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EX-32 - EX-32 - CABOT CORPcbt-ex32_10.htm
EX-31.2 - EX-31.2 - CABOT CORPcbt-ex312_11.htm
EX-31.1 - EX-31.1 - CABOT CORPcbt-ex311_8.htm
EX-10.1 - EX-10.1 - CABOT CORPcbt-ex101_226.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2016

or

o

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

For the transition period from                      to                     

Commission file number 1-5667

 

Cabot Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

04-2271897

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

Two Seaport Lane

Boston, Massachusetts

02210-2019

(Address of principal executive offices)

(Zip Code)

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

 

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

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

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

 

Large accelerated filer

x

Accelerated filer

o

 

 

 

 

Non-accelerated filer

o  (Do not check if smaller reporting company)

Smaller reporting company

o

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

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

As of August 1, 2016 the Company had 62,377,934 shares of Common Stock, par value $1.00 per share, outstanding.

 

 

 


 

CABOT CORPORATION

INDEX

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2016 and 2015

3

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2016 and 2015

4

 

 

Consolidated Balance Sheets as of June 30, 2016 and September 30, 2015

5

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2016 and 2015

7

 

 

Notes to Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

28

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

Item 4.

Controls and Procedures

43

 

 

 

Part II.

Other Information

 

 

Item 1.

Legal Proceedings

44

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

Item 6.

Exhibits

45

 

 

2


 

Part I. Financial Information

Item 1.

Financial Statements

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In millions, except per share amounts)

 

Net sales and other operating revenues

 

$

621

 

 

$

694

 

 

$

1,792

 

 

$

2,200

 

Cost of sales

 

 

461

 

 

 

544

 

 

 

1,383

 

 

 

1,754

 

Gross profit

 

 

160

 

 

 

150

 

 

 

409

 

 

 

446

 

Selling and administrative expenses

 

 

64

 

 

 

67

 

 

 

197

 

 

 

216

 

Research and technical expenses

 

 

13

 

 

 

15

 

 

 

40

 

 

 

44

 

Purification Solutions long-lived assets impairment charge

   (Note B)

 

 

 

 

 

209

 

 

 

 

 

 

209

 

Purification Solutions goodwill impairment charge (Note B)

 

 

 

 

 

353

 

 

 

 

 

 

353

 

Income (loss) from operations

 

 

83

 

 

 

(494

)

 

 

172

 

 

 

(376

)

Interest and dividend income

 

 

1

 

 

 

1

 

 

 

4

 

 

 

3

 

Interest expense

 

 

(13

)

 

 

(13

)

 

 

(40

)

 

 

(40

)

Other income (expense)

 

 

3

 

 

 

(3

)

 

 

(8

)

 

 

(6

)

Income (loss) from continuing operations before income taxes

   and equity in earnings of affiliated companies

 

 

74

 

 

 

(509

)

 

 

128

 

 

 

(419

)

(Provision) benefit for income taxes

 

 

(15

)

 

 

64

 

 

 

(21

)

 

 

47

 

Equity in earnings of affiliated companies, net of tax

 

 

1

 

 

 

1

 

 

 

2

 

 

 

4

 

Income (loss) from continuing operations

 

 

60

 

 

 

(444

)

 

 

109

 

 

 

(368

)

Income from discontinued operations, net of tax

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Net income (loss)

 

 

60

 

 

 

(443

)

 

 

109

 

 

 

(367

)

Net income attributable to noncontrolling interests,

   net of tax

 

 

4

 

 

 

2

 

 

 

12

 

 

 

7

 

Net income (loss) attributable to Cabot Corporation

 

 

56

 

 

 

(445

)

 

 

97

 

 

 

(374

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

62.4

 

 

 

63.3

 

 

 

62.4

 

 

 

63.7

 

Diluted

 

 

62.9

 

 

 

63.3

 

 

 

62.9

 

 

 

63.7

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss)  from continuing operations attributable to

   Cabot Corporation

 

$

0.90

 

 

$

(7.05

)

 

$

1.55

 

 

$

(5.89

)

Income from discontinued operations

 

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Net income (loss) attributable to Cabot Corporation

 

$

0.90

 

 

$

(7.04

)

 

$

1.55

 

 

$

(5.88

)

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to

   Cabot Corporation

 

$

0.88

 

 

$

(7.05

)

 

$

1.53

 

 

$

(5.89

)

Income from discontinued operations

 

 

 

 

 

0.01

 

 

 

 

 

 

0.01

 

Net income (loss) attributable to Cabot Corporation

 

$

0.88

 

 

$

(7.04

)

 

$

1.53

 

 

$

(5.88

)

Dividends per common share

 

$

0.30

 

 

$

0.22

 

 

$

0.74

 

 

$

0.66

 

 

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

 

 

3


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Net income (loss)

 

$

60

 

 

$

(443

)

 

$

109

 

 

$

(367

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment (net of tax benefit of

   $-, $-, $- and $1)

 

 

(13

)

 

 

18

 

 

 

5

 

 

 

(216

)

Pension and other postretirement benefit liability adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other postretirement benefit liability adjustments

   arising during the period, net of tax

 

 

 

 

 

 

 

 

(1

)

 

 

21

 

Amortization of net loss and prior service credit included in net

   periodic pension cost, net of tax

 

 

(1

)

 

 

 

 

 

 

 

 

1

 

Other comprehensive (loss) income

 

 

(14

)

 

 

18

 

 

 

4

 

 

 

(194

)

Comprehensive income (loss)

 

 

46

 

 

 

(425

)

 

 

113

 

 

 

(561

)

Net income attributable to noncontrolling interests

 

 

4

 

 

 

2

 

 

 

12

 

 

 

7

 

Noncontrolling interests foreign currency translation

   adjustment, net of tax

 

 

(3

)

 

 

 

 

 

(5

)

 

 

(3

)

Comprehensive income attributable to noncontrolling interests,

   net of tax

 

 

1

 

 

 

2

 

 

 

7

 

 

 

4

 

Comprehensive income (loss) attributable to Cabot Corporation

 

$

45

 

 

$

(427

)

 

$

106

 

 

$

(565

)

 

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

 

 

4


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

ASSETS

UNAUDITED

 

 

 

June 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(In millions)

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

222

 

 

$

77

 

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

 

 

434

 

 

 

477

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials

 

 

67

 

 

 

69

 

Work in process

 

 

3

 

 

 

1

 

Finished goods

 

 

223

 

 

 

287

 

Other

 

 

37

 

 

 

40

 

Total inventories

 

 

330

 

 

 

397

 

Prepaid expenses and other current assets

 

 

44

 

 

 

54

 

Deferred income taxes

 

 

49

 

 

 

43

 

Total current assets

 

 

1,079

 

 

 

1,048

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

1,297

 

 

 

1,383

 

Goodwill

 

 

152

 

 

 

154

 

Equity affiliates

 

 

55

 

 

 

57

 

Intangible assets, net

 

 

142

 

 

 

153

 

Assets held for rent

 

 

95

 

 

 

86

 

Deferred income taxes

 

 

172

 

 

 

152

 

Other assets

 

 

41

 

 

 

42

 

Total assets

 

$

3,033

 

 

$

3,075

 

 

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

 

 

5


 

CABOT CORPORATION

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

UNAUDITED

 

 

 

June 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

 

(In millions, except share

 

 

 

and per share amounts)

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

7

 

 

$

22

 

Accounts payable and accrued liabilities

 

 

332

 

 

 

389

 

Income taxes payable

 

 

20

 

 

 

28

 

Deferred income taxes

 

 

1

 

 

 

1

 

Current portion of long-term debt

 

 

301

 

 

 

1

 

Total current liabilities

 

 

661

 

 

 

441

 

Long-term debt

 

 

669

 

 

 

970

 

Deferred income taxes

 

 

67

 

 

 

59

 

Other liabilities

 

 

226

 

 

 

240

 

Redeemable preferred stock

 

 

27

 

 

 

27

 

Commitments and contingencies (Note G)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Issued and Outstanding : None and none

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued:  62,530,702 and 62,704,966 shares

 

 

 

 

 

 

 

 

Outstanding: 62,288,963 and 62,458,396 shares

 

 

63

 

 

 

63

 

Less cost of 241,739 and 246,570 shares of common treasury stock

 

 

(8

)

 

 

(8

)

Additional paid-in capital

 

 

 

 

 

 

Retained earnings

 

 

1,523

 

 

 

1,478

 

Accumulated other comprehensive loss

 

 

(290

)

 

 

(299

)

Total Cabot Corporation stockholders' equity

 

 

1,288

 

 

 

1,234

 

Noncontrolling interests

 

 

95

 

 

 

104

 

Total stockholders' equity

 

 

1,383

 

 

 

1,338

 

Total liabilities and stockholders’ equity

 

$

3,033

 

 

$

3,075

 

 

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

 

 

6


 

CABOT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

109

 

 

$

(367

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

122

 

 

 

140

 

Long-lived asset impairment charge

 

 

23

 

 

 

209

 

Goodwill impairment charge

 

 

 

 

 

353

 

Deferred tax benefit

 

 

(13

)

 

 

(75

)

Employee benefit plan settlement

 

 

 

 

 

18

 

Equity in net income of affiliated companies

 

 

(2

)

 

 

(4

)

Non-cash compensation

 

 

13

 

 

 

9

 

Other non-cash expense (income)

 

 

3

 

 

 

(3

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts and notes receivable

 

 

42

 

 

 

80

 

Inventories

 

 

61

 

 

 

33

 

Prepaid expenses and other current assets

 

 

9

 

 

 

4

 

Accounts payable and accrued liabilities

 

 

(56

)

 

 

(84

)

Income taxes payable

 

 

(10

)

 

 

(22

)

Other liabilities

 

 

(16

)

 

 

(27

)

Cash dividends received from equity affiliates

 

 

8

 

 

 

10

 

Other

 

 

2

 

 

 

4

 

Cash provided by operating activities

 

$

295

 

 

$

278

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(80

)

 

 

(103

)

Proceeds from the sale of land

 

 

16

 

 

 

 

Change in assets held for rent

 

 

(6

)

 

 

(8

)

Cash used in investing activities

 

$

(70

)

 

$

(111

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Repayments under financing arrangements

 

 

(3

)

 

 

(4

)

Increase in notes payable, net

 

 

 

 

 

1

 

(Repayments of) proceeds from issuance of commercial paper, net

 

 

(11

)

 

 

111

 

Repayments of long-term debt

 

 

(1

)

 

 

(57

)

Purchases of common stock

 

 

(27

)

 

 

(85

)

Proceeds from sales of common stock

 

 

8

 

 

 

6

 

Cash dividends paid to noncontrolling interests

 

 

(16

)

 

 

(16

)

Cash dividends paid to common stockholders

 

 

(47

)

 

 

(42

)

Cash used in financing activities

 

$

(97

)

 

$

(86

)

Effects of exchange rate changes on cash

 

 

17

 

 

 

(64

)

Increase in cash and cash equivalents

 

 

145

 

 

 

17

 

Cash and cash equivalents at beginning of period

 

 

77

 

 

 

67

 

Cash and cash equivalents at end of period

 

$

222

 

 

$

84

 

 

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

 

 

7


 

CABOT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

UNAUDITED

 

A. Basis of Presentation

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

The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (“2015 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, 2016 and 2015. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.

 

 

 

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

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Reinforcement Materials

 

 

46

%

 

 

52

%

 

 

48

%

 

 

55

%

Performance Chemicals

 

 

38

%

 

 

35

%

 

 

38

%

 

 

33

%

Purification Solutions

 

 

13

%

 

 

11

%

 

 

12

%

 

 

10

%

Specialty Fluids

 

 

3

%

 

 

2

%

 

 

2

%

 

 

2

%

 

Cabot derives the substantial majority of its revenues from the sale of products in the Reinforcement Materials, Performance Chemicals, and Purification Solutions segments. Revenue from these products is typically recognized when the product is shipped 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 based on the contracted rental terms. Customers are also billed and revenue is recognized, typically at the end of the job, for cesium formate product that is not returned. The Company also generates revenues from cesium formate sold outside of a rental process and revenue is recognized upon delivery of the fluid.

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

Intangible Assets and Goodwill Impairment

The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of May 31, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. The reporting units with goodwill balances are Reinforcement Materials, Purification Solutions, and Fumed Metal Oxides. The separate businesses included within Performance Chemicals are considered separate reporting units. As such, the goodwill balance relative to Performance Chemicals is recorded in the Fumed Metal Oxides reporting unit.

For the purpose of the goodwill impairment test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed under the two-step impairment test. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, the Company performs an analysis of the fair value of all assets and liabilities of the reporting unit. If the implied fair value of the reporting unit’s goodwill is determined to be less than its carrying amount, an impairment is recognized for the difference. The fair value of a reporting unit is based on discounted estimated future cash flows. The fair value is also benchmarked against a market approach using the guideline public companies method. The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. Should the fair value of any of the Company’s reporting units decline below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other conditions, charges for impairment may be necessary.

When the Company performed its annual goodwill impairment test in the third quarter of fiscal 2015, the fair value of the Purification Solutions reporting unit was less than its carrying amount and the Company recorded impairment charges as a result. A discussion of this assessment and the charges recorded is included under “Purification Solutions Goodwill and Long-Lived Assets Impairment Charges”.

Based on the Company’s most recent annual goodwill impairment test performed as of May 31, 2016, the fair values of the Reinforcement Materials and Fumed Metal Oxides reporting units were substantially in excess of their carrying values.  The fair value of the Purification Solutions reporting unit exceeded its carrying amount by 9%. The future growth of the Purification Solutions reporting unit is dependent on achieving the expected volumes and margins, which are generally driven by the macroeconomic environment, environmental regulations, and global and regional competition, and are highly impacted by the activated carbon based mercury removal business. The expected demand for mercury removal products significantly depends upon: (1)  the volumes of activated carbon used in coal-fired energy units for the removal of pollutants and the utilization of these units for electricity generation and (2) other factors, such as environmental laws and regulations, particularly those that require U.S. based coal-fired electric utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards (“MATS”) issued by the U.S. Environmental Protection Agency (“EPA”) continuing to be in effect and enforced.

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

9


 

assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition.

Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. The Company recognized an impairment on intangible assets associated with the Purification Solutions business in the third fiscal quarter of 2015 and no events have been subsequently identified that would require an additional impairment evaluation.

Long-lived Assets Impairment

The Company’s long-lived assets primarily include property, plant and equipment, intangible assets, long-term investments and assets held for rent. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable.

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

An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset.

Purification Solutions Goodwill and Long-Lived Assets Impairment Charges

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

 

 

 

June 30, 2015

 

 

 

 

(Dollars in millions)

 

Goodwill impairment charge

 

$

353

 

Long-lived assets impairment charge

 

 

209

 

Provision (benefit) for income taxes

 

 

(80

)

Impairment charges, after tax

 

$

482

 

 

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 the timing of MATS implementation and its legal enforcement, the anticipated size of the mercury removal industry, and growth rates 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. Based on these estimates and as part of step one of the annual impairment test, the Company determined that the estimated fair value of the Purification Solutions reporting unit was lower than the reporting unit's carrying value. As such, the reporting unit failed step one of the goodwill impairment test. The Company then proceeded to step two.

Step two of the goodwill impairment test requires the Company to perform a theoretical purchase price allocation for the reporting unit to determine the implied fair value of goodwill and to compare the implied fair value of goodwill to the recorded amount of goodwill. The estimate of fair value is complex and requires significant judgment. Accounting guidance provides that a company should recognize an estimated impairment charge to the extent that it determines that it is probable that an impairment loss has occurred and such impairment can be reasonably estimated. Based on its best estimate as of June 30, 2015, the Company recorded a pre-tax goodwill impairment charge of $353 million. The Company completed the step two analysis in the fourth quarter of fiscal 2015, which resulted in recording a credit of $1 million to the pre-tax goodwill impairment charge.

10


 

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

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

In the Consolidated Statements of Operations for the quarter ended June 30, 2015, the Purification Solutions long-lived assets and goodwill impairment charges were separately presented below the subtotal for income from operations. These charges should have been included in the subtotal for income from operations. The Company has corrected the presentation of these charges in the accompanying Consolidated Statements of Operations. These charges were correctly presented in the Consolidated Statements of Operations for the year ended September 30, 2015.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives. The depreciable lives for buildings, machinery and equipment, and other fixed assets are twenty to twenty-five years, ten to twenty-five years, and three to twenty-five years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in earnings in the Consolidated Statements of Operations. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated.

Income Tax in Interim Periods

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

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

Inventory Valuation

Inventories are stated at the lower of cost or market. The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. Had the Company used the first-in, first-out (“FIFO”) method instead of the LIFO method for such inventories, the value of those inventories would have been $28 million and $30 million higher as of June 30, 2016 and September 30, 2015, respectively. The cost of Specialty Fluids inventories, which are classified as assets held for rent, is determined using the average cost method. The cost of other U.S. and non-U.S. inventories is determined using the first-in, first-out (“FIFO”) method.

11


 

Cabot reviews inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory, and based on these assumptions estimates the amount of any obsolete, unmarketable, slow moving, or overvalued inventory. Cabot writes down the value of these inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value.

Pensions and Other Postretirement Benefits

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

Accumulated Other Comprehensive (Loss) Income

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

Recent Accounting Pronouncements

In May 2014, the FASB issued a new standard, “Revenue from Contracts with Customers”, which amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 2017 and for interim periods within those years and early adoption is permitted for the fiscal years beginning after December 15, 2016. The Company expects to adopt this standard on October 1, 2018. The Company is currently evaluating the impact the adoption of this standard may have on its consolidated financial statements.

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

In November 2015, the FASB issued a new standard that amends the existing accounting standard for income taxes and simplifies the presentation of deferred income taxes.  This will require that deferred income tax assets and liabilities be classified as noncurrent on the balance sheet.  This standard is applicable for fiscal years beginning after December 15, 2016 and for interim periods within those years and early adoption is permitted.  The Company is evaluating this standard and the timing of its adoption. The adoption of this standard is not expected to materially impact the Company’s consolidated financial statements.

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

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

 

 

12


 

C. Employee Benefit Plans

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

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(Dollars in millions)

 

Service cost

 

$

1

 

 

$

2

 

 

$

 

 

$

2

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

1

 

 

 

2

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Expected return on plan assets

 

 

(2

)

 

 

(3

)

 

 

(3

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Amortization of actuarial loss

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic (credit) benefit cost

 

$

 

 

$

1

 

 

$

(1

)

 

$

2

 

 

$

 

 

$

 

 

$

(1

)

 

$

1

 

 

 

 

 

Nine Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

U.S.

 

 

Foreign

 

 

 

(Dollars in millions)

 

Service cost

 

$

1

 

 

$

6

 

 

$

 

 

$

7

 

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

4

 

 

 

6

 

 

 

5

 

 

 

9

 

 

 

1

 

 

 

 

 

 

1

 

 

 

1

 

Expected return on plan assets

 

 

(8

)

 

 

(10

)

 

 

(8

)

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(2

)

 

 

 

Amortization of actuarial loss

 

 

 

 

 

2

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement and curtailment cost (credit)

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Net periodic (credit) benefit cost

 

$

(3

)

 

$

4

 

 

$

(3

)

 

$

25

 

 

$

(3

)

 

$

 

 

$

(1

)

 

$

1

 

 

Settlement of employee benefit plan

Effective October 1, 2014, the Company transferred the defined benefit obligations and pension plan assets in one of its foreign defined benefit plans to a multi-employer plan. As a result of the transfer, a pre-tax charge of $18 million was recorded in the nine months ended June 30, 2015 as reflected in Settlement costs in the table above. The pre-tax charge consists of $27 million released from Accumulated other comprehensive (loss) income (“AOCI”) and $2 million of employer contributions at the time of the settlement, partially offset by an $11 million release of the pension liability. The settlement charge was recorded primarily in Cost of sales in the Consolidated Statements of Operations.

 

 

D. Goodwill and Intangible Assets

Cabot had goodwill balances of $152 million and $154 million at June 30, 2016 and September 30, 2015, respectively. 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, 2016 are as follows:

 

 

 

Reinforcement

Materials

 

 

Performance

Chemicals

 

 

Purification

Solutions

 

 

Total

 

 

 

(Dollars in millions)

 

Balance at September 30, 2015

 

$

55

 

 

$

9

 

 

$

90

 

 

$

154