The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
UNAUDITED
A. Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting policies generally accepted in the United States (“U.S.”) and include the accounts of Cabot Corporation (“Cabot” or the “Company”) and its wholly owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights. Intercompany transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for its fiscal year ended September 30, 2017 (“2017 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, 2018 and 2017. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.
Effective October 1, 2017, the Company changed its method of accounting for its U.S. carbon black inventories from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. The Company applied this change retrospectively to all prior periods presented, which is discussed in further detail in Note B.
As discussed in Note C, in November 2017, the Company acquired all of the issued and outstanding shares of 8755329 Canada Inc. (“Tech Blend”), a North American producer of black masterbatches. The financial position, results of operations and cash flows of Tech Blend are included in the Company’s consolidated financial statements from the date of acquisition.
B. Significant Accounting Policies
Revenue Recognition and Accounts Receivable
Cabot recognizes revenue when persuasive 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 June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Reinforcement Materials
|
|
|
57
|
%
|
|
|
54
|
%
|
|
|
57
|
%
|
|
|
53
|
%
|
|
Performance Chemicals
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
33
|
%
|
|
|
35
|
%
|
|
Purification Solutions
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
11
|
%
|
|
Specialty Fluids
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Cabot derives the substantial majority of its revenues from the sale of products in its Reinforcement Materials, Performance Chemicals, and Purification Solutions segments. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. The Company offers certain of its customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time 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.
8
Revenue in Specialty Fluids arises primarily from the rental of cesium formate. This revenue is recognized throughout the rental period b
ased on the contracted rental terms. Customers are also billed and revenue is recognized, typically at the end of the job, for cesium formate product that is not returned. The Company also generates revenues from cesium formate sold outside of the rental p
rocess and from the sale of fine cesium chemicals
.
This
revenue is recognized upon delivery of the product.
Cabot maintains allowances for doubtful accounts based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable and other economic information on both a historical and prospective basis. Customer account balances are charged against the allowance when it is probable the receivable will not be recovered. There were no material changes in the allowance for any of the periods presented. There is no material off-balance sheet credit exposure related to customer receivable balances.
Intangible Assets and Goodwill Impairment
The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. The Company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition. The Company acquired Tech Blend in November 2017, which included separately identifiable intangible assets of $29 million as part of the purchase price allocation as discussed in Note C.
Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.
Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of 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. Reinforcement Materials, and the Fumed Metal Oxides and Specialty Compounds businesses within Performance Chemicals, which are considered separate reporting units, carry the Company’s goodwill balances as of May 31, 2018. The Purification Solutions reporting unit has no remaining goodwill balance subsequent to the goodwill impairment charge recorded in the second quarter of fiscal 2018. As part of the Tech Blend acquisition, goodwill of $33 million was generated and is reflected in the Specialty Compounds 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. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result. The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The fair value is also benchmarked against a market approach using the guideline public 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. Refer to Note E and Note F for details on the Purification Solutions goodwill impairment test and the resulting charge recorded in the second quarter of fiscal 2018, and the results of the Company’s annual goodwill impairment test performed as of May 31, 2018, respectively.
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.
9
An asset impairment is recognized when the carryi
ng 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 separately identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset.
In
the second
quarter of fiscal 2018, the Company determine
d that the long-lived asset group of Purificatio
n Solutions was not
fully
recoverable and
a
ccordingly, the Company recorded an impairment charge for the carrying value in excess of th
e fair value of the asset group, as described in
Note E
.
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 of the related assets. The depreciable lives for buildings, machinery and equipment, and other fixed assets are between twenty and twenty-five years, ten and twenty-five years, and three and twenty-five years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in earnings in the Consolidated Statements of Operations. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated.
Income Tax in Interim Periods
The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be recognized and the income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period.
Valuation allowances are provided against the future tax benefits that arise from the deferred tax assets in jurisdictions for which no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.
Inventory Valuation
Inventories are stated at the lower of cost or market. Effective October 1, 2017, the Company changed its method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method. Total U.S. inventories accounted for utilizing the LIFO cost flow assumption represented 7% of the Company’s total worldwide inventories as of September 30, 2017 prior to this change in method. The Company believes the FIFO method is preferable because it: (i) conforms the accounting for U.S. carbon black inventories to the Company’s inventory valuation methodology for the majority of its other inventories; (ii) better represents how management assesses and reports on the performance of the Reinforcement Materials and Performance Chemicals operating segments that carry the Company’s U.S. carbon black inventories, as the impact of accounting for this inventory on a LIFO basis has historically been excluded from segment results; (iii) better aligns the accounting for U.S. carbon black inventories with the physical flow of that inventory; and (iv) improves comparability with many of the Company’s peers.
10
The Company applied this change retrospectively t
o all prior periods presented.
This change resulted in a
$17
milli
on
increase in retained earnings as of October 1, 2016,
from $1,544 million to $1,561
million. In addition, the following
financial statement line items in the Company’s
Consolidated Stateme
nts of Operations for the three and
nine
months ended
June
3
0
, 2017, its
Consolidated Balance Sheet
s
as of September 30, 2017,
and
its
Consolidated Statement
s
of Cash Flows for the
nine
months ended
June
3
0
, 201
7
were adjusted
:
|
Consolidated Statements of Operations
|
|
Three Months Ended June 30
|
|
|
|
|
2017
|
|
|
|
|
As Originally Reported
|
|
|
Effect of Change
|
|
|
As Adjusted
|
|
|
|
|
(In millions, except per share amounts)
|
|
|
Cost of sales
|
|
$
|
546
|
|
|
$
|
(2
|
)
|
|
$
|
544
|
|
|
Income (loss) from continuing operations before income taxes
and equity in earnings of affiliated companies
|
|
$
|
66
|
|
|
$
|
2
|
|
|
$
|
68
|
|
|
(Provision) benefit for income taxes
|
|
$
|
(16
|
)
|
|
$
|
—
|
|
|
$
|
(16
|
)
|
|
Net income (loss)
|
|
$
|
53
|
|
|
$
|
2
|
|
|
$
|
55
|
|
|
Net income (loss) attributable to Cabot Corporation
|
|
$
|
45
|
|
|
$
|
2
|
|
|
$
|
47
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.71
|
|
|
$
|
0.02
|
|
|
$
|
0.73
|
|
|
Diluted
|
|
$
|
0.71
|
|
|
$
|
0.02
|
|
|
$
|
0.73
|
|
|
Consolidated Statements of Operations
|
|
Nine Months Ended June 30
|
|
|
|
|
2017
|
|
|
|
|
As Originally Reported
|
|
|
Effect of Change
|
|
|
As Adjusted
|
|
|
|
|
(In millions)
|
|
|
Cost of sales
|
|
$
|
1,509
|
|
|
$
|
(4
|
)
|
|
$
|
1,505
|
|
|
Income (loss) from continuing operations before income taxes
and equity in earnings of affiliated companies
|
|
$
|
217
|
|
|
$
|
4
|
|
|
$
|
221
|
|
|
(Provision) benefit for income taxes
|
|
$
|
(32
|
)
|
|
$
|
(1
|
)
|
|
$
|
(33
|
)
|
|
Net income (loss)
|
|
$
|
191
|
|
|
$
|
3
|
|
|
$
|
194
|
|
|
Net income (loss) attributable to Cabot Corporation
|
|
$
|
173
|
|
|
$
|
3
|
|
|
$
|
176
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.75
|
|
|
$
|
0.04
|
|
|
$
|
2.79
|
|
|
Diluted
|
|
$
|
2.74
|
|
|
$
|
0.04
|
|
|
$
|
2.78
|
|
|
Consolidated Balance Sheets
|
|
September 30, 2017
|
|
|
|
|
As Originally Reported
|
|
|
Effect of Change
|
|
|
As Adjusted
|
|
|
|
|
(In millions)
|
|
|
Inventories
|
|
$
|
396
|
|
|
$
|
37
|
|
|
$
|
433
|
|
|
Deferred income taxes (assets)
|
|
$
|
250
|
|
|
$
|
(13
|
)
|
|
$
|
237
|
|
|
Retained earnings
|
|
$
|
1,683
|
|
|
$
|
24
|
|
|
$
|
1,707
|
|
|
Consolidated Statements of Cash Flows
|
|
Nine Months Ended June 30
|
|
|
|
|
2017
|
|
|
|
|
As Originally Reported
|
|
|
Effect of Change
|
|
|
As Adjusted
|
|
|
|
|
(In millions)
|
|
|
Net income (loss)
|
|
$
|
191
|
|
|
$
|
3
|
|
|
$
|
194
|
|
|
Deferred tax provision (benefit)
|
|
$
|
(26
|
)
|
|
$
|
1
|
|
|
$
|
(25
|
)
|
|
Inventories
|
|
$
|
(57
|
)
|
|
$
|
(4
|
)
|
|
$
|
(61
|
)
|
If the Company had continued to account for its U.S. carbon black inventories under LIFO, there would have been an increase in Cost of Sales of $8 million and $11 million, an additional benefit to the (Provision) benefit for income taxes of $2 million and $3 million, an impact to the Net income (loss) attributable to Cabot Corporation of $6 million and $8 million, and a decrease of $
0.10 and
$
0.13
in both basic and diluted earnings per common share in the Consolidated Statements of Operations for the three and nine months ended June 30, 2018, respectively. The impact to the Consolidated Balance Sheets as of June 30, 2018 would have been a decrease of $
48
million in Inventories, an increase of $
16
million in Deferred income taxes, and a decrease of $
32
million in Retained earnings.
11
The cost of Specialty Flu
ids inventories that are classified as assets held for rent is determined using the average cost method. The cost of all other inventories is determined using the FIFO method.
Cabot periodically reviews inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory, and based on these assumptions estimates the amount of any obsolete, unmarketable, slow moving, or overvalued inventory. Cabot writes down the value of these inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value.
Pensions and Other Postretirement Benefits
The Company recognizes the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. 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.
Redeemable Preferred Stock
In November 2013, the Company purchased all of its joint venture partner’s common stock in the former NHUMO, S.A. de C.V. (“NHUMO”) joint venture. At the close of the transaction, NHUMO issued redeemable preferred stock to the joint venture partner 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 the former joint venture partner or the Company for $25 million starting in November 2018 or upon the occurrence of certain other conditions. Annual payment of the dividends by NHUMO 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 all fiscal years since the close of the transaction and dividend payments of approximately $1 million were paid for each fiscal year and a final dividend payment of approximately $1 million is due in November 2018. 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 as of September 30, 2017 and as a current liability as of June 30, 2018 as it becomes redeemable beginning in November 2018.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI”), which is included as a component of stockholders’ equity, includes unrealized gains or losses on available-for-sale marketable securities and derivative instruments, currency translation adjustments in foreign subsidiaries, translation adjustments on foreign equity securities and minimum pension liability adjustments.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard that amends the accounting standard for stock compensation by simplifying several aspects of the accounting for employee share-based payment transactions, including the related accounting for income taxes, forfeitures, and the withholding of shares to satisfy the employer’s tax withholding requirements, as well as classification in the Statements of Cash Flows. The Company adopted the standard on October 1, 2017. The following guidance was updated under the new standard, and its impact to Cabot is described below:
|
|
•
|
When accounting for forfeitures the Company may elect to estimate the number of forfeitures to be recognized over the term of an award, which was also permitted under the previous guidance, or account for forfeitures as they occur. The Company elected to modify its accounting policy and account for forfeitures as they occur. The Company applied the accounting change on a modified retrospective basis, which resulted in a cumulative-effect charge of less than $1 million to Retained earnings as of October 1, 2017.
|
|
|
•
|
Excess tax benefits or deficiencies related to stock compensation that were previously recorded to Additional paid-in capital are now recognized as a discrete tax benefit or expense in (Provision) benefit for income taxes within the Consolidated Statements of Operations. The impact on the (Provision) benefit for income taxes was a discrete tax benefit of $2 million during the first nine months of fiscal 2018.
|
|
|
•
|
Excess tax benefits are no longer reclassified out of cash flows from operating activities to financing activities in the Consolidated Statements of Cash Flows. The Company elected to apply this cash flow presentation requirement retrospectively, which resulted in the reclassification of $8 million of tax benefit from share-based compensation awards from cash flows from financing activities to cash flows from operating activities in the Consolidated Statements of Cash Flows for the nine months ended June 30, 2017.
|
12
|
|
•
|
Cash paid by an employer when directly withholding
shares for tax withholding purposes are required to be classified as a financing activity in the Consolidated Statements of Cash Flows. This method of presentation is consistent with the Company's historical presentation.
|
In August 2017, the FASB issued a new standard that amends the hedge accounting recognition and presentation requirements under hedge accounting. The new standard will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amends the presentation and disclosure requirements, and simplifies how companies assess effectiveness. The Company adopted the standard on October 1, 2017. The adoption of this standard did not impact the Company’s consolidated financial statements.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new standard that amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017. The Company has completed its preliminary assessment of the new standard, which included reviewing a sample of contracts across the Company’s four business segments. Based on this assessment, the Company does not expect adoption of this standard to have a material impact on how it recognizes revenue. The Company has substantially completed its assessment of the new standard and is preparing to implement the updates that will be necessary to its revenue recognition policy, internal controls, processes and financial statement disclosures. The Company will adopt this standard on October 1, 2018 and expects to apply a modified retrospective approach.
In February 2016, the FASB issued a new standard for the accounting for leases. This new standard requires lessees to recognize assets and liabilities for most leases, but recognize expenses on their income statements in a manner that is similar to the 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 August 2016, the FASB issued final amendments to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows, such as distributions received from equity method investees, proceeds from the settlement of insurance claims, and proceeds from the settlement of corporate-owned life insurance policies. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and early adoption is permitted. The Company will adopt this standard on October 1, 2018. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.
In March 2017, the FASB issued a new standard that amends the requirements on the presentation of net periodic pension and postretirement benefit costs. Currently, net benefit costs are reported as employee costs within operating income. The new standard requires the service cost component to be presented with other employee compensation costs. The other components will be reported separately outside of operations. The new standard is effective for fiscal years beginning after December 15, 2017. The Company will adopt this standard on October 1, 2018. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.
In February 2018, the FASB issued a new standard that allows entities to reclassify from AOCI to Retained earnings for stranded tax effects resulting from enactment of H.R. 1 (the “Act”), commonly referred to as the Tax Cuts and Jobs Act of 2017. The amendments in this new standard also require certain disclosures about stranded tax effects. The new standard is effective for all entities for fiscal years beginning after December 15, 2018, 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. Acquisition of Tech Blend
In November 2017, the Company acquired all of the issued and outstanding shares and cash of Tech Blend, a North American producer of black masterbatches, for a purchase price of $65 million, paid in cash. The purchase price was subject to a working capital adjustment, which was immaterial. The operating results of the business are included in the Company’s Performance Chemicals segment. The acquisition extends the Company’s global footprint in black masterbatch and compounds and provides a platform to serve global customers and grow in conductive formulations. Since the date of acquisition, Tech Blend revenues have totaled approximately $19 million through June 30, 2018.
The Company incurred acquisition costs of less than $1 million through June 30, 2018 associated with the transaction, which are included in Selling and administrative expenses in the Consolidated Statements of Operations.
13
T
he allocation of the
purchase price set for
th below was based on
estimates of the fair value of assets acquired and
liabilities assumed.
|
|
|
(In millions)
|
|
|
Assets
|
|
|
|
|
|
Cash
|
|
$
|
1
|
|
|
Accounts Receivable
|
|
|
5
|
|
|
Inventories
|
|
|
3
|
|
|
Property, plant and equipment
|
|
|
7
|
|
|
Intangible assets
|
|
|
29
|
|
|
Goodwill
|
|
|
33
|
|
|
Total assets acquired
|
|
|
78
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current liabilities
|
|
|
(3
|
)
|
|
Deferred tax liabilities
|
|
|
(10
|
)
|
|
Total liabilities assumed
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
Cash consideration paid
|
|
$
|
65
|
|
As part of the purchase price allocation, the Company determined the separately identifiable intangible assets are comprised of developed technologies of $21 million, which will be amortized over 25 years, and customer relationships of $8 million, which will be amortized over 12 years. The Company estimated the fair values of the identifiable acquisition-related intangible assets based on projections of cash flows that will arise from those assets. The projected cash flows are discounted to determine the fair value of the assets at the date of acquisition. The determination of the fair value of the intangible assets acquired required the use of significant judgment with regard to (i) assumptions in the discounted cash flow model used and (ii) determination of the useful lives of the developed technologies and customer relationships.
The excess of the purchase price over the fair value of the tangible net assets and intangible assets acquired was recorded as goodwill. The goodwill recognized is attributable to the growth and operating synergies that the Company expects to realize from this acquisition. Goodwill generated from the acquisition will not be deductible for tax purposes.
D. Employee Benefit Plans
Net periodic defined benefit pension and other postretirement benefit costs include the following:
|
|
|
Three Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
(In millions)
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Amortization of actuarial loss
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
14
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
U.S.
|
|
|
Foreign
|
|
|
|
|
(In millions)
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
|
3
|
|
|
|
6
|
|
|
|
3
|
|
|
|
4
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
Amortization of actuarial loss
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
|
$
|
(4
|
)
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
E. Purification Solutions Goodwill and Long-Lived Assets Impairment Charges
During the second quarter of fiscal 2018, the Company recorded impairment charges relating to the goodwill and long-lived assets of the Purification Solutions reporting unit, and an associated deferred tax benefit, in the Consolidated Statement of Operations as follows:
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
(In millions)
|
|
|
Purification Solutions goodwill impairment charge
|
|
$
|
92
|
|
|
Purification Solutions long-lived assets impairment charge
|
|
|
162
|
|
|
Provision (benefit) for income taxes
|
|
|
(30
|
)
|
|
Impairment charges, after tax
|
|
$
|
224
|
|
In the second quarter of fiscal 2018, the Purification Solutions reporting unit experienced further share losses, lower customer demand and declining prices in the mercury removal and North America powdered activated carbon applications, which led the Company to reassess its previous estimates for expected growth in volumes, prices and margins in the reporting unit. The forecasted demand and profit margins in mercury removal applications were lowered reflecting further unit closures at coal-fired utility plants, lower usage levels of activated carbon and lower plant utilization levels for coal-fired utilities, as well as lower pricing due to industry overcapacity, among other factors. While development programs continue to progress, growth estimates in other environmental and specialty applications were also lowered, reflecting heightened competition and updated timelines to commercialize certain new products. Due to these revised forecasts, the Company performed the quantitative goodwill impairment test and determined that the estimated fair value of the Purification Solutions reporting unit was lower than the reporting unit's carrying value, resulting in a goodwill impairment charge of $92 million.
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 growth rates in environmental and specialty applications and pricing assumptions of activated carbon, among others. In addition, an estimate of the reporting unit’s weighted average cost of capital (“WACC”) was 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.
Prior to determining the goodwill impairment charge, the Company considered whether the assets of the reporting unit were recoverable. As a result of this assessment, the Company recorded an inventory reserve adjustment of $13 million and impairments to long lived assets of $162 million. The adjustment to inventory carrying value was determined based on reassessments of volumes, pricing, and margins described above and was recorded in Cost of sales in the Consolidated Statements of Operations. The impairment analysis to assess if definite-lived intangible assets and property, plant and equipment were recoverable was 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, the Company recorded impairment charges of $64 million and $98 million, to its definite-lived intangible assets and property, plant and equipment, respectively, in the quarter ended March 31, 2018 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 the cost approach to determine the fair value of its property, plant and equipment. Cabot will continue to monitor for events or changes in business circumstances that may indicate that the remaining carrying value of the asset group may not be recoverable.
15
The Company recorded a tax benefit related to the impairment charges of $30 million in the second quarter of fiscal 2018
which was subsequently reduced
by $2
million in the third quarter of fiscal 2018 due to finalization of the impairment charges by
tax
jurisdiction.
F. Goodwill and Intangible Assets
The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the nine month period ended June 30, 2018 are as follows:
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Total
|
|
|
|
|
(In millions)
|
|
|
Balance at September 30, 2017
|
|
$
|
53
|
|
|
$
|
9
|
|
|
$
|
92
|
|
|
$
|
154
|
|
|
Goodwill acquired
(1)
|
|
|
—
|
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
|
Impairment charge
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
(92
|
)
|
|
Foreign currency impact
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(3
|
)
|
|
Balance at June 30, 2018
|
|
$
|
51
|
|
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
92
|
|
|
(1)
|
Consists of goodwill acquired in the acquisition of Tech Blend as described in Note C.
|
|
(2)
|
Refer to Note E for details on the Purification Solutions goodwill impairment test and the resulting impairment charge recorded in the second fiscal quarter of 2018. Based on the Company’s most recent annual goodwill impairment test performed as of May 31, 2018, the fair values of the Reinforcement Materials, Fumed Metal Oxides, and Specialty Compounds reporting units were substantially in excess of their carrying values.
|
The following table provides information regarding the Company’s intangible assets:
|
|
|
June 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
Assets
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Intangible
Assets
|
|
|
|
|
(In millions)
|
|
|
Intangible assets with finite lives
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies
|
|
$
|
50
|
|
|
$
|
(1
|
)
|
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
(7
|
)
|
|
$
|
42
|
|
|
Trademarks
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
15
|
|
|
Customer relationships
|
|
|
49
|
|
|
|
(10
|
)
|
|
|
39
|
|
|
|
94
|
|
|
|
(14
|
)
|
|
|
80
|
|
|
Total intangible assets
|
|
$
|
107
|
|
|
$
|
(11
|
)
|
|
$
|
96
|
|
|
$
|
159
|
|
|
$
|
(22
|
)
|
|
$
|
137
|
|
|
(1)
|
Refer to Note E for intangible assets impairment charges recorded in the second fiscal quarter of 2018.
|
Intangible assets are amortized over their estimated useful lives, which range between twelve and twenty-five years, with a weighted average amortization period of approximately nineteen years. Amortization expense for the three month periods ended June 30, 2018 and 2017 was $1 million and $2 million, respectively, and is included in Cost of sales and Selling and administrative expenses in the Consolidated Statements of Operations. Amortization expense for both nine month periods ended June 30, 2018 and 2017 was $6 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 $6 million each year for the next five fiscal years.
G. Stockholders’ Equity
In January 2015, the Board of Directors authorized Cabot to repurchase up to five million shares of its common stock in the open market or in privately negotiated transactions. As of June 30, 2018, under such authorization, Cabot has repurchased 4,171,802 shares of its common stock and 828,198 shares remained available for repurchase. The Company retired the repurchased shares and recorded the excess of the purchase price over par value to additional paid-in capital until such amount was reduced to zero and then charged the remainder against retained earnings. In July 2018, the Board of Directors authorized Cabot to repurchase up to an additional ten million shares of its common stock on the open market or in privately negotiated transactions. The January 2015 share repurchase authorization remains in place. Neither authorization has a set expiration date.
During the first nine months of fiscal 2018 and 2017, Cabot paid cash dividends in the aggregate amount of $0.96 and $0.915, respectively, per share of common stock, with a total cost of $60 million and $57 million, respectively.
16
Noncontrolling Interest
The following table illustrates the noncontrolling interest activity for the periods presented:
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Noncontrolling interests at beginning of period
|
|
$
|
121
|
|
|
$
|
98
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
31
|
|
|
|
18
|
|
|
Foreign currency translation adjustment attributable to
noncontrolling interests, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
Dividends declared to noncontrolling interests
|
|
|
(22
|
)
|
|
|
(14
|
)
|
|
Contribution from noncontrolling interest
|
|
|
—
|
|
|
|
2
|
|
|
Noncontrolling interests at end of period
|
|
$
|
130
|
|
|
$
|
104
|
|
During the nine months ended June 30, 2018, $21 million of the dividends declared to noncontrolling interests during the period were paid. During the nine months ended June 30, 2017, $13 million of the dividends declared to noncontrolling interests during the period were paid.
H. Accumulated Other Comprehensive Income (Loss)
Comprehensive income combines net income (loss) and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets.
Changes in each component of AOCI, net of tax, were as follows:
|
|
|
Currency
Translation
Adjustment
|
|
|
Unrealized
Gains on
Investments
|
|
|
Pension and Other
Postretirement
Benefit Liability
Adjustments
|
|
|
Total
|
|
|
|
|
(In millions)
|
|
|
Balance at September 30, 2017, attributable to Cabot Corporation
|
|
$
|
(204
|
)
|
|
$
|
2
|
|
|
$
|
(57
|
)
|
|
$
|
(259
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amounts reclassified from AOCI
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Less: Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
Balance at December 31, 2017, attributable to Cabot Corporation
|
|
|
(208
|
)
|
|
|
2
|
|
|
|
(57
|
)
|
|
|
(263
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
59
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59
|
|
|
Amounts reclassified from AOCI
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Less: Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
Balance at March 31, 2018, attributable to Cabot Corporation
|
|
|
(154
|
)
|
|
|
2
|
|
|
|
(57
|
)
|
|
|
(209
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(109
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(110
|
)
|
|
Amounts reclassified from AOCI
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Less: Other comprehensive income (loss) attributable to
noncontrolling interests
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
Balance at June 30, 2018, attributable to Cabot Corporation
|
|
$
|
(257
|
)
|
|
$
|
1
|
|
|
$
|
(57
|
)
|
|
$
|
(313
|
)
|
17
The amounts reclassified out of AOCI and into the Consolidated Statements of Operations in the three
and nine
months ended
June 30
, 2018 and 2017
were as follows:
|
|
|
Affected Line Item in the Consolidated
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
Statements of Operations
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(In millions)
|
|
|
Derivatives: net investment hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified to interest
expense
|
|
Interest expense
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
Pension and other postretirement
benefit liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial losses
|
|
Net Periodic Benefit Cost - see
Note D for details
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
4
|
|
|
Amortization of prior service credit
|
|
Net Periodic Benefit Cost - see
Note D for details
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
Total before tax
|
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
2
|
|
|
Tax impact
|
|
Provision (benefit) for income
taxes
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
Total after tax
|
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
2
|
|
I. Commitments and Contingencies
Purchase Commitments
Cabot has entered into long-term purchase agreements primarily for the purchase of raw materials. Under certain of these agreements, the quantity of material being purchased is fixed, but the price paid changes as market prices change. For these purchase commitments, the amounts included in the table below are based on market prices at June 30, 2018, which may differ from actual market prices at the time of purchase.
|
|
|
Payments Due by Fiscal Year
|
|
|
|
|
Remainder of
Fiscal 2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
(In millions)
|
|
|
Reinforcement Materials
|
|
$
|
79
|
|
|
$
|
294
|
|
|
$
|
180
|
|
|
$
|
140
|
|
|
$
|
140
|
|
|
$
|
1,901
|
|
|
$
|
2,734
|
|
|
Performance Chemicals
|
|
|
19
|
|
|
|
67
|
|
|
|
55
|
|
|
|
54
|
|
|
|
54
|
|
|
|
461
|
|
|
|
710
|
|
|
Purification Solutions
|
|
|
3
|
|
|
|
7
|
|
|
|
6
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
Specialty Fluids
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
Total
|
|
$
|
101
|
|
|
$
|
383
|
|
|
$
|
241
|
|
|
$
|
195
|
|
|
$
|
194
|
|
|
$
|
2,362
|
|
|
$
|
3,476
|
|
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.
18
Environme
ntal Matters
As of June 30, 2018 and September 30, 2017, Cabot had $15 million and $12 million, respectively, reserved for environmental matters. These environmental matters mainly relate to former operations. The Company’s reserves for environmental matters represent Cabot’s best estimates of the probable costs to be incurred at those sites where costs are reasonably estimable based on the Company’s analysis of the extent of clean up required, alternative clean-up methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site.
Cash payments related to these environmental matters were $2 million in the first nine months of both fiscal 2018 and 2017. Cabot reviews the adequacy of the reserves as circumstances change at individual sites and adjusts the reserves as appropriate. Almost all of Cabot’s environmental issues relate to sites that are mature and have been investigated and studied and, in many cases, are subject to agreed upon remediation plans. However, depending on the results of future testing, changes in risk assessment practices, remediation techniques and regulatory requirements, newly discovered conditions, and other factors, it is reasonably possible that the Company could incur additional costs in excess of environmental reserves currently recorded. Management estimates, based on the latest available information, that any such future environmental remediation costs that are reasonably possible to be in excess of amounts already recorded would be immaterial to the Company’s consolidated financial statements.
Respirator Liabilities
Cabot has exposure in connection with a safety respiratory products business that a subsidiary acquired from American Optical Corporation (“AO”) in an April 1990 asset purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (i) AO’s insurance coverage for the period prior to the 1990 acquisition and (ii) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. As more fully described in the 2017 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 June 30, 2018 and September 30, 2017, there were approximately 35,000 and 37,000 claimants, respectively, 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 June 30, 2018 and September 30, 2017, the reserve was $17 million and $18 million, respectively. The Company made payments related to its respirator liability of $1 million and $3 million in the first nine months of fiscal 2018 and fiscal 2017, respectively.
The Company’s current estimate of the cost of its share of existing and future respirator liability claims is based on facts and circumstances existing at this time. 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 that contribute to the settlement of respirator claims, (viii) a change in the availability of insurance coverage maintained by certain of the other parties that 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 Matters
The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business and with respect to its divested businesses. The Company does not believe that any of these matters will have a material adverse effect on its financial position; however, litigation is inherently unpredictable. Cabot could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material impact on its results of operations in the period in which the amounts are accrued or its cash flows in the period in which the amounts are paid.
19
J
. Income Tax
Effective Tax Rate
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(Dollars in millions)
|
|
|
(Provision) benefit for income taxes
|
|
$
|
4
|
|
|
$
|
(16
|
)
|
|
$
|
(194
|
)
|
|
$
|
(33
|
)
|
|
Effective tax rate
|
|
|
(3
|
)%
|
|
|
23
|
%
|
|
|
1202
|
%
|
|
|
14
|
%
|
For the three and nine months ended June 30, 2018, the tax (provision) benefit included a net discrete tax benefit of $23 million and a net discrete tax expense of $139 million, respectively, of which a net tax benefit of $4 million and a net tax expense of $185 million, respectively, resulted from the Act. The amounts for the three and nine month periods also included a net tax expense of $2 million and a net tax benefit of $28 million, respectively, associated with the Purification Solutions goodwill and long-lived assets impairment charges as well as a net tax benefit of $20 million from a change in valuation allowance on a beginning of year tax balance. For the three and nine months ended June 30, 2017, the tax provision included a net discrete tax expense of $5 million and a net discrete tax benefit of $15 million, respectively, primarily comprised of a tax expense associated with various return to provision adjustments related to tax return filings and a tax benefit associated with the generation of excess foreign tax credits upon repatriation of previously taxed foreign earnings.
Tax Reform
On December 22, 2017, the U.S. enacted significant changes to federal income tax law affecting the Company, including a permanent reduction of the U.S. corporate income tax rate from 35% to 21%, effective January 1, 2018. Cabot expects that these changes will positively impact the Company's future after-tax earnings in the U.S., primarily due to the lower federal statutory tax rate and the establishment of a full participation exemption regime for foreign earnings.
In transitioning to this new full participation exemption regime for foreign earnings, Cabot is subject to a one-time tax for the deemed repatriation of certain foreign earnings.
A discussion of certain provisions of the Act and the Company’s preliminary assessment of the impact of such provisions on its consolidated financial statements is set forth below.
Uncertain Impacts of the Act
The accounting standard for income taxes (“ASC 740”) required the Company to recognize the effect of the tax law changes under the Act in the first quarter of fiscal 2018. However, due to the potential uncertainty or diversity of views in accounting for the impact of the Act, the Securities and Exchange Commission staff issued Staff Accounting Bulletin 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.
In particular, SAB 118 clarified that the impact of the Act must be accounted for and reported in one of three ways: (1) by reflecting the tax effects of the Act for which the accounting is complete; (2) by reporting provisional amounts for those specific income tax effects of the Act for which the accounting is incomplete but a reasonable estimate can be determined, with such provisional amounts (or adjustments to provisional amounts) identified in the measurement period, as defined therein, being included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined; or (3) where the income tax effects cannot be reasonably estimated, no provisional amounts should be reported and the registrant should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Act. The measurement period begins in the reporting period that includes the Act’s enactment date and ends when the accounting has been completed, but not beyond one year from the enactment date.
Due to various uncertainties as described below, the Company has not completed its accounting for certain tax impacts of the Act. However, as provided in SAB 118, reasonable estimates, including any adjustments to the estimates made during the first quarter of fiscal 2018, have been made and recorded as provisional amounts in its financial results for the third quarter of fiscal 2018. A discussion of the material impacts of tax law changes under the Act for which the accounting is incomplete follows:
|
|
•
|
Revaluation of Deferred Tax Assets: Due to the Company’s September 30 fiscal year-end, the reduction in the corporate tax rate to 21% effective January 1, 2018 will apply on a pro-rata basis for fiscal 2018, resulting in a U.S. federal statutory tax rate of 24.53% for the fiscal year. The reduction requires the Company to revalue its deferred tax assets and liabilities to account for the future financial impact of these amounts.
|
20
As of June 30
, 2018
, the accounting for this item was incomplete. Additional information is necessary in order to complete the accounting for this item, including: (1)
further analysis regarding the impact of the reduced rate on the reversal of deferred tax assets and liabilities for the full fiscal 2018 at the pro-rata rate, and (2) the true-up of deferred tax assets and liabilities upon the filing of the U.S. income t
ax return for fiscal 2017. However,
for the three and nine months ended June 30, 2018,
the Company has recorded a total provisional tax expense of
less than $1 million and
$
17
million
, respectively,
related to the impact of the rate
change on deferred tax
balances
. The adjustment
to the provisional amount
recorded
during the three months ended June 30, 2018
was primarily associated with
changes in estimates of temporary differences for the full fiscal year 2018
.
|
|
•
|
Deemed Repatriation: In general, the Act provides that U.S. shareholders of a “specified foreign corporation”, as defined in the Act, must include in U.S. taxable income its pro-rata share of certain undistributed and previously untaxed post-1986 foreign earnings and profits (“E&P”). The amount of E&P taken into account is the amount determined either as of November 2, 2017 or December 31, 2017, whichever is greater. This inclusion is offset by a deduction that results in an effective U.S. federal income tax rate of either 15.5% or 8%. The 15.5% rate applies to the “aggregate cash position”, as defined in the Act, of the specified foreign corporations and the 8% rate applies to the extent that the income inclusion exceeds the aggregate cash position. The aggregate cash position is determined as the cash position either as of September 30, 2018, or the average of September 30, 2016 and September 30, 2017, whichever is greater. Finally, the U.S. cash tax impact of the deemed repatriation inclusion may be offset by the utilization of foreign tax credits, which are pro-rated to reflect the deduction described above.
|
As of June 30, 2018, the accounting for this item is incomplete. Significant additional information will need to be obtained and analyzed in order to complete the accounting for this item. This includes: (1) the determination of the full fiscal 2018 E&P and foreign tax credits of the specified foreign corporations; (2) the true-up of the pre-fiscal 2018 E&P and foreign tax credits of the specified foreign corporations upon the filing of the U.S. income tax return for fiscal 2017 (tax year 2016); (3) establishing the appropriate foreign exchange rate for the full fiscal year 2018 used to translate foreign taxes; (4) clarification of the state income tax impact of the repatriation, including guidance from states in which Cabot has a taxable presence on the extent to which the state will conform with the provisions of the Act, as well as determination of the apportionment of the Company’s income for the full fiscal year 2018; (5) uncertainty as to which of the alternative aggregate cash position measurement dates will apply to the Company; and (6) further guidance from the U.S. Treasury Department on the interpretation and application of the rules.
In the absence of such additional information, Cabot has made a reasonable estimate of the financial impact of this item. For the three and nine months ended June 30, 2018, the Company recorded a provisional benefit of $5 million and a provisional expense of $144 million, respectively, to the (Provision) benefit for income taxes for deemed repatriation. The adjustment to the provisional amount recorded during the three months ended June 30, 2018 was due to a change in the prevailing interpretation of pending U.S. Treasury Department guidance discussed in Internal Revenue Service ("IRS")
Notice 2018-7, relating to the appropriate U.S. shareholder level at which foreign earnings are aggregated. On August 1, 2018 this interpretation was further confirmed upon issuance of U.S. Treasury Department guidance. This amount is expected to be a fully non-cash charge due to the Company’s existing tax attributes.
|
|
•
|
Deferred Tax Liability on Unremitted Earnings: In addition to the deemed repatriation of foreign earnings, going forward, the Act effectively establishes a participation exemption system of taxation that, in general, provides a 100% deduction for dividends from specified foreign corporations. However, the Company is still required to provide non-U.S. withholding taxes, as well as other potential tax impacts, on undistributed earnings of non-U.S. subsidiaries that it does not consider to be indefinitely reinvested.
|
As of June 30, 2018, the accounting for this item is incomplete. Additional information necessary to complete the accounting includes: (1) finalization of U.S. previously taxed income resulting from the deemed repatriation of foreign earnings; (2) further analysis of the amount of distributable reserves, including treatment thereof under local law, available in various non-U.S. subsidiaries; (3) clarification of the state income tax impact of unremitted earnings that are not indefinitely reinvested; and (4) evolving interpretations of the U.S. GAAP rules applicable to the Act. As a result of the Act, the Company has made certain changes to its indefinite reinvestment assertion and has made a reasonable estimate of the financial impact of this item. For the three and nine months ended June 30, 2018, the Company recorded a provisional amount of $1 million and $24 million, respectively, to its tax expense for this item. The adjustment to the provisional amount recorded during the three months ended June 30, 2018 was due to a change in the prevailing interpretation of pending U.S. Treasury Department guidance discussed in IRS Notice 2018-7, relating to the appropriate U.S. shareholder level at which foreign earnings are aggregated. On August 1, 2018 this interpretation was further confirmed upon issuance of U.S. Treasury Department guidance.
21
The Company
will continue to evaluate the impact of the Act on
its
business and co
nsolidated financial statements and will make any
further
adjustments to
its
provisional amounts in subsequent reporting periods upon obtaining, preparing or analyzing additional information affecting the income tax effects initially reported as a provisio
nal amount.
Accounting for the Global Intangible Low-Taxed Income Tax
Under the Act, Cabot may be subject to a tax on global intangible low-taxed income (“GILTI”) in future years. In general, GILTI is a 10.5% tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. This tax is effective for taxable years beginning after December 31, 2017. The Company has not yet adopted an accounting policy with respect to whether (i) to recognize deferred taxes for temporary differences (including outside basis differences) expected to reverse as GILTI or (ii) to recognize these temporary differences as period costs if and when incurred.
Other Material Provisions of the Act Effective in Future Periods
The Act also contains a number of other provisions that may have a material financial impact on the Company in the future. These include base erosion anti-abuse tax, foreign derived intangible income and the interest expense limitation under Internal Revenue Code section 163(j). These tax law changes apply only to tax years beginning after December 31, 2017. Therefore, the Company has not and will not record any amounts related to these items in its fiscal 2018 financial results.
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 2014 through 2015 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 2015 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2002 through 2016 remain subject to examination by their respective tax authorities. As of December 31, 2017, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands.
During the three months ended June 30, 2018, Cabot did not release any uncertain tax positions. During the nine months ended June 30, 2018, Cabot released uncertain tax positions of $2 million due to the expirations of statutes of limitations in various jurisdictions. During the three and nine months ended June 30, 2017, Cabot released uncertain tax positions of less than $1 million and $3 million, respectively, due to the expirations of statutes of limitations in various jurisdictions.
22
K
. Earnings Per Share
The following tables summarize the components of the basic and diluted earnings (loss) per common share (“EPS”) computations:
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions, except per share amounts)
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot
Corporation
|
|
$
|
88
|
|
|
$
|
47
|
|
|
$
|
(207
|
)
|
|
$
|
176
|
|
|
Less: Undistributed earnings allocated to
participating securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
88
|
|
|
$
|
47
|
|
|
$
|
(207
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
participating securities outstanding
|
|
|
62.5
|
|
|
|
62.9
|
|
|
|
62.5
|
|
|
|
62.8
|
|
|
Less: Participating securities
(1)
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
61.8
|
|
|
|
62.4
|
|
|
|
61.8
|
|
|
|
62.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic:
|
|
$
|
1.41
|
|
|
$
|
0.73
|
|
|
$
|
(3.36
|
)
|
|
$
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) allocated to common
shareholders
|
|
$
|
88
|
|
|
$
|
47
|
|
|
$
|
(207
|
)
|
|
$
|
175
|
|
|
Plus: Earnings (loss) allocated to
participating securities
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Less: Adjusted earnings allocated to
participating securities
(2)
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Earnings (loss) allocated to common
shareholders (numerator)
|
|
$
|
88
|
|
|
$
|
47
|
|
|
$
|
(207
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares outstanding
|
|
|
61.8
|
|
|
|
62.4
|
|
|
|
61.8
|
|
|
|
62.3
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issuable
(3)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
0.5
|
|
|
Adjusted weighted average common
shares (denominator)
|
|
|
62.3
|
|
|
|
62.7
|
|
|
|
61.8
|
|
|
|
62.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - diluted:
|
|
$
|
1.40
|
|
|
$
|
0.73
|
|
|
$
|
(3.36
|
)
|
|
$
|
2.78
|
|
|
(1)
|
Participating securities consist of shares underlying outstanding and achieved performance-based restricted stock units issued during and after fiscal 2017 and all unvested time-based restricted stock units.
|
23
Undistributed earnings are the earn
ings which remain after dividends declared during the period are assumed to be distributed to the common and participating shareholders. Undistributed earnings are allocated to common and participating shareholders on the same basis as dividend distributio
ns. The calculation of undistributed earnings is as follows:
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Calculation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot Corporation
|
|
$
|
88
|
|
|
$
|
47
|
|
|
$
|
(207
|
)
|
|
$
|
176
|
|
|
Less: Dividends declared on common stock
|
|
|
21
|
|
|
|
19
|
|
|
|
60
|
|
|
|
57
|
|
|
Undistributed earnings (loss)
|
|
$
|
67
|
|
|
$
|
28
|
|
|
$
|
(267
|
)
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (loss) allocated to
common shareholders
|
|
$
|
67
|
|
|
$
|
28
|
|
|
$
|
(267
|
)
|
|
$
|
118
|
|
|
Undistributed earnings (loss) allocated to
participating shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Undistributed earnings (loss)
|
|
$
|
67
|
|
|
$
|
28
|
|
|
$
|
(267
|
)
|
|
$
|
119
|
|
|
(2)
|
Undistributed earnings are adjusted for the assumed distribution of dividends to the dilutive securities, which are described in (3) below, and then reallocated to participating securities.
|
|
(3)
|
Represents incremental shares of common stock from the (i) assumed exercise of stock options issued under Cabot’s equity incentive plans; (ii) assumed issuance of shares to employees pursuant to the Company’s Deferred Compensation and Supplemental Retirement Plan; and (iii) assumed issuance of shares for outstanding and achieved performance-based restricted stock unit awards issued before fiscal 2017 under Cabot’s equity incentive plans using the treasury stock method. For the three and nine months ended June 30, 2018, 260,630 and 799,163 incremental shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive. For the three and nine months ended June 30, 2017, 191,616 and 172,969 incremental shares of common stock, respectively, were excluded from the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive.
|
L. Restructuring
Cabot’s restructuring activities were recorded in the Consolidated Statements of Operations in the three and nine months ended June 30, 2018 and 2017 as follows:
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Cost of sales
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(8
|
)
|
|
$
|
2
|
|
|
Selling and administrative expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Total
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(7
|
)
|
|
$
|
3
|
|
24
Details of all restructuring activities and the related reserves during the three and nine months ended June 30, 2018 were as follows:
|
|
|
Severance
and Employee
Benefits
|
|
|
Environmental
Remediation
|
|
|
Asset
Sales
|
|
|
Asset
Impairment
and
Accelerated
Depreciation
|
|
|
Other
|
|
|
Total
|
|
|
|
|
(In millions)
|
|
|
Reserve at September 30, 2017
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Charges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Accrual for deposit on sale of land
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
Cash received (paid)
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
Reserve at December 31, 2017
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Charges (gain)
|
|
|
1
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
1
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
Costs charged against assets / (liabilities)
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
Cash (paid) received
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
Reserve at March 31, 2018
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Charges (gain)
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Accrual for deposit on sale of land rights
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
Cash (paid) received
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
Reserve at June 30, 2018
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Cabot’s severance and employee benefit reserves and other closure related reserves are reflected in Accounts payable and accrued liabilities on the Company’s Consolidated Balance Sheets. Cabot’s environmental remediation reserves related to restructuring activities are reflected in Other liabilities on the Company’s Consolidated Balance Sheets.
Marshall, Texas Plan
In October 2017, Cabot indefinitely idled three of the seven production units at its activated carbon manufacturing facility in Marshall, Texas. The decision, affecting approximately 40 local employees, was driven by the need to better match the business’ production capacity and cost structure with the current demand for powdered activated carbon in North America. Total costs related to this plan are expected to be approximately $1 million, comprised of approximately $1 million of non-cash accelerated depreciation costs and less than $1 million of severance costs. The Company recorded charges of approximately $1 million in the nine months ended June 30, 2018, comprised mainly of accelerated depreciation charges. No further charges are anticipated related to this plan.
2016 Plan
In October 2015, in response to challenging macroeconomic conditions, the Company announced its intention to restructure its operations subject to local consultation requirements and processes in certain locations. Cabot’s plan resulted in the termination of employment for approximately 300 employees across the Company’s global locations.
Most of the charges and cash outlays related to this plan were recorded in fiscal 2016. The Company recorded pre-tax cash charges related to plan of approximately $1 million in the first nine months of both fiscal 2018 and 2017, and expects to record approximately $1 million of cash charges in the remainder of fiscal 2018. The charges recorded and anticipated are comprised of severance, employee benefits and other transition costs. As of June 30, 2018, Cabot has less than $1 million of accrued severance charges in the Consolidated Balance Sheets related to these actions.
Additionally, in fiscal 2016 Cabot closed its carbon black manufacturing facility in Merak, Indonesia to consolidate production in Asia using the Company’s Cilegon, Indonesia and other Asian and global carbon black production sites to meet regional demand. The decision was driven by the financial performance at the Merak facility in the years preceding the closure. Manufacturing operations ceased at the end of January 2016.
The Company completed the sale of the land in Merak on which the facility was located in the second quarter of fiscal 2018. The Company received a refundable deposit of $4 million of cash in the first quarter of fiscal 2018, which was recorded in Accounts payable and accrued liabilities on the Consolidated Balance Sheets as of December 31, 2017. An additional payment of approximately $9 million was received in the second quarter of fiscal 2018,
resulting in a net gain of approximately $11 million. The Company recorded net charges of less than $1 million in the nine months ended June 30, 2017 primarily for site clearing and demolition costs related to the Merak closure.
25
As of
June 30
, 2018
, Cabot has less than $
1
million of accrued severance costs in the Consolidated Balance Sheet
s
related to the Merak facility closure.
Other Actions
Cabot has recorded approximately $1 million of severance charges in the nine months ended June 30, 2018, nearly all of which has been paid in the first nine months of fiscal 2018.
Additionally, in previous years, the Company entered into other various restructuring actions that have been substantially completed, other than the sale of land rights in Thane, India and environmental remediation activities in Berre, France that remain to be completed.
The Company entered into an agreement to sell the land rights in Thane, India. The sale is anticipated to be completed for consideration of approximately $32 million and is anticipated to result in a net pre-tax gain of approximately $32 million upon completion of the transaction. The Company received a deposit of $3 million in cash in the first quarter of fiscal 2015 and another deposit of $3 million in cash in the third quarter of fiscal 2018 related to this transaction that are recorded in Accounts payable and accrued liabilities on the Consolidated Balance Sheets as the sale has not been consummated.
M. Financial Instruments and Fair Value Measurements
The FASB authoritative guidance on fair value measurements defines fair value, provides a framework for measuring fair value, and requires certain disclosures about fair value measurements. The required disclosures focus on the inputs used to measure fair value. The guidance establishes the following hierarchy for categorizing these inputs:
|
Level 1
|
|
—
|
|
Quoted market prices in active markets for identical assets or liabilities
|
|
|
|
|
|
|
|
Level 2
|
|
—
|
|
Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs)
|
|
|
|
|
|
|
|
Level 3
|
|
—
|
|
Significant unobservable inputs
|
There were no transfers of financial assets or liabilities measured at fair value between Level 1 and Level 2 and there were no Level 3 investments during the first nine months of either fiscal 2018 or 2017.
At June 30, 2018 and September 30, 2017, Cabot had derivatives relating to foreign currency risks carried at fair value. At June 30, 2018 and September 30, 2017, the fair value of these derivatives was a net liability of $17 million and $13 million, respectively, and was included in Prepaid expenses and other current assets and Other liabilities on the Consolidated Balance Sheets. These derivatives are classified as Level 2 instruments within the fair value hierarchy as the fair value determination was based on observable inputs.
At June 30, 2018 and September 30, 2017, the fair value of guaranteed investment contracts, included in Other assets on the Consolidated Balance Sheets, was $11 million and $12 million, respectively. Guaranteed investment contracts were classified as Level 2 instruments within the fair value hierarchy as the fair value determination was based on other observable inputs.
At June 30, 2018 and September 30, 2017, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and short-term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments. Both the carrying value and fair value of the long-term fixed rate debt were $0.66 billion as of June 30, 2018. The carrying value and fair value of the long-term fixed rate debt were $0.91 billion and $0.94 billion, respectively, as of September 30, 2017. The fair values of Cabot’s fixed rate long-term debt are estimated based on comparable quoted market prices at the respective period ends. The carrying amounts of Cabot’s floating rate long-term debt and capital lease obligations approximate their fair values. All such measurements are based on observable inputs and are classified as Level 2 within the fair value hierarchy. The valuation technique used is the discounted cash flow model.
N. Derivatives
Foreign Currency Risk Management
Cabot’s international operations are subject to certain risks, including currency exchange rate fluctuations and government actions. Cabot endeavors to match the currency in which debt is issued to the currency of the Company’s major, stable cash receipts. In some situations, Cabot has issued debt denominated in U.S. dollars and then entered into cross-currency swaps that exchange the dollar principal and interest payments into Euro-denominated principal and interest payments.
26
Additionally, the Company has foreign currency exp
osure arising from its net investments in foreign operations. Cabot may enter into cross-currency swaps to mitigate the impact of currency rate changes on the Company’s net investments.
The Company also has foreign currency exposure arising from the denomination of monetary assets and liabilities in foreign currencies other than the functional currency of a given subsidiary as well as the risk that currency fluctuations could affect the dollar value of future cash flows generated in foreign currencies. Accordingly, Cabot uses short-term forward contracts to minimize the exposure to foreign currency risk. In certain situations where the Company has forecasted purchases under a long-term commitment or forecasted sales denominated in a foreign currency, Cabot may enter into appropriate financial instruments in accordance with the Company’s risk management policy to hedge future cash flow exposures.
The following table provides details of the derivatives held as of June 30, 2018 and September 30, 2017 to manage foreign currency risk.
|
|
|
|
|
Notional Amount
|
|
|
|
Description
|
|
Borrowing
|
|
June 30, 2018
|
|
September 30, 2017
|
|
Hedge Designation
|
|
Cross-Currency Swaps
|
|
3.4% Notes
|
|
USD 250 million swapped to EUR 223 million
|
|
USD 250 million swapped to EUR 223 million
|
|
Net investment
|
|
Forward Foreign Currency Contracts
(1)
|
|
N/A
|
|
USD (6) million
|
|
USD 5 million
|
|
No designation
|
|
(1)
|
Cabot’s forward foreign exchange contracts are denominated in the Indonesian rupiah and Czech koruna.
|
Accounting for Derivative Instruments and Hedging Activities
The Company determines the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Company uses standard models with market-based inputs, which take into account the present value of estimated future cash flows and the ability of Cabot or the financial counterparty to perform. For interest rate and cross-currency swaps, the significant inputs to these models are interest rate curves for discounting future cash flows and are adjusted for credit risk. For forward foreign currency contracts, the significant inputs are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows.
Fair Value Hedge
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current period earnings.
Cash Flow Hedge
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded in AOCI and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period earnings.
Net Investment Hedge
For net investment hedges, changes in the fair value of the effective portion of the derivatives’ gains or losses are reported as foreign currency translation gains or losses in AOCI while changes in the ineffective portion are reported in earnings. Effectiveness is assessed based on the hypothetical derivative method. The gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period in which earnings are affected by the underlying item, such as a disposal or substantial liquidations of the entities being hedged. Effective October 1, 2017, the Company elected to de-designate its existing net investment hedge instruments in which hedge effectiveness was assessed using the method based on changes in forward exchange rates and re-designate the net investment hedges in which hedge effectiveness will be assessed using the method based on changes in spot exchange rates.
The Company has cross-currency swaps with a notional amount of $250 million, which are designated as hedges of its net investments in certain Euro-denominated subsidiaries. Cash settlements occur semi-annually on March 15
th
and September 15
th
for fixed rate interest payments and a cash exchange of the notional currency amount will occur at the end of the term in 2026. During the first nine months of both fiscal 2018 and 2017, the Company received net cash interest of $2 million. As of June 30, 2018, the fair value of these swaps was a net liability of $17 million and was included in Prepaid expenses and other current assets and Other liabilities and the cumulative loss of $15 million was included in AOCI on the Consolidated Balance Sheets. As of September 30, 2017, the fair value of these swaps was a net liability of $13 million and was included in Prepaid expenses and other current assets and Other Liabilities and the cumulative loss of $9 million was included in AOCI on the Consolidated Balance Sheets.
27
The following table
s summarize
the impact of the cross-currency swaps to AOCI and the Consolidated Statements of Operations:
|
|
|
Three Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Description
|
|
Gain/(Loss) Recognized in AOCI
|
|
|
(Gain)/Loss Reclassified from AOCI into Interest Expense in the Consolidated Statements of Operations
|
|
|
(Gain)/Loss Recognized in Interest Expense in the Consolidated Statements of Operations (Amount Excluded from Effectiveness Testing)
|
|
|
|
|
(In millions)
|
|
|
Cross-currency swaps
(1)
|
|
$
|
10
|
|
|
$
|
(10
|
)
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Description
|
|
Gain/(Loss) Recognized in AOCI
|
|
|
(Gain)/Loss Reclassified from AOCI into Interest Expense in the Consolidated Statements of Operations
|
|
|
(Gain)/Loss Recognized in Interest Expense in the Consolidated Statements of Operations (Amount Excluded from Effectiveness Testing)
|
|
|
|
|
(In millions)
|
|
|
Cross-currency swaps
(1)
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
(1)
|
As noted above, effective October 1, 2017, the Company changed the method it uses to assess effectiveness from the method based on changes in forward exchange rates, in which all gains/losses were recognized in AOCI, to the method based on changes in spot exchange rates.
|
Other Derivative Instruments
From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes, which may include cross-currency swaps, foreign currency forward contracts and commodity derivatives. For cross-currency swaps and foreign currency forward contracts not designated as hedges, the Company uses standard models with market-based inputs. The significant inputs to these models are interest rate curves for discounting future cash flows, and exchange rate curves of the foreign currency for translating future cash flows. In determining the fair value of the commodity derivatives, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. Although these derivatives do not qualify for hedge accounting, Cabot believes that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. The gains or losses from changes in the fair value of derivative instruments that are not accounted for as hedges are recognized in current period earnings.
At June 30, 2018, the fair value of derivative instruments not designated as hedges were immaterial and were presented in Accounts payable and accrued liabilities, and Prepaid expenses and other current assets on the Consolidated Balance Sheets. At September 30, 2017 the fair value of derivative instruments not designated as hedges were immaterial and were presented in Prepaid expenses and other current assets on the Consolidated Balance Sheets.
O. Venezuela
Cabot owns 49% of a carbon black operating affiliate in Venezuela, which is accounted for as an equity affiliate, through wholly-owned subsidiaries that carry the investment and receive its dividends. As of June 30, 2018, these subsidiaries carried the operating affiliate investment of $13 million.
During each of the nine month periods ended June 30, 2018 and 2017, the Company received dividends in the amounts of $3 million, which were paid in U.S. dollars.
A significant portion of the Company’s operating affiliate’s sales are exports denominated in U.S. dollars. The Venezuelan government mandates that a certain percentage of the dollars collected from these sales be converted into bolivars. The exchange rates made available to the Company as of June 30, 2018 and September 30, 2017 were 96,000 bolivars and 3,345 bolivars to the U.S. dollar, respectively. Due to a reduced level of export sales in recent quarters, this exchange rate devaluation had an immaterial impact on the Company’s results.
The operating entity has historically been profitable. The Company continues to closely monitor developments in Venezuela and their potential impact on the recoverability of its equity affiliate investment. Any future change in the exchange rate made available to the Company could cause the Company to change the exchange rate it uses and result in gains or losses on the bolivar-denominated assets held by its operating affiliate and wholly-owned subsidiaries.
28
P. Financial Information by Segment
The Company identifies a business as an operating segment if: (i) it engages in business activities from which it may earn revenues and incur expenses; (ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Cabot’s President and Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and (iii) it has available discrete financial information. The Company has determined that all of its businesses are operating segments. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments are determined to have similar economic characteristics and if the operating segments are similar in the following areas: (i) nature of products and services; (ii) nature of production processes; (iii) type or class of customer for their products and services; (iv) methods used to distribute the products or provide services; and (v) if applicable, the nature of the regulatory environment.
The Company has four reportable segments: Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids.
The Reinforcement Materials segment represents the rubber blacks and elastomer composites product lines.
The Performance Chemicals segment combines the specialty carbons, specialty compounds and inkjet colorants product lines into the Specialty Carbons and Formulations business, and combines the fumed metal oxides and aerogel product lines into the Metal Oxides business. These businesses are similar in terms of economic characteristics, nature of products, processes, customer class and product distribution methods, and, therefore, have been aggregated into one reportable segment. The net sales from each of these businesses for the three and nine months ended June 30, 2018 and 2017 were as follows:
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Specialty Carbons and Formulations
|
|
$
|
195
|
|
|
$
|
154
|
|
|
$
|
548
|
|
|
$
|
454
|
|
|
Metal Oxides
|
|
|
79
|
|
|
|
75
|
|
|
|
223
|
|
|
|
208
|
|
|
Total Performance Chemicals
|
|
$
|
274
|
|
|
$
|
229
|
|
|
$
|
771
|
|
|
$
|
662
|
|
The Purification Solutions segment represents the Company’s activated carbon business and the Specialty Fluids segment includes cesium formate oil and gas drilling fluids and high-purity fine cesium chemicals product lines.
Income (loss) from continuing operations before income taxes (“Segment EBIT”) is presented for each reportable segment in the table below. Segment EBIT excludes certain items, meaning items management does not consider representative of on-going operating segment results. In addition, Segment EBIT includes Equity in earnings of affiliated companies, net of tax, the full operating results of a contractual joint venture in Purification Solutions, royalties, Net income attributable to noncontrolling interests, net of tax, and discounting charges for certain Notes receivable, but excludes Interest expense, foreign currency transaction gains and losses, interest income, dividend income, unearned revenue, general unallocated expense and unallocated corporate costs.
29
Financial information by reportable segment is as follows:
|
|
|
Reinforcement
Materials
|
|
|
Performance
Chemicals
|
|
|
Purification
Solutions
|
|
|
Specialty
Fluids
|
|
|
Segment
Total
|
|
|
Unallocated
and Other
(1)
|
|
|
Consolidated
Total
|
|
|
|
|
(In millions)
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
(2)
|
|
$
|
466
|
|
|
$
|
274
|
|
|
$
|
70
|
|
|
$
|
12
|
|
|
$
|
822
|
|
|
$
|
32
|
|
|
$
|
854
|
|
|
Income (loss) from continuing operations
before income taxes
(3)
|
|
$
|
74
|
|
|
$
|
56
|
|
|
$
|
(6
|
)
|
|
$
|
3
|
|
|
$
|
127
|
|
|
$
|
(32
|
)
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
(2)
|
|
$
|
367
|
|
|
$
|
229
|
|
|
$
|
71
|
|
|
$
|
12
|
|
|
$
|
679
|
|
|
$
|
26
|
|
|
$
|
705
|
|
|
Income (loss) from continuing operations
before income taxes
(3)
|
|
$
|
51
|
|
|
$
|
46
|
|
|
$
|
(2
|
)
|
|
$
|
4
|
|
|
$
|
99
|
|
|
$
|
(31
|
)
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
(2)
|
|
$
|
1,307
|
|
|
$
|
771
|
|
|
$
|
206
|
|
|
$
|
24
|
|
|
$
|
2,308
|
|
|
$
|
84
|
|
|
$
|
2,392
|
|
|
Income (loss) from continuing operations
before income taxes
(3)
|
|
$
|
215
|
|
|
$
|
160
|
|
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
367
|
|
|
$
|
(351
|
)
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
(2)
|
|
$
|
1,014
|
|
|
$
|
662
|
|
|
$
|
207
|
|
|
$
|
30
|
|
|
$
|
1,913
|
|
|
$
|
81
|
|
|
$
|
1,994
|
|
|
Income (loss) from continuing operations
before income taxes
(3)
|
|
$
|
145
|
|
|
$
|
146
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
301
|
|
|
$
|
(80
|
)
|
|
$
|
221
|
|
|
(1)
|
Unallocated and Other includes certain items and eliminations necessary to reflect management’s reporting of operating segment results. These items are reflective of the segment reporting presented to the CODM.
|
|
(2)
|
Consolidated Total Revenues from external customers reconciles to Net sales and other operating revenues on the Consolidated Statements of Operations.
Revenues from external customers that are categorized as Unallocated and Other reflects royalties, external shipping and handling fees, the impact of unearned revenue, the removal of 100% of the sales of an equity method affiliate and discounting charges for certain Notes receivable. Details are provided in the table below:
|
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Royalties, the impact of unearned
revenue, the removal of 100% of
the sales of an equity method
affiliate and discounting charges
for certain notes receivable
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(10
|
)
|
|
$
|
(6
|
)
|
|
Shipping and handling fees
|
|
|
34
|
|
|
|
30
|
|
|
|
94
|
|
|
|
87
|
|
|
Total
|
|
$
|
32
|
|
|
$
|
26
|
|
|
$
|
84
|
|
|
$
|
81
|
|
30
|
(3)
|
Consolidated Total
Income (loss) from continuing operations before income taxes
reconciles to Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies on the Consolidated Statements of Operations.
Income (loss) from continuing operations before income taxes that are categorized as Un
allocated and Other includes:
|
|
|
|
Three Months Ended June 30
|
|
|
Nine Months Ended June 30
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(14
|
)
|
|
$
|
(13
|
)
|
|
$
|
(41
|
)
|
|
$
|
(39
|
)
|
|
Certain items
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purification Solutions goodwill and long-lived assets
impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
(254
|
)
|
|
|
—
|
|
|
Inventory reserve adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
—
|
|
|
Global restructuring activities
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
(3
|
)
|
|
Legal and environmental matters and reserves
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
2
|
|
|
Gains (losses) on sale of investments
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
Executive transition costs
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Acquisition and integration-related charges
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
Non-recurring gains (losses) on foreign exchange
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
Total certain items, pre-tax
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(260
|
)
|
|
|
(2
|
)
|
|
Unallocated corporate costs
(b)
|
|
|
(15
|
)
|
|
|
(11
|
)
|
|
|
(45
|
)
|
|
|
(37
|
)
|
|
General unallocated income (expense)
(c)
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
4
|
|
|
Less: Equity in earnings of affiliated
companies, net of tax
(d)
|
|
|
—
|
|
|
|
3
|
|
|
|
2
|
|
|
|
6
|
|
|
Total
|
|
$
|
(32
|
)
|
|
$
|
(31
|
)
|
|
$
|
(351
|
)
|
|
$
|
(80
|
)
|
|
|
(a)
|
Certain items are
items of expense and income that management does not consider representative of the Company’s fundamental on-going segment results and they are, therefore, excluded from Segment EBIT.
|
|
|
(b)
|
Unallocated corporate costs are costs that are not controlled by the segments and primarily benefit corporate interests.
|
|
|
(c)
|
General unallocated income (expense) consists of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, the profit or loss related to the corporate adjustment for unearned revenue, and the impact of including the full operating results of a contractual joint venture in Purification Solutions Segment EBIT. Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in General unallocated income (expense) decreasing by $2 million and increasing by $4 million, respectively, for the three and nine months ended June 30, 2017.
|
|
|
(d)
|
Equity in earnings of affiliated companies, net of tax, is included in Segment EBIT and is removed in Unallocated and other to reconcile to Income (loss) from operations before income taxes and equity in earnings from affiliated companies.
|
Q. Subsequent Event
Cabot owns 100% of a carbon black operating entity in Argentina. Due to recent negative economic trends in Argentina, including multiple periods of increasing inflation rates, devaluation of the Argentine peso, and increasing borrowing rates locally, the cumulative three-year inflation rate for the country exceeds 100%, and is expected to exceed 100% for the foreseeable future. Therefore, the operating entity is considered to be functioning in a highly inflationary economy, and will begin using Cabot’s reporting currency, the U.S. dollar, as its functional currency as of July 1, 2018. No financial statement impact is expected at the date of conversion as a result of the change in functional currency.
Income from operations is not expected to be significantly impacted from this change since the operating entity’s sales and a portion of its raw material purchases are denominated in U.S. dollars. However, any future change in the Argentine peso exchange rate will result in foreign currency exchange gains or losses on the operating entity’s peso-denominated monetary assets and liabilities.
31
