10-Q 1 cbt-10q_20161231.htm FORM 10-Q cbt-10q_20161231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended December 31, 2016

or

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

For the transition period from                      to                     

Commission file number 1-5667

 

Cabot Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-2271897

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Two Seaport Lane

Boston, Massachusetts

02210-2019

(Address of principal executive offices)

(Zip Code)

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

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if 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  

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

As of February 3, 2017 the Company had 62,191,740 shares of Common Stock, par value $1.00 per share, outstanding.

 

 

 


 

CABOT CORPORATION

INDEX

 

 

2


 

Part I. Financial Information

Item 1.

Financial Statements

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions, except

per share amounts)

 

Net sales and other operating revenues

 

$

611

 

 

$

603

 

Cost of sales

 

 

454

 

 

 

504

 

Gross profit

 

 

157

 

 

 

99

 

Selling and administrative expenses

 

 

63

 

 

 

71

 

Research and technical expenses

 

 

12

 

 

 

16

 

Income (loss) from operations

 

 

82

 

 

 

12

 

Interest and dividend income

 

 

2

 

 

 

1

 

Interest expense

 

 

(13

)

 

 

(13

)

Other income (expense)

 

 

2

 

 

 

(8

)

Income (loss) from continuing operations before income taxes and equity in earnings

   of affiliated companies

 

 

73

 

 

 

(8

)

(Provision) benefit for income taxes

 

 

(17

)

 

 

5

 

Equity in earnings of affiliated companies, net of tax

 

 

2

 

 

 

 

Net income (loss)

 

 

58

 

 

 

(3

)

Net income (loss) attributable to noncontrolling interests, net of tax

 

 

4

 

 

 

4

 

Net income (loss) attributable to Cabot Corporation

 

 

54

 

 

 

(7

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

62.2

 

 

 

62.5

 

Diluted

 

 

62.8

 

 

 

62.5

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot Corporation

 

$

0.85

 

 

$

(0.11

)

Diluted:

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot Corporation

 

$

0.85

 

 

$

(0.11

)

Dividends per common share

 

$

0.30

 

 

$

0.22

 

 

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

3


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Net income (loss)

 

$

58

 

 

$

(3

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

Foreign currency translation adjustment (net of tax provision of $2 and $—)

 

 

(125

)

 

 

(47

)

Pension and other postretirement benefit liability adjustments

 

 

 

 

 

 

 

 

Pension and other postretirement benefit liability adjustments arising during

   the period, net of tax

 

 

 

 

 

(1

)

Amortization of net loss and prior service credit included in net periodic

   pension cost, net of tax

 

 

1

 

 

 

 

Other comprehensive income (loss)

 

 

(124

)

 

 

(48

)

Comprehensive income (loss)

 

 

(66

)

 

 

(51

)

Net income (loss) attributable to noncontrolling interests, net of tax

 

 

4

 

 

 

4

 

Noncontrolling interests foreign currency translation adjustment, net of tax

 

 

(4

)

 

 

(3

)

Comprehensive income (loss) attributable to noncontrolling interests, net of tax

 

 

 

 

 

1

 

Comprehensive income (loss) attributable to Cabot Corporation

 

$

(66

)

 

$

(52

)

 

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

4


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

UNAUDITED

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

 

 

(In millions)

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

189

 

 

$

200

 

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

 

 

405

 

 

 

456

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials

 

 

73

 

 

 

66

 

Work in process

 

 

1

 

 

 

1

 

Finished goods

 

 

249

 

 

 

237

 

Other

 

 

37

 

 

 

38

 

Total inventories

 

 

360

 

 

 

342

 

Prepaid expenses and other current assets

 

 

47

 

 

 

49

 

Total current assets

 

 

1,001

 

 

 

1,047

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,236

 

 

 

1,290

 

Goodwill

 

 

147

 

 

 

152

 

Equity affiliates

 

 

52

 

 

 

53

 

Intangible assets, net

 

 

131

 

 

 

140

 

Assets held for rent

 

 

98

 

 

 

97

 

Deferred income taxes

 

 

219

 

 

 

216

 

Other assets

 

 

45

 

 

 

40

 

Total assets

 

$

2,929

 

 

$

3,035

 

 

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

5


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2016

 

 

 

(In millions, except share

 

 

 

and per share amounts)

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

7

 

 

$

7

 

Accounts payable and accrued liabilities

 

 

369

 

 

 

364

 

Income taxes payable

 

 

20

 

 

 

25

 

Current portion of long-term debt

 

 

1

 

 

 

1

 

Total current liabilities

 

 

397

 

 

 

397

 

Long-term debt

 

 

913

 

 

 

914

 

Deferred income taxes

 

 

41

 

 

 

41

 

Other liabilities

 

 

275

 

 

 

285

 

Redeemable preferred stock

 

 

26

 

 

 

26

 

Commitments and contingencies (Note G)

 

 

 

 

 

 

 

 

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:  62,419,896 and 62,449,425 shares

 

 

 

 

 

 

 

 

Outstanding: 62,181,180 and 62,210,711 shares

 

 

62

 

 

 

62

 

Less cost of 238,716 and 238,714 shares of common treasury stock

 

 

(7

)

 

 

(7

)

Additional paid-in capital

 

 

 

 

 

 

Retained earnings

 

 

1,576

 

 

 

1,544

 

Accumulated other comprehensive income (loss)

 

 

(445

)

 

 

(325

)

Total Cabot Corporation stockholders' equity

 

 

1,186

 

 

 

1,274

 

Noncontrolling interests

 

 

91

 

 

 

98

 

Total stockholders' equity

 

 

1,277

 

 

 

1,372

 

Total liabilities and stockholders’ equity

 

$

2,929

 

 

$

3,035

 

 

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

6


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

58

 

 

$

(3

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

38

 

 

 

41

 

Long-lived asset impairment charge

 

 

 

 

 

23

 

Deferred tax benefit

 

 

(2

)

 

 

 

Equity in net income of affiliated companies

 

 

(2

)

 

 

 

Non-cash compensation

 

 

5

 

 

 

3

 

Tax benefit from stock based compensation awards

 

 

(5

)

 

 

 

Other non-cash (income) expense

 

 

 

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

28

 

 

 

30

 

Inventories

 

 

(34

)

 

 

16

 

Prepaid expenses and other current assets

 

 

2

 

 

 

(13

)

Accounts payable and accrued liabilities

 

 

22

 

 

 

(6

)

Income taxes payable

 

 

(4

)

 

 

(6

)

Other liabilities

 

 

(8

)

 

 

(13

)

Cash dividends received from equity affiliates

 

 

3

 

 

 

3

 

Other

 

 

1

 

 

 

 

Cash provided by operating activities

 

 

102

 

 

 

83

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(22

)

 

 

(24

)

Proceeds from the sale of land

 

 

 

 

 

7

 

Change in assets held for rent

 

 

(1

)

 

 

(1

)

Cash used in investing activities

 

 

(23

)

 

 

(18

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Repayments under financing arrangements

 

 

(4

)

 

 

(3

)

Increase in notes payable, net

 

 

4

 

 

 

 

Proceeds from (repayments of) issuance of commercial paper, net

 

 

 

 

 

(11

)

Purchases of common stock

 

 

(16

)

 

 

(14

)

Proceeds from sales of common stock

 

 

3

 

 

 

1

 

Tax benefit from stock based compensation awards

 

 

5

 

 

 

 

Cash dividends paid to common stockholders

 

 

(19

)

 

 

(14

)

Cash used in financing activities

 

 

(27

)

 

 

(41

)

Effects of exchange rate changes on cash

 

 

(63

)

 

 

(17

)

Increase (decrease) in cash and cash equivalents

 

 

(11

)

 

 

7

 

Cash and cash equivalents at beginning of period

 

 

200

 

 

 

77

 

Cash and cash equivalents at end of period

 

$

189

 

 

$

84

 

 

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

7


 

CABOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

UNAUDITED

 

A. Basis of Presentation

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

The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 (“2016 10-K”).

The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended December 31, 2016 and 2015. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.

Effective October 1, 2016, the Company adopted a new accounting standard simplifying the presentation of debt issuance costs by presenting debt issuance costs as a reduction of the corresponding debt liability. In addition, the Company early adopted a new accounting standard that simplifies the presentation of deferred income taxes by classifying all deferred taxes as noncurrent assets or liabilities. These new standards were applied retrospectively. The retrospective application of the standard that simplifies the presentation of debt issuance costs resulted in the reclassification of $1 million and $3 million of unamortized debt issuance costs from Prepaid expenses and other current assets and Other assets, respectively, to Long-term debt within the Consolidated Balance Sheets as of September 30, 2016. The retrospective application of the standard that simplifies the presentation of deferred income taxes resulted in the reclassification of $41 million of current deferred tax assets and $1 million of current deferred tax liabilities to noncurrent deferred tax accounts within the Consolidated Balance Sheets as of September 30, 2016.

 

 

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. Taxes collected on sales to customers are excluded from revenues.

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

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

Reinforcement Materials

 

 

51

%

 

 

51

%

Performance Chemicals

 

 

35

%

 

 

36

%

Purification Solutions

 

 

12

%

 

 

12

%

Specialty Fluids

 

 

2

%

 

 

1

%

 

Cabot derives the substantial majority of its revenues from the sale of products in the Reinforcement Materials, Performance Chemicals, and Purification Solutions segments. Revenue from these products is typically recognized when the product is shipped

8


 

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.

For major activated carbon injection systems projects in Purification Solutions, 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 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.

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 Performance Chemicals is recorded in the Fumed Metal Oxides reporting unit.

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 of the remaining operating period at the reporting unit level. Should the fair value of any of the Company’s reporting units decline below its carrying amount 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, 2016, the fair values of the Reinforcement Materials and Fumed Metal Oxides reporting units were substantially in excess of their carrying values. The fair value of the Purification Solutions reporting unit exceeded its carrying amount by 9%. The fair value of the Purification Solutions reporting unit includes certain growth assumptions that are primarily dependent on: (1) further growth in the mercury removal related portion of the business, which is largely dependent on the amount of coal-based power generation used in the United States and the continued regulation of those utilities under the Mercury and Air Toxics Standards and (2) growth in demand for Cabot’s activated carbon products in other applications, while meeting the Company’s margin expectations. Realizing these assumptions is generally driven by the macroeconomic environment, environmental regulations, and global and regional competition.

9


 

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

Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.

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.

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.

Income Tax in Interim Periods

The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be recognized and the income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period.

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

Inventory Valuation

Inventories are stated at the lower of cost or market. 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 $28 million and $27 million higher as of December 31, 2016 and September 30, 2016, 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 non-U.S. inventories is determined using the first-in, first-out (“FIFO”) method.

10


 

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 net realizable value.

Pensions and Other Postretirement Benefits

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

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (“AOCI”), which is included as a component of stockholders’ equity, includes unrealized gains or losses on 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.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new standard, “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, 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 the adoption of this standard may have 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 makes 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. The Company adopted this standard on October 1, 2016. The standard required retrospective application, which resulted in the reclassification of $1 million and $3 million of unamortized debt issuance costs from Prepaid expenses and other current assets and Other assets, respectively, to Long-term debt within the Consolidated Balance Sheets as of September 30, 2016.

In November 2015, the FASB issued a new standard that amends the existing accounting standard for income taxes and simplifies the presentation of deferred income taxes. This standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. It is effective for fiscal years beginning after December 15, 2016 and for interim periods within those years and early adoption is permitted. The Company elected to early adopt this standard effective October 1, 2016 and retrospectively apply the standard, which resulted in the reclassification of $41 million of current deferred tax assets and $1 million of current deferred tax liabilities into noncurrent deferred tax accounts within the Consolidated Balance Sheets as of September 30, 2016.

In February 2016, the FASB issued a new standard for the accounting for leases. This new standard requires lessees to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner that is similar to the current accounting treatment for leases. The standard is applicable for fiscal years beginning after December 15, 2018 and for interim periods within those years and early adoption is permitted. The Company expects to adopt the standard on October 1, 2019. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In March 2016, the FASB issued a new standard that amends the accounting standard for stock compensation by simplifying several aspects of the accounting for employee share-based payment transactions, including the related accounting for income taxes, forfeitures, and the withholding of shares to satisfy the employer’s tax withholding requirements, as well as classification in the statements of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim

11


 

periods within those years and early adoption is permitted. The Company is evaluating this standard and the timing of its adoption. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.

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

 

 

C. Employee Benefit Plans

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

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(Dollars in millions)

 

Service cost

 

$

 

 

$

2

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

1

 

 

 

1

 

 

 

1

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected return on plan assets

 

 

(3

)

 

 

(3

)

 

 

(3

)

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

Amortization of actuarial loss

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement and curtailment cost (credit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

Net periodic benefit (credit) cost

 

$

(2

)

 

$

1

 

 

$

(2

)

 

$

2

 

 

$

 

 

$

 

 

$

(2

)

 

$

 

 

 

 

D. Goodwill and Intangible Assets

Cabot had goodwill balances of $147 million and $152 million at December 31, 2016 and September 30, 2016, respectively. The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the three month period ended December 31, 2016 are as follows:

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Total

 

 

 

(Dollars in millions)

 

Balance at September 30, 2016

 

$

52

 

 

$

9

 

 

$

91

 

 

$

152

 

Foreign currency impact

 

 

(3

)

 

 

(1

)

 

 

(1

)

 

 

(5

)

Balance at December 31, 2016

 

$

49

 

 

$

8

 

 

$

90

 

 

$

147

 

 

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

 

 

 

December 31, 2016

 

 

September 30, 2016

 

 

 

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 technologies

 

$

46

 

 

$

(5

)

 

$

41

 

 

$

48

 

 

$

(4

)

 

$

44

 

Trademarks

 

 

15

 

 

 

(1

)

 

 

14

 

 

 

16

 

 

 

(1

)

 

 

15

 

Customer relationships

 

 

86

 

 

 

(10

)

 

 

76

 

 

 

90

 

 

 

(9

)

 

 

81

 

Total intangible assets

 

$

147

 

 

$

(16

)

 

$

131

 

 

$

154

 

 

$

(14

)

 

$

140

 

 

Intangible assets are amortized over their estimated useful lives, which range from fourteen to twenty-five years, with a weighted average amortization period of approximately nineteen years. Amortization expense for the three months ended both

12


 

December 31, 2016 and 2015 was $2 million, and is included in Cost of sales and Selling and administrative expenses in the Consolidated Statements of Operations. Total amortization expense is estimated to be approximately $7 million each year for the next five fiscal years.

 

 

E. Stockholders’ Equity

In January 2015, the Board of Directors authorized Cabot to repurchase up to five million shares of its common stock in the open market or in privately negotiated transactions. Cabot has repurchased 2,429,176 shares of its common stock under this authorization. As of December 31, 2016, 2,570,824 shares remain available for repurchase under the current authorization. The Company retired the repurchased shares and recorded the excess of the purchase price over par value to additional paid-in capital until such amount was reduced to zero and then charged the remainder against retained earnings.

During the first three months of fiscal 2017 and 2016, Cabot paid cash dividends in the amount of $0.30 and $0.22, respectively, per share of common stock, with a total cost of $19 million and $14 million, respectively.

Noncontrolling interest

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

 

 

 

2016

 

 

2015

 

 

 

(Dollars in millions)

 

Balance at September 30

 

$

98

 

 

$

104

 

Net income (loss) attributable to noncontrolling interests

 

 

4

 

 

 

4

 

Noncontrolling interest foreign currency translation

   adjustment

 

 

(4

)

 

 

(3

)

Noncontrolling interest dividends declared

 

 

(7

)

 

 

(9

)

Balance at December 31

 

$

91

 

 

$

96

 

 

During the three months ended December 31, 2016, $7 million of dividends were declared to noncontrolling interests, none of which were paid during the period. During the three months ended December 31, 2015, $9 million of dividends were declared to noncontrolling interests, all of which were paid later in the fiscal year.

 

 

F. Accumulated Other Comprehensive Income (Loss)

Comprehensive income combines net income (loss) and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets.

Changes in each component of AOCI, net of tax, were as follows:

 

 

 

Currency

Translation

Adjustment

 

 

Unrealized

Gains on

Investments

 

 

Pension and Other

Postretirement

Benefit Liability

Adjustments

 

 

Total

 

 

 

(Dollars in millions)

 

Balance at September 30, 2016, attributable to Cabot

   Corporation

 

$

(227

)

 

$

2

 

 

$

(100

)

 

$

(325

)

Other comprehensive income (loss) before reclassifications

 

 

(125

)

 

 

 

 

 

1

 

 

 

(124

)

Net other comprehensive items

 

 

(352

)

 

 

2

 

 

 

(99

)

 

 

(449

)

Less: Noncontrolling interest

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

Balance at December 31, 2016, attributable to Cabot

   Corporation

 

$

(348

)

 

$

2

 

 

$

(99

)

 

$

(445

)

 

13


 

The amounts reclassified out of AOCI and into the Consolidated Statements of Operations in the three months ended December 31, 2016 and 2015 were as follows:

 

 

 

 

 

Three Months Ended

 

 

 

Affected Line Item in the Consolidated

 

December 31,

 

 

 

Statements of Operations

 

2016

 

 

2015

 

 

 

 

 

(Dollars in millions)

 

Pension and other postretirement

   benefit liability adjustment

 

 

 

 

 

 

 

 

 

 

Amortization of actuarial losses

 

Net Periodic Benefit Cost - see

   Note C for details

 

$

1

 

 

$

1

 

Amortization of prior service credit

 

Net Periodic Benefit Cost - see

   Note C for details

 

 

 

 

 

(1

)

Settlement and curtailment (credit) cost

 

Net Periodic Benefit Cost - see

   Note C for details

 

 

 

 

 

(1

)

Total before tax

 

 

 

 

1

 

 

 

(1

)

Tax impact

 

Provision (benefit) for income taxes

 

 

 

 

 

 

Total after tax

 

 

 

$

1

 

 

$

(1

)

 

 

 

G. Commitments and Contingencies

Purchase Commitments

Cabot has entered into long-term purchase agreements primarily for the purchase of raw materials. Under certain of these agreements the quantity of material being purchased is fixed, but the price paid changes as market prices change. For those commitments, the amounts included in the table below are based on market prices at December 31, 2016.

 

 

 

Payments Due by Fiscal Year

 

 

 

Remainder of

Fiscal 2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

 

 

(Dollars in millions)

 

Reinforcement Materials

 

$

154

 

 

$

189

 

 

$

184

 

 

$

118

 

 

$

91

 

 

$

1,202

 

 

$

1,938

 

Performance Chemicals

 

 

34

 

 

 

43

 

 

 

30

 

 

 

23

 

 

 

21

 

 

 

109

 

 

 

260

 

Purification Solutions

 

 

7

 

 

 

8

 

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

27

 

Total

 

$

195

 

 

$

240

 

 

$

220

 

 

$

147

 

 

$

112

 

 

$

1,311

 

 

$

2,225

 

 

Guarantee Agreements

Cabot has provided certain indemnities pursuant to which it may be required to make payments to an indemnified party in connection with certain transactions and agreements. In connection with certain acquisitions and divestitures, Cabot has provided routine indemnities with respect to such matters as environmental, tax, insurance, product and employee liabilities. In connection with various other agreements, including service and supply agreements with customers, Cabot has provided indemnities for certain contingencies and routine warranties. Cabot is unable to estimate the maximum potential liability for these types of indemnities as a maximum obligation is not explicitly stated in most cases and the amounts, if any, are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be reasonably estimated. The duration of the indemnities vary, and in many cases are indefinite. Cabot has not recorded any liability for these indemnities in the consolidated financial statements, except as otherwise disclosed.

Contingencies

Cabot is a defendant, or potentially responsible party, in various lawsuits and environmental proceedings wherein substantial amounts are claimed or at issue.

14


 

Environmental Matters

As of December 31, 2016 and September 30, 2016, Cabot had $13 million and $14 million, respectively, reserved for environmental matters. These environmental matters mainly relate to former operations. These reserves represent Cabot’s best estimates of the probable costs to be incurred at those sites where costs are reasonably estimable based on the Company’s analysis of the extent of clean up required, alternative clean-up methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site. Cash payments related to these environmental matters were less than $1 million in the first three months of both fiscal 2017 and 2016. Cabot reviews the adequacy of the reserves as circumstances change at individual sites and adjusts the reserves as appropriate. Almost all of Cabot’s environmental issues relate to sites that are mature and have been investigated and studied and, in many cases, are subject to agreed upon remediation plans. However, depending on the results of future testing, changes in risk assessment practices, remediation techniques and regulatory requirements, newly discovered conditions, and other factors, it is reasonably possible that the Company could incur additional costs in excess of environmental reserves currently recorded. Management estimates, based on the latest available information, that any such future environmental remediation costs that are reasonably possible to be in excess of amounts already recorded would be immaterial to the Company’s consolidated financial statements.

Other Matters

Respirator Liabilities

Cabot has exposure in connection with a safety respiratory products business that a subsidiary acquired from American Optical Corporation (“AO”) in an April 1990 asset purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (i) AO’s insurance coverage for the period prior to the 1990 acquisition and (ii) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. As more fully described in the 2016 10-K, the respirator liabilities generally involve claims for personal injury, including asbestosis, silicosis and coal worker’s pneumoconiosis, allegedly resulting from the use of respirators that are alleged to have been negligently designed and/or labeled. Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. At no time did this respiratory product line represent a significant portion of the respirator market.

As of both December 31, 2016 and September 30, 2016, there were approximately 38,000 claimants in pending cases asserting claims against AO in connection with respiratory products. Cabot has a reserve to cover its expected share of liability for existing and future respirator liability claims. At December 31, 2016 and September 30, 2016, the reserve was $20 million and $21 million, respectively. Cash payments related to this liability were $1 million in the first three months of both fiscal 2017 and 2016.

Cabot’s current estimate of the cost of its share of existing and future respirator liability claims is based on facts and circumstances existing at this time. Developments that could affect the Company’s estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of dismissals without payment of pending claims, (iii) significant changes in the average cost of resolving claims, (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 certain of the other parties which contribute to the settlement of respirator claims, or the indemnity provided by a former owner of the business, (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 Cabot’s share of liability are no longer reasonable. The Company cannot determine the impact of these potential developments on its current estimate of its share of liability for existing and future claims. Accordingly, the actual amount of these liabilities for existing and future claims could be different than the reserved amount.

Other

The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business and with respect to the Company’s divested businesses. In the opinion of the Company, although final disposition of some or all of these other suits and claims may impact the Company’s consolidated financial statements in a particular period, they are not expected, in the aggregate, to have a material adverse effect on the Company’s consolidated financial statements.

15


 

 

 

H. Income Tax

Effective Tax Rate

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in millions)

 

Provision (benefit) for income taxes

 

$

17

 

 

$

(5

)

Effective tax rate

 

 

24

%

 

 

74

%

 

During the three months ended December 31, 2016, the Company recorded a tax provision of $17 million resulting in an effective tax rate of 24%. This amount included a net discrete tax benefit of less than $1 million, primarily comprised of a tax benefit from releases of reserves for uncertain tax positions, partially offset by a net tax charge from excludible foreign exchange gains and losses. During the three months ended December 31, 2015, the Company recorded a tax benefit of $5 million, resulting in an effective tax rate of 74%. This amount included net discrete tax benefits of $6 million, primarily comprised of the net tax benefit from certain foreign exchange gains and losses, the renewal of the U.S. Research and Experimentation credit and releases of reserves for uncertain tax positions.

Uncertainties

Cabot and certain subsidiaries are under audit in a number of jurisdictions. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a further change in the unrecognized tax benefits may also occur within the next twelve months related to the settlement of one or more of these audits or the lapse of applicable statutes of limitations. However, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time.

Cabot files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The 2012 through 2014 tax years generally remain subject to examination by the United States Internal Revenue Service and various tax years from 2005 through 2014 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2002 through 2015 remain subject to examination by their respective tax authorities. As of December 31, 2016, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands.

During both the three months ended December 31, 2016 and 2015, Cabot released uncertain tax positions of $2 million due to the expirations of statutes of limitations in various jurisdictions.

 

 

16


 

I. Earnings Per Share

The following tables summarize the components of the basic and diluted earnings per common share computations:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars and shares in millions, except per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot Corporation

 

$

54

 

 

$

(7

)

Less: Dividends and dividend equivalents to

   participating securities

 

 

 

 

 

 

Less: Undistributed earnings allocated to

   participating securities(1)

 

 

 

 

 

 

Earnings (loss) allocated to common

   shareholders (numerator)

 

$

54

 

 

$

(7

)

Weighted average common shares and

   participating securities outstanding

 

 

62.7

 

 

 

62.9

 

Less: Participating securities(1)

 

 

0.5

 

 

 

0.4

 

Adjusted weighted average common shares

   (denominator)

 

 

62.2

 

 

 

62.5

 

Amounts per share - basic:

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cabot Corporation

 

$

0.85

 

 

$

(0.11

)

Diluted EPS:

 

 

 

 

 

 

 

 

Earnings (loss) allocated to common shareholders

 

$

54

 

 

$

(7

)

Plus: Earnings (loss) allocated to participating securities

 

 

 

 

 

 

Less: Adjusted earnings allocated to participating

   securities(2)

 

 

 

 

 

 

Earnings (loss) allocated to common

   shareholders (numerator)

 

$

54

 

 

$

(7

)

Adjusted weighted average common shares

   outstanding

 

 

62.2

 

 

 

62.5

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Common shares issuable(3)