included in Other income (expense) in the Consolidated Statements of Operations as part of continuing operations.

Financial Instruments

Cabot’s financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, investments, notes receivable from the sale of a business, accounts payable and accrued liabilities, short-term and long-term debt, and derivative instruments. The carrying values of Cabot’s financial instruments approximate fair value with the exception of fixed rate long-term debt, which is recorded at amortized cost. The fair values of the Company’s financial instruments are based on quoted market prices, if such prices are available. In situations where quoted market prices are not available, the Company relies on valuation models to derive fair value. Such valuation takes into account the ability of the financial counterparty to perform.

 

64


Table of Contents

Cabot uses derivative financial instruments primarily for purposes of hedging exposures to fluctuations in foreign currency exchange rates, which exist as part of its on-going business operations. Cabot does not enter into derivative contracts for speculative purposes, nor does it hold or issue any derivative contracts for trading purposes. All derivatives are recognized on the Consolidated Balance Sheets at fair value. Where Cabot has a legal right to offset derivative settlements under a master netting agreement with a counterparty, derivatives with that counterparty are presented on a net basis. The changes in the fair value of derivatives are recorded in either earnings or Accumulated other comprehensive (loss) income, depending on whether or not the instrument is designated as part of a hedge transaction and, if designated as part of a hedge transaction, the type of hedge transaction. The gains or losses on derivative instruments reported in Accumulated other comprehensive (loss) income are reclassified to earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion of all hedges is recognized in earnings during the period in which the ineffectiveness occurs.

In accordance with Cabot’s risk management strategy, the Company may enter into certain derivative instruments that may not be designated as hedges for hedge accounting purposes. Although these derivatives are not designated as hedges, the Company believes that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. The Company records in earnings the gains or losses from changes in the fair value of derivative instruments that are not designated as hedges. Cash movements associated with these instruments are presented in the Consolidated Statement of Cash Flows as Cash Flows from Operating Activities because the derivatives are designed to mitigate risk to the Company’s cash flow from operations. The cash flows related to the principal of these instruments are presented in the Cash Flows from Financing Activities section of the Consolidated Statement of Cash Flows.

Revenue Recognition

Cabot recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Cabot generally is able to ensure that products meet customer specifications prior to shipment. If the Company is unable to determine that the product has met the specified objective criteria prior to shipment or if title has not transferred because of sales terms, the revenue is considered “unearned” and is deferred until the revenue recognition criteria are met.

Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price.

The following table shows the relative size of the revenue recognized in each of the Company’s reportable segments

 

     Years ended September 30  
     2014     2013     2012(1)  

Reinforcement Materials

     58     57     63

Performance Materials

     27     27     29

Advanced Technologies

     6     6     6

Purification Solutions

     9     10     2

 

(1) 

Fiscal 2012 includes two months of revenue for Purification Solutions, which the Company acquired on July 31, 2012.

Cabot derives the substantial majority of its revenues from the sale of products in Reinforcement Materials and Performance Materials. Revenue from these products is typically recognized when the

 

65


Table of Contents

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 revenue is recognized and are estimated based on historical experience and contractual obligations. Cabot periodically reviews the assumptions underlying its estimates of discounts and volume rebates and adjusts its revenues accordingly.

Revenue in Advanced Technologies, excluding the Specialty Fluids business, is typically recognized when the product is shipped and title and risk of loss have passed to the customer. Depending on the nature of the contract with the customer, a portion of the revenue may be recognized using proportional performance.

A significant portion of the revenue in the Specialty Fluids business, included in Advanced Technologies, arises 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 a rental process and revenue is recognized upon delivery of the fluid.

Revenue in Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. For major activated carbon injection systems projects, revenue is recognized using the percentage-of-completion method.

Cost of Sales

Cost of sales consists of the cost of raw and packaging materials, direct manufacturing costs, depreciation, internal transfer costs, inspection costs, inbound and outbound freight and shipping and handling costs, plant purchasing and receiving costs and other overhead expenses necessary to manufacture the products.

Accounts and Notes Receivable

Trade receivables are recorded at the invoiced amount and generally do not bear interest. Trade receivables in China may at certain times be settled with the receipt of bank issued non-interest bearing notes. These notes totaled 193 million Chinese Renminbi (“RMB”) ($31 million) and 148 million RMB ($24 million) as of September 30, 2014 and 2013, respectively, and are included in accounts and notes receivable. Cabot periodically sells a portion of the trade receivables in China and other customer receivables at a discount and such sales are accounted for as asset sales. The Company does not have any continuing involvement with the notes after the sale. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as a loss on the sale of receivables and is included in Other income (expense) in the accompanying Consolidated Statements of Operations. During fiscal 2014, 2013 and 2012, the Company recorded charges of $3 million, $4 million, and $2 million, respectively, for the sale of these receivables.

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 years presented. There is no material off-balance sheet credit exposure related to customer receivable balances.

 

66


Table of Contents

Notes Receivable from Sales of business

The Company’s Notes receivable from sale of business are derived from the sale of the Supermetals business to Global Advanced Metals Pty Ltd., an Australian company (“GAM”) as discussed in Note D. The notes were carried at amortized cost and the carrying value was $214 million at September 30, 2013. During fiscal 2014, Cabot received the final payment on these notes in the amount of $215 million.

Stock-based Compensation

Cabot recognizes compensation expense for stock-based awards granted to employees using the fair value method. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited, and an estimate of what level of performance the Company will achieve for Cabot’s performance-based stock awards. Cabot calculates the fair value of its stock options using the Black-Scholes option pricing model. The fair value of restricted stock units is determined using the closing price of Cabot stock on the day of the grant.

Selling and Administrative Expenses

Selling and administrative expenses consist of salaries and fringe benefits of sales and office personnel, general office expenses and other expenses not directly related to manufacturing operations.

Research and Technical Expenses

Research and technical expenses include salaries, equipment and material expenditures, and contractor fees and are expensed as incurred.

Income Taxes

Deferred income taxes are determined based on the estimated future tax effects of differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are recognized to the extent that realization of those assets is considered to be more likely than not.

A valuation allowance is established for deferred taxes when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Provisions are made for the U.S. income tax liability and additional non-U.S. taxes on the undistributed earnings of non-U.S. subsidiaries, except for amounts Cabot has designated to be indefinitely reinvested.

Cabot records benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities’ full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. The Company also accrues for interest and penalties on its uncertain tax positions and includes such charges in its income tax provision in the Consolidated Statements of Operations.

Accumulated Other Comprehensive Income

Accumulated other comprehensive (loss) income, 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.

 

67


Table of Contents

Environmental Costs

Cabot accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, Cabot accrues the amount that reflects the best estimate within that range or the low end of the range if no estimate within the range is better. The amount accrued reflects Cabot’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Cabot discounts certain of its long-term environmental liabilities to reflect the time value of money if the amount of the liability and the amount and timing of cash payments for the liability are fixed and reliably determinable. The liability will be discounted at a rate that will produce an amount at which the liability theoretically could be settled in an arm’s length transaction with a third party. This discounted rate may not exceed the risk-free rate for maturities comparable to those of the liability. Cabot does not reduce its estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by either the receipt of cash or a contractual agreement.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Note B. Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued a new standard related to the “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The standard requires, unless certain conditions exist, an unrecognized tax benefit or a portion of an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. This standard is applicable for fiscal years beginning after December 15, 2013, and for interim periods within those years. The Company adopted this standard on October 1, 2014 and the implementation of the new standard did not have a material impact on its consolidated financial statements.

In April 2014, the FASB issued a new standard related to the “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The standard requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results and requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This standard is applicable for fiscal years beginning after December 15, 2014 and for interim periods within those years with early adoption permitted, but only for disposals that have not been reported in financial statements previously issued. The Company expects to adopt this standard beginning on October 1, 2015. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In May 2014, the FASB issued a new standard related to the “Revenue from Contracts with Customers” which 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, 2016 and for interim periods within those years and early adoption is not permitted. The Company expects to adopt this

 

68


Table of Contents

standard on October 1, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

Note C. Acquisition of NHUMO

In November 2013, the Company purchased all of KUO’s common stock in the NHUMO joint venture, which represented approximately 60% of the outstanding common stock of the joint venture. Prior to this transaction, the Company owned approximately 40% of the outstanding common stock of NHUMO, and the NHUMO entity was accounted for as an equity affiliate of the Company.

At the close of the transaction, the Company paid KUO $80 million in cash and NHUMO issued redeemable preferred stock to KUO with a redemption value of $25 million. The preferred stock accumulates dividends at a fixed rate of 6% annually and is redeemable at the option of KUO or the Company for $25 million starting in November 2018 or upon the occurrence of certain other conditions. Annual payment by NHUMO of the dividends will be contingent on NHUMO achieving a minimum EBITDA (earnings before interest, taxes, depreciation and amortization) level and if such minimum EBITDA is not achieved in any year, the dividend will be accumulated and paid at the time the preferred shares are redeemed. The minimum EBITDA was achieved in 2014 and the dividend payout of $1.5 million will be made in December 2014. As a result, $1.5 million of the preferred stock liability was classified in current liabilities. The preferred stock issued in connection with the transaction is not mandatorily redeemable and has embedded put and call rights at the fixed redemption price. Accordingly, the instrument is accounted for as a financing obligation and has been separately presented in the Consolidated Balance Sheets as a long-term liability. Upon acquisition, the Company began consolidating NHUMO into its consolidated financial statements. Prior to closing, the Company received a $14 million dividend from NHUMO.

The Company incurred acquisition costs of approximately $2 million through September 30, 2014 associated with the transaction, which are included in Selling and administrative expenses in the Consolidated Statements of Operations.

 

69


Table of Contents

As of September 2014, the Company completed the valuation of its assets acquired and liabilities assumed. The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed, and Cabot’s previously held equity interest in NHUMO as of the acquisition date. During fiscal 2014, the Company recorded certain measurement period adjustments which are presented in the table below. The measurement period adjustments and the related tax impact were immaterial to the Company’s consolidated financial statements. The following table presents the components and allocation of the purchase price, including the measurement period adjustments:

 

     At Acquisition Date
(October 31, 2013)
    Measurement
Period
Adjustments
    At Acquisition Date
(As adjusted  at
September 30, 2014)
 
     (Dollars in millions)  

Assets

      

Cash

   $ 7     $      $ 7  

Accounts receivable

     33             33  

Inventories

     14             14  

Property, plant and equipment

     48             48  

Other non-current assets

     1             1  

Intangible assets

     57       6       63  

Goodwill

     51       (6     45  
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     211             211  
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Accounts payable, accruals and other liabilities

     (18     (2     (20

Deferred tax liabilities—long-term

     (31     2       (29
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     (49           (49
  

 

 

   

 

 

   

 

 

 

Net assets acquired

   $ 162     $      $ 162  
  

 

 

   

 

 

   

 

 

 

Cash consideration paid

   $ 80      

Fair value of redeemable preferred stock

     28      

Previously held equity interest in NHUMO

     54      
  

 

 

     

Total

   $ 162      
  

 

 

     

As a result of the acquisition, the Company recorded a gain of $29 million for the difference between the carrying value and the fair value of the previously held equity interest in NHUMO, which was included in Other income (expense). The fair value of $54 million for the previously held equity interest was determined based on the fair value of Cabot’s pre-existing interest in NHUMO as adjusted for a control premium derived from synergies gained as a result of the Company obtaining control of NHUMO.

As part of the purchase price allocation, the Company determined that a separately identifiable intangible asset was customer relationships in the amount of $63 million, which is being amortized over a period of 20 years. The Company estimated the fair value of the identifiable acquisition-related intangible asset based on projections of cash flows that will arise from the asset. The projected cash flows are discounted to determine the fair value of the asset at the date of acquisition. The determination of the fair value of the intangible asset acquired required the use of significant judgment with regard to assumptions in the discounted cash flow model used.

The fair value of the redeemable preferred stock was determined based on a discounted cash flow model, using the expected timing of the cash flows and an appropriate discount rate.

The excess of the purchase price over the fair value of the tangible net assets and intangible asset acquired, the issuance of redeemable preferred stock and the previously held equity interest in NHUMO was recorded as goodwill. The goodwill recognized is attributable to the expected 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.

 

70


Table of Contents

Note D. Discontinued Operations

In July 2014, the Company sold its Security Materials business, which was reported in the Advanced Technologies segment, to SICPA SA for approximately $20 million in cash. The Company recorded a gain in discontinued operations as a result of this transaction.

In January 2012, the Company sold its Supermetals business to GAM for $452 million, including cash consideration of $175 million received on the closing date and notes receivable (“GAM Notes”) totaling $277 million payable at various dates through March 2014. In fiscal 2014, Cabot received the final payment on the GAM Notes in the amount of $215 million.

The following table summarizes the results from discontinued operations:

 

     Years Ended September 30  
       2014         2013         2012    
     (Dollars in millions)  

Net sales and other operating revenues

   $ 5     $ 7     $ 55  
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations before income taxes

     (3     (5     20  

Provision for (benefit from) income taxes on operations

     1       2       (7
  

 

 

   

 

 

   

 

 

 

(Loss) income from operations, net of tax

   $ (2   $ (3   $ 13  
  

 

 

   

 

 

   

 

 

 

Gain (loss) on sale of discontinued operations

     7       (2     300  

(Provision for) benefit from income taxes on gain (loss) on sale

     (3     4       (109
  

 

 

   

 

 

   

 

 

 

Gain on sale of discontinued operations, net of tax

     4       2       191  
  

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

   $ 2     $ (1   $ 204  
  

 

 

   

 

 

   

 

 

 

The following table summarizes the assets and the liabilities held for sale in the Company’s Consolidated Balance Sheet as of September 30, 2013:

 

     September 30, 2013
(in millions)
 

Assets

  

Inventories

   $ 3  

Other current assets

     1  
  

 

 

 

Total current assets held for sale

   $ 4  
  

 

 

 

Property, plant and equipment, net

     5  

Goodwill

     2  

Intangible assets, net

     2  
  

 

 

 

Total noncurrent assets held for sale

   $ 9  
  

 

 

 

Note E. Inventories

Inventories, net of LIFO, obsolete, unmarketable and slow moving reserves, are as follows:

 

     September 30  
     2014      2013  
     (Dollars in millions)  

Raw materials

   $ 111       $ 100   

Work in process

     2         2   

Finished goods

     341         309   

Other

     44         44   
  

 

 

    

 

 

 

Total

   $ 498       $ 455   
  

 

 

    

 

 

 

 

71


Table of Contents

Inventories valued under the LIFO method comprised approximately 5% of total inventories at both September 30, 2014 and 2013. At September 30, 2014 and 2013, the LIFO reserve was $52 million and $55 million, respectively. Other inventory is comprised of certain spare parts and supplies.

During fiscal 2013 and 2012, inventory quantities carried on a LIFO basis were decreased at the Company’s U.S. carbon black sites. These reductions led to liquidations of LIFO inventory quantities and resulted in a decrease of Cost of sales of $1 million and an increase in consolidated Net income of $1 million ($0.01 per diluted common share) in both fiscal years. No such reductions occurred in fiscal 2014.

Cabot reviews inventory for both potential obsolescence and potential loss of value periodically. In this review, Cabot makes assumptions about the future demand for and market value of the inventory and, based on these assumptions, estimates the amount of obsolete, unmarketable or slow moving inventory. The inventory reserves were $14 million and $15 million, respectively, as of September 30, 2014 and 2013.

Note F. Property, Plant and Equipment

Property, plant and equipment consists of the following:

 

     September 30  
     2014     2013  
     (Dollars in millions)  

Land and land improvements

   $ 132     $ 138  

Buildings

     536       507  

Machinery and equipment

     2,593       2,504  

Other

     233       236  

Construction in progress

     216       278  
  

 

 

   

 

 

 

Total property, plant and equipment

     3,710        3,663  

Less: accumulated depreciation

     (2,129     (2,063
  

 

 

   

 

 

 

Net property, plant and equipment

   $ 1,581     $ 1,600  
  

 

 

   

 

 

 

Depreciation expense was $184 million, $175 million and $152 million for fiscal 2014, 2013 and 2012, respectively.

Note G. Goodwill and Other Intangible Assets

Cabot had goodwill balances of $536 million and $502 million at September 30, 2014 and 2013, respectively. The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the years ended September 30, 2014 and 2013 are as follows:

 

     Reinforcement
Materials
    Performance
Materials
    Purification
Solutions
    Total  
     (Dollars in millions)  

Balance at September 30, 2012

   $ 28     $ 11     $ 439     $ 478  

Measurement period adjustments(1)

                  22       22  

Foreign currency impact

     (3            5        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 25     $ 11     $ 466     $ 502  

Goodwill acquired(2)

     45                   45  

Foreign currency impact

     (2     (1     (8     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 68     $ 10     $ 458     $ 536  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Measurement period adjustments relate to the acquisition of Purification Solutions in July 2012.

(2) 

Goodwill acquired relates to the NHUMO transaction as described in Note C.

 

72


Table of Contents

Goodwill impairment tests are performed at least annually. The Company performed its last annual impairment assessment as of May 31, 2014 and determined there was no impairment.

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

 

     Years Ended September 30  
     2014      2013  
     Gross
Carrying
Value
     Accumulated
Amortization
    Net
Intangible
Assets
     Gross
Carrying
Value
     Accumulated
Amortization
    Net
Intangible
Assets
 
     (Dollars in millions)  

Intangible assets with finite lives

               

Developed technology

   $ 152      $ (16   $ 136      $ 154      $ (9   $ 145  

Customer relationships(1)

     171        (17     154        113        (7     106  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets, finite lives

   $ 323      $ (33   $ 290      $ 267      $ (16   $ 251  

Trademarks, indefinite lives

     57               57        57               57  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets