10-Q 1 cbt-10q_20150630.htm 10-Q cbt-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2015

or

o

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

For the transition period from                      to                     

Commission file number 1-5667

 

Cabot Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-2271897

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Two Seaport Lane

Boston, Massachusetts

02210-2019

(Address of principal executive offices)

(Zip Code)

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

 

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  o

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  o

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. (Check one):

 

Large accelerated filer

x

Accelerated filer

o

 

 

 

 

Non-accelerated filer

o  (Do not check if smaller reporting company)

Smaller reporting company

o

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

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

As of August 4, 2015 the Company had 62,914,994 shares of Common Stock, par value $1.00 per share, outstanding.

 

 

 


 

CABOT CORPORATION

INDEX

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and 2014

3

 

 

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended June 30, 2015 and 2014

4

 

 

Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014

5

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and 2014

7

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

31

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

Item 4.

Controls and Procedures

48

 

 

 

Part II.

Other Information

 

 

Item 1.

Legal Proceedings

48

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

Item 6.

Exhibits

49

 

 

2


 

Part I. Financial Information

Item 1.

Financial Statements

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In millions, except share and per share amounts)

 

Net sales and other operating revenues

 

$

694

 

 

$

940

 

 

$

2,200

 

 

$

2,736

 

Cost of sales

 

 

544

 

 

 

756

 

 

 

1,754

 

 

 

2,197

 

Gross profit

 

 

150

 

 

 

184

 

 

 

446

 

 

 

539

 

Selling and administrative expenses

 

 

67

 

 

 

76

 

 

 

216

 

 

 

245

 

Research and technical expenses

 

 

15

 

 

 

15

 

 

 

44

 

 

 

46

 

Income from operations

 

 

68

 

 

 

93

 

 

 

186

 

 

 

248

 

Interest and dividend income

 

 

1

 

 

 

1

 

 

 

3

 

 

 

3

 

Interest expense

 

 

(13

)

 

 

(14

)

 

 

(40

)

 

 

(41

)

Other (expense) income

 

 

(3

)

 

 

 

 

 

(6

)

 

 

27

 

Long-lived assets impairment charge (Note F)

 

 

(209

)

 

 

 

 

 

(209

)

 

 

 

Goodwill impairment charge (Note F)

 

 

(353

)

 

 

 

 

 

(353

)

 

 

 

(Loss) income from continuing operations

 

 

(509

)

 

 

80

 

 

 

(419

)

 

 

237

 

Benefit (provision) for income taxes

 

 

64

 

 

 

(20

)

 

 

47

 

 

 

(51

)

Equity in earnings (loss) of affiliated companies, net of tax

 

 

1

 

 

 

(2

)

 

 

4

 

 

 

(2

)

(Loss) income from continuing operations

 

 

(444

)

 

 

58

 

 

 

(368

)

 

 

184

 

Income (loss) from discontinued operations, net of tax

 

 

1

 

 

 

(1

)

 

 

1

 

 

 

(2

)

Net (loss) income

 

 

(443

)

 

 

57

 

 

 

(367

)

 

 

182

 

Net income attributable to noncontrolling interests,

   net of tax

 

 

2

 

 

 

5

 

 

 

7

 

 

 

14

 

Net (loss) income attributable to Cabot Corporation

 

$

(445

)

 

$

52

 

 

$

(374

)

 

$

168

 

Weighted-average common shares outstanding, in millions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

63.3

 

 

 

64.5

 

 

 

63.7

 

 

 

64.3

 

Diluted

 

 

63.3

 

 

 

65.2

 

 

 

63.7

 

 

 

65.0

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations attributable to

   Cabot Corporation

 

$

(7.05

)

 

$

0.80

 

 

$

(5.89

)

 

$

2.61

 

Income (loss) from discontinued operations

 

 

0.01

 

 

 

(0.01

)

 

 

0.01

 

 

 

(0.03

)

Net (loss) income attributable to Cabot Corporation

 

$

(7.04

)

 

$

0.79

 

 

$

(5.88

)

 

$

2.58

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations attributable to

   Cabot Corporation

 

$

(7.05

)

 

$

0.79

 

 

$

(5.89

)

 

$

2.58

 

Income (loss) from discontinued operations

 

$

0.01

 

 

$

(0.01

)

 

$

0.01

 

 

 

(0.03

)

Net (loss) income attributable to Cabot Corporation

 

$

(7.04

)

 

$

0.78

 

 

$

(5.88

)

 

$

2.55

 

Dividends per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.66

 

 

$

0.62

 

 

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

 

 

 

3


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

 

2015

 

 

 

2014

 

 

 

2015

 

 

 

2014

 

 

 

(In millions)

 

Net (loss) income

 

$

(443

)

 

$

57

 

 

$

(367

)

 

$

182

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment (net of tax provision

   of $-, $-, $1 and $1)

 

 

18

 

 

 

11

 

 

 

(216

)

 

 

(18

)

Unrealized holding gains arising during the period

   (net of tax provision of $-, $1, $- and $-)

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Pension and other postretirement benefit liability adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement benefit liability adjustments

   arising during the period (net of tax provision of $-, $-, $6

   and $-)  

 

 

 

 

 

 

 

 

21

 

 

 

 

Amortization of net loss and prior service credit included in

   net periodic pension cost (net of tax benefit of less than $1

   million in all periods)

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Other comprehensive income (loss)

 

 

18

 

 

 

13

 

 

 

(194

)

 

 

(15

)

Comprehensive (loss) income

 

 

(425

)

 

 

70

 

 

 

(561

)

 

 

167

 

Net income attributable to noncontrolling interests

 

 

2

 

 

 

5

 

 

 

7

 

 

 

14

 

Noncontrolling interests foreign currency translation

   adjustment, net of tax

 

 

 

 

 

 

 

 

(3)

 

 

 

(2

)

Comprehensive income attributable to noncontrolling interests,

   net of tax

 

 

2

 

 

 

5

 

 

 

4

 

 

 

12

 

Comprehensive (loss) income attributable to Cabot Corporation

 

$

(427

)

 

$

65

 

 

$

(565

)

 

$

155

 

 

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

 

 

 

4


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

UNAUDITED

 

 

 

June 30,

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

 

(In millions)

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84

 

 

$

67

 

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

 

 

563

 

 

 

688

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials

 

 

88

 

 

 

111

 

Work in process

 

 

4

 

 

 

2

 

Finished goods

 

 

298

 

 

 

341

 

Other

 

 

42

 

 

 

44

 

Total inventories

 

 

432

 

 

 

498

 

Prepaid expenses and other current assets

 

 

60

 

 

 

69

 

Deferred income taxes

 

 

39

 

 

 

42

 

Total current assets

 

 

1,178

 

 

 

1,364

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,427

 

 

 

1,581

 

Goodwill

 

 

157

 

 

 

536

 

Equity affiliates

 

 

61

 

 

 

68

 

Intangible assets, net

 

 

159

 

 

 

347

 

Assets held for rent

 

 

68

 

 

 

56

 

Deferred income taxes

 

 

137

 

 

 

80

 

Other assets

 

 

49

 

 

 

52

 

Total assets

 

$

3,236

 

 

$

4,084

 

 

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

 

 

 

5


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

 

June 30,

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

 

(In millions, except share

 

 

 

and per share amounts)

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

152

 

 

$

44

 

Accounts payable and accrued liabilities

 

 

387

 

 

 

512

 

Income taxes payable

 

 

27

 

 

 

49

 

Deferred income taxes

 

 

1

 

 

 

1

 

Current portion of long-term debt

 

 

1

 

 

 

24

 

Total current liabilities

 

 

568

 

 

 

630

 

Long-term debt

 

 

971

 

 

 

1,004

 

Deferred income taxes

 

 

52

 

 

 

68

 

Other liabilities

 

 

249

 

 

 

291

 

Redeemable preferred stock

 

 

28

 

 

 

27

 

Commitments and contingencies (Note J)

 

 

 

 

 

 

 

 

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:  63,162,812 and 64,634,731 shares

 

 

 

 

 

 

 

 

Outstanding: 62,914,996 and 64,382,366 shares

 

 

63

 

 

 

64

 

Less cost of 247,816 and 252,365 shares of common treasury stock

 

 

(8

)

 

 

(7

)

Additional paid-in capital

 

 

 

 

 

49

 

Retained earnings

 

 

1,464

 

 

 

1,900

 

Accumulated other comprehensive loss

 

 

(255

)

 

 

(64

)

Total Cabot Corporation stockholders' equity

 

 

1,264

 

 

 

1,942

 

Noncontrolling interests

 

 

104

 

 

 

122

 

Total stockholders' equity

 

 

1,368

 

 

 

2,064

 

Total liabilities and stockholders’ equity

 

$

3,236

 

 

$

4,084

 

 

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

 

 

 

6


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

 

Nine months ended

 

 

 

June 30

 

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(367

)

 

$

182

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

140

 

 

 

150

 

Long-lived asset impairment charge

 

 

209

 

 

 

4

 

Goodwill impairment charge

 

 

353

 

 

 

 

Deferred tax (benefit) provision

 

 

(75

)

 

 

(16

)

Gain on step-acquisition

 

 

 

 

 

(29

)

Employee benefit plan settlement

 

 

18

 

 

 

 

Equity in net (income) loss of affiliated companies

 

 

(4

)

 

 

2

 

Non-cash compensation

 

 

9

 

 

 

11

 

Other non-cash (income) expense

 

 

(3

)

 

 

1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

80

 

 

 

(62

)

Inventories

 

 

33

 

 

 

(66

)

Prepaid expenses and other current assets

 

 

4

 

 

 

(20

)

Accounts payable and accrued liabilities

 

 

(84

)

 

 

 

Income taxes payable

 

 

(22

)

 

 

2

 

Other liabilities

 

 

(27

)

 

 

4

 

Cash dividends received from equity affiliates

 

 

10

 

 

 

22

 

Other

 

 

4

 

 

 

 

Cash provided by operating activities

 

 

278

 

 

 

185

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(103

)

 

 

(115

)

Proceeds from notes receivable from sales of business

 

 

 

 

 

215

 

Change in assets held for rent

 

 

(8

)

 

 

(5

)

Cash paid for acquisition of business, net of cash acquired of $7

 

 

 

 

 

(73

)

Cash (used in) provided by investing activities

 

 

(111

)

 

 

22

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Borrowings under financing arrangements

 

 

 

 

 

13

 

Repayments under financing arrangements

 

 

(4

)

 

 

(10

)

Increase (decrease) in notes payable, net

 

 

1

 

 

 

(11

)

Proceeds (repayments) from issuance of commercial paper, net

 

 

111

 

 

 

(138

)

Proceeds from long-term debt, net of issuance costs

 

 

 

 

 

17

 

Repayments of long-term debt

 

 

(57

)

 

 

(7

)

Purchases of common stock

 

 

(85

)

 

 

(6

)

Proceeds from sales of common stock

 

 

6

 

 

 

13

 

Cash dividends paid to noncontrolling interests

 

 

(16

)

 

 

(19

)

Cash dividends paid to common stockholders

 

 

(42

)

 

 

(40

)

Cash used in financing activities

 

 

(86

)

 

 

(188

)

Effects of exchange rate changes on cash

 

 

(64

)

 

 

(13

)

Increase in cash and cash equivalents

 

 

17

 

 

 

6

 

Cash and cash equivalents at beginning of period

 

 

67

 

 

 

95

 

Cash and cash equivalents at end of period

 

$

84

 

 

$

101

 

 

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

 

 

 

7


 

CABOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

UNAUDITED

 

A. Basis of Presentation

The consolidated financial statements include the accounts of Cabot Corporation (“Cabot” or the “Company”) and its wholly owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights. Intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014 (“2014 10-K”).

The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended June 30, 2015 and 2014. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.

In 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 former 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.

In July 2014, the Company completed the sale of its Security Materials business. The Consolidated Statements of Operations and the notes to the consolidated financial statements for all periods presented exclude the Security Materials business.

In December 2014, the Company realigned its business reporting structure into four segments that consist of Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The new structure is aligned with senior management changes and it better leverages Cabot’s global activities across common customer applications, production, and research and development activities. Prior period segment results have been recast to reflect the realignment.

 

 

B. Significant Accounting Policies

Revenue Recognition and Accounts Receivable

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.

 

8


 

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

 

 

 

Three Months Ended

June 30

 

 

Nine Months Ended

June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Reinforcement Materials

 

 

52

%

 

 

60

%

 

 

55

%

 

 

59

%

Performance Chemicals

 

 

35

%

 

 

29

%

 

 

33

%

 

 

29

%

Purification Solutions

 

 

11

%

 

 

9

%

 

 

10

%

 

 

9

%

Specialty Fluids

 

 

2

%

 

 

2

%

 

 

2

%

 

 

3

%

 

Cabot derives the substantial majority of its revenues from the sale of products in Reinforcement Materials and Performance Chemicals. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. The Company offers certain of its customers cash discounts and volume rebates as sales incentives. Depending on the nature of the contract with the customer, a portion of the revenue may be recognized using proportional performance. 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 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.

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

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

Intangible Assets and Goodwill Impairment

The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for 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 reporting units with goodwill balances are Reinforcement Materials, Purification Solutions, and Fumed Metal Oxides. The separate businesses included within Performance Chemicals are considered separate reporting units. As such, the goodwill balance relative to this segment is recorded in the Fumed Metal Oxides reporting unit within Performance Chemicals.

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 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

 

9


 

of the remaining operating period at the reporting unit level. Should the fair value of any of the Company’s reporting units sufficiently decline because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary. Based on the Company’s most recent annual goodwill impairment test performed as of May 31, 2015, 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 was less than its carrying amount. Refer to Note F for details on the Purification Solutions goodwill impairment test and the resulting impairment charge recorded.  

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. Refer to Note F for details on the impairment test performed on intangible assets of the Purification Solutions reporting unit and the resulting impairment charges recorded. Effective in the third quarter of 2015 and as a part of the impairment assessment performed, the Company determined that the trademarks for Purification Solutions no longer have an indefinite life.   

Long-lived Assets Impairment

The Company’s long-lived assets primarily include property, plant and equipment, intangible assets, 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.

To test for impairment of assets, the Company generally uses a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.

An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset. Refer to Note F regarding the results of the impairment test performed on the long-lived assets of the Purification Solutions segment.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is generally 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.

Income Tax in Interim Periods

The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim

 

10


 

period. Losses from jurisdictions for which no benefit can be recognized and the income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period.

Valuation allowances are provided against the future tax benefits that arise from the deferred tax assets in jurisdictions for which no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.

Inventory Valuation

Inventories are stated at the lower of cost or market. The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. Had the Company used the first-in, first-out (“FIFO”) method instead of the LIFO method for such inventories, the value of those inventories would have been $37 million and $52 million higher as of June 30, 2015 and September 30, 2014, respectively. The cost of Specialty Fluids inventories is determined using the average cost method. The cost of other U.S. and non-U.S. inventories is determined using the 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.

Pensions and Other Postretirement Benefits

The Company recognizes the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. The Company is required to recognize as a component of other comprehensive income, net of tax, the actuarial gains/losses and prior service costs/credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive income is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.

Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income (“AOCI”), which is included as a component of stockholders’ equity, includes unrealized gains or losses on available-for-sale marketable securities, currency translation adjustments in foreign subsidiaries, translation adjustments on foreign equity securities and pension liability adjustments.

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 to be presented in the consolidated 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 “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 of a business 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 and early adoption is permitted, but only for disposals that have not been reported in consolidated financial statements previously issued. The Company expects to adopt this standard beginning on October 1, 2015.

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

 

11


 

promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017 and for interim periods within those years and early adoption is permitted for the fiscal years beginning after December 15, 2016. The Company expects to adopt this standard on October 1, 2018. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In April 2015, the FASB issued a new standard simplifying the presentation of debt issuance costs by requiring debt issuance costs to be presented as a reduction of the corresponding debt liability. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. This standard is applicable for fiscal years beginning after December 15, 2015 and for interim periods within those years and early adoption is permitted. The Company expects to adopt this standard on October 1, 2016. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.

 

 

C. Acquisition of NHUMO

In November 2013, the Company purchased all of KUO’s common stock in the former 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 is 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 a dividend payment of $1.5 million was made in December 2014. 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.

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. The following table presents the components and allocation of the purchase price:

 

 

 

(Dollars in millions)

 

 

Assets

 

 

 

 

 

Current assets

 

$

54

 

 

Property, plant and equipment

 

 

48

 

 

Other non-current assets

 

 

1

 

 

Intangible assets

 

 

63

 

 

Goodwill

 

 

45

 

 

Total assets acquired

 

 

211

 

 

Liabilities

 

 

 

 

 

Accounts payable, accruals and other liabilities

 

 

(20

)

 

Deferred tax liabilities - long-term

 

 

(29

)

 

Total liabilities assumed

 

 

(49

)

 

Net assets acquired

 

$

162

 

 

Cash consideration paid

 

 

80

 

 

Fair value of redeemable preferred stock

 

 

28

 

 

Previously held equity interest in NHUMO

 

 

54

 

 

Total

 

$

162

 

 

 

12


 

 

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 (expense) income in the first quarter of fiscal 2014. 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, which includes the cash consideration paid and the fair values of redeemable preferred stock and the previously held equity interest in NHUMO, over the fair value of the tangible net assets and intangible asset acquired, 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 is not deductible for tax purposes.

 

 

D. Discontinued Operations

In July 2014, the Company sold its Security Materials business to SICPA SA. The Consolidated Statements of Operations for all periods presented have been recast to reflect the Security Materials business in discontinued operations. During the third quarter of fiscal 2015, Cabot recorded a tax benefit in the amount of $1 million related to the sale of the business, which was included in the Company’s 2014 tax return.

 

 

E. Employee Benefit Plans

Net periodic defined benefit pension and other postretirement benefit costs include the following:

 

 

 

Three Months Ended June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(Dollars in millions)

 

Service cost

 

$

 

 

$

2

 

 

$

1

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

2

 

 

 

3

 

 

 

2

 

 

 

4

 

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

Expected return on plan assets

 

 

(3

)

 

 

(4

)

 

 

(3

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Amortization of actuarial loss

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit (credit) cost

 

$

(1

)

 

$

2

 

 

$

 

 

$

2

 

 

$

(1

)

 

$

1

 

 

$

 

 

$

1

 

 

 

13


 

 

 

Nine Months Ended June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(Dollars in millions)

 

Service cost

 

$

 

 

$

7

 

 

$

2

 

 

$

7

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

5

 

 

 

9

 

 

 

6

 

 

 

12

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Expected return on plan assets

 

 

(8

)

 

 

(12

)

 

 

(8

)

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

 

 

 

Amortization of actuarial loss

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement costs

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit (credit) cost

 

$

(3

)

 

$

25

 

 

$

 

 

$

7

 

 

$

(1

)

 

$

1

 

 

$

 

 

$

1

 

 

Settlement of employee benefit plan

Effective October 1, 2014, the Company transferred the defined benefit obligations and pension plan assets in one of its foreign defined benefit plans to a multi-employer plan. This decision effectively moves the administrative, asset custodial, asset investment, actuarial, communication and benefit payment obligations to the multi-employer fund administrator. The plan is over 80% funded. Cabot is required to make contributions to the multi-employer fund and assets contributed by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. As a result of the transfer, a pre-tax charge of $18 million has been recorded in the nine months ended June 30, 2015 as reflected in Settlement costs in the table above. The pre-tax charge consists of $27 million released from AOCI and $2 million of employer contributions at the time of the settlement, partially offset by an $11 million release of the pension liability. The settlement charge has been recorded primarily in Cost of sales in the Consolidated Statements of Operations.

 

 

F. Purification Solutions Goodwill and Long-Lived Assets Impairment Charges

During the third quarter of fiscal 2015 and as a result of the impairment tests performed on goodwill and long-lived assets of the Purification Solutions reporting unit, the Company recorded impairment charges and an associated tax benefit in the Consolidated Statements of Operations as follows:

 

 

June 30, 2015

 

 

 

(Dollars in millions)

 

Goodwill impairment charge

$

353

 

Long-lived assets impairment charge

 

209

 

Provision (benefit) for income taxes

 

(80

)

Impairment charges, after tax

$

482

 

 

The future growth in the Purification Solutions segment 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 business. The expected 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 electric utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards (“MATS”) issued by the U.S. Environmental Protection Agency (“EPA”) and (2) other factors such as the anticipated usage of activated carbon in the coal-fired energy units. In November 2014, 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.  On June 29, 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by coal-fired utilities, and remanded the case back to the D.C. Circuit Court of Appeals for further proceedings.

The implementation period for the MATS regulations began in April 2015. With this recent implementation and associated customer and industry developments during the quarter, as well as the U.S. Supreme Court’s ruling, the Company reassessed its previous estimates for expected growth in volumes, prices and margins in the Purification Solutions reporting unit. The main drivers

 

14


 

of growth, including the size of the overall mercury removal industry, utility adoption rates, usage levels, and pricing, among others, were lowered. Based on these revised estimates and as part of step one of the annual impairment test, the Company determined that the estimated fair value of the Purification Solutions reporting unit was lower than the reporting unit's carrying value. As such, the reporting unit failed step one of the goodwill impairment test.

In determining the fair value of the Purification Solutions reporting unit, the Company used an income approach (a discounted cash flow analysis) which incorporated significant estimates and assumptions related to future periods, including timing of MATS implementation, the anticipated size of the mercury removal industry, and growth rates and pricing assumptions of activated carbon, among others. The Company assumed a two year delay in the MATS implementation due to the U.S. Supreme Court’s ruling. Total charges incurred could be higher if the rulings of the D.C. Circuit Court of Appeals on remand result in a delay in the implementation of MATS that is longer than two years. In addition, an estimate of the reporting unit’s weighted average cost of capital (“WACC”) is used to discount future estimated cash flows to their present value. The WACC was based upon externally available data considering market participants’ cost of equity and debt, optimal capital structure and risk factors specific to the Purification Solutions reporting unit.

Step two of the goodwill impairment test requires the Company to perform a theoretical purchase price allocation for the reporting unit to determine the implied fair value of goodwill and to compare the implied fair value of goodwill to the recorded amount of goodwill. The estimate of fair value is complex and requires significant judgment. Accounting guidance provides that a company should recognize an estimated impairment charge to the extent that it determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated. Based on the best estimate as of June 30, 2015, the Company recorded a pre-tax goodwill impairment charge of $353 million.

Based on the same factors leading to goodwill impairment, the Company also considered whether the reporting unit's carrying values of definite-lived intangible assets and property, plant and equipment may not be recoverable or whether the carrying value of certain indefinite-lived intangible assets were impaired. The Company used the income approach to determine the fair value of the indefinite-lived intangible assets, which are the trademarks of Purification Solutions, and determined that the fair value of these intangible assets was lower than their carrying value. As such, an impairment loss was recorded in the amount of $39 million. Subsequent to this impairment analysis, the Company concluded that such assets no longer had an indefinite life and began amortizing these assets over their estimated useful life.  The Company also performed an impairment analysis to assess if definite-lived intangible assets and property, plant and equipment were recoverable based on the estimated undiscounted cash flows of the reporting unit, and these cash flows were not sufficient to recover the carrying value of the long-lived assets over their remaining useful lives. Accordingly, an impairment charge was recorded based on the lower of the carrying amount or fair value of the long-lived assets. The Company used the income approach to determine the fair value of the definite-lived intangible assets and a combination of the cost and market approaches to fair value its property, plant and equipment. The Company recorded impairment charges of $119 million and $51 million, to its definite-lived intangible assets and property, plant and equipment, respectively, in the quarter ended June 30, 2015.

In connection with the long-lived assets impairment charges, the Company recorded a deferred tax benefit of $80 million to its income tax provision.

Due to the complexities involved in estimating fair value and the recent issuance of the U.S. Supreme Court’s ruling, the Company has not completed the step two analysis and expects to finalize it in the fourth quarter of fiscal 2015.  Total impairment charges are not expected to materially change.

The performance of the Purification Solutions reporting unit will continue to be monitored. If the reporting unit does not achieve the financial performance that the Company expects or events or circumstances change, it is possible that additional impairment charges may result.

 

 

15


 

G. Goodwill and Intangible Assets

 

Cabot had goodwill balances of $157 million and $536 million at June 30, 2015 and September 30, 2014, respectively. The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the period ended June 30, 2015 are as follows:

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Total