Long-term debt | | Less:Current portion of long-term debt | | Notes payable | | | Less: | Cash and cash equivalents |
Less the four quarter rolling impact of after tax certain items. 22
(5) | Net debt to capitalization ratio is calculated by dividing total debt (the sum of short-term and long-term debt less cash and cash equivalents) by total capitalization (the sum of Total stockholders’ equity plus total Debt). |
(6) | Adjusted return on net assets (“Adjusted RONA”) is a non-GAAP financial measure that management believes is useful to investors as a measure of performance and the effectiveness of our use of capital. We use Adjusted RONA as one measure to monitor and evaluate performance. RONA is not a measure of financial performance under GAAP and may not be defined and calculated by other companies in the same manner. Adjusted RONA, which excludes items management does not consider representative of the Company’s segment results, is calculated as follows. |
Numerator (four quarter rolling): Net income (loss) attributable to Cabot Corporation Less the after-tax impact of: Noncontrolling interest in net income Certain items Discontinued operations Denominator: Previous five quarter average ending net asset balance calculated as follows: Net Working Capital (Accounts Receivable plus Inventory less Accounts Payable and Accruals) | | Plus: | Property Plant & Equipment (net of depreciation) | | Assets held for rent | | External investments, including Equity affiliates |
Assets held for rent
External investments, including Equity affiliates
23
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Critical Accounting Policies The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements. On an ongoing basis, we evaluate our estimates and the application of our policies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The policies that we believe are critical to the preparation of the Consolidated Financial Statements are presented below. Revenue Recognition and Accounts and Notes Receivable We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We generally are able to ensure that products meet customer specifications prior to shipment. If we are unable to determine that the product has met the specified objective criteria prior to shipment or if title has not transferred because of sales terms, the revenue is considered “unearned” and is deferred until the revenue recognition criteria are met. Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price. 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: | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | 2013 | | 2012(1) | | | 2015 | | | 2014 | | | 2013 | | Reinforcement Materials | | | 58 | % | | | 57 | % | | | 63 | % | | | 54 | % | | | 59 | % | | | 57 | % | Performance Materials | | | 27 | % | | | 27 | % | | | 29 | % | | Advanced Technologies | | | 6 | % | | | 6 | % | | | 6 | % | | Performance Chemicals | | | | 33 | % | | | 29 | % | | | 30 | % | Purification Solutions | | | 9 | % | | | 10 | % | | | 2 | % | | | 11 | % | | | 9 | % | | | 10 | % | Specialty Fluids | | | | 2 | % | | | 3 | % | | | 3 | % |
(1) | Fiscal 2012 consists of two months of revenues for Purification Solutions, which was acquired on July 31, 2012.
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We derive the substantial majority of revenues from the sale of products in Reinforcement Materials and Performance Materials.Chemicals. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. We offer certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized and are estimated based on historical experience and contractual obligations. We periodically review the assumptions underlying estimates of discounts and volume rebates and adjust revenues accordingly. Revenue in Advanced Technologies, excluding the Specialty Fluids business,Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. Depending on the nature of the contract with the customer, a portion of theFor major activated carbon injection systems projects, revenue may beis recognized using proportional performance.the percentage-of-completion method. A significant portion of the revenue in the Specialty Fluids business, included in Advanced Technologies, arises from the rental of cesium formate. This revenue is recognized throughout the rental period based on the contracted rental terms. Customers are also billed and revenue is recognized, typically at the end of the job, for cesium formate product that is not returned. We also generate revenues from cesium formate sold outside of a rental process and revenue is recognized upon delivery of the fluid. Revenue in Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. For major activated carbon injection systems projects, revenue is recognized using the percentage-of-completion method.
We maintain allowances for doubtful accounts based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable and other economic information on both a historical and prospective basis. Customer account balances are charged against the allowance when it is probable the receivable will not be recovered. Changes in the allowance during fiscal 2014 and 2013 were immaterial. There is no material off-balance sheet credit exposure related to customer receivable balances. Inventory Valuation The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. Total U.S. inventories utilizing this cost flow assumption was $24 million at September 30, 2015 and $28 million at September 30, 2014 and $24 million at September 30, 2013.2014. These inventories represent 6% and 5% of total worldwide inventories at both September 30, 2015 and 2014, and 2013.respectively. Had we used the first-in, first-out (“FIFO”) method instead of the LIFO method for such inventories, the value of those inventories would have been $52$30 million and $55$52 million higher as of September 30, 20142015 and 2013,2014, respectively. The cost of Specialty Fluids inventories, which are classified as assets held for rent, is determined using the average cost method. The cost of other U.S. and all non-U.S. inventories is determined using the FIFO method. In periods of rapidly rising or declining raw material costs, the inventory method we employ 24
can have a significant impact on our profitability. Under our current LIFO method, when raw material costs are rising, our most recent higher priced purchases are the first to be charged to Cost of sales. If, however, we were using a FIFO method, our purchases from earlier periods, which were at lower prices, would instead be the first charged to Cost of sales. The opposite result could occur during a period of rapid decline in raw material costs. At certain times, we may decrease inventory levels to the point where layers of inventory recorded under the LIFO method that were purchased in preceding years are liquidated. The inventory in these layers may be valued at an amount that is different than our current costs. If there is a liquidation of an inventory layer, there may be an impact to our Cost of sales and Net income for that period. If the liquidated inventory is at a cost lower than our current cost, there would be a reduction in our Cost of sales and an increase to our Net income during the period. Conversely, if the liquidated inventory is at a cost higher than our current cost, there will be an increase in our Cost of sales and a reduction to our net income during the period. During fiscal 2013 and 2012, inventory quantities carried on a LIFO basis were decreased at the Company’s U.S. carbon black sites. These reductions led to liquidations of LIFO inventory quantities and resulted in a decrease in Cost of sales of $1 million and an increase in consolidated Net income of $1 million ($0.01 per diluted common share) in both fiscal years. No such reductions occurred in fiscal 2014.
We review inventory for both potential obsolescence and potential declines in anticipated selling prices periodically. In this review, we make assumptions about the future demand for and market value of the inventory and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of inventory and the estimated market value. Historically, such write-downs have not been significant.material. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our gross profit and our earnings. Intangible Assets and Goodwill and Long-Lived AssetsImpairment We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of May 31, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. The separate businesses included within Performance MaterialsChemicals are considered separate reporting units. The goodwill balance relative to this segment is recorded in the Fumed Metal Oxides reporting unit within Performance Materials.unit. For the purpose of the goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed under the two-step impairment test. Alternatively, we may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, we perform an analysis of the fair value of all assets and liabilities of the reporting unit. If the implied fair value of the reporting unit’s goodwill is determined to be less than its carrying amount, an impairment is recognized for the difference. The fair value of a reporting unit is based on discounted estimated future cash flows. The fair value is also benchmarked against a market approach using the guideline public companies method. The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. Should the fair value of any of our reporting units decline below its carrying amount because of reduced operating performance, market declines, changes in the discount rate, or other indicators of impairment,conditions, charges for impairment may be necessary. Based on our most recent annual goodwill impairment test performed as of May 31, 2014,2015, the fair values of the Reinforcement Materials and Fumed Metal Oxides reporting units were substantially in excess of their carrying values. The fair value of the Purification Solutions reporting unit exceededwas less than its carrying amount and an impairment charge was recorded in the third quarter of fiscal 2015 as described below under “Purification Solutions Goodwill and Long-Lived Assets Impairment Charges.” Due to the impairment recorded, the fair value by approximately 9%. At September 30, 2014,of the Purification Solutions reporting unit had the most significant goodwill balance,was insignificantly higher than its carrying value. No events occurred in the amountfourth fiscal quarter of $458 million. The future growth in2015 that would suggest that it is more likely than not that the Purification Solutions business is highly dependent on achieving expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and our successful realizationcarrying values of any of our anticipated share of volumes in this segment over the next 3 years. The demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those that would require U.S. based coal fired electrical utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards that become effective beginning in April 2015 and (2) other factors such as the anticipated usage of activated carbon in the coal fired energy units. Recently, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. It is not possible to predict the outcome of the Supreme Court’s review of this matter.reporting units exceeded its fair value. We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. We estimate the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition. 25
Definite-lived intangible assets, which are comprised of customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. We evaluate indefinite-lived intangible assets, which are comprised of the trademarks of Purification Solutions, for impairment annually or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. The annual review is performed as of May 31. We may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. The quantitative impairment test is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates and discount rates over an estimate of the remaining operating period at the unit of accounting level. These future growth rates dependRefer to the “Purification Solutions Goodwill and Long-Lived Assets Impairment Charges” section below for details on achieving the expected volumes and pricing levelsimpairment test performed on intangible assets of the productsPurification Solutions reporting unit and the resulting impairment charges recorded. Effective in the third quarter of fiscal year 2015 and as a part of the impairment assessment performed, we determined that the trademarks for Purification Solutions.Solutions no longer had an indefinite life. Long-lived Assets Impairment Our 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. An asset impairment is recognized when the carrying value of the asset is not recoverable based on the probability-weighted undiscounted estimated future cash flows to be generated by the asset. Our estimates reflect management’s assumptions about selling prices, production and sales volumes, costs and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. The key inputs to the discounted cash flow would be the same as the undiscounted cash flow noted above, with the addition of the discount rate used. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when we no longer intend to use the asset. To test for impairment of assets we generally use a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable. Refer to the “Purification Solutions Goodwill and Long-Lived Assets Impairment Charges” section below for details on the Purification Solutions goodwill impairment test and the resulting impairment charge recorded. 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 we no longer intend to use the asset. Purification Solutions Goodwill and Long-Lived Assets Impairment Charges During fiscal 2015 and as a result of the impairment tests performed on goodwill and long-lived assets of the Purification Solutions reporting unit, we recorded impairment charges and an associated tax benefit in the Consolidated Statements of Operations as follows: | | Year Ended September 30, 2015 | | | | (Dollars in millions) | | Purifications Solutions goodwill impairment charge | | $ | 352 | | Purification Solutions long-lived assets impairment charge | | | 210 | | Provision (benefit) for income taxes | | | (80 | ) | Impairment charges, after tax | | $ | 482 | |
The future growth in the Purification Solutions segment is highly dependent on achieving the expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and our successful realization of our anticipated share of volumes in this segment. The expected demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those that would require U.S. based coal-fired electric utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards (“MATS”) issued by the U.S. Environmental Protection Agency (“EPA”) and (2) other factors such as the anticipated usage of activated carbon in the coal-fired energy units. In November 2014, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. On June 29, 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by coal-fired utilities, and remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. 26
The implementation period for the MATS regulations began in April 2015. With this recent implementation and associated customer and industry developments during the third fiscal quarter, as well as the Supreme Court’s ruling, we reassessed our previous estimates for expected growth in volumes, prices and margins in the Purification Solutions reporting unit. The main drivers of growth, including the size of the overall mercury removal industry, utility adoption rates, usage levels, and pricing, among others were lowered from previous estimates. Based on these revised estimates and as part of step one of the annual impairment test, we determined the estimated fair value of the Purification Solutions reporting unit was lower than the reporting unit's carrying value. As such, the reporting unit failed step one of the goodwill impairment test. In determining the fair value of the Purification Solutions reporting unit, we used an income approach (a discounted cash flow analysis) which incorporated significant estimates and assumptions related to future periods including, timing of MATS implementation, the anticipated size of the mercury removal industry, and growth rates and pricing assumptions of activated carbon, among others. We assumed a two year delay in the final MATS implementation due to the U.S. Supreme Court’s ruling. Additional impairment charges may be required if the rulings of the U.S. Court of Appeals for the District of Columbia Circuit on remand result in a delay in the implementation of MATS that is longer than two years or if the regulation is vacated. In addition, an estimate of the reporting unit’s weighted average cost of capital (“WACC”) is used to discount future estimated cash flows to their present value. The WACC was based upon externally available data considering market participants’ costs of equity and debt, capital structure and risk factors specific to the Purification Solutions reporting unit. Step two of the goodwill impairment test requires us 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. As of June 30, 2015, we recorded a pre-tax goodwill impairment charge in the amount of $353 million. We completed the step two analysis in the fourth quarter of fiscal year 2015, which resulted in recording a credit of $1 million to the pre-tax goodwill impairment charge. Therefore, for the year ended September 30, 2015, the pre-tax goodwill impairment charge was $352 million. Based on the same factors leading to goodwill impairment, we 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. We used the income approach to determine the fair value of the indefinite-lived intangible assets represented by 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, we concluded that an indefinite life of such assets could no longer be supported and have begun amortizing these assets on their estimated useful life. We 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, which was determined to be the lowest level of identifiable cash flows, and these cash flows were not sufficient to recover the carrying value of the long-lived assets over their remaining useful lives. Accordingly, an impairment charge was recorded based on the lower of the carrying amount or fair value of the long-lived assets. We 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 our property, plant and equipment. We recorded impairment charges of $119 million and $51 million, to our definite-lived intangible assets and property, plant and equipment, respectively, in the quarter ended June 30, 2015. We completed the impairment analysis in the fourth quarter of fiscal year 2015 which resulted in increasing the property, plant and equipment impairment charge by $1 million to $52 million. Therefore, for the year ended September 30, 2015, the long-lived assets impairment charge was $210 million. In connection with the long-lived assets impairment charges, we recorded a deferred tax benefit of $80 million to our income tax provision. The performance of the Purification Solutions reporting unit will continue to be monitored. If the reporting unit does not achieve the financial performance that we expect or events or circumstances change, it is possible that additional impairment charges may result. Pensions and Other Postretirement Benefits We maintain both defined benefit and defined contribution plans for our employees. In addition, we provide certain postretirement health care and life insurance benefits for our retired employees. Plan obligations and annual expense calculations are based on a number of key assumptions. The assumptions, which are specific for each of our U.S. and foreign plans, are related to both the assets we hold to fund our plans (where applicable) and the characteristics of the benefits that will ultimately be provided to our employees. The most significant assumptions relative to our plan assets include the anticipated rates of return on these assets. Assumptions relative to our pension obligations are more varied; they include estimated discount rates, rates of compensation increases for employees, and mortality, employee turnover and other related demographic data. Projected health care and life insurance obligations also rely on the above mentioned demographic assumptions and assumptions surrounding health 27
care cost trends. Actual results that differ from the assumptions are generally accumulated and amortized over future periods and could therefore affect the recognized expense and recorded obligation in such future periods. However, cash flow requirements may be different from the amounts of expense that are recorded in the consolidated financial statements. Litigation and Contingencies We are involved in litigation in the ordinary course of business, including personal injury and environmental litigation. After consultation with counsel, as appropriate, we accrue a liability for litigation when it is probable that a liability has been incurred and the amount can be reasonably estimated. The estimated reserves are recorded based on our best estimate of the liability associated with such matters or the low end of the estimated range of liability if we are unable to identify a better estimate within that range. Our best estimate is determined through the evaluation of various information, including claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience. Litigation is highly uncertain and there is always the possibility of an unusual result in any particular case that may reduce our earnings and cash flows. The most significant reserves that we have established are for environmental remediation and respirator litigation claims. The amount accrued for environmental matters reflects our assumptions about remediation requirements at the contaminated sites, the nature of the remedies, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. A portion of the reserve for environmental matters is recognized on a discounted basis, which requires the use of an estimated discount rate and estimates of future cash flows associated with the liability. These liabilities can be affected by the availability of new information, changes in the assumptions on which the accruals are based, unanticipated government enforcement action or changes in applicable government laws and regulations, which could result in higher or lower costs. Our current estimate of the cost of our share of existing and future respirator liability claims is based on facts and circumstances existing at this time. Developments that could affect our estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of dismissals without payment of pending silica and non-malignant asbestos claims, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of other parties which contribute to the settlement of respirator claims, (viii) a change in the availability of insurance coverage maintained by certain of the entity fromother parties which we acquiredcontribute to the safety respiratory products businesssettlement of respirator claims, or the indemnity provided by itsa 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 our share of liability are no longer reasonable. We cannot determine the impact of these potential developments on our current estimate of our share of liability for these existing and future claims. Accordingly, the actual amount of these liabilities for existing and future claims could be different than the reserved amount. Income Taxes Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations which make the ultimate tax determination uncertain. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. We have recorded reserves for taxes and associated interest and penalties that may become payable in future years as a result of audits by tax authorities. Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, and/or our cash flow. We record benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities’ full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. We also accrue for interest and penalties on these uncertain tax positions and include such charges in the income tax provision in the Consolidated Statements of Operations. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carry-forwards, foreign tax credits, and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. Failure to 28
achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense, while a release of valuation allowances in periods when these tax attributes become realizable would reduce our income tax expense. During the fourth quarter of 2014, the Company recorded a $20 million increase in the valuation allowance on deferred tax assets of a foreign jurisdiction that incurred cumulative losses for the current year and prior two years. Significant Accounting Policies We have other significant accounting policies that are discussed in Note A of the Notes to our Consolidated Financial Statements in Item 8 below. Certain of these policies include the use of estimates, but do not meet the definition of critical because they generally do not require estimates or judgments that are as difficult or subjective to measure. However, these policies are important to an understanding of the Consolidated Financial Statements. Results of Operations Definition of Terms and Non-GAAP Financial Measures When discussing our results of operations, we use several terms as described below. The term “product mix” refers to the mix of types and grades of products sold or the mix of geographic regions where products are sold, and the positive or negative impact this has on the revenue or profitability of the business or segment. The term “LIFO” includes two factors: (i) the impact of current inventory costs being recognized immediately in Cost of sales under a last-in first-out method, compared to the older costs that would have been included in Cost of sales under a first-in first-out method (“Cost of sales impact”); and (ii) the impact of reductions in inventory quantities, causing historical inventory costs to flow through Cost of sales (“liquidation impact”). The discussion under the heading “Provision for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate” includes a discussion of our “effective tax rate” and our “operating tax rate” and includes a reconciliation of the two rates. Our operating tax rate is a non-GAAP financial measure and should not be considered as an alternative to our effective tax rate, the most comparable GAAP financial measure. In calculating our operating tax rate, we exclude discrete tax items, which include: i) unusual or infrequent items such as a significant release of a valuation allowance, ii) items related to uncertain tax positions such as the tax impact of audit settlements, interest on tax reserves, and the release of tax reserves from the expiration of statutes of limitations, and iii) other discrete tax items, such as the tax impact of legislative changes and, on a quarterly basis, the timing of losses in certain jurisdictions and the cumulative rate adjustment, if applicable. We also exclude the tax impact of certain items, as defined below in the discussion of Total segment EBIT, on both operating income and the tax provision. Our definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that the non-GAAP financial measure is useful supplemental information because it helps our investors compare our tax rate year to year on a consistent basis and understand what our tax rate on current operations would be without the impact of these items which we do not believe are reflective of the underlying business results. Total segment EBIT is a non-GAAP performance measure, and should not be considered an alternative for Income from continuing operations before taxes, the most directly comparable GAAP financial measure. In calculating Total segment EBIT, we make certain adjustments such as excluding certain items, meaning items that management does not consider representative of our fundamental segment results, as well as items that are not allocated to our business segments, such as interest expense and other corporate costs. Our Chief Operating Decision Maker uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT provides useful supplemental information for our investors as it is an important indicator of the Company’s operational strength and performance. Investors should consider the limitations associated with this non-GAAP measure, including the potential lack of comparability of this measure from one company to another. A reconciliation of Total segment EBIT to Income from continuing operations before income taxes and equity in earnings of affiliated companies is provided in Note TV of our consolidated financial statements. Cabot is organized into four reportable business segments: Reinforcement Materials, Performance Materials, Advanced TechnologiesChemicals, Purification Solutions, and Purification Solutions. Cabot is also organizedSpecialty Fluids. In fiscal 2015, we realigned our business reporting structure into these four segments. Segment results have been recast for operational purposes into three geographic regions: the Americas; Europe, Middle East and Africa; and Asia Pacific. Discussions of all periods presented to reflect these structures.the realignment of our global business segments. The new segment structure is designed to improve efficiency and resource prioritization and reflects how our chief operating decision maker reviews segment results to assess performance and allocate resources. Our analysis of financial condition and operating results should be read with our consolidated financial statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to our fiscal years ended September 30. On July 31, 2012, we purchased all of the issued and outstanding shares of Norit N.V., the business of which we renamed and report as Purification Solutions. Our results for the twelve month period ended September 30, 2012 include two months of results for Purification Solutions.29
Drivers of Demand and Key Factors Affecting Profitability Drivers of demand and key factors affecting our profitability differ by segment. In Reinforcement Materials, demand is influenced on a long-term basis primarily by: i) the number of vehicle miles driven globally; ii) the number of original equipment and replacement tires produced; and iii) the number of automotive builds. Over the past several years, operating results have been driven by a number of factors, including: i) increases or decreases in our sales volumes;volumes driven by changes in production levels for tires or industrial rubber products and the level at which we service that demand; ii) changes in raw material costs and our ability to obtainadjust the sales price increases for our products commensurate with increaseschanges in raw material costs; iii) changes in pricing and product mix;mix dependent on the level of price increases or decreases to customers as well as the mix of products sold or the region in which they are sold; iv) global and regional capacity utilization;utilization for carbon black; v) fixed cost savings achieved through restructuring and other cost saving activities; vi) the growth of our volumes and market position in emerging economies; and vii) capacity management and technology investments, including the impact of energy utilization and yield improvement technologies at our manufacturing facilities.facilities; and viii) royalties and technology payments related to our patented elastomer composites technology that is used in tire applications. In Performance Materials,Chemicals, longer term demand is driven primarily by the construction and infrastructure, automotive, electronics and consumer products industries. In recent years, operating results in Performance MaterialsChemicals have been driven by: i) increases or decreases in sales volumes;volumes to the industries previously noted; ii) our ability to deliver differentiated products that drive enhanced performance in customers’ applications; iii) our ability to obtain value pricing for this differentiation; and iv) the cost of new capacity. In Advanced Technologies, drivers of demand are specific to the various businesses. In the Inkjet Colorants business, demand has been driven by a relative increase of printer platforms using our pigments at both new and existing customers and the broader adoption of inkjet technology in office and commercial printing applications. Demand in the Aerogel business has been driven by the adoption of
aerogel products for daylighting and insulation for building, construction and industrial applications, and insulation products used in the oil and gas industry. In the Elastomer Composites business, operating results have been driven by sales of elastomer composites as well as royalties and technology payments related to our patented technology that is used in tire applications. During fiscal 2014, we fully transitioned into the royalty phase of our exclusive licensing agreement for our patented elastomer composites manufacturing process with Michelin. Under our current agreement, in future years, revenues will be driven by royalties and technology payments in accordance with this agreement based on a pre-determined schedule linked to Michelin’s installed elastomer composites manufacturing capacity. In our Specialty Fluids business, demand for cesium formate is primarily driven by the level of drilling activity for high pressure oil and gas wells and by the petroleum industry’s acceptance of our product as a drilling and completion fluid for this application. Operating results in Advanced Technologies have been influenced by: i) the rate at which we commercialize new technology; ii) our ability to select the highest value opportunities and work with lead users in the appropriate markets; iii) our ability to appropriately size the overall cost platform for the opportunities; iv) the timing of royalty and technology payments in our Elastomer Composites and Aerogel businesses;capacity; and v) the size, type and durationadoption of drilling jobsnew products for use in our Specialty Fluids business.customers’ applications.
In Purification Solutions, longer term demand is driven primarily by the demand for activated carbon based solutions for water, gas and air, pharmaceuticals, food and beverages, catalysts and other chemical applications. Operating results in Purification Solutions have been influenced by i) changes in volume in the various applications previously noted, ii) the amount of coal-based power generation utilized in the U.S., and the regulation of those utilities, iii) elevated maintenance activitymanagement of our operations, including inventory levels, and higher maintenancethe commensurate costs, iv) changes in price and product mix, and v) industry capacity utilization. In Specialty Fluids, demand for cesium formate is primarily driven by the level of drilling activity for high pressure oil and gas wells and by the petroleum industry’s acceptance of our product as a drilling and completion fluid for this application. Operating results in Specialty Fluids are influenced by the number of drilling projects as well as the size, type and duration of the drilling jobs within the business. Overview of Results for Fiscal 20142015 During fiscal 2014,2015, Income from continuing operations before income taxes and equity in earnings (loss) earnings of affiliated companies increaseddecreased compared to fiscal 20132014 largely due to higher volumes from improved demandan impairment charge related to the assets of Purification Solutions. The impairment was driven by a less favorable estimate of the developing business for activated carbon in our key end markets,mercury removal applications and uncertainty created by the additionJune 2015 U.S. Supreme Court decision regarding the Mercury and Air Toxics Standards (“MATS”) regulations. This resulted in a pre-tax Long-lived assets impairment charge of new carbon black capacity in China,$210 million and from our acquisitiona pre-tax Goodwill impairment charge of Grupo Kuo S.A.B. de C.V.’s common stock interest in our carbon black joint venture in Mexico (“NHUMO”).$352 million. The total after-tax charge was $482 million. In addition, raw material purchasing savings and the benefits from energy efficiency investmentsresults declined due to margin pressure in Reinforcement Materials contributedand lower project activity in Specialty Fluids, partially offset by improved EBIT results in Purification Solutions and Performance Chemicals. Fiscal 2015 compared to the improvement in earnings. In fiscalFiscal 2014 we recognized a gain on our pre-existing equity investment in NHUMO upon our acquisition of KUO’s common stock interest in NHUMO. See Note C to our consolidated financial statements for details of the NHUMO transaction. and Fiscal 2014 compared to Fiscal 2013 and Fiscal 2013 compared to Fiscal 2012—2013—Consolidated Net Sales and other operating revenue and Gross Profit | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Net sales and other operating revenues | | $ | 3,647 | | | $ | 3,456 | | | $ | 3,291 | | | $ | 2,871 | | | $ | 3,647 | | | $ | 3,456 | | Gross profit | | $ | 721 | | | $ | 633 | | | $ | 644 | | | $ | 585 | | | $ | 721 | | | $ | 633 | |
The $776 million decrease in net sales from fiscal 2014 to fiscal 2015 was due primarily to a less favorable price and product mix (combined $433 million), an unfavorable impact from foreign currency translation ($203 million), a decrease in volumes ($116 million), lower elastomer composites royalties and technology payments ($10 million), and lower royalties in Purification Solutions ($3 million). The less favorable price and product mix impact was primarily due to lower selling prices during the year from price adjustments to customers for decreases in raw materials costs. The $191 million increase in net sales from fiscal 2013 to fiscal 2014 was due primarily to an increase in volumes ($247 million). The improvement was partially offset by lower prices and a less favorable price and product mix (combined $57 million). The $165 30
Gross profit decreased by $136 million increase in net sales from fiscal 20122015 when compared to fiscal 2013 was due primarily to the addition of Purification Solutions (approximately $267 million). The improvement was partially offset2014 driven by lower prices and a less favorable product mix (combined $50 million), the unfavorable impact of foreign currency translation ($50 million),margins in Reinforcement Materials and lower volumes ($29 million). in Specialty Fluids. Gross profit increased by $88 million in fiscal 2014 when compared to fiscal 2013 driven by higher volumes, raw material purchasing savings, and the benefits from energy efficiency investments. Gross Selling and Administrative Expenses profit
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Selling and administrative expenses | | $ | 282 | | | $ | 326 | | | $ | 297 | |
Selling and administrative expenses decreased by $11$44 million in fiscal 20132015 when compared to fiscal 20122014. The decrease was principally driven by reduced spending on travel and corporate projects, lower unit margins that resulted from price decreases and a less favorable product mix,incentive compensation expense, and lower volumes. Sellingexpenses related to a 2014 restructuring in our Europe, Middle East and Administrative Expenses
| | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Selling and administrative expenses | | $ | 326 | | | $ | 297 | | | $ | 281 | |
Africa (“EMEA”) business service center. Selling and administrative expenses increased by $29 million in fiscal 2014 when compared to fiscal 2013. The increase was principally driven by higher expenses related to the restructuring actions taken inof our Europe, Middle East and Africa (“EMEA”)EMEA business service center, the addition of NHUMO, and higher costs associated with corporate projects. Selling and administrative expenses increased by $16 million in fiscal 2013 when compared to fiscal 2012. The comparative increase was principally driven by the addition of Purification Solutions and restructuring-related charges. Research and Technical Expenses | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Research and technical expenses | | $ | 60 | | | $ | 68 | | | $ | 72 | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Research and technical expenses | | $ | 58 | | | $ | 60 | | | $ | 68 | |
Research and technical expenses decreased by $2 million in fiscal 2015 when compared to fiscal 2014 due to lower spending on projects across the segments. Research and technical expenses decreased by $8 million in fiscal 2014 when compared to fiscal 2013 and decreased $4 million in fiscal 2013 when compared to fiscal 2012. The reduction in both periods was primarily due to lower costs from the benefits associated with restructuring-related activities as we focus on activities that are closer to our existing businesses. Purification Solutions Long-Lived Assets and Goodwill Impairment Charges | | Years ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Purification Solutions long-lived assets impairment charge | | $ | 210 | | | $ | — | | | $ | — | | Purification Solutions goodwill impairment charge | | $ | 352 | | | $ | — | | | $ | — | |
The Purification Solutions long-lived assets and goodwill impairment charges were recorded during fiscal 2015. Refer to Note G for further information on these charges. Interest and Dividend Income | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Interest and dividend income | | $ | 3 | | | $ | 5 | | | $ | 4 | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Interest and dividend income | | $ | 4 | | | $ | 3 | | | $ | 5 | |
Interest and dividend income increased by $1 million in fiscal 2015 when compared to fiscal 2014 due to higher interest earned on cash balances. Interest and dividend income decreased by $2 million in fiscal 2014 when compared to fiscal 2013 due to lower interest earned on cash balances. Interest and dividend income increased $1Expense | | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Interest expense | | $ | 53 | | | $ | 55 | | | $ | 62 | |
Interest expense decreased by $2 million in fiscal 2013 when2015 as compared to fiscal 20122014. The decrease was primarily due to higher interest earned on cash balances. Interest Expense
| | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Interest expense | | $ | 55 | | | $ | 62 | | | $ | 46 | |
the repayment of certain long-term debt. Interest expense decreased by $7 million in fiscal 2014 as compared to fiscal 2013. The decrease was due to the maturity of long-term debt in the fourth quarter of fiscal 2013 that was refinanced with commercial paper carrying a lower interest rate. Interest expense increased $16 31
Other (Expense) Income | | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Other (expense) income | | $ | (11 | ) | | $ | 25 | | | $ | (1) | |
Other (expense) income during fiscal 2015 changed by $36 million in fiscal 2013 as compared to fiscal 2012. The increase was2014 due primarily to a higher debt balancegain recognized on our existing equity investment in NHUMO ($29 million) in fiscal 2014 as a result of the financingNHUMO transaction and the unfavorable comparison of the Purification Solutions acquisition, which was partially offset by lower interest expense related to the use of commercial paper in fiscal 2013. foreign currency movements ($6 million). Other (Income) Expense | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Other (income) expense | | $ | (25 | ) | | $ | 1 | | | $ | 3 | |
Other (income) expense(expense) income during fiscal 2014 increasedchanged by $26 million as compared to fiscal 2013 due primarily to a gain recognized on our existing equity investment in NHUMO ($29 million) as a result of the NHUMO transaction. This gain was partially offset by an unfavorable comparison of foreign currency movements. Other expense decreased by $2 million in fiscal 2013 compared to fiscal 2012 due to a favorable comparison of foreign currency movements.
Provision for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate | | | | | | | | Years Ended September 30 | | | | Years Ended September 30 | | | 2015 | | | 2014 | | | 2013 | | | | 2014 | | 2013 | | 2012 | | | (Dollars in millions) | | | | (Dollars in millions) | | | Provision for income taxes | | $ | 92 | | | $ | 60 | | | $ | 55 | | | (Benefit) provision for income taxes | | | $ | (45 | ) | | $ | 92 | | | $ | 60 | | Effective tax rate | | | 30% | | | | 28% | | | | 22% | | | | 12 | % | | | 30 | % | | | 28 | % | Impact of discrete tax items: | | | | | | | | | | | | | | | | | | | Unusual or infrequent items | | | (7% | ) | | | (3% | ) | | | 3% | | | | (2 | )% | | | (7 | %) | | | (3 | %) | Items related to uncertain tax positions | | | 3% | | | | 2% | | | | 1% | | | | (2 | )% | | | 3 | % | | | 2 | % | Other discrete tax items | | | (2% | ) | | | 1% | | | | — | | | | 1 | % | | | (2 | %) | | | 1 | % | Impact of certain items | | | 3% | | | | (2% | ) | | | (1% | ) | | | 17 | % | | | 3 | % | | | (2 | %) | | | | | | | | | | | | Operating tax rate | | | 27% | | | | 26% | | | | 25% | | | | 26 | % | | | 27 | % | | | 26 | % |
The benefit for income taxes was $45 million for fiscal 2015, resulting in an effective tax rate of 12%. This amount included net tax benefits of $107 million, principally comprised of an $80 million benefit from the impairment of the Purification Solutions segment, $14 million of benefits from other certain items and $13 million of benefits from discrete tax items. See Note G of the consolidated financial statements for details of the impairment. The operating tax rate for fiscal 2015 was 26%. The provision for income taxes was $92 million for fiscal 2014, resulting in an effective tax rate of 30%. This amount included net discrete charges of $17 million, principally comprised of a $20 million valuation allowance, partially offset by a non-taxable gain of $29 million recognized on the Company’s pre-existing investment in NHUMO as a result of the NHUMO transaction. This gain is reported as a certain item. See Note C of the consolidated financial statements for details of the transaction. The operating tax rate for fiscal 2014 was 27%. The provision for income taxes was $60 million for fiscal 2013, resulting in an effective tax rate of 28%. The increase in the effective tax rate for fiscal 2013, as compared to fiscal 2012, is due to a change in our geographic mix of earnings and an increase in losses from jurisdictions for which no benefit can be recognized. This amount included net discrete charges of $3 million composed of $13 million foreign currency related charge, offset by $10 million of net tax benefit related to tax settlements, renewal of the U.S. research and experimentation credit, and other miscellaneous tax items in the tax provision. The operating tax rate for fiscal 2013 was 26%. The provision for income taxes was $55 million for fiscal 2012, resulting in an effective tax rate of 22%. This amount included net discrete tax benefits of $8 million from the release of a Cabot state tax valuation allowance as a result of the Purification Solutions acquisition and from settlements and miscellaneous tax items. The operating tax rate for fiscal 2012 was 25%.
Our anticipated operating tax rate for fiscal 20152016 is between 26% and 28%. The IRS has not yet commenced the audit of our 20072012 and later tax years and certain Cabot subsidiaries are under audit in a number of jurisdictions outside of the U.S. It is possible that some of these audits will be resolved in fiscal 20152016 and could impact our anticipated effective tax rate. We have filed our tax returns in accordance with the tax laws in each jurisdiction and maintain tax reserves for uncertain tax positions. Equity in Earnings of Affiliated Companies and Net Income Attributable to Noncontrolling Interest, net of tax | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Equity in earnings of affiliated companies, net of tax | | $ | — | | | $ | 11 | | | $ | 11 | | | $ | 4 | | | $ | — | | | $ | 11 | | Net income attributable to noncontrolling interests, net of tax | | $ | 19 | | | $ | 7 | | | $ | 18 | | | $ | 8 | | | $ | 19 | | | $ | 7 | |
Equity in earnings of affiliated companies, net of tax, increased by $4 million in fiscal 2015 compared to fiscal 2014. The increase was primarily due to higher earnings from our Venezuelan equity affiliate. Equity in earnings of affiliated companies, net of tax, decreased by $11 million in fiscal 2014 compared fiscal 2013. The decline was primarily due to the consolidation of the earnings 32
of NHUMO following the NHUMO transaction and lower earnings from our Venezuelan equity affiliate, including the unfavorable impact from the devaluation of the Venezuelan bolivar. Equity in earnings of affiliated companies, For fiscal 2015, net income attributable to noncontrolling interests, net of tax, indecreased by $11 million compared to fiscal 2013 was consistent with fiscal 2012. 2014 due to lower profitability of our joint ventures. For fiscal 2014, net income attributable to noncontrolling interests, net of tax, increased by $12 million compared to fiscal 2013 due to higher profitability of our joint ventures and charges associated with our 2013 restructuring in Malaysia that did not repeat in fiscal 2014. For fiscal 2013, net income attributable to noncontrolling interests, net of tax, decreased $11 million due to charges associated with our restructuring in Malaysia and lower profitability of our joint ventures in China. Income (Loss) from Discontinued Operations, net of tax During fiscal 2014, we divested our Security Materials business and during fiscal 2012, we divested our Supermetals business. Accordingly, for all periods we have classified the income or loss from the Security Materials and Supermetalsthese businesses as Income from discontinued operations, net of tax. Income from discontinued operations, net of tax, increased $3 million in fiscal 2014 when compared to fiscal 2013 due to a gain recognized on the sale of the Security Materials business in fiscal 2014. Income from discontinued operations, net of tax, decreased $205 million in fiscal 2013 when compared to fiscal 2012 because we recognized the gain on the sale of the Supermetals business in fiscal 2012 and no longer operated the business in fiscal 2013. Net (Loss) Income Attributable to Cabot Corporation In fiscal 2014,2015, we reported a net loss of $334 million ($5.27 per diluted common share). The loss is driven by the Purification Solutions long-lived asset and goodwill impairment charges more fully discussed in Note G to our consolidated financial statements. This is compared to net income of $199 million ($3.03 per diluted common share). This is compared to in fiscal 2014 and net income of $153 million ($2.36 per diluted common share) in fiscal 20132013. Fiscal 2015 compared to Fiscal 2014 and net income of $388 million ($5.99 per diluted common share) in fiscal 2012. Fiscal 2014 compared to Fiscal 2013 and Fiscal 2013 compared to Fiscal 2012—2013—By Business Segment Total segment EBIT, certain items, other unallocated items and Income from continuing operations before income taxes and equity in earnings of affiliated companies for fiscal 2015, 2014 2013 and 20122013 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note UV of our Consolidated Financial Statements. | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Total segment EBIT | | $ | 447 | | | $ | 386 | | | $ | 410 | | | $ | 332 | | | $ | 447 | | | $ | 386 | | Certain items | | | (28 | ) | | | (54 | ) | | | (51 | ) | | | (617 | ) | | | (28 | ) | | | (54 | ) | Other unallocated items | | | (111 | ) | | | (122 | ) | | | (113 | ) | | | (92 | ) | | | (111 | ) | | | (122 | ) | | | | | | | | | | | | Income from continuing operations before income taxes and equity in earnings of affiliated companies | | $ | 308 | | | $ | 210 | | | $ | 246 | | | | | | | | | | | | | | (Loss) income from continuing operations before income taxes and equity in earnings of affiliated companies | | | $ | (377 | ) | | $ | 308 | | | $ | 210 | |
In fiscal 2015, total segment EBIT decreased by $115 million when compared to fiscal 2014. The decrease was driven by lower volumes ($69 million), lower unit margins ($44 million), an unfavorable comparison of foreign currency movements ($20 million), lower elastomer composites royalties and technology payments ($10 million), lower Purification Solutions royalties ($3 million) and the absence of a one-time insurance recovery in fiscal 2014 that did not repeat in fiscal 2015 in Purification Solutions ($9 million). These impacts were partially offset by lower fixed costs ($46 million). In fiscal 2014, total segment EBIT increased by $61 million when compared to fiscal 2013. The increase was driven by higher volumes ($84 million), higher unit margins ($23 million) that resulted from raw material purchasing savings and the benefits from energy efficiency investments, a favorable comparison of foreign currency movements ($15 million), and higher royalty and technology payments in Elastomer Compositeselastomer composites ($11 million). The increase wasThese increases were partially offset by higher fixed costs ($73 million) driven by costs from new capacity in the Reinforcement Materials segment and higher maintenance costs in the Purification Solutions segment. In fiscal 2013, total segment EBIT decreased by $24 million when compared to fiscal 2012. The decrease was principally driven by lower volumes ($8 million), lower unit margins ($8 million) that resulted from price decreases and a less favorable product mix, and the unfavorable impact of foreign currency translation ($7 million).33
Certain Items: Details of the certain items for fiscal 2015, 2014, 2013, and 20122013 are as follows: | | | | | | | | Years Ended September 30 | | | | Years Ended September 30 | | | 2015 | | | 2014 | | | 2013 | | | | 2014 | | 2013 | | 2012 | | | (Dollars in millions) | | | | (Dollars in millions) | | | Impairment of goodwill and long-lived assets of Purification Solutions | | | $ | (562 | ) | | $ | — | | | $ | — | | Global restructuring activities | | $ | (29 | ) | | $ | (35 | ) | | $ | (17 | ) | | | (21 | ) | | | (29 | ) | | | (35 | ) | Acquisition and integration-related charges | | | (7 | ) | | | (21 | ) | | | (26 | ) | | | (5 | ) | | | (7 | ) | | | (21 | ) | Employee benefit plan settlement and other charges | | | | (21 | ) | | | — | | | | — | | Foreign currency (loss) gain on revaluations | | | (3 | ) | | | 3 | | | | — | | | | (2 | ) | | | (3 | ) | | | 3 | | Gain on existing investment in NHUMO | | | 29 | | | | — | | | | — | | | | — | | | | 29 | | | | — | | Legal and environmental matters and reserves | | | (18 | ) | | | (1 | ) | | | (8 | ) | | | — | | | | (18 | ) | | | (1 | ) | | | | | | | | | | | | Inventory reserve adjustment | | | | (6 | ) | | | — | | | | — | | Total certain items, pre-tax | | $ | (28 | ) | | $ | (54 | ) | | $ | (51 | ) | | $ | (617 | ) | | $ | (28 | ) | | $ | (54 | ) | | | | | | | | | | | | Tax-related certain items | | | | | | | | | | | | | | | | | | | Tax impact of certain items | | $ | 17 | | | $ | 10 | | | $ | 9 | | | $ | 94 | | | $ | 17 | | | $ | 10 | | Tax impact of certain foreign exchange (losses) gains | | | — | | | | (12 | ) | | | 1 | | | | — | | | | — | | | | (12 | ) | Tax impact of non-deductible interest expense | | | — | | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | Discrete tax items | | | (17 | ) | | | 11 | | | | 11 | | | | 13 | | | | (17 | ) | | | 11 | | | | | | | | | | | | | Total tax-related certain items | | | — | | | | 9 | | | | 19 | | | | — | | | | — | | | | 9 | | Total certain items after tax | | $ | (28 | ) | | $ | (45 | ) | | $ | (32 | ) | | $ | (510 | ) | | $ | (28 | ) | | $ | (45 | ) | | | | | | | | | | | |
Certain items for fiscal 20142015 include charges related to the impairment of Purification Solutions long-lived assets and goodwill, restructuring activities, acquisition and integration-related charges, foreign currency impacts on revaluations, a gain recognized on our existing equity investment in NHUMO, legal and environmental matters and reservesemployee benefit plan settlements, an inventory adjustment, and tax certain items. Details of the impairment of goodwill and long-lived assets are included in Note G of the Consolidated Financial Statements. Details of restructuring activities are included in Note OP of the Consolidated Financial Statements. Acquisition and integration-related charges include legal and professional fees, the incremental value of inventory as a result of purchase accounting adjustments and other expenses related to the completion of the acquisitions and the integrations of Purification Solutions and NHUMO. DetailsA discussion of the gain recognized on our existing equity investment in NHUMO areemployee benefit plan settlements is included in Note CN of the consolidated financial statements. A discussion of legal and environmental matters and reservesthe inventory reserve adjustment is included in Note SE of the consolidated financial statements. Tax-related certain items include discrete tax items, which are unusual and infrequent, and the tax impact of certain foreign exchange losses. Other Unallocated Items: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Interest expense | | $ | (55 | ) | | $ | (62 | ) | | $ | (46 | ) | | $ | (53 | ) | | $ | (55 | ) | | $ | (62 | ) | Equity in earnings of affiliated companies, net of tax | | | — | | | | (11 | ) | | | (11 | ) | | | (4 | ) | | | — | | | | (11 | ) | Unallocated corporate costs | | | (54 | ) | | | (48 | ) | | | (56 | ) | | | (46 | ) | | | (54 | ) | | | (48 | ) | General unallocated expense | | | (2 | ) | | | (1 | ) | | | — | | | | | | | | | | | | | | General unallocated income (expense) | | | | 11 | | | | (2 | ) | | | (1 | ) | Total other unallocated items | | $ | (111 | ) | | $ | (122 | ) | | $ | (113 | ) | | $ | (92 | ) | | $ | (111 | ) | | $ | (122 | ) | | | | | | | | | | | |
Other unallocated items include Interest expense, Equity in earnings of affiliated companies, net of tax, Unallocated corporate costs, and General unallocated expense.income (expense). The balances of unallocated corporate costs are primarily comprised of expenditures related to managing a public company that are not allocated to the segments and corporate business development costs related to new technology efforts. The balances of General unallocated expense primarily include foreign currency transaction gains (losses), interest income, dividend income, the elimination of profit related to unearned revenue, and the COGScost of sales impact of LIFO accounting. In fiscal 2015, costs from total other unallocated items decreased by $19 million when compared to fiscal 2014. The decrease was driven by a change of $13 million of General unallocated income (expense) due to the cost of sales impact of LIFO accounting from changes in carbon black raw material costs that resulted in a favorable comparison ($19 million) partially offset by the unfavorable impact of changes in foreign currency movements ($6 million). In addition, Unallocated corporate costs decreased by $8 million primarily associated with lower spending for corporate projects and lower expenses related to incentive compensation. 34
In fiscal 2014, costs from total other unallocated items decreased by $11 million when compared to fiscal 2013. The decrease was driven by $11 million of lower Equity in earnings of affiliated companies, net of tax, due to the consolidation of the earnings of NHUMO following the NHUMO transaction and lower earnings from our Venezuelan equity affiliate. Interest expense also decreased by $7 million due to the maturity of long-term debt in the fourth quarter of fiscal 2013 that was refinanced with commercial paper carrying a lower interest rate. These decreases were partially offset by a $6 million increase in Unallocated corporate costs primarily associated with spending for corporate projects and higher expenses related to incentive compensation. In fiscal 2013, costs from total other unallocated items increased by $9 million when compared to fiscal 2012. The increase was primarily driven by a $16 million increase in Interest expense due to a higher debt balance as a result of the financing of the Purification Solutions acquisition. The increase was partially offset by an $8 million decrease in Unallocated corporate costs due to lower expenses related to incentive compensation.
Reinforcement Materials Sales and EBIT for Reinforcement Materials for fiscal 2015, 2014 2013 and 20122013 are as follows: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Reinforcement Materials Sales | | $ | 2,076 | | | $ | 1,902 | | | $ | 2,019 | | | $ | 1,507 | | | $ | 2,108 | | | $ | 1,931 | | | | | | | | | | | | | Reinforcement Materials EBIT | | $ | 242 | | | $ | 188 | | | $ | 227 | | | $ | 143 | | | $ | 259 | | | $ | 195 | | | | | | | | | | | | |
In fiscal 2015, sales in Reinforcement Materials decreased by $601 million when compared to fiscal 2014. The decrease was principally driven by a less favorable price and product mix (combined $418 million), an unfavorable comparison of foreign currency translation ($116 million), 2% lower volumes ($55 million), and lower elastomer composites royalties and technology payments ($10 million). The less favorable price and product mix was primarily due to price adjustments to customers for decreases in raw material costs, lower pricing, and a shift in regional mix from North America to Asia. Lower volumes were driven by a reduction in rubber blacks volumes from lower contractual volumes in North America and weaker demand in China and South America. The lower elastomer composites royalties and technology payments were due to the transition from a fixed to a variable royalty arrangement and lower technology milestone payments. In fiscal 2014, sales in Reinforcement Materials increased by $174$177 million when compared to fiscal 2013. The increase was principally driven by 13% higher rubber blacks volumes ($254 million). The increase was offset by a less favorable rubber blacks price and product mix (combined $67 million) and an unfavorable comparison of foreign currency translation ($14 million). Higher rubber blacks volumes were due to improved carbon black demand, the addition of new capacity in China, and the acquisition of NHUMO. The less favorable rubber blacks price and product mix was primarily due to price adjustments to customers for decreases in raw material costs. In fiscal 2013, sales in2015, Reinforcement Materials EBIT decreased by $117$116 million when compared to fiscal 2012. The decrease was2014 driven principally driven by a less favorable price and product mix (combined $54lower rubber blacks unit margins ($91 million), thelower rubber blacks volumes ($14 million), lower elastomer composites royalties and technology payments ($10 million), and an unfavorable impactcomparison of foreign currency translation ($417 million), and 1%. The decreases were partially offset by lower volumes ($23rubber blacks fixed costs ($9 million). The less favorable price and product mix was primarilyrubber blacks unit margins were due to price adjustmentslower contract pricing and increased competition in Asia, negative feedstock effects from lower raw materials purchasing savings, lower benefits from our energy efficiency investments, and the impact of high cost inventory that moved through our supply chain during the first half of the year. We also experienced a less favorable sales mix, with lower sales in North America and higher sales in Asia. Lower rubber blacks fixed costs were primarily associated with cost management efforts to customers for decreases in raw material costsoperate more efficiently and lower prices as a result of a more competitive market environment in Asia and Europe. Lower volumes were primarily due to a weak economic environment in Europe and a supply disruption at one of our plants in Japan.discretionary spending.
In fiscal 2014, Reinforcement Materials EBIT increased by $54$64 million when compared to fiscal 2013 driven principally by higher rubber blacks volumes ($85 million), higher rubber blacks unit margins ($16 million) from raw material purchasing savings and the benefit from energy efficiency investments, and a favorable comparison of foreign currency translation ($12 million), and higher elastomer composites royalties and technology payments ($11 million). The increase was partially offset by higher rubber blacks fixed costs ($58 million). Higher volumes were due to improved carbon black demand, the addition of new capacity in China and the acquisition of NHUMO. Higherrubber blacks fixed costs were primarily associated with new carbon black capacity in China and the acquisition of NHUMO. In fiscal 2013, Reinforcement Materials EBIT decreased by $39 million when compared to fiscal 2012 driven principally by lower unit margins ($27 million) that resulted from lower prices and a less favorable product mix, lower volumes ($7 million), and higher fixed manufacturing costs ($7 million) primarily from higher utility costs. Lower unit margins were driven by lower prices as a result of a more competitive market environment in Asia and Europe.
Performance MaterialsChemicals Sales and EBIT for Performance MaterialsChemicals for fiscal 2015, 2014 2013 and 20122013 are as follows: | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Specialty Carbons and Compounds Sales | | $ | 647 | | | $ | 622 | | | $ | 664 | | Fumed Metal Oxides Sales | | | 300 | | | | 282 | | | | 250 | | | | | | | | | | | | | | | Performance Materials Sales | | $ | 947 | | | $ | 904 | | | $ | 914 | | | | | | | | | | | | | | | Performance Materials EBIT | | $ | 158 | | | $ | 132 | | | $ | 128 | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Specialty Carbons and Formulations Sales | | $ | 630 | | | $ | 709 | | | $ | 686 | | Metal Oxides Sales | | | 297 | | | | 313 | | | | 303 | | Performance Chemicals Sales | | $ | 927 | | | $ | 1,022 | | | $ | 989 | | Performance Chemicals EBIT | | $ | 178 | | | $ | 168 | | | $ | 149 | |
35
In fiscal 2015, sales in Performance Chemicals decreased by $95 million when compared to fiscal 2014 due to an unfavorable comparison of foreign currency translation ($64 million), and a less favorable price and product mix (combined $32 million). The change in price and product mix was mainly driven by price adjustments to customers for decreases in raw material costs. In fiscal 2014, sales in Performance MaterialsChemicals increased $43by $33 million when compared to fiscal 2013 due to higher volumes ($4941 million) and a favorable comparison of foreign currency translation ($119 million), offset by a less favorable price and product mix (combined $17$10 million) and lower aerogel royalties ($8 million). During fiscal 2014, volumes in Specialty Carbons and CompoundsFormulations increased by 6%4% and volumes in Fumed Metal Oxides increased by 5%4%. Higher volumes were due to improved demand in our key end markets. The change in price and product mix was driven by a less favorable product mix and price adjustments to customers that coincided withfor decreases in raw material costs. In fiscal 2013, sales2015, EBIT in Performance Materials decreasedChemicals was $10 million higher when compared to fiscal 20122014 due to a less favorable pricehigher unit margins ($20 million) and product mix (combined $9lower fixed costs ($8 million). The improvement in unit margins was driven by lower prices that coincided with lower raw material costs in the specialty carbons product line. Lower fixed costs were a result of cost management efforts across the segment. These benefits were partially offset by unfavorable foreign currency translation ($16 million) and a less favorable mix of products sold. Duringslightly lower volumes ($2 million). Volumes were relatively flat across the segment during fiscal 2013, volumes in Specialty Carbons and Compounds decreased by 5% due to lower demand in our key end markets and volumes in Fumed Metal Oxides increased by 14% due to new product introductions and the successful commercialization of new capacity.2015. In fiscal 2014, EBIT in Performance MaterialsChemicals was $26$19 million higher when compared to fiscal 2013 due to higher volumes ($2621 million) as demand improved in our key end markets. In fiscal 2013, EBIT in Performance Materials was $4 million higher when compared to fiscal 2012 due to higher volumes ($11 million) driven by an increase in Fumed Metal Oxides due to new product introductions and the successful commercialization of new capacity. The higher volumes were partially offset by a less favorable price and product mix (combined $2 million) and higher costs associated with the reduction of inventory levels ($8 million).
Advanced Technologies
Sales and EBIT for Advanced Technologies for fiscal 2014, 2013 and 2012 are as follows:
| | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Inkjet Colorants | | $ | 62 | | | $ | 64 | | | $ | 66 | | Aerogel | | | 13 | | | | 21 | | | | 18 | | Elastomer Composites | | | 32 | | | | 29 | | | | 23 | | Specialty Fluids | | | 98 | | | | 101 | | | | 94 | | | | | | | | | | | | | | | Advanced Technologies Sales | | $ | 205 | | | $ | 215 | | | $ | 201 | | | | | | | | | | | | | | | Advanced Technologies EBIT | | $ | 66 | | | $ | 70 | | | $ | 50 | | | | | | | | | | | | | | |
Sales in Advanced Technologies decreased by $10 million in fiscal 2014 when compared to fiscal 2013. The decrease was primarily due to lower volumes ($25 million), most notably in the Specialty Fluids and Elastomer Composites businesses, lower Aerogel royalties ($8 million), and the unfavorable impact of foreign currency translation ($2 million). These decreases were partially offset by higher pricing and a more favorable product mix (combined $14 million) driven by price increases implemented in the Specialty Fluids business, and higher royalties and technology payments in the Elastomer Composites business ($11 million).
Sales in Advanced Technologies increased by $14 million in fiscal 2013 when compared to fiscal 2012. The increase was primarily due to higher pricing and a favorable product mix ($15 million) driven by price increases implemented in the Specialty Fluids business, partially offset by unfavorable foreign currency translation ($3 million). Higher royalties and technology payments in the Elastomer Composites business offset lower volumes in the segment.
EBIT in Advanced Technologies decreased by $4 million in fiscal 2014 when compared to fiscal 2013. The decrease is primarily due to lower volumes ($10 million), lower Aerogel royalties ($8 million), higher fixed costs ($4 million) driven by higher mine-related costs in the Specialty Fluids business, and the unfavorable impact of foreign currency translation ($1 million). These decreases were partially offset by higher pricing and a more favorable product mix (combined $8 million) driven by price increases implemented in the Specialty Fluids business, and higher royalties and technology payments in the Elastomer Composites business ($11 million).
EBIT in Advanced Technologies increased by $20 million in fiscal 2013 when compared to fiscal 2012. The increase was driven by cost savings from restructuring activities in the segment ($10 million) and higher royalties and technology payments in the Elastomer Composites business ($9 million). Higher prices and a favorable product mix were largely offset by lower volumes.
The main raw material source for our Specialty Fluids business is our cesium mine in Canada. After a fall of ground in 2013 in a portion of the mine that contains significant cesium reserves, we began to assess the technical and economic feasibility of development alternatives at the mine to enable us to continue to access our pollucite reserves, and recently began a development project in a portion of the mine unaffected by the instability. If this project is successfully implemented, taking into account inventory on hand and our expected consumption rate, we expect our supply of cesium products to last approximately five years, excluding the potential for additional cesium supply from other projects that we are currently pursuing. We will continue to assess options to access the additional reserves in the mine, assess various technologies to augment our cesium supply, seek alternative sources of ore, and be more selective in the projects we supply to minimize our annual consumption of cesium. These actions will likely affect costs, pricing and volumes in the Specialty Fluids business.
Purification Solutions Sales and EBIT for Purification Solutions for fiscal 2015, 2014 2013 and 20122013 are as follows: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Purification Solutions Sales | | $ | 315 | | | $ | 328 | | | $ | 61 | | | $ | 296 | | | $ | 315 | | | $ | 328 | | | | | | | | | | | | | Purification Solutions EBIT | | $ | (19 | ) | | $ | (4 | ) | | $ | 5 | | | $ | 5 | | | $ | (19 | ) | | $ | (4 | ) | | | | | | | | | | | |
Sales in Purification Solutions decreased by $19 million in fiscal 2015 when compared to fiscal 2014 due to an unfavorable comparison of foreign currency translation ($23 million), lower royalties ($3 million) and lower volumes ($3 million) partially offset by a more favorable price and product mix (combined $10 million). The more favorable price and product mix was primarily due to the implementation of price increases and an improved product mix. Overall volumes declined slightly from the effect on volumes of increasing prices, however, volumes sold to mercury removal customers increased. This was due to the first wave of customers complying with the MATS regulation in April of 2015. Sales in Purification Solutions decreased by $13 million in fiscal 2014 when compared to fiscal 2013 due to lower volumes ($31 million) partially offset by a more favorable price and product mix (combined $13 million) and a favorable comparison of foreign currency movementstranslation ($5 million). Lower volumes were driven by a decline in demand in the air and gas sector. The more favorable price and product mix was primarily due to the implementation of price increases. The acquisition of Purification Solutions was completed on July 31, 2012. SalesEBIT in Purification Solutions increased by $267$24 million in fiscal 20132015 when compared to fiscal 2012 because our results for2014 driven by improved unit margins ($21 million), lower fixed costs ($14 million), and the twelve month period ended September 30, 2012 included two monthsfavorable comparison of results.foreign currency translation ($2 million). These improvements were partially offset by lower royalties ($3 million) and the absence of a one-time insurance recovery in fiscal 2014 that did not repeat in fiscal 2015 ($9 million), and lower volumes ($2 million). Higher unit margins were due to the implementation of price increases, improvement in the product mix and lower variable costs. Lower fixed costs were a result of improved operational performance, cost management efforts and $5 million of lower depreciation and amortization.
EBIT in Purification Solutions decreased by $15 million in fiscal 2014 when compared to fiscal 2013 driven by lower volumes ($17 million) and higher fixed costs ($10 million). These declines were partially offset by higher unit margins ($2 million) due to price increases and the benefit from insurance proceeds ($9 million). Lower volumes were primarily due to a decline in demand in the air and gas sector. Higher fixed costs were primarily related to higher maintenance costs and higher allocation of certain functional and indirect costs. The insurance proceeds were related to business interruption and property damage insurance recoveries for operating issues experienced in late fiscal 2013 and early fiscal 2014. 36
Specialty Fluids Sales and EBIT for Specialty Fluids for fiscal 2015, 2014 and 2013 are as follows: | | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Specialty Fluids Sales | | $ | 42 | | | $ | 98 | | | $ | 101 | | Specialty Fluids EBIT | | $ | 6 | | | $ | 39 | | | $ | 46 | |
Sales in Purification SolutionsSpecialty Fluids decreased by $9$56 million in fiscal 20132015 when compared to fiscal 2012. During fiscal 2013, the business experienced2014. The decrease was primarily due to lower volumes ($62 million) from lower project activity levels that resulted in lower rental and pricingsales volumes for our drilling fluids. The lower level of project activity was caused by the downturn in the oil and gas industry, which resulted in fewer investments, project delays, and air purificationstringent cost management by our customers. The decrease in volumes was partially offset by a more favorable price and product mix (combined $6 million). Sales in Specialty Fluids decreased by $3 million in fiscal 2014 when compared to fiscal 2013. The decrease was primarily due to lower volumes ($8 million) partially offset by a more favorable price and product mix (combined $6 million). EBIT in Specialty Fluids decreased by $33 million in fiscal 2015 when compared to fiscal 2014. The decrease was primarily due to lower volumes ($46 million). In response, we improved our price and product mix ($5 million) and reduced fixed costs ($8 million) to help partially offset the lower volumes. EBIT in Specialty Fluids decreased by $7 million in fiscal 2014 when compared to fiscal 2013. The decrease is primarily due to higher fixed costs ($10 million) driven by higher mine-related costs, and lower volumes ($1 million), partially offset by a more favorable price and product mix (combined $5 million). Outlook We expect modest growth in volumes in fiscal year 2016 in Reinforcement Materials and Performance Chemicals driven by demand growth for our products in the developed economies and continued economic uncertainty in Asia and South America. We anticipate continued margin pressure in the Reinforcement Materials segment during the remainder of calendar year 2015 from feedstock-related effects and an increasingly competitive environment in Asia. For Purification Solutions, we are repositioning our cost profile and until a decision from the U.S. Court of Appeals for the District of Columbia about next steps for MATS can provide clarity of direction for the regulation, we expect that Purification Solutions will operate at roughly breakeven EBIT in the near-term. Specialty Fluids continues to work on strengthening the project pipeline, but the short-term outlook remains difficult for the segment. To respond to the current environment, we remain focused on managing costs and cash flow. In October 2015, we announced our intention to implement a restructuring plan that is expected to result in Company-wide cost savings of approximately $50 million in fiscal 2016 as compared to fiscal 2015, with savings starting in the second quarter of fiscal 2016. In November 2015, we announced our intention to close our Merak, Indonesia carbon black manufacturing facility by the end market. In addition, the segment has incurred higher costs associated with plant unit outages, the reduction of inventory levels, and the allocationJanuary 2016. It is expected that this closure will result in annual cost savings of certain functional and indirect costs.approximately $8 million. We anticipate capital expenditures to be approximately $150 million in fiscal 2016. Cash Flows and Liquidity Overview Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, increased by $184$28 million during fiscal 2014.2015. The increase was largely attributable to an increase in cash and the receipt, during fiscal 2014,paydown of the final cash payment for the salecommercial paper. As of the Supermetals business, partially offset by cash used for the NHUMO acquisition. At September 30, 2014,2015, we had cash and cash equivalents of $67$77 million and currentborrowing availability under our revolving credit agreement of $720$738 million. Our revolving credit agreement, which has awas amended in October 2015 to increase the borrowing limit from $750 million limit,to $1 billion, supports our commercial paper program. The outstanding balance of commercial paper as of September 30, 20142015 was $30$12 million and is included within the Notes payable caption on our Consolidated Balance Sheets. At September 30, 2014,2015, we were in compliance with all applicable covenants including interest coverage, debt-to-EBITDAthe total consolidated debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) and subsidiary debt to total capitalization ratios.covenant. Effective October 3, 2014, we entered into a new revolving credit agreement that amended and extended our $750 million revolving credit agreement (which was scheduled to mature on August 25, 2016). The new revolving credit agreement, which matures on October 3, 2019, subject to two one-year options to extend after the first and second anniversaries of the effective date, continues to support our commercial paper program. Borrowings under the new revolving credit agreement may be used for working capital, letters of credit and other general corporate purposes. The new revolving credit agreement contains affirmative and negative covenants, a single financial covenant (debt-to-EBITDA) and events of default customary for financings of this type.
We generally manage our cash and debt on a global basis to provide for working capital requirements as needed by region or site. Cash and debt are generally denominated in the local currency of the subsidiary holding the assets or liabilities, except where there are operational cash flow reasons to hold non-functional currency or debt. AsThe vast majority of September 30, 2014, our cash and cash equivalent holdings included $4 milliontend to be held outside the U.S., as excess cash balances in the U.S. and $63 million internationally.are generally used to repay commercial paper. We anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from our revolving credit agreement and our commercial paper program to meet our operational and capital investment needs and financial 37
obligations for the foreseeable future. Our liquidity derived from cash flows from operations is, to a large degree, predicated on our ability to collect our receivables in a timely manner, the cost of our raw materials, and our ability to manage inventory levels. Discontinued Operations
Our Consolidated Statements of Cash Flows have been presented to include discontinued operations with continuing operations. Therefore, unless noted otherwise, the following discussion of our cash flows and liquidity position include both continuing and discontinued operations. The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows. Cash Flows from Operating Activities Cash provided by operating activities, which consists of net income adjusted for the various non-cash items included in income, changes in working capital and changes in certain other balance sheet accounts, totaled $499 million in fiscal 2015. Operating activities provided $315 million and $419 million in fiscal 2014 and 2013, respectively. Cash provided by operating activities in fiscal 2015 was driven primarily by our non-cash charges for depreciation and amortization and asset impairments, which more than offset our net loss for the period. In addition, there was a net decrease in accounts receivable and inventories largely driven by lower raw material costs and associated price reductions. Cash provided from operating activities in fiscal 2014 was driven primarily by net income of $218 million plus $201 million of depreciation and amortization and $25 million of dividends from equity affiliates, $14 million of which was received from NHUMO prior to our purchase of the remaining outstanding common stock of the joint venture. These sources of cash were partially offset by an increase in accounts receivable and inventories due to higher sales and the inclusion of NHUMO balances. Cash provided from operating activities in fiscal 2013 was driven primarily by net income of $160 million plus $190 million of depreciation and amortization and a decrease in accounts receivable and inventories. In addition to the factors noted above, the following other elements of operations have a bearing on operating cash flows: Restructurings — As of September 30, 2015, we had $9 million of total restructuring costs in accrued expenses in the consolidated balance sheet related to our global restructuring activities. We made cash payments of $24 million during fiscal 2015 and expect to make cash payments of approximately $9 million in fiscal 2016 and thereafter related to these restructuring plans. In the first quarter of fiscal 2016, we announced our intention to restructure our operations subject to local consultation requirements and processes in certain locations. Additionally, we announced our commitment to close our carbon black manufacturing facility in Merak, Indonesia. These actions are expected to result in net cash outlays of approximately $38 million, substantially all of which is expected to be paid in fiscal 2016. We may receive cash in the future from the sale of certain assets and land relating to restructured sites, which is not included in these amounts. Environmental Reserves and Litigation Matters—As of September 30, 2015, we have recorded a $16 million reserve for environmental remediation costs at various sites. These sites are primarily associated with businesses divested in prior years. We anticipate that the expenditures at these sites will be made over a number of years, and will not be concentrated in any one year. Additionally, as of September 30, 2015 we have recorded an $11 million reserve for respirator claims. These expenditures will be incurred over many years. We also have other litigation costs arising in the ordinary course of business. The following table represents the estimated future payments related to our environmental reserve. | | Future Payments by Fiscal Year | | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | Thereafter | | | Total | | | | (Dollars in millions) | | Environmental | | $ | 2 | | | $ | 3 | | | $ | 3 | | | $ | 1 | | | $ | 1 | | | $ | 6 | | | $ | 16 | |
Cash Flows from Investing Activities In fiscal 2015, capital expenditures were $141 million. Major capital project expenditures were related to the completion of our lignite mine development project in the Purification Solutions segment, mine development activities for our Specialty Fluids segment, and sustaining and compliance capital projects at our operating facilities. In fiscal 2014, capital expenditures of $171 million and cash paid for NHUMO of $73 million (net of cash acquired of $7 million) were partially offset by the receipt of the final cash payment for the sale of the Supermetals business of $215 million. Capital expenditures were primarily related to our lignite mine development project in the Purification Solutions segment, sustaining and compliance capital projects at our operating facilities, and mine development activities for the Specialty Fluids segment. In fiscal 2013, investing activities consumed $227 million of cash and were primarily driven by capital expenditures of $264 million partially offset by cash received from the notes receivable from the sale of the Supermetals business ($40 million in total, comprised of $39 million of principal and $1 million of interest). 38
Capital expenditures for fiscal 2016 are expected to be approximately $150 million. Our planned capital spending program for fiscal 2016 is primarily for sustaining and compliance capital projects at our operating facilities. In January 2012, we completed the sale of our Supermetals business, which we classified as discontinued operations beginning in the fourth quarter of fiscal 2011 when we entered into the sale and purchase agreement. In connection with the sale, we received $175 million on the closing date and notes for additional minimum consideration totaling approximately $277 million that were payable at various dates through March 2014. Total cash proceeds collected were $452 million, of which the final payment of $215 million was received in fiscal 2014. In July 2014, we completed the sale of our Security Materials business, which we classified as discontinued operations. In connection with the sale, we received approximately $20 million in cash proceeds. The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows.
Cash Flows from Operating Activities
Cash provided by operating activities, which consists of net income adjusted for the various non-cash items included in income, changes in working capital (inventories plus accounts and notes receivable, less accounts payable and accrued liabilities) and changes in certain other balance sheet accounts, totaled $315 million in fiscal 2014. Operating activities provided $419 million and $415 million in fiscal 2013 and 2012, respectively.
Cash provided from operating activities in fiscal 2014 was driven primarily by net income of $218 million plus $201 million of depreciation and amortization and $25 million of dividends from equity affiliates. These sources of cash were partially offset by a net increase in working capital. Our working capital increase during fiscal 2014 was driven primarily by higher Accounts receivable and Inventories.
Cash provided from operating activities in fiscal 2013 was driven primarily by net income of $160 million plus $190 million of depreciation and amortization and a decrease in working capital. The increase in fiscal 2013 depreciation and amortization when compared to fiscal 2012 was driven primarily by higher amortization of intangible assets related to the fiscal 2012 acquisition of Norit N.V. Our fiscal 2013 working capital decrease when compared to fiscal 2012 was primarily driven by lower Accounts receivable and lower Inventories partially offset by lower Accounts payable and accrued liabilities.
Cash generated from operating activities in fiscal 2012 was driven primarily by net income of $406 million plus $154 million of depreciation and amortization and a decrease in working capital. Our
fiscal 2012 working capital decrease when compared to fiscal 2011 was primarily driven by higher Accounts payable and accrued liabilities partially offset by higher Inventories.
In addition to the working capital movements noted above, the following other elements of operations have had a bearing on operating cash flows:
Restructurings—As of September 30, 2014, we had $19 million of total restructuring costs in accrued expenses in the consolidated balance sheet related to our global restructuring activities. We made cash payments of $15 million during fiscal 2014 related to these restructuring plans. We expect to make cash payments related to these restructuring activities of approximately $32 million in fiscal 2015 and thereafter (which includes the $19 million already accrued in the consolidated balance sheet as of September 30, 2014). We may receive cash in the future from the sale of certain assets and land relating to restructured sites, which is not included in these amounts.
Environmental Reserves and Litigation Matters—As of September 30, 2014, we have recorded a $17 million reserve, substantially all of which is accounted for on an undiscounted basis for environmental remediation costs at various sites. These sites are primarily associated with businesses divested in prior years. We anticipate that the expenditures at these sites will be made over a number of years, and will not be concentrated in any one year. Additionally, as of September 30, 2014 we have recorded a $13 million reserve for respirator claims. These expenditures will be incurred over many years. We also have other litigation costs arising in the ordinary course of business.
The following table represents the estimated future payments related to our environmental reserve.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Future Payments by Fiscal Year | | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Thereafter | | | Total | | | | (Dollars in millions) | | Environmental | | $ | 4 | | | $ | 6 | | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 4 | | | $ | 17 | |
Cash Flows from Investing Activities
In fiscal 2014, capital expenditures of $171 million and cash paid for NHUMO of $73 million (net of cash acquired of $7 million) were partially offset by the receipt of the final cash payment for the sale of the Supermetals business of $215 million. In fiscal 2013, investing activities consumed $227 million of cash and were primarily driven by capital expenditures of $264 million partially offset by cash received from the notes receivable from the sale of the Supermetals business ($40 million in total, comprised of $39 million of principal and $1 million of interest).
Capital expenditures totaled $171 million, $264 million and $281 million in fiscal 2014, 2013 and 2012, respectively. In each of these years, expenditures were primarily related to expansion of our manufacturing footprint in the Asia Pacific region, the development of our lignite mine in Texas, sustaining and compliance capital projects at our operating facilities, investments in energy recovery technology, and capital spending required for process technology and product differentiation projects.
Capital expenditures for fiscal 2015 are expected to be between $200 million and $250 million. Our planned capital spending program for fiscal 2015 is primarily for sustaining and compliance capital projects at our operating facilities, investments in energy related projects, and site-development initiatives.
Cash Flows from Financing Activities Financing activities consumed $256 million of cash in fiscal 2015 compared to $302 million of cash in fiscal 2014 compared to consumingand $206 million of cash in fiscal 2013 and providing $606 million in fiscal 2012.2013. During fiscal 2015, our overall debt balance decreased by $78 million. The decrease was driven primarily by our repayment of certain long-term debt and commercial paper. As of September 30, 2015, we had outstanding notes under our commercial paper program in an aggregate amount of $12 million, with a weighted average interest rate of 0.36%. During fiscal 2014, our overall debt balance decreased by $226 million. The decrease was driven primarily by our repayment of commercial paper using the cash received from the sale of the Supermetals business. As of September 30, 2014, we had outstanding notes under our commercial paper program in an aggregate amount of $30 million, with a weighted average interest rate of 0.25%. In fiscal 2013, our overall debt balance decreased by $123 million primarily driven by cash generated from operations which was used to repay short-term debt offset by dividend payments to our stockholders of $51 million. Long-term debt of $175 million with an interest rate of 5.25% matured during fiscal 2013, and was repaid using our commercial paper program. In addition, derivatives related to this debt were settled at the time of maturity and consumed $31 million of cash. As of September 30, 2013, we had outstanding notes under our commercial paper program in an aggregate amount of $241 million with a weighted average interest rate of 0.32%.
Debt
The following table provides a summary of our outstanding debt. | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Notes payable | | $ | 44 | | | $ | 264 | | | $ | 22 | | | $ | 44 | | Variable rate debt | | | 28 | | | | 47 | | | | — | | | | 28 | | | | | | | | | | Total variable rate debt | | | 72 | | | | 311 | | | | 22 | | | | 72 | | Fixed rate debt, net of discount | | | 984 | | | | 971 | | | | 958 | | | | 984 | | | | | | | | | | Unamortized bond discounts | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | (1 | ) | Capital leases | | | 17 | | | | 18 | | | | 14 | | | | 17 | | | | | | | | | | Total debt | | $ | 1,072 | | | $ | 1,298 | | | $ | 993 | | | $ | 1,072 | | | | | | | | | |
At September 30, 2014,2015, we had $720$738 million of availability under our credit agreement. Our long-term total debt, of which $24$1 million is current, matures at various times as presented in Note I.J. The weighted-average interest rate on our fixed rate long-term debt was 4.07%4.04% as of September 30, 2014. The weighted-average interest rate on variable interest rate long-term debt was 6.67% as of September 30, 2014.2015. At September 30, 2014,2015, we have provided standby letters of credit totaling $10$11 million, which expire throughout fiscal 2015.2016. On October 23, 2015, we entered into a new revolving credit agreement that amended and extended our $750 million revolving credit agreement (which was scheduled to mature October 3, 2019). With this amendment and extension, we increased our borrowing availability to $1 billion. The new credit agreement matures on October 23, 2020, subject to two one-year options to extend on the first and second anniversaries of the effective date. The new credit agreement continues to support our commercial paper program. Borrowings under the new revolving credit agreement may be used for working capital, letters of credit and other general corporate purposes. The new revolving credit agreement contains affirmative and negative covenants, a single financial covenant (consolidated total debt to consolidated EBITDA) and events of default customary for financings of this type. We issued $300 million of 5% fixed rate debt in fiscal 2009 that matures in early fiscal 2017 (October 1, 2016). Our intention is to refinance these securities prior to maturity during fiscal 2016. Share repurchases During fiscal 20142015 and fiscal 2012,2014, we repurchased approximately 0.22.3 million and 1.10.2 million shares of our common stock on the open market for an aggregate purchase price of $11$96 million and $36$11 million, respectively. We did not make any repurchases on the open market in fiscal 2013. As of September 30, 2014,2015, we had approximately 1.43.7 million shares available for repurchase under the Board of Directors’ share repurchase authorization. Dividend payments In fiscal 2015, 2014 2013 and 2012,2013, we paid cash dividends on our common stock of $0.88, $0.84 $0.80 and $0.76$0.80 per share, respectively. These cash dividend payments totaled $56 million in fiscal 2015, $54 million in fiscal 2014, and $51 million in fiscal 2013, and $49 million in fiscal 2012.2013. 39
Venezuela We own 49% of an operating carbon black affiliate in Venezuela, which is accounted for as an equity affiliate, through wholly- ownedwholly-owned subsidiaries that carry the investment and receive its dividends. As of September 30, 2014,2015, these subsidiaries carried the operating affiliate investment of $17$14 million and held 1918 million bolivars (less than $1 million) in cash. During fiscal 2015, 2014 and 2013, and 2012, the operating affiliate declaredwe received dividends in the amounts of $6 million, $5 million $3 million and $6$3 million, respectively, which were paid in U.S. dollars and repatriated to our wholly-owned subsidiaries.dollars. During the second quarter of fiscal 2014, the Venezuelan government enacted several changes to Venezuela’s foreign exchange regime, introducing a multi-tier foreign exchange system whereby there are now three exchange rate mechanisms available to convert Venezuelan bolivars to U.S. dollars. In March 2014, the Venezuelan government created a currency exchange mechanism referred to as SICAD 2 (Supplementary System for the Administration of Foreign Currency) and allowed its use by all entities for all transactions. The exchange rate on March 31, 2014 under SICAD 2 was 50.8 bolivars to the U.S. dollar (B/$) compared to the previously used official exchange rate of 6.3 B/$. A significant portion of our operating affiliate’s sales are exports denominated in U.S. dollars. The Venezuelan government mandates that a certain percentage of the dollars collected from these sales be converted into bolivars. Since theThe operating affiliate and our wholly owned subsidiaries used an exchange rate that was made available to us when converting these dollars into bolivars was the SICAD 2 exchange rate, the operating affiliate remeasured itsto remeasure their bolivar denominated monetary accounts at that rate.accounts. The negative impact of the exchange rate devaluationmade available to us on the operating affiliate’s results was $8 million, of which our share was $4 million as of September 30, 2014. The SICAD 2 rate at September 30, 20142015 was 50.0 B/$.
In addition, in the second quarter of fiscal 2014, we remeasured the bolivar denominated monetary accounts in our wholly-owned subsidiaries at the SICAD 2 rate as it was determined that this exchange mechanism is applicable to these subsidiaries. This resulted in the recognition of a $2 million loss which was recorded within Other income (expense) within the Consolidated Statements of Operations. We also recognized a tax benefit of $2 million from a reduction in its bolivar denominated deferred tax liability due52 bolivars to the impact of the devaluation of the bolivar on unremitted earnings.U.S. dollar (B/$).
The operating entity has generally been profitable and has significant export operations from which it is entitled to retain a certain percentage of the foreign currency that it collects, which is principally the U.S. dollar.profitable. We continue to closely monitor developments in Venezuela and their potential impact on the recoverability of our equity affiliate investment. We closely monitor our ability to convert our bolivar holdings into U.S. dollars, as we intend to convert substantially all bolivars held by our wholly-owned subsidiaries in Venezuela to U.S. dollars as soon as practical. Any future change in the SICAD 2exchange rate or opening of additional parallel markets could cause us to change the exchange rate we use and result in gains or losses on the bolivar denominated assets held by our wholly-owned subsidiaries. Employee Benefit Plans As of September 30, 2014,2015, we had a consolidated pension obligation, net of the fair value of plan assets, of $176$139 million, comprised of $109$86 million for pension benefit plan liabilities and $67$53 million for postretirement benefit plan liabilities. The $109$86 million of unfunded pension benefit plan liabilities is derived as follows: | | | U.S. | | Foreign | | Total | | | U.S. | | | Foreign | | | Total | | | | (Dollars in millions) | | | (Dollars in millions) | | Fair Value of Plan Assets | | $ | 167 | | | $ | 388 | | | $ | 555 | | | $ | 153 | | | $ | 279 | | | $ | 432 | | Benefit Obligation | | | (173 | ) | | | (491 | ) | | | (664 | ) | | $ | 170 | | | $ | 348 | | | $ | 518 | | | | | | | | | | | | | Unfunded Status | | $ | (6 | ) | | $ | (103 | ) | | $ | (109 | ) | | $ | (17 | ) | | $ | (69 | ) | | $ | (86 | ) | | | | | | | | | | | |
In fiscal 2014,2015, we made cash contributions totaling approximately $10$9 million to our foreign pension benefit plans and $3 million to a U.S. pension plan. Forplans. In fiscal 2015,2016, we expect to make cash contributions of less than $1 million to our U.S. pension plan and approximately $9$8 million to our foreign pension plans. Effective October 1, 2014, we transferred the defined benefit obligations and pension plan assets in one of our foreign defined benefit plans to a multi-employer plan. As a result of the transfer an estimated pre-tax charge of $18 million will be recorded in the first quarter of fiscal 2015.
The $67$53 million of unfunded postretirement benefit plan liabilities is comprised of $50$38 million for our U.S. and $17$15 million for our foreign postretirement benefit plans. These postretirement benefit plans provide certain health care and life insurance benefits for retired employees. Typical of such plans, our postretirement plans are unfunded and, therefore, have no plan assets. We fund these plans as claims or insurance premiums come due. In fiscal 2014,2015, we paid postretirement benefits of $4 million under our U.S. postretirement plans and less than $1 million under our foreign postretirement plans. For fiscal 2015,2016, we expect to make benefit payments of approximately $4 million under our U.S. postretirement plans and less than $1 million under our foreign postretirement plans. Off-balance sheet arrangements We had no material transactions that meet the definition of an off-balance sheet arrangement. Contractual Obligations The following table sets forth our long-term contractual obligations. Variable interest is based on the variable debt outstanding and prevailing variable interest rates as of September 30, 2014. | | | Payments Due by Fiscal Year | | | Payments Due by Fiscal Year | | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Thereafter | | | Total | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | Thereafter | | | Total | | | | (Dollars in millions) | | | (Dollars in millions) | | Contractual Obligations(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Purchase Commitments | | $ | 368 | | | $ | 302 | | | $ | 274 | | | $ | 267 | | | $ | 259 | | | $ | 2,490 | | | $ | 3,960 | | | $ | 302 | | | $ | 225 | | | $ | 216 | | | $ | 212 | | | $ | 174 | | | $ | 2,001 | | | $ | 3,130 | | Long-term debt | | | 23 | | | | 7 | | | | 314 | | | | 265 | | | | 30 | | | | 373 | | | | 1,012 | | | — | | | | 305 | | | | 250 | | | | 30 | | | — | | | | 373 | | | | 958 | | Capital lease obligations(2) | | | 4 | | | | 4 | | | | 4 | | | | 3 | | | | 3 | | | | 21 | | | | 39 | | | | 3 | | | | 4 | | | | 3 | | | | 3 | | | | 3 | | | | 17 | | | | 33 | | Fixed interest on long-term debt | | | 40 | | | | 40 | | | | 25 | | | | 19 | | | | 15 | | | | 59 | | | | 198 | | | | 39 | | | | 24 | | | | 19 | | | | 15 | | | | 15 | | | | 30 | | | | 142 | | Variable interest on long-term debt | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | Operating leases | | | 24 | | | | 19 | | | | 13 | | | | 11 | | | | 10 | | | | 70 | | | | 147 | | | | 21 | | | | 14 | | | | 12 | | | | 10 | | | | 8 | | | | 67 | | | | 132 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 460 | | | $ | 372 | | | $ | 630 | | | $ | 565 | | | $ | 317 | | | $ | 3,013 | | | $ | 5,357 | | | $ | 365 | | | $ | 572 | | | $ | 500 | | | $ | 270 | | | $ | 200 | | | $ | 2,488 | | | $ | 4,395 | | | | | | | | | | | | | | | | | | | | | | | | |
40
(1) | We are unable to estimate the timing of potential future payments related to our accrual for uncertain tax positions in the amount of $38$16 million at September 30, 2014.2015. |
(2) | Capital lease obligations include executory costs and interest. |
Purchase commitments We have entered into long-term, volume-based purchase agreements primarily for the purchase of raw materials and natural gas with various key suppliers in Reinforcement Materials, Performance Materials,Chemicals, and Purification Solutions. Under certain of these agreements the quantity of material being purchased is fixed, but the price we pay changes as market prices change. For purposes of the table above, current purchase prices have been used to quantify total commitments. Capital Leases We have capital lease obligations primarily for certain equipment and buildings. These obligations are payable over the next 1716 years. Operating Leases We have operating leases primarily comprised of leases for transportation vehicles, warehouse facilities, office space, and machinery and equipment. Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through long- and short-term borrowings and denominate our transactions in a variety of foreign currencies. Changes in these rates may have an impact on future cash flows and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We have policies governing our use of derivative instruments, and we do not enter into financial instruments for trading or speculative purposes. By using derivative instruments, we are subject to credit and market risk. The derivative instruments are booked to our balance sheet at fair market value and reflect the asset or (liability) position as of September 30, 2014.2015. If a counterparty fails to fulfill its performance obligations under a derivative contract, our exposure will equal the fair value of the derivative. Generally, when the fair value of a derivative contract is positive, the counterparty owes Cabot, thus creating a payment risk for Cabot. We minimize counterparty credit (or repayment) risk by entering into these transactions with major financial institutions of investment grade credit rating. As of September 30, 2014,2015, the counterpartiescounterparty that we havehad executed derivatives with werewas rated between A- and AA-, inclusive, by Standard and Poor’s. Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow. Foreign Currency Risk Our international operations are subject to certain risks, including currency exchange rate fluctuations and government actions. Foreign currency exposures also relate to assets and liabilities denominated in foreign currencies other than the functional currency of a given subsidiary as well as the risk that currency fluctuations could affect the dollar value of future cash flows generated in foreign currencies. Accordingly, we use short-term forward contracts to minimizereduce the exposure to foreign currency risk. At September 30, 2014,2015, we had $32$2 million in net notional foreign currency contracts, which were denominated in British pound sterling Brazilian real, and Czech koruna. These forwards had a fair value of less than $1 million as of September 30, 2014.2015. In certain situations where we have a long-term commitment denominated in a foreign currency we may enter into appropriate financial instruments in accordance with our risk management policy to hedge future cash flow exposures. The primary currencies for which we have exchange rate exposure are the Euro, the Yen and the Brazilian Real. In fiscal year 2015, the unfavorable impact from foreign currency translations on our business segment EBIT was $20 million, affecting most significantly the results of the Performance Chemicals segment. This was largely from the depreciation of the Euro versus the U.S. dollar, which depreciated by 13% from September 30, 2014 to September 30, 2015, and the Yen versus the U.S. dollar, which depreciated by 9% in that same period. In addition, we recognized an $8 million unfavorable impact in Other (expense) income in fiscal 2015 related to the translation of monetary assets and liabilities, largely attributable to the depreciation of the Brazilian Real by 66% from September 30, 2014 to September 30, 2015. 41
Item 8. | Financial StatementsStatements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS | Description | Description | | Page | | Description | Page | (1) | | Consolidated Statements of Operations for each of the fiscal years ended September 30, 2015, 2014, and 2013 | 43 | (1)(2) | | Consolidated Statements of Operations for each of the fiscal years ended September 30, 2014, 2013, and 2012 | | | 53 | | Consolidated Statements of Comprehensive (Loss) Income for each of the fiscal years ended September 30, 2015, 2014, and 2013 | 44 | (2)(3) | | Consolidated Statements of Comprehensive Income for each of the fiscal years ended September 30, 2014, 2013, and 2012 | | | 54 | | Consolidated Balance Sheets at September 30, 2015 and 2014 | 45 | (3)(4) | | Consolidated Balance Sheets at September 30, 2014 and 2013 | | | 55 | | Consolidated Statements of Cash Flows for each of the fiscal years ended September 30, 2015, 2014, and 2013 | 47 | (4)(5) | | Consolidated Statements of Cash Flows for each of the fiscal years ended September 30, 2014, 2013, and 2012 | | | 57 | | Consolidated Statements of Changes in Stockholders’ Equity for each of the fiscal years ended September 30, 2015, 2014, and 2013 | 48 | (5)(6) | | Consolidated Statements of Changes in Stockholders’ Equity for each of the fiscal years ended September 30, 2014, 2013, and 2012 | | | 58 | | Notes to the Consolidated Financial Statements | 51 | (6)(7) | | Notes to the Consolidated Financial Statements | | | 61 | | Report of Independent Registered Public Accounting Firm | 91 | (7) | | Report of Independent Registered Public Accounting Firm | | | 112 | | |
42
CABOT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (In millions, except per share amounts) | | | (In millions, except per share amounts) | | Net sales and other operating revenues | | $ | 3,647 | | | $ | 3,456 | | | $ | 3,291 | | | $ | 2,871 | | | $ | 3,647 | | | $ | 3,456 | | Cost of sales | | | 2,926 | | | | 2,823 | | | | 2,647 | | | | 2,286 | | | | 2,926 | | | | 2,823 | | | | | | | | | | | | | Gross profit | | | 721 | | | | 633 | | | | 644 | | | | 585 | | | | 721 | | | | 633 | | Selling and administrative expenses | | | 326 | | | | 297 | | | | 281 | | | | 282 | | | | 326 | | | | 297 | | Research and technical expenses | | | 60 | | | | 68 | | | | 72 | | | | 58 | | | | 60 | | | | 68 | | | | | | | | | | | | | Income from operations | | | 335 | | | | 268 | | | | 291 | | | Purification Solutions long-lived assets impairment charge (Note G) | | | | 210 | | | | — | | | | — | | Purification Solutions goodwill impairment charge (Note G) | | | | 352 | | | | — | | | | — | | (Loss) income from operations | | | | (317 | ) | | | 335 | | | | 268 | | Interest and dividend income | | | 3 | | | | 5 | | | | 4 | | | | 4 | | | | 3 | | | | 5 | | Interest expense | | | (55 | ) | | | (62 | ) | | | (46 | ) | | | (53 | ) | | | (55 | ) | | | (62 | ) | Other income (expense) | | | 25 | | | | (1 | ) | | | (3 | ) | | | | | | | | | | | | | Income from continuing operations before income taxes and equity in earnings of affiliated companies | | | 308 | | | | 210 | | | | 246 | | | Provision for income taxes | | | (92 | ) | | | (60 | ) | | | (55 | ) | | Other (expense) income | | | | (11 | ) | | | 25 | | | | (1 | ) | (Loss) income from continuing operations before income taxes and equity in earnings of affiliated companies | | | | (377 | ) | | | 308 | | | | 210 | | Benefit (provision) for income taxes | | | | 45 | | | | (92 | ) | | | (60 | ) | Equity in earnings of affiliated companies, net of tax | | | — | | | | 11 | | | | 11 | | | | 4 | | | | — | | | | 11 | | | | | | | | | | | | | Income from continuing operations | | | 216 | | | | 161 | | | | 202 | | | Income (loss) from discontinued operations, net of tax of $2, $(6) and $116 | | | 2 | | | | (1 | ) | | | 204 | | | | | | | | | | | | | | Net income | | | 218 | | | | 160 | | | | 406 | | | Net income attributable to noncontrolling interests, net of tax of $5, $5 and $7 | | | 19 | | | | 7 | | | | 18 | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 199 | | | $ | 153 | | | $ | 388 | | | | | | | | | | | | | | (Loss) income from continuing operations | | | | (328 | ) | | | 216 | | | | 161 | | Income (loss) from discontinued operations, net of tax of $-, $2 and $(6) | | | | 2 | | | | 2 | | | | (1 | ) | Net (loss) income | | | | (326 | ) | | | 218 | | | | 160 | | Net income attributable to noncontrolling interests, net of tax of $5, $5 and $5 | | | | 8 | | | | 19 | | | | 7 | | Net (loss) income attributable to Cabot Corporation | | | $ | (334 | ) | | $ | 199 | | | $ | 153 | | Weighted-average common shares outstanding, in millions: | | | | | | | | | | | | | | | | | | | Basic | | | 64.4 | | | | 63.8 | | | | 63.4 | | | | 63.4 | | | | 64.4 | | | | 63.8 | | | | | | | | | | | | | Diluted | | | 65.1 | | | | 64.5 | | | | 64.2 | | | | 63.4 | | | | 65.1 | | | | 64.5 | | | | | | | | | | | | | Income per common share: | | | | | | | | (Loss) income per common share: | | | | | | | | | | | | | | Basic: | | | | | | | | | | | | | | | | | | | Income from continuing operations attributable to Cabot Corporation | | $ | 3.04 | | | $ | 2.39 | | | $ | 2.88 | | | (Loss) income from continuing operations attributable to Cabot Corporation | | | $ | (5.29 | ) | | $ | 3.04 | | | $ | 2.39 | | Income (loss) from discontinued operations | | | 0.02 | | | | (0.01 | ) | | | 3.19 | | | $ | 0.02 | | | | 0.02 | | | | (0.01 | ) | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 3.06 | | | $ | 2.38 | | | $ | 6.07 | | | | | | | | | | | | | | Net (loss) income attributable to Cabot Corporation | | | $ | (5.27 | ) | | $ | 3.06 | | | $ | 2.38 | | Diluted: | | | | | | | | | | | | | | | | | | | Income from continuing operations attributable to Cabot Corporation | | $ | 3.01 | | | $ | 2.37 | | | $ | 2.84 | | | (Loss) income from continuing operations attributable to Cabot Corporation | | | $ | (5.29 | ) | | $ | 3.01 | | | $ | 2.37 | | Income (loss) from discontinued operations | | | 0.02 | | | | (0.01 | ) | | | 3.15 | | | $ | 0.02 | | | | 0.02 | | | | (0.01 | ) | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 3.03 | | | $ | 2.36 | | | $ | 5.99 | | | | | | | | | | | | | | Net (loss) income attributable to Cabot Corporation | | | $ | (5.27 | ) | | $ | 3.03 | | | $ | 2.36 | | Dividends per common share | | $ | 0.84 | | | $ | 0.80 | | | $ | 0.76 | | | $ | 0.88 | | | $ | 0.84 | | | $ | 0.80 | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 43
CABOT CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (In millions) | | Net income | | $ | 218 | | | $ | 160 | | | $ | 406 | | Other comprehensive (loss) income, net of tax | | | | | | | | | | | | | Foreign currency translation adjustment (net of tax (benefit) provision of $(10), $(12), $2) | | | (131 | ) | | | (10 | ) | | | 3 | | Unrealized holding gains (losses) arising during the period (net of tax provision of $—, $1, $—) | | | — | | | | 2 | | | | (1 | ) | Pension and other postretirement benefit liability adjustments | | | | | | | | | | | | | Pension and other postretirement benefit liability adjustments arising during the period (net of tax (benefit) provision of $(1), $13, $(9)) | | | (40 | ) | | | 20 | | | | (18 | ) | Amortization of net loss and prior service credit included in net periodic pension cost (net of tax provision of $—, $—, $—) | | | — | | | | 2 | | | | 1 | | | | | | | | | | | | | | | Other comprehensive (loss) income | | | (171 | ) | | | 14 | | | | (15 | ) | | | | | | | | | | | | | | Comprehensive income | | | 47 | | | | 174 | | | | 391 | | Net income attributable to noncontrolling interests, (net of tax provision of $5, $5, $7) | | | 19 | | | | 7 | | | | 18 | | Noncontrolling interests foreign currency translation adjustment | | | (4 | ) | | | 3 | | | | (1 | ) | | | | | | | | | | | | | | Comprehensive income attributable to noncontrolling interests | | | 15 | | | | 10 | | | | 17 | | | | | | | | | | | | | | | Comprehensive income attributable to Cabot Corporation | | $ | 32 | | | $ | 164 | | | $ | 374 | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (In millions) | | Net (loss) income | | $ | (326 | ) | | $ | 218 | | | $ | 160 | | Other comprehensive (loss) income, net of tax | | | | | | | | | | | | | Foreign currency translation adjustment (net of tax (benefit) provision of $(3), $(10), ($12)) | | | (270 | ) | | | (131 | ) | | | (10 | ) | Unrealized holding gains (losses) arising during the period (net of tax provision of $—, $—, $1) | | | — | | | | — | | | | 2 | | Pension and other postretirement benefit liability adjustments | | | | | | | | | | | | | Pension and other postretirement benefit liability adjustments arising during the period (net of tax provision (benefit) of $5, $(1), $13) | | | 28 | | | | (40 | ) | | | 20 | | Amortization of net loss and prior service credit included in net periodic pension cost (net of tax provision of $—, $—, $—) | | | 3 | | | | — | | | | 2 | | Other comprehensive (loss) income | | | (239 | ) | | | (171 | ) | | | 14 | | Comprehensive (loss) income | | | (565 | ) | | | 47 | | | | 174 | | Net income attributable to noncontrolling interests, (net of tax provision of $5, $5, $5) | | | 8 | | | | 19 | | | | 7 | | Noncontrolling interests foreign currency translation adjustment | | | (4 | ) | | | (4 | ) | | | 3 | | Comprehensive income attributable to noncontrolling interests | | | 4 | | | | 15 | | | | 10 | | Comprehensive (loss) income attributable to Cabot Corporation | | $ | (569 | ) | | $ | 32 | | | $ | 164 | |
The accompanying notes are an integral part of these consolidated financial statements. 44
CABOT CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (In millions, except share and per share amounts) | | | (In millions, except share and per share amounts) | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 67 | | | $ | 95 | | | $ | 77 | | | $ | 67 | | Accounts and notes receivable, net of reserve for doubtful accounts of $7 and $8 | | | 688 | | | | 633 | | | Accounts and notes receivable, net of reserve for doubtful accounts of $7 and $7 | | | | 477 | | | | 688 | | Inventories | | | 498 | | | | 455 | | | | 397 | | | | 498 | | Prepaid expenses and other current assets | | | 69 | | | | 58 | | | | 54 | | | | 69 | | Notes receivable from sale of business | | | — | | | | 214 | | | Deferred income taxes | | | 42 | | | | 36 | | | | 43 | | | | 42 | | Current assets held for sale | | | — | | | | 4 | | | | | | | | | | | Total current assets | | | 1,364 | | | | 1,495 | | | | 1,048 | | | | 1,364 | | | | | | | | | | Property, plant and equipment | | | 3,710 | | | | 3,663 | | | | 3,385 | | | | 3,710 | | Accumulated depreciation | | | (2,129 | ) | | | (2,063 | ) | | | (2,002 | ) | | | (2,129 | ) | | | | | | | | | Net property, plant and equipment | | | 1,581 | | | | 1,600 | | | | 1,383 | | | | 1,581 | | | | | | | | | | Goodwill | | | 536 | | | | 502 | | | | 154 | | | | 536 | | Equity affiliates | | | 68 | | | | 119 | | | | 57 | | | | 68 | | Intangible assets, net | | | 347 | | | | 308 | | | | 153 | | | | 347 | | Assets held for rent | | | 56 | | | | 49 | | | | 86 | | | | 56 | | Deferred income taxes | | | 80 | | | | 68 | | | | 152 | | | | 80 | | Other assets | | | 52 | | | | 83 | | | | 42 | | | | 52 | | Noncurrent assets held for sale | | | — | | | | 9 | | | | | | | | | | | Total assets | | $ | 4,084 | | | $ | 4,233 | | | $ | 3,075 | | | $ | 4,084 | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. 45
CABOT CORPORATION CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS’ EQUITY | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (In millions, except share and per share amounts) | | | (In millions, except share and per share amounts) | | Current liabilities: | | | | | | | | | | | | | Notes payable | | $ | 44 | | | $ | 264 | | | $ | 22 | | | $ | 44 | | Accounts payable and accrued liabilities | | | 512 | | | | 534 | | | | 389 | | | | 512 | | Income taxes payable | | | 49 | | | | 30 | | | | 28 | | | | 49 | | Deferred income taxes | | | 1 | | | | 2 | | | | 1 | | | | 1 | | Current portion of long-term debt | | | 24 | | | | 14 | | | | 1 | | | | 24 | | | | | | | | | | Total current liabilities | | | 630 | | | | 844 | | | | 441 | | | | 630 | | | | | | | | | | Long-term debt | | | 1,004 | | | | 1,020 | | | | 970 | | | | 1,004 | | Deferred income taxes | | | 68 | | | | 21 | | | | 59 | | | | 68 | | Other liabilities | | | 291 | | | | 265 | | | | 240 | | | | 291 | | Redeemable Preferred Stock | | | 27 | | | | — | | | | 27 | | | | 27 | | Commitments and contingencies (Note S) | | | | | | Commitments and contingencies (Note T) | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | | | Preferred stock: | | | | | | | | | | | | | Authorized: 2,000,000 shares of $1 par value | | | | | | | | | | | | | Issued and Outstanding: None and none | | | — | | | | — | | | | — | | | | — | | Common stock: | | | | | | | | | | | | | Authorized: 200,000,000 shares of $1 par value | | | | | | | | | | | | | Issued: 64,634,731 and 64,223,985 shares | | | | | | Outstanding: 64,382,366 and 63,970,502 shares | | | 64 | | | | 64 | | | Less cost of 252,365 and 253,483 shares of common treasury stock | | | (7 | ) | | | (8 | ) | | Issued: 62,704,966 and 64,634,731 shares | | | | | | | | | | Outstanding 62,458,396 and 64,382,366 shares | | | | 63 | | | | 64 | | Less cost of 246,570 and 252,365 shares of common treasury stock | | | | (8 | ) | | | (7 | ) | Additional paid-in capital | | | 49 | | | | 39 | | | | — | | | | 49 | | Retained earnings | | | 1,900 | | | | 1,755 | | | | 1,478 | | | | 1,900 | | Deferred employee benefits | | | — | | | | (2 | ) | | Accumulated other comprehensive (loss) income | | | (64 | ) | | | 103 | | | | | | | | | | | Accumulated other comprehensive loss | | | | (299 | ) | | | (64 | ) | Total Cabot Corporation stockholders’ equity | | | 1,942 | | | | 1,951 | | | | 1,234 | | | | 1,942 | | Noncontrolling interests | | | 122 | | | | 132 | | | | 104 | | | | 122 | | | | | | | | | | Total stockholders’ equity | | | 2,064 | | | | 2,083 | | | | 1,338 | | | | 2,064 | | | | | | | | | | Total liabilities and stockholders’ equity | | $ | 4,084 | | | $ | 4,233 | | | $ | 3,075 | | | $ | 4,084 | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
46
CABOT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS | | | Years Ended September 30 | | | | | 2014 | | 2013 | | 2012 | | | Years Ended September 30 | | | | (In millions) | | | 2015 | | | 2014 | | | 2013 | | Cash Flows from Operating Activities: | | | | | | | | | | | | | | | | | | | Net income | | $ | 218 | | | $ | 160 | | | $ | 406 | | | Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | Net (loss) income | | | $ | (326 | ) | | $ | 218 | | | $ | 160 | | Adjustments to reconcile net (loss) income to cash provided (used in) by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 201 | | | | 190 | | | | 154 | | | | 183 | | | | 201 | | | | 190 | | Impairment of assets | | | 4 | | | | 16 | | | | 2 | | | Deferred tax provision (benefit) | | | 8 | | | | (9 | ) | | | (6 | ) | | Purification Solutions long-lived asset impairment charge (Note G) | | | | 210 | | | | — | | | | — | | Purification Solutions goodwill impairment charge (Note G) | | | | 352 | | | | — | | | �� | — | | Deferred tax (benefit) provision | | | | (86 | ) | | | 8 | | | | (9 | ) | Gain on existing investment in NHUMO | | | (29 | ) | | | — | | | | — | | | | — | | | | (29 | ) | | | — | | Gain on sale of business | | | (4 | ) | | | — | | | | (191 | ) | | | — | | | | (4 | ) | | | — | | Equity in earnings of affiliated companies | | | — | | | | (11 | ) | | | (11 | ) | | Employee benefit plan settlement | | | | 18 | | | | — | | | | | | Equity in net income of affiliated companies | | | | (4 | ) | | | — | | | | (11 | ) | Non-cash compensation | | | 14 | | | | 16 | | | | 18 | | | | 12 | | | | 14 | | | | 16 | | Other, net | | | 18 | | | | 2 | | | | 4 | | | Other non-cash expense | | | | 6 | | | | 22 | | | | 18 | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | Accounts and notes receivable | | | (54 | ) | | | 34 | | | | 6 | | | | 154 | | | | (54 | ) | | | 34 | | Inventories | | | (56 | ) | | | 64 | | | | (30 | ) | | | 58 | | | | (56 | ) | | | 64 | | Prepaid expenses and other assets | | | 2 | | | | 5 | | | | 26 | | | Prepaid expenses and other current assets | | | | 16 | | | | 2 | | | | 5 | | Accounts payable and accrued liabilities | | | (29 | ) | | | (18 | ) | | | 100 | | | | (75 | ) | | | (29 | ) | | | (18 | ) | Income taxes payable | | | 15 | | | | (29 | ) | | | (13 | ) | | | (21 | ) | | | 15 | | | | (29 | ) | Other liabilities | | | (14 | ) | | | (11 | ) | | | (38 | ) | | | (17 | ) | | | (14 | ) | | | (11 | ) | Cash dividends received from equity affiliates | | | 25 | | | | 8 | | | | 6 | | | | 14 | | | | 25 | | | | 8 | | Other | | | (4 | ) | | | 2 | | | | (18 | ) | | | 5 | | | | (4 | ) | | | 2 | | | | | | | | | | | | | Cash provided by operating activities | | | 315 | | | | 419 | | | | 415 | | | | 499 | | | | 315 | | | | 419 | | | | | | | | | | | | | Cash Flows from Investing Activities: | | | | | | | | | | | | | | | | | | | Additions to property, plant and equipment | | | (171 | ) | | | (264 | ) | | | (281 | ) | | | (141 | ) | | | (171 | ) | | | (264 | ) | Proceeds from sale of business | | | 20 | | | | — | | | | 181 | | | Proceeds from notes receivable from sales of business | | | | — | | | | 20 | | | | — | | Receipts from notes receivable from sale of business | | | 215 | | | | 39 | | | | 23 | | | | — | | | | 215 | | | | 39 | | Acquisition of business, net of cash acquired | | | (73 | ) | | | — | | | | (1,104 | ) | | Proceeds from sales of property, plant and equipment | | | — | | | | — | | | | 2 | | | Change in assets held for rent | | | (7 | ) | | | (2 | ) | | | (1 | ) | | | (21 | ) | | | (7 | ) | | | (2 | ) | | | | | | | | | | | | Cash paid for acquisition of business, net of cash acquired of $7 | | | | — | | | | (73 | ) | | | — | | Cash used in investing activities | | | (16 | ) | | | (227 | ) | | | (1,180 | ) | | | (162 | ) | | | (16 | ) | | | (227 | ) | | | | | | | | | | | | Cash Flows from Financing Activities: | | | | | | | | | | | | | | | | | | | Borrowings under financing arrangements | | | 13 | | | | 6 | | | | 84 | | | | — | | | | 13 | | | | 6 | | Repayments under financing arrangements | | | (17 | ) | | | (33 | ) | | | (88 | ) | | | (3 | ) | | | (17 | ) | | | (33 | ) | (Repayment) Proceeds from issuance of commercial paper, net | | | (211 | ) | | | 241 | | | | — | | | Decrease in notes payable, net | | | | — | | | | (4 | ) | | | (12 | ) | (Repayments) proceeds from issuance of commercial paper, net | | | | (18 | ) | | | (211 | ) | | | 241 | | Proceeds from long-term debt, net of issuance costs | | | 17 | | | | 117 | | | | 911 | | | | — | | | | 17 | | | | 117 | | Repayments of long-term debt | | | (23 | ) | | | (442 | ) | | | (172 | ) | | | (57 | ) | | | (23 | ) | | | (442 | ) | Decrease in notes payable, net | | | (4 | ) | | | (12 | ) | | | (42 | ) | | Settlement of derivatives | | | — | | | | (31 | ) | | | — | | | | — | | | | — | | | | (31 | ) | Proceeds from cash contributions received from noncontrolling stockholders | | | — | | | | 13 | | | | 4 | | | | — | | | | — | | | | 13 | | Purchases of common stock | | | (18 | ) | | | (6 | ) | | | (36 | ) | | | (101 | ) | | | (18 | ) | | | (6 | ) | Proceeds from sales of common stock | | | 14 | | | | 9 | | | | 10 | | | | 6 | | | | 14 | | | | 9 | | Cash dividends paid to noncontrolling interests | | | (19 | ) | | | (17 | ) | | | (16 | ) | | | (27 | ) | | | (19 | ) | | | (17 | ) | Cash dividends paid to common stockholders | | | (54 | ) | | | (51 | ) | | | (49 | ) | | | (56 | ) | | | (54 | ) | | | (51 | ) | | | | | | | | | | | | Cash (used in) provided by financing activities | | | (302 | ) | | | (206 | ) | | | 606 | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (25 | ) | | | (11 | ) | | | (7 | ) | | | | | | | | | | | | | Decrease in cash and cash equivalents | | | (28 | ) | | | (25 | ) | | | (166 | ) | | Cash used in financing activities | | | | (256 | ) | | | (302 | ) | | | (206 | ) | Effects of exchange rate changes on cash | | | | (71 | ) | | | (25 | ) | | | (11 | ) | Increase (decrease) in cash and cash equivalents | | | | 10 | | | | (28 | ) | | | (25 | ) | Cash and cash equivalents at beginning of year | | | 95 | | | | 120 | | | | 286 | | | | 67 | | | | 95 | | | | 120 | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 67 | | | $ | 95 | | | $ | 120 | | | $ | 77 | | | $ | 67 | | | $ | 95 | | | | | | | | | | | | | | | | | | | | | | | | Income taxes paid | | $ | 53 | | | $ | 84 | | | $ | 73 | | | | 78 | | | | 53 | | | | 84 | | Interest paid | | | 47 | | | | 51 | | | | 39 | | | | 42 | | | | 47 | | | | 51 | | Non-cash additions to property, plant and equipment | | | — | | | | — | | | | 4 | | |
The accompanying notes are an integral part of these consolidated financial statements
47
CABOT CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Years Ended September 30 (In millions, except shares in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2012 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Deferred Employee Benefits | | | Accumulated Other Comprehensive Income | | | Total Cabot Corporation Stockholders’ Equity | | | Non- controlling Interests | | | Total Stockholders’ Equity | | | | Shares | | | Cost | | | | | | | | | Balance at September 30, 2011 | | | 63,861 | | | $ | 63 | | | $ | 18 | | | $ | 1,314 | | | $ | (14 | ) | | $ | 106 | | | $ | 1,487 | | | $ | 129 | | | $ | 1,616 | | Net income attributable to Cabot Corporation | | | | | | | | | | | | | | | 388 | | | | | | | | | | | | 388 | | | | | | | | 388 | | Net Income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18 | | | | 18 | | Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | (14 | ) | | | (14 | ) | | | (1 | ) | | | (15 | ) | Noncontrolling interest—other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4 | | | | 4 | | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (24 | ) | | | (24 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (49 | ) | | | | | | | | | | | (49 | ) | | | | | | | (49 | ) | Issuance of stock under employee compensation plans | | | 611 | | | | 2 | | | | 13 | | | | | | | | | | | | | | | | 15 | | | | | | | | 15 | | Amortization of share-based compensation | | | | | | | | | | | 15 | | | | | | | | | | | | | | | | 15 | | | | | | | | 15 | | Purchase and retirement of common and treasury stock | | | (1,124 | ) | | | (9 | ) | | | (27 | ) | | | | | | | | | | | | | | | (36 | ) | | | | | | | (36 | ) | Principal payment by Employee Stock Ownership Plan under guaranteed loan | | | | | | | | | | | | | | | | | | | 6 | | | | | | | | 6 | | | | | | | | 6 | | Notes receivable for restricted stock—payments | | | | | | | | | | | 1 | | | | | | | | | | | | | | | | 1 | | | | | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2012 | | | 63,348 | | | $ | 56 | | | $ | 20 | | | $ | 1,653 | | | $ | (8 | ) | | $ | 92 | | | $ | 1,813 | | | $ | 126 | | | $ | 1,939 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2013 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in | | | Retained | | | Deferred Employee | | | Accumulated Other Comprehensive | | | Total Cabot Corporation Stockholders’ | | | Non- controlling | | | Total Stockholders’ | | | | Shares | | | Cost | | | Capital | | | Earnings | | | Benefits | | | Income (Loss) | | | Equity | | | Interests | | | Equity | | Balance at September 30, 2012 | | | 63,348 | | | $ | 56 | | | $ | 20 | | | $ | 1,653 | | | $ | (8 | ) | | $ | 92 | | | $ | 1,813 | | | $ | 126 | | | $ | 1,939 | | Net income attributable to Cabot Corporation | | | | | | | | | | | | | | | 153 | | | | | | | | | | | | 153 | | | | | | | | 153 | | Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | 7 | | Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 11 | | | | 11 | | | | 3 | | | | 14 | | Contribution from noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 13 | | | | 13 | | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (17 | ) | | | (17 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (51 | ) | | | | | | | | | | | (51 | ) | | | | | | | (51 | ) | Issuance of stock under employee compensation plans | | | 784 | | | | — | | | | 12 | | | | | | | | | | | | | | | | 12 | | | | | | | | 12 | | Amortization of share-based compensation | | | | | | | | | | | 13 | | | | | | | | | | | | | | | | 13 | | | | | | | | 13 | | Purchase and retirement of common stock | | | (161 | ) | | | | | | | (6 | ) | | | | | | | | | | | | | | | (6 | ) | | | | | | | (6 | ) | Principal payment by Employee Stock Ownership Plan under guaranteed loan | | | | | | | | | | | | | | | | | | | 6 | | | | | | | | 6 | | | | | | | | 6 | | Balance at September 30, 2013 | | | 63,971 | | | $ | 56 | | | $ | 39 | | | $ | 1,755 | | | $ | (2 | ) | | $ | 103 | | | $ | 1,951 | | | $ | 132 | | | $ | 2,083 | |
The accompanying notes are an integral part of these consolidated financial statements. 48
CABOT CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Years Ended September 30 (In millions, except shares in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2013 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Deferred Employee Benefits | | | Accumulated Other Comprehensive Income | | | Total Cabot Corporation Stockholders’ Equity | | | Non- controlling Interests | | | Total Stockholders’ Equity | | | | Shares | | | Cost | | | | | | | | | Balance at September 30, 2012 | | | 63,348 | | | $ | 56 | | | $ | 20 | | | $ | 1,653 | | | $ | (8 | ) | | $ | 92 | | | $ | 1,813 | | | $ | 126 | | | $ | 1,939 | | Net income attributable to Cabot Corporation | | | | | | | | | | | | | | | 153 | | | | | | | | | | | | 153 | | | | | | | | 153 | | Net Income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | 7 | | Total other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 11 | | | | 11 | | | | 3 | | | | 14 | | Contribution from noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 13 | | | | 13 | | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (17 | ) | | | (17 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (51 | ) | | | | | | | | | | | (51 | ) | | | | | | | (51 | ) | Issuance of stock under employee compensation plans | | | 784 | | | | — | | | | 12 | | | | | | | | | | | | | | | | 12 | | | | | | | | 12 | | Amortization of share-based compensation | | | | | | | | | | | 13 | | | | | | | | | | | | | | | | 13 | | | | | | | | 13 | | Purchase and retirement of common stock | | | (161 | ) | | | | | | | (6 | ) | | | | | | | | | | | | | | | (6 | ) | | | | | | | (6 | ) | Principal payment by Employee Stock Ownership Plan under guaranteed loan | | | | | | | | | | | | | | | | | | | 6 | | | | | | | | 6 | | | | | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2013 | | | 63,971 | | | $ | 56 | | | $ | 39 | | | $ | 1,755 | | | $ | (2 | ) | | $ | 103 | | | $ | 1,951 | | | $ | 132 | | | $ | 2,083 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in | | | Retained | | | Deferred Employee | | | Accumulated Other Comprehensive | | | Total Cabot Corporation Stockholders’ | | | Non- controlling | | | Total Stockholders’ | | | | Shares | | | Cost | | | Capital | | | Earnings | | | Benefits | | | Income (Loss) | | | Equity | | | Interests | | | Equity | | Balance at September 30, 2013 | | | 63,971 | | | $ | 56 | | | $ | 39 | | | $ | 1,755 | | | $ | (2 | ) | | $ | 103 | | | $ | 1,951 | | | $ | 132 | | | $ | 2,083 | | Net income attributable to Cabot Corporation | | | | | | | | | | | | | | | 199 | | | | | | | | | | | | 199 | | | | | | | | 199 | | Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | | | | 19 | | Total other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (167 | ) | | | (167 | ) | | | (4 | ) | | | (171 | ) | Noncontrolling interest—other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1 | ) | | | (1 | ) | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (24 | ) | | | (24 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (54 | ) | | | | | | | | | | | (54 | ) | | | | | | | (54 | ) | Issuance of stock under employee compensation plans | | | 758 | | | | 1 | | | | 13 | | | | | | | | | | | | | | | | 14 | | | | | | | | 14 | | Amortization of share-based compensation | | | | | | | | | | | 14 | | | | | | | | | | | | | | | | 14 | | | | | | | | 14 | | Purchase and retirement of common stock | | | (346 | ) | | | | | | | (17 | ) | | | | | | | | | | | | | | | (17 | ) | | | | | | | (17 | ) | Principal payment by Employee Stock Ownership Plan under guaranteed loan | | | | | | | | | | | | | | | | | | | 2 | | | | | | | | 2 | | | | | | | | 2 | | Balance at September 30, 2014 | | | 64,383 | | | $ | 57 | | | $ | 49 | | | $ | 1,900 | | | $ | — | | | $ | (64 | ) | | $ | 1,942 | | | $ | 122 | | | $ | 2,064 | |
The accompanying notes are an integral part of these consolidated financial statements. 49
CABOT CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY Years Ended September 30 (In millions, except shares in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2014 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Deferred Employee Benefits | | | Accumulated Other Comprehensive Income | | | Total Cabot Corporation Stockholders’ Equity | | | Non- controlling Interests | | | Total Stockholders’ Equity | | | | Shares | | | Cost | | | | | | | | | Balance at September 30, 2013 | | | 63,971 | | | $ | 56 | | | $ | 39 | | | $ | 1,755 | | | $ | (2 | ) | | $ | 103 | | | $ | 1,951 | | | $ | 132 | | | $ | 2,083 | | Net income attributable to Cabot Corporation | | | | | | | | | | | | | | | 199 | | | | | | | | | | | | 199 | | | | | | | | 199 | | Net Income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | | | | 19 | | Total other comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (167 | ) | | | (167 | ) | | | (4 | ) | | | (171 | ) | Noncontrolling interest—other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1 | ) | | | (1 | ) | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (24 | ) | | | (24 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (54 | ) | | | | | | | | | | | (54 | ) | | | | | | | (54 | ) | Issuance of stock under employee compensation plans | | | 758 | | | | 1 | | | | 13 | | | | | | | | | | | | | | | | 14 | | | | | | | | 14 | | Amortization of share-based compensation | | | | | | | | | | | 14 | | | | | | | | | | | | | | | | 14 | | | | | | | | 14 | | Purchase and retirement of common stock | | | (346 | ) | | | | | | | (17 | ) | | | | | | | | | | | | | | | (17 | ) | | | | | | | (17 | ) | Principal payment by Employee Stock Ownership Plan under guaranteed loan | | | | | | | | | | | | | | | | | | | 2 | | | | | | | | 2 | | | | | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at September 30, 2014 | | | 64,383 | | | $ | 57 | | | $ | 49 | | | $ | 1,900 | | | $ | — | | | $ | (64 | ) | | $ | 1,942 | | | $ | 122 | | | $ | 2,064 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | Common Stock, Net of Treasury Stock | | | Additional Paid-in | | | Retained | | | Accumulated Other Comprehensive | | | Total Cabot Corporation Stockholders’ | | | Non- controlling | | | Total Stockholders’ | | | | Shares | | | Cost | | | Capital | | | Earnings | | | Income (Loss) | | | Equity | | | Interests | | | Equity | | Balance at September 30, 2014 | | | 64,383 | | | $ | 57 | | | $ | 49 | | | $ | 1,900 | | | $ | (64 | ) | | $ | 1,942 | | | $ | 122 | | | $ | 2,064 | | Net loss attributable to Cabot Corporation | | | | | | | | | | | | | | | (334 | ) | | | | | | | (334 | ) | | | | | | | (334 | ) | Net income attributable to non-controlling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | 8 | | | | 8 | | Total other comprehensive loss | | | | | | | | | | | | | | | | | | | (235 | ) | | | (235 | ) | | | (4 | ) | | | (239 | ) | Noncontrolling interest—dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (22 | ) | | | (22 | ) | Cash dividends paid to common stockholders | | | | | | | | | | | | | | | (56 | ) | | | | | | | (56 | ) | | | | | | | (56 | ) | Issuance of stock under employee compensation plans | | | 450 | | | | — | | | | 6 | | | | | | | | | | | | 6 | | | | | | | | 6 | | Amortization of share-based compensation | | | | | | | | | | | 12 | | | | | | | | | | | | 12 | | | | | | | | 12 | | Purchase and retirement of common stock | | | (2,375 | ) | | | (2 | ) | | | (67 | ) | | | (32 | ) | | | | | | | (101 | ) | | | | | | | (101 | ) | Balance at September 30, 2015 | | | 62,458 | | | $ | 55 | | | $ | — | | | $ | 1,478 | | | $ | (299 | ) | | $ | 1,234 | | | $ | 104 | | | $ | 1,338 | |
The accompanying notes are an integral part of these consolidated financial statements. 50
Notes to Consolidated Financial Statements Note A. Significant Accounting Policies The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The significant accounting policies of Cabot Corporation (“Cabot” or “the Company”) are described below. In January 2012, the Company completed the sale of its Supermetals business and in July 2014, the Company completed the sale of its Security Materials business. The results of these businesses for all periods presented are reflected as discontinued operations in the Consolidated Statements of Operations.
In July 2012, the Company completed the acquisition of Norit N.V. (“Purification Solutions”). The financial position, results of operations and cash flows of Purification Solutions are included in the Consolidated Financial Statements from the date of acquisition.
In November 2013, the Company purchased all of Grupo Kuo S.A.B. de C.V.’s (“KUO”) common stock in NHUMO, S.A. de C.V. (“NHUMO”), a carbon black joint venture between the Company and KUO in Mexico, which represented approximately 60% of the outstanding common stock of NHUMO (the “NHUMO transaction”). Prior to this transaction, the Company owned approximately 40% of the outstanding common stock of NHUMO, and the NHUMO entity was accounted for as an equity affiliate of the Company. The financial position, results of operations and cash flows of NHUMO are included in the Company’s consolidated financial statements from the date of acquisition. In July 2014, the Company completed the sale of its Security Materials business. The results of this business are reflected as discontinued operations in the Consolidated Statements of Operations. In the first quarter of fiscal 2015, the Company realigned its business reporting structure into four segments that consist of Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The new structure is aligned with senior management changes and it better leverages Cabot’s global activities across common customer applications, production, and research and development activities. Prior period segment results have been recast to reflect the realignment. Unless otherwise indicated, all disclosures and amounts in the Notes to Consolidated Financial Statements relate to the Company’s continuing operations. Certain amounts in prior years’ Consolidated Statement of Cash Flows have been reclassified to conform to the current presentation. Principles of Consolidation The consolidated financial statements include the accounts of Cabot and its wholly-owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights, of which there were none in the periods presented. Intercompany transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents include all highly liquid investments with a maturity of three months or less at date of acquisition. Cabot continually assesses the liquidity of cash equivalents and, as of September 30, 2014,2015, has determined that they are readily convertible to cash. Inventories Inventories are stated at the lower of cost or market. The cost of all carbon black inventories in the U.S. is determined using the last-in, first-out (“LIFO”) method. The cost of Specialty Fluids inventories, which are classified as assets held for rent, is determined using the average cost method. The cost of other U.S. and non-U.S. inventories is determined using the first-in, first-out (“FIFO”) method. Cabot reviews inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory, and based on these assumptions estimates the amount of any obsolete, unmarketable, slow moving, or overvalued inventory. Cabot writes down the value of these inventories by an amount equal to the difference between the cost of the inventory and its estimated marketnet realizable value. Investments The Company has investments in equity affiliates and marketable securities. As circumstances warrant, all investments are subject to periodic impairment reviews. Unless consolidation is required, investments in equity affiliates, where Cabot generally owns between 20% and 50% of the affiliate, are accounted for using the equity method. Cabot records its share of the equity affiliate’s results of operations based on its percentage of ownership of the affiliate. Dividends declared from equity affiliates are a return on investment and are recorded as a reduction to the equity investment value. At September 30, 20142015 and 2013,2014, Cabot had equity affiliate investments of $68$57 million and $119$68 million, respectively. Dividends declared and received from these investments were $14 million, $25 million $8 million and $6$8 million in fiscal 2015, 2014 2013 and 2012,2013, respectively. All investments in marketable securities are classified as available-for-sale and are recorded at fair value with the corresponding unrealized holding gains or losses, net of taxes, recorded as a separate component of Other comprehensive income (loss)loss within stockholders’ equity. Unrealized losses that are determined to be other-than-temporary, based on current and expected 51
market conditions, are recognized in earnings. The fair value of marketable securities is determined based on quoted market prices at the balance sheet dates. The cost of marketable securities sold is determined by the specific identification method. The Company’s investment in marketable securities was immaterial as of both September 30, 20142015 and 2013.2014. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives. The depreciable lives for buildings, machinery and equipment, and other fixed assets are twenty to twenty-five years, ten to twenty-five years, and three to twenty-five years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in earnings in the Consolidated Statements of Operations. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated.
Cabot capitalizes interest costs when they are part of the historical cost of acquiring and constructing certain assets that require a period of time to prepare for their intended use. During fiscal 2014, 2013 and 2012, Cabot capitalized $3 million, $5 million and $4 million of interest costs, respectively. These amounts will be amortized over the lives of the related assets.
Intangible Assets and Goodwill 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 MaterialsChemicals are considered separate reporting units. TheAs such, the goodwill balance relative to this segmentPerformance Chemicals is recorded in the Fumed Metal Oxides reporting unit within Performance Materials.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 indicators of impairment,conditions, charges for impairment may be necessary. Based on the Company’s most recent annual goodwill impairment test performed as of May 31, 2014,2015, the fair values of the Reinforcement Materials and Fumed Metal Oxides reporting units were substantially in excess of their carrying values. The fair value of the Purification Solutions reporting unit exceededwas less than its carrying amount. Refer to Note G for details on the Purification Solutions goodwill impairment test and the resulting impairment charge recorded in the third fiscal quarter of 2015. Due to the impairment recorded, the fair value by approximately 9%. At September 30, 2014,of the Purification Solutions reporting unit had the most significant goodwill balance,was insignificantly higher than its carrying value. No events occurred in the amountfourth fiscal quarter of $458 million. The future growth in the Purification Solutions business is highly dependent on achieving the expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and the Company’s successful realization of its anticipated share of volumes in this segment over the next 3 years. The demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those2015 that would require U.S. based coal fired electrical utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standardssuggest that become effective beginning in April 2015 and (2) other factors such as the anticipated usage of activated carbon in the coal fired energy units. Recently, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. It ismore likely than not possible to predictthat the outcomecarrying values of the Supreme Court’s reviewany of this matter.our reporting units exceeded its fair value. The Company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition. Definite-lived intangible assets, which are comprised of customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. The Company evaluates indefinite-lived intangible assets, which are comprised of the trademarks of Purification Solutions, for impairment annually or when events occur or circumstances change that may reduce the fair value of the asset below its carrying amount. The annual review is performed as of May 31. The Company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. The quantitative impairment test is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates and discount rates over an estimate of the remaining operating period at the unit of accounting level. These future growth rates dependRefer to Note G for details on achieving the expected volumes and pricing levelsimpairment test performed on intangible assets of the productsPurification Solutions reporting unit and the resulting impairment charges recorded. Effective in the third quarter of 2015 and as a part of the impairment assessment performed, the Company determined that the trademarks for Purification Solutions.Solutions no longer have an indefinite life. 52
Long-lived Assets Impairment The Company’s long-lived assets primarily include property, plant and equipment, intangible assets, long-term investments and assets held for rent. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. To test for impairment of assets, the Company generally uses a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable. An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset. Refer to Note G regarding the results of the impairment test performed on the long-lived assets of the Purification Solutions segment. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives. The depreciable lives for buildings, machinery and equipment, and other fixed assets are twenty to twenty-five years, ten to twenty-five years, and three to twenty-five years, respectively. The cost and accumulated depreciation for property, plant and equipment sold, retired, or otherwise disposed of are removed from the Consolidated Balance Sheets and resulting gains or losses are included in earnings in the Consolidated Statements of Operations. Expenditures for repairs and maintenance are charged to expenses as incurred. Expenditures for major renewals and betterments, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Cabot capitalizes interest costs when they are part of the historical cost of acquiring and constructing certain assets that require a period of time to prepare for their intended use. During fiscal 2015, 2014 and 2013, Cabot capitalized less than $1 million, $3 million and $5 million of interest costs, respectively. These amounts will be amortized over the lives of the related assets. Assets Held for Rent Assets held for rent represent Specialty Fluids cesium formate product that is available to customers in the normal course of business.business and $11 million of ore that has been mined and will be converted into cesium formate. Assets held for rent are stated at average cost. Asset Retirement Obligations Cabot estimates incremental costs for special handling, removal and disposal of materials that may or will give rise to conditional asset retirement obligations (“ARO”) and then discounts the expected costs back to the current year using a credit adjusted risk free rate. Cabot recognizes ARO liabilities and costs when the timing and/or settlement can be reasonably estimated. The ARO reserves were $15$20 million and $16$15 million at September 30, 20142015 and 2013,2014, respectively. Impairment of Long-Lived Assets
Cabot’s long-lived assets primarily include property, plant and equipment, long-term investments, and assets held for rent and sale. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. To test for impairment of assets we generally use a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable. Cabot’s estimates reflect management’s assumptions about selling prices, production and sales volumes, costs and market conditions over an estimate of the remaining operating period. If an impairment is indicated, the asset is written down to fair value. If the asset does not have a readily determinable market value, a discounted cash flow model may be used to determine the fair value of the asset. The key inputs to the discounted cash flow would be the same as the undiscounted cash flow noted above, with the addition of the discount rate used. In circumstances when an asset does not have separate identifiable cash flows, an impairment charge is recorded when Cabot no longer intends to use the asset.
Foreign Currency Translation The functional currency of the majority of Cabot’s foreign subsidiaries is the local currency in which the subsidiary operates. Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet dates. Income and expense items are translated at average monthly exchange rates during the year. Unrealized currency translation adjustments are included as a separate component of Accumulated other comprehensive (loss) income within stockholders’ equity. Realized and unrealized foreign currency gains and losses arising from transactions denominated in currencies other than the subsidiary’s functional currency are reflected in earnings with the exception of (i) intercompany transactions considered to be of a long-term investment nature; and (ii) foreign currency borrowings designated as net investment hedges. Gains or losses arising from these transactions are included as a component of other comprehensive (loss) income. In fiscal 2015, 2014 2013 and 2012,2013, net foreign currency transaction losses of $2$8 million, gainslosses of $2 million, and lossesgains of $2 million, respectively, are included in Other (expense) income (expense) in the Consolidated Statements of Operations as part of continuing operations.Operations. 53
Financial Instruments Cabot’s financial instruments consist primarily of cash and cash equivalents, accounts and notes receivable, investments, notes receivable from the sale of a business, accounts payable and accrued liabilities, short-term and long-term debt, and derivative instruments. The carrying values of Cabot’s financial instruments approximate fair value with the exception of fixed rate long-term debt, which is recorded at amortized cost. The fair values of the Company’s financial instruments are based on quoted market prices, if such prices are available. In situations where quoted market prices are not available, the Company relies on valuation models to derive fair value. Such valuation takes into account the ability of the financial counterparty to perform. Cabot uses derivative financial instruments primarily for purposes of hedging the exposures to fluctuations in foreign currency exchange rates, which exist as part of its on-going business operations. Cabot does not enter into derivative contracts for speculative purposes, nor does it hold or issue any derivative contracts for trading purposes. All derivatives are recognized on the Consolidated Balance Sheets at fair value. Where Cabot has a legal right to offset derivative settlements under a master netting agreement with a counterparty, derivatives with that counterparty are presented on a net basis. The changes in the fair value of derivatives are recorded in either earnings or Accumulated other comprehensive (loss) income, depending on whether or not the instrument is designated as part of a hedge transaction and, if designated as part of a hedge transaction, the type of hedge transaction. The gains or losses on derivative instruments reported in Accumulated other comprehensive (loss) income are reclassified to earnings in the period in which earnings are affected by the underlying hedged item. The ineffective portion of all hedges is recognized in earnings during the period in which the ineffectiveness occurs. In accordance with Cabot’s risk management strategy, the Company may enter into certain derivative instruments that may not be designated as hedges for hedge accounting purposes. Although these derivatives are not designated as hedges, the Company believes that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. The Company records in earnings the gains or losses from changes in the fair value of derivative instruments that are not designated as hedges. Cash movements associated with these instruments are presented in the Consolidated Statement of Cash Flows as Cash Flows from Operating Activities because the derivatives are designed to mitigate risk to the Company’s cash flow from operations. The cash flows related to the principal amount of theseoutstanding debt instruments are presented in the Cash Flows from Financing Activities section of the Consolidated Statement of Cash Flows. Revenue Recognition Cabot recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Cabot generally is able to ensure that products meet customer specifications prior to shipment. If the Company is unable to determine that the product has met the specified objective criteria prior to shipment or if title has not transferred because of sales terms, the revenue is considered “unearned” and is deferred until the revenue recognition criteria are met. Shipping and handling charges related to sales transactions are recorded as sales revenue when billed to customers or included in the sales price. 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 | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | 2013 | | 2012(1) | | | 2015 | | | 2014 | | | 2013 | | Reinforcement Materials | | | 58 | % | | | 57 | % | | | 63 | % | | | 54 | % | | | 59 | % | | | 57 | % | Performance Materials | | | 27 | % | | | 27 | % | | | 29 | % | | Advanced Technologies | | | 6 | % | | | 6 | % | | | 6 | % | | Performance Chemicals | | | | 33 | % | | | 29 | % | | | 30 | % | Purification Solutions | | | 9 | % | | | 10 | % | | | 2 | % | | | 11 | % | | | 9 | % | | | 10 | % | Specialty Fluids | | | | 2 | % | | | 3 | % | | | 3 | % |
(1) | Fiscal 2012 includes two months of revenue for Purification Solutions, which the Company acquired on July 31, 2012.
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Cabot derives the substantial majority of its revenues from the sale of products in Reinforcement Materials and Performance Materials.Chemicals. Revenue from these products is typically recognized when the product is shipped and title and risk of loss have passed to the customer. The Company offers certain of its customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized and are estimated based on historical experience and contractual obligations. Cabot periodically reviews the assumptions underlying its estimates of discounts and volume rebates and adjusts its revenues accordingly. Revenue in Advanced Technologies, excluding the Specialty Fluids business,Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. Depending on the nature of the contract with the customer, a portion of theFor major activated carbon injection systems projects, revenue may beis recognized using proportional performance.the percentage-of-completion method. A significant portion of the revenue54
Revenue in the Specialty Fluids business, included in Advanced Technologies, 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. Revenue in Purification Solutions is typically recognized when the product is shipped and title and risk of loss have passed to the customer. For major activated carbon injection systems projects, revenue is recognized using the percentage-of-completion method.
Cost of Sales Cost of sales consists of the cost of raw and packaging materials, direct manufacturing costs, depreciation, internal transfer costs, inspection costs, inbound and outbound freight and shipping and handling costs, plant purchasing and receiving costs and other overhead expenses necessary to manufacture the products. Accounts and Notes Receivable Trade receivables are recorded at the invoiced amount and generally do not bear interest. Trade receivables in China may at certain times be settled with the receipt of bank issued non-interest bearing notes. These notes totaled 19395 million Chinese Renminbi (“RMB”) ($3115 million) and 148193 million RMB ($2431 million) as of September 30, 20142015 and 2013,2014, respectively, and are included in accounts and notes receivable. Cabot periodically sells a portion of the trade receivables in China and other customer receivables at a discount and such sales are accounted for as asset sales. The Company does not have any continuing involvement with the notes after the sale. The difference between the proceeds from the sale and the carrying value of the receivables is recognized as a loss on the sale of receivables and is included in Other (expense) income (expense) in the accompanying Consolidated Statements of Operations. During each of fiscal 2015, 2014 2013 and 2012,2013, the Company recorded charges of $3 million, $4$3 million, and $2$4 million, respectively, for the sale of these receivables. Cabot maintains allowances for doubtful accounts based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable and other economic information on both a historical and prospective basis. Customer account balances are charged against the allowance when it is probable the receivable will not be recovered. There were no material changes in the allowance for any of the years presented. There is no material off-balance sheet credit exposure related to customer receivable balances. Notes Receivable from Sales of business
The Company’s Notes receivable from sale of business are derived from the sale of the Supermetals business to Global Advanced Metals Pty Ltd., an Australian company (“GAM”) as discussed in Note D. The notes were carried at amortized cost and the carrying value was $214 million at September 30, 2013. During fiscal 2014, Cabot received the final payment on these notes in the amount of $215 million.
Stock-based Compensation Cabot recognizes compensation expense for stock-based awards granted to employees using the fair value method. Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the service period, which generally represents the vesting period, and includes an estimate of the awards that will be forfeited, and an estimate of what level of performance the Company will achieve for Cabot’s performance-based stock awards. Cabot calculates the fair value of its stock options using the Black-Scholes option pricing model. The fair value of restricted stock units is determined using the closing price of Cabot stock on the day of the grant. Selling and Administrative Expenses Selling and administrative expenses consist of salaries and fringe benefits of sales and office personnel, general office expenses and other expenses not directly related to manufacturing operations. Research and Technical Expenses Research and technical expenses include salaries, equipment and material expenditures, and contractor fees and are expensed as incurred. Income Taxes Deferred income taxes are determined based on the estimated future tax effects of differences between financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are recognized to the extent that realization of those assets is considered to be more likely than not. A valuation allowance is established for deferred taxes when it is more likely than not that all or a portion of the deferred tax assets will not be realized. Provisions are made for the U.S. income tax liability and additional non-U.S. taxes on the undistributed earnings of non-U.S. subsidiaries, except for amounts Cabot has designated to be indefinitely reinvested. Cabot records benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities’ full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. The Company also accrues for interest and penalties on its uncertain tax positions and includes such charges in its income tax provision in the Consolidated Statements of Operations. 55
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. Environmental Costs Cabot accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, Cabot accrues the amount that reflects the best estimate within that range or the low end of the range if no estimate within the range is better. The amount accrued reflects Cabot’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Cabot discounts certain of its long-term environmental liabilities to reflect the time value of money if the amount of the liability and the amount and timing of cash payments for the liability are fixed and reliably determinable. The liability will be discounted at a rate that will produce an amount at which the liability theoretically could be settled in an arm’s length transaction with a third party. This discounted rate may not exceed the risk-free rate for maturities comparable to those of the liability. Cabot does not reduce its estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by either the receipt of cash or a contractual agreement. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Note B. Recent Accounting Pronouncements In July 2013, the Financial Accounting Standards Board (FASB)(“FASB”) issued a new standard related to the “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The standard requires, unless certain conditions exist, an unrecognized tax benefit or a portion of an unrecognized tax benefit to be presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar to a tax loss or a tax credit carryforward. This standard is applicable for fiscal years beginning after December 15, 2013, and for interim periods within those years. The Company adopted this standard on October 1, 2014 and the implementation of the new standard did not have a material impact on its consolidated financial statements. In April 2014, the FASB issued a new standard related to the “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The standard requires discontinued operations treatment for disposals of a component or group of components of a business that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results and requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This standard is applicable for fiscal years beginning after December 15, 2014 and for interim periods within those years withand early adoption is permitted, but only for disposals that have not been reported in consolidated financial statements previously issued. The Company expects towill adopt this standard beginning on October 1, 2015. The Company is currently evaluating the2015 and does not expect it to have a material impact of the adoption of this standard on its consolidated financial statements. In May 2014, the FASB issued a new standard related to the “Revenue from Contracts with Customers” which amends the existing accounting standards for revenue recognition. The standard requires entities to recognize revenue when they transfer promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This standard is applicable for fiscal years beginning after December 15, 20162017 and for interim periods within those years and early adoption is notpermitted 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, 2017.2016. The Company is currently evaluating the impact of the adoption of this standard on itsis not expected to materially impact the Company’s consolidated financial statements. 56
Note C. Acquisition of NHUMO In November 2013, the Company purchased all of KUO’s common stock in the former NHUMO joint venture, which represented approximately 60% of the outstanding common stock of the joint venture. Prior to this transaction, the Company owned approximately 40% of the outstanding common stock of NHUMO, and the NHUMO entity was accounted for as an equity affiliate of the Company. At the close of the transaction, the Company paid KUO $80 million in cash and NHUMO issued redeemable preferred stock to KUO with a redemption value of $25 million. The preferred stock accumulates dividends at a fixed rate of 6% annually and is redeemable at the option of KUO or the Company for $25 million starting in November 2018 or upon the occurrence of certain other conditions. Annual payment by NHUMO of the dividends will beis 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 both 2014 and the2015. A dividend payoutpayment of $1.5 million will bewas made in December 2014. As2014 related to fiscal 2014 and a result,dividend payment of $1.5 million of the preferred stock liability was classifiedrelated to fiscal 2015 is due in current liabilities.December 2015. The preferred stock issued in connection with the transaction is not mandatorily redeemable and has embedded put and call rights at the fixed redemption price. Accordingly, the instrument is accounted for as a financing obligation and has been separately presented in the Consolidated Balance Sheets as a long-term liability. Upon acquisition, the Company began consolidating NHUMO into its consolidated financial statements. Prior to closing, the Company received a $14 million dividend from NHUMO. The Company incurred acquisition costs of approximately $2 million through September 30,in fiscal 2014, associated with the transaction, which are included in Selling and administrative expenses in the Consolidated Statements of Operations. As of September 2014, the Company completed the valuation of its assets acquired and liabilities assumed. The allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed, and Cabot’s previously held equity interest in NHUMO as of the acquisition date. During fiscal 2014, the Company recorded certain measurement period adjustments which are presented in the table below. The measurement period adjustments and the related tax impact were immaterial to the Company’s consolidated financial statements. The following table presents the components and allocation of the purchase price, including the measurement period adjustments:price: | | | At Acquisition Date (October 31, 2013) | | Measurement Period Adjustments | | At Acquisition Date (As adjusted at September 30, 2014) | | | | | (Dollars in millions) | | | (Dollars in millions) | | Assets | | | | | | | | | | | Cash | | $ | 7 | | | $ | — | | | $ | 7 | | | Accounts receivable | | | 33 | | | | — | | | | 33 | | | Inventories | | | 14 | | | | — | | | | 14 | | | Current assets | | | $ | 54 | | Property, plant and equipment | | | 48 | | | | — | | | | 48 | | | | 48 | | Other non-current assets | | | 1 | | | | — | | | | 1 | | | | 1 | | Intangible assets | | | 57 | | | | 6 | | | | 63 | | | | 63 | | Goodwill | | | 51 | | | | (6 | ) | | | 45 | | | | 45 | | | | | | | | | | | | | Total assets acquired | | | 211 | | | | — | | | | 211 | | | | 211 | | | | | | | | | | | | | Liabilities | | | | | | | | | | | Accounts payable, accruals and other liabilities | | | (18 | ) | | | (2 | ) | | | (20 | ) | | | (20 | ) | Deferred tax liabilities—long-term | | | (31 | ) | | | 2 | | | | (29 | ) | | | | | | | | | | | | | Deferred tax liabilities - long-term | | | | (29 | ) | Total liabilities assumed | | | (49 | ) | | | — | | | | (49 | ) | | | (49 | ) | | | | | | | | | | | | Net assets acquired | | $ | 162 | | | $ | — | | | $ | 162 | | | $ | 162 | | | | | | | | | | | | | Cash consideration paid | | $ | 80 | | | | | | | | 80 | | Fair value of redeemable preferred stock | | | 28 | | | | | | | | 28 | | Previously held equity interest in NHUMO | | | 54 | | | | | | | | 54 | | | | | | | | | | | Total | | $ | 162 | | | | | | | $ | 162 | | | | | | | | | | |
As a result of the acquisition, the Company recorded a gain of $29 million for the difference between the carrying value and the fair value of the previously held equity interest in NHUMO, which was included in Other (expense) income (expense).in the first quarter of fiscal 2014. The fair value of $54 million for the previously held equity interest was determined based on the fair value of Cabot’s pre-existing interest in NHUMO as adjusted for a control premium derived from synergies gained as a result of the Company obtaining control of NHUMO. As part of the purchase price allocation, the Company determined that a separately identifiable intangible asset was customer relationships in the amount of $63 million, which is being amortized over a period of 20 years. The Company estimated the fair value of the identifiable acquisition-related intangible asset based on projections of cash flows that will arise from the asset. The projected cash flows are discounted to determine the fair value of the asset at the date of acquisition. The determination of the fair value of the intangible asset acquired required the use of significant judgment with regard to assumptions in the discounted cash flow model used. The fair value of the redeemable preferred stock was determined based on a discounted cash flow model, using the expected timing of the cash flows and an appropriate discount rate. 57
The excess of the purchase price, which includes the cash consideration paid and the fair values of redeemable preferred stock and the previously held equity interest in NHUMO, over the fair value of the tangible net assets and intangible asset acquired, the issuance of redeemable preferred stock and the previously held equity interest in NHUMO was recorded as goodwill. The goodwill recognized is attributable to the expected growth and operating synergies that the Company expects to realize from this acquisition. Goodwill generated from the acquisition willis not be deductible for tax purposes. Note D. Discontinued Operations In July 2014, the Company sold its Security Materials business which was reported in the Advanced Technologies segment, to SICPA SASA. The Consolidated Statements of Operations for approximately $20 million in cash. The Company recorded a gainall periods presented have been recast to reflect the Security Materials business in discontinued operations as a result of this transaction.operations. In January 2012, the Company sold its Supermetals business to GAMGlobal Advanced Metals Pty Ltd., an Australian company (“GAM”) for $452 million, including cash consideration of $175 million received on the closing date and notes receivable (“GAM Notes”) totaling $277 million that were payable at various dates through March 2014. In fiscal 2014, Cabot received the final payment on the GAM Notes in the amount of $215 million. The following table summarizes the resultsDuring fiscal 2015, Cabot recorded $2 million of income from discontinued operations:operations related to sales of businesses that occurred in prior years.
| | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Net sales and other operating revenues | | $ | 5 | | | $ | 7 | | | $ | 55 | | | | | | | | | | | | | | | (Loss) income from operations before income taxes | | | (3 | ) | | | (5 | ) | | | 20 | | Provision for (benefit from) income taxes on operations | | | 1 | | | | 2 | | | | (7 | ) | | | | | | | | | | | | | | (Loss) income from operations, net of tax | | $ | (2 | ) | | $ | (3 | ) | | $ | 13 | | | | | | | | | | | | | | | Gain (loss) on sale of discontinued operations | | | 7 | | | | (2 | ) | | | 300 | | (Provision for) benefit from income taxes on gain (loss) on sale | | | (3 | ) | | | 4 | | | | (109 | ) | | | | | | | | | | | | | | Gain on sale of discontinued operations, net of tax | | | 4 | | | | 2 | | | | 191 | | | | | | | | | | | | | | | Income (loss) from discontinued operations, net of tax | | $ | 2 | | | $ | (1 | ) | | $ | 204 | | | | | | | | | | | | | | |
The following table summarizes the assets and the liabilities held for sale in the Company’s Consolidated Balance Sheet as of September 30, 2013:
| | | | | | | September 30, 2013 (in millions) | | Assets | | | | | Inventories | | $ | 3 | | Other current assets | | | 1 | | | | | | | Total current assets held for sale | | $ | 4 | | | | | | | Property, plant and equipment, net | | | 5 | | Goodwill | | | 2 | | Intangible assets, net | | | 2 | | | | | | | Total noncurrent assets held for sale | | $ | 9 | | | | | | |
Note E. Inventories Inventories, net of LIFO, obsolete, unmarketable and slow moving reserves, are as follows: | | | September 30 | | | September 30 | | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Raw materials | | $ | 111 | | | $ | 100 | | | $ | 69 | | | $ | 111 | | Work in process | | | 2 | | | | 2 | | | | 1 | | | | 2 | | Finished goods | | | 341 | | | | 309 | | | | 287 | | | | 341 | | Other | | | 44 | | | | 44 | | | | 40 | | | | 44 | | | | | | | | | | Total | | $ | 498 | | | $ | 455 | | | $ | 397 | | | $ | 498 | | | | | | | | | | | | | | | | |
Inventories valued under the LIFO method comprised approximately 6% and 5% of total inventories at both September 30, 2015 and 2014, and 2013.respectively. At September 30, 20142015 and 2013,2014, the LIFO reserve was $52$30 million and $55$52 million, respectively. Other inventory is comprised of certain spare parts and supplies. During fiscal 20132015 and 2012,2013, inventory quantities carried on a LIFO basis were decreased at the Company’s U.S. carbon black sites. TheseIn fiscal 2015, these reductions led to liquidations of LIFO inventory quantities and resulted in an increase of Cost of sales of $1 million and a decrease in consolidated Net income of $1 million ($0.01 per diluted common share). In fiscal 2013, these reductions led to liquidations of LIFO inventory quantities and resulted in a decrease of Cost of sales of $1 million and an increase in consolidated Net income of $1 million ($0.01 per diluted common share) in both fiscal years.. No such reductions occurred in fiscal 2014. Cabot reviews inventory for both potential obsolescence and potential loss of value periodically. In this review, Cabot makes assumptions about the future demand for and market value of the inventory and, based on these assumptions, estimates the amount of obsolete, unmarketable or slow moving inventory. TheTotal inventory reserves were $14$20 million and $15$14 million, respectively, as of September 30, 20142015 and 2013.2014. During fiscal year 2015, the Company recorded a lower cost or market reserve in the amount of $6 million related to its Purification Solutions inventory held in Marshall, TX. This reserve reflects less favorable sales trends for activated carbon in mercury removal applications in the U.S., which continued into the fourth fiscal quarter of 2015. 58
Note F. Property, Plant and Equipment Property, plant and equipment consists of the following: | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Land and land improvements | | $ | 132 | | | $ | 138 | | | $ | 154 | | | $ | 132 | | Buildings | | | 536 | | | | 507 | | | | 509 | | | | 536 | | Machinery and equipment | | | 2,593 | | | | 2,504 | | | | 2,391 | | | | 2,593 | | Other | | | 233 | | | | 236 | | | | 225 | | | | 233 | | Construction in progress | | | 216 | | | | 278 | | | | 106 | | | | 216 | | | | | | | | | | Total property, plant and equipment | | | 3,710 | | | | 3,663 | | | | 3,385 | | | | 3,710 | | Less: accumulated depreciation | | | (2,129 | ) | | | (2,063 | ) | | | (2,002 | ) | | | (2,129 | ) | | | | | | | | | Net property, plant and equipment | | $ | 1,581 | | | $ | 1,600 | | | $ | 1,383 | | | $ | 1,581 | | | | | | | | | |
Depreciation expense was $169 million, $184 million $175 million and $152$175 million for fiscal 2015, 2014 2013 and 2012,2013, respectively. Note G. Purification Solutions Goodwill and OtherLong-Lived Assets Impairment Charges During 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: | | Year Ended | | | | September 30, 2015 | | | | (Dollars in millions) | | Purification Solutions goodwill impairment charge | | $ | 352 | | Purification Solutions long-lived assets impairment charge | | | 210 | | Provision (benefit) for income taxes | | | (80 | ) | Impairment charges, after tax | | $ | 482 | |
The future growth in the Purification Solutions segment is highly dependent on achieving the expected volumes and margins in the activated carbon based mercury removal business. These volumes and margins are highly dependent on demand for mercury removal products and the Company’s successful realization of its anticipated share of volumes in this business. The expected demand for mercury removal products significantly depends on: (1) the implementation and enforcement of environmental laws and regulations, particularly those that would require U.S. based coal-fired electric utilities to reduce the quantity of air pollutants they release, including mercury, to comply with the Mercury and Air Toxics Standards (“MATS”) issued by the U.S. Environmental Protection Agency (“EPA”) and (2) other factors such as the anticipated usage of activated carbon in the coal-fired energy units. In November 2014, the U.S. Supreme Court agreed to consider whether the EPA appropriately considered costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by electric utilities. On June 29, 2015, the U.S. Supreme Court held that the EPA unreasonably failed to consider costs in determining whether it is necessary and appropriate to regulate hazardous air pollutants emitted by coal-fired utilities, and remanded the case back to the U.S. Court of Appeals for the District of Columbia Circuit further proceedings. The implementation period for the MATS regulations began in April 2015. With this recent implementation and associated customer and industry developments during the third fiscal quarter, as well as the U.S. Supreme Court’s ruling, the Company reassessed its previous estimates for expected growth in volumes, prices and margins in the Purification Solutions reporting unit. The main drivers of growth, including the size of the overall mercury removal industry, utility adoption rates, usage levels, and pricing, among others, were lowered from previous estimates. Based on these revised estimates and as part of step one of the annual impairment test, the Company determined that the estimated fair value of the Purification Solutions reporting unit was lower than the reporting unit's carrying value. As such, the reporting unit failed step one of the goodwill impairment test. In determining the fair value of the Purification Solutions reporting unit, the Company used an income approach (a discounted cash flow analysis) which incorporated significant estimates and assumptions related to future periods, including timing of MATS implementation, the anticipated size of the mercury removal industry, and growth rates and pricing assumptions of activated carbon, among others. The Company assumed a two year delay in the final MATS implementation due to the U.S. Supreme Court’s ruling. Total charges incurred could be higher if the rulings of the U.S. Court of Appeals for the District of Columbia Circuit on remand result in a delay in the implementation of MATS that is longer than two years. In addition, an estimate of the reporting unit’s weighted average cost of capital (“WACC”) is used to discount future estimated cash flows to their present value. The WACC was based upon externally available data considering market participants’ cost of equity and debt, capital structure and risk factors specific to the Purification Solutions reporting unit. 59
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. As of June 30, 2015, we recorded a pre-tax goodwill impairment charge in the amount of $353 million. We 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. Therefore, for the year ended September 30, 2015, the pre-tax goodwill impairment charge was $352 million. Based on the same factors leading to goodwill impairment, the Company also considered whether the reporting unit's carrying values of definite-lived intangible assets and property, plant and equipment may not be recoverable or whether the carrying value of certain indefinite-lived intangible assets were impaired. The Company used the income approach to determine the fair value of the indefinite-lived intangible assets, which are the trademarks of Purification Solutions, and determined that the fair value of these intangible assets was lower than their carrying value. As such, an impairment loss was recorded in the amount of $39 million. Subsequent to this impairment analysis, the Company concluded that such assets no longer had an indefinite life and began amortizing these assets over their estimated useful life. The Company also performed an impairment analysis to assess if definite-lived intangible assets and property, plant and equipment were recoverable based on the estimated undiscounted cash flows of the reporting unit, and these cash flows were not sufficient to recover the carrying value of the long-lived assets over their remaining useful lives. Accordingly, an impairment charge was recorded based on the lower of the carrying amount or fair value of the long-lived assets. The Company used the income approach to determine the fair value of the definite-lived intangible assets and a combination of the cost and market approaches to fair value its property, plant and equipment. The Company recorded impairment charges of $119 million and $51 million, to its definite-lived intangible assets and property, plant and equipment, respectively. We completed the impairment analysis in the fourth quarter of fiscal year 2015 which resulted in increasing the property, plant and equipment impairment charge by $1 million to $52 million. Therefore, for the year ended September 30, 2015, the long-lived assets impairment charge was $210 million. In connection with the long-lived assets impairment charges, the Company recorded a deferred tax benefit of $80 million to its income tax provision. The performance of the Purification Solutions reporting unit will continue to be monitored. If the reporting unit does not achieve the financial performance that the Company expects or events or circumstances change, it is possible that additional impairment charges may result. Note H. Goodwill and Intangible Assets Cabot had goodwill balances of $536$154 million and $502$536 million at September 30, 20142015 and 2013,September 30, 2014, respectively. The carrying amount of goodwill attributable to each reportable segment with goodwill balances and the changes in those balances during the yearsperiod ended September 30, 2014 and 20132015 are as follows: | | | | | | | | | | | | | | | | | | | Reinforcement Materials | | | Performance Materials | | | Purification Solutions | | | Total | | | | (Dollars in millions) | | Balance at September 30, 2012 | | $ | 28 | | | $ | 11 | | | $ | 439 | | | $ | 478 | | Measurement period adjustments(1) | | | — | | | | — | | | | 22 | | | | 22 | | Foreign currency impact | | | (3 | ) | | | — | | | | 5 | | | | 2 | | | | | | | | | | | | | | | | | | | Balance at September 30, 2013 | | $ | 25 | | | $ | 11 | | | $ | 466 | | | $ | 502 | | Goodwill acquired(2) | | | 45 | | | | — | | | | — | | | | 45 | | Foreign currency impact | | | (2 | ) | | | (1 | ) | | | (8 | ) | | | (11 | ) | | | | | | | | | | | | | | | | | | Balance at September 30, 2014 | | $ | 68 | | | $ | 10 | | | $ | 458 | | | $ | 536 | | | | | | | | | | | | | | | | | | |
| | Reinforcement Materials | | | Performance Chemicals | | | Purification Solutions | | | Total | | | | (Dollars in millions) | | Balance at September 30, 2014 | | $ | 68 | | | $ | 10 | | | $ | 458 | | | $ | 536 | | Impairment charge | | | — | | | | — | | | | (352 | ) | | | (352 | ) | Foreign currency impact | | | (13 | ) | | | (1 | ) | | | (16 | ) | | | (30 | ) | Balance at September 30, 2015 | | $ | 55 | | | $ | 9 | | | $ | 90 | | | $ | 154 | |
(1) | Measurement period adjustments relate to the acquisition of Purification Solutions in July 2012.
| | Reinforcement Materials | | | Performance Chemicals | | | Purification Solutions | | | Total | | | | (Dollars in millions) | | Accumulated impairment losses at September 30, 2014 | | | — | | | | — | | | | — | | | | — | | Accumulated impairment losses at September 30, 2015 | | $ | — | | | $ | — | | | $ | (352 | ) | | $ | (352 | ) |
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(2) | Goodwill acquired relates to the NHUMO transaction as described in Note C.
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Goodwill impairment tests are performed at least annually. The Company performed its lastmost recent annual impairment assessment as of May 31, 20142015 and determined there was no impairment.an impairment of the assets attributable to the Purification Solutions reporting unit. Refer to Note G. 60
The following table provides information regarding the Company’s intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | | (Dollars in millions) | | Intangible assets with finite lives | | | | | | | | | | | | | | | | | | | | | | | | | Developed technology | | $ | 152 | | | $ | (16 | ) | | $ | 136 | | | $ | 154 | | | $ | (9 | ) | | $ | 145 | | Customer relationships(1) | | | 171 | | | | (17 | ) | | | 154 | | | | 113 | | | | (7 | ) | | | 106 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total intangible assets, finite lives | | $ | 323 | | | $ | (33 | ) | | $ | 290 | | | $ | 267 | | | $ | (16 | ) | | $ | 251 | | Trademarks, indefinite lives | | | 57 | | | | — | | | | 57 | | | | 57 | | | | — | | | | 57 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total intangible assets | | $ | 380 | | | $ | (33 | ) | | $ | 347 | | | $ | 324 | | | $ | (16 | ) | | $ | 308 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | | September 30, 2014 | | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Intangible Assets | | | | (Dollars in millions) | | Intangible assets with finite lives(1) | | | | | | | | | | | | | | | | | | | | | | | | | Developed technologies | | $ | 48 | | | $ | (1 | ) | | $ | 47 | | | $ | 152 | | | $ | (16 | ) | | $ | 136 | | Trademarks | | | 16 | | | | — | | | | 16 | | | | 57 | | | | — | | | | 57 | | Customer relationships | | | 96 | | | | (6 | ) | | | 90 | | | | 171 | | | | (17 | ) | | | 154 | | Total intangible assets | | $ | 160 | | | $ | (7 | ) | | $ | 153 | | | $ | 380 | | | $ | (33 | ) | | $ | 347 | |
(1) | The changeRefer to Note G for intangible assets impairment charges recorded in the gross carrying value of the Customer relationships intangible asset is primarily due to the NHUMO transaction as described in Note C.fiscal 2015.
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Intangible assets with finite lives are amortized over their estimated useful lives, which range from sixteenfourteen to twentytwenty-five years, with a weighted average amortization period of approximately nineteen years. Amortization expense for the years ended September 30, 2015, 2014 and 2013 and 2012 was $14 million, $17 million $14 million and $3$14 million, respectively, 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 $17$9 million each year for the next five fiscal years. Intangible assets with indefinite lives are evaluated for impairment at least annually. The Company performed its annual impairment assessment as of May 31, 2014, and determined there was no impairment. Note H.I. Accounts Payable, Accrued Liabilities and Other Liabilities Accounts payable and accrued liabilities included in current liabilities consist of the following: | | | September 30 | | | September 30 | | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Accounts payable | | $ | 351 | | | $ | 398 | | | $ | 274 | | | $ | 351 | | Accrued employee compensation | | | 48 | | | | 41 | | | | 34 | | | | 48 | | Other accrued liabilities | | | 113 | | | | 95 | | | | 81 | | | | 113 | | | | | | | | | | Total | | $ | 512 | | | $ | 534 | | | $ | 389 | | | $ | 512 | | | | | | | | | |
Other long-term liabilities consist of the following: | | | September 30 | | | September 30 | | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Employee benefit plan liabilities | | $ | 174 | | | $ | 149 | | | $ | 138 | | | $ | 174 | | Non-current tax liabilities | | | 33 | | | | 47 | | | | 17 | | | | 33 | | Other accrued liabilities | | | 84 | | | | 69 | | | | 85 | | | | 84 | | | | | | | | | | Total | | $ | 291 | | | $ | 265 | | | $ | 240 | | | $ | 291 | | | | | | | | | |
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Note I.J. Debt and Other Obligations Long-term Obligations The Company’s long-term obligations, the fiscal year in which they mature and their respective interest rates are summarized below: | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Variable Rate Debt: | | | | | | | | | | | | | $750 million Revolving Credit Facility, expires 2016 | | $ | — | | | $ | — | | | $750 million Revolving Credit Facility, expires 2019 | | | $ | — | | | $ | — | | Chinese Renminbi Notes, due through 2016, 6.15%—6.77% | | | 28 | | | | 47 | | | | — | | | | 28 | | | | | | | | | | Total variable rate debt | | | 28 | | | | 47 | | | | — | | | | 28 | | Fixed Rate Debt: | | | | | | | | | | | | | 5% Notes due 2017 | | $ | 300 | | | $ | 300 | | | $ | 300 | | | $ | 300 | | 2.55% Notes due 2018 | | | 250 | | | | 250 | | | | 250 | | | | 250 | | 3.7% Notes due 2022 | | | 350 | | | | 350 | | | | 350 | | | | 350 | | Medium Term Notes: | | | | | | | | | | | | | Notes due 2019, 7.42% | | | 30 | | | | 30 | | | | 30 | | | | 30 | | Notes due 2022, 8.35%—8.47% | | | 15 | | | | 15 | | | | 15 | | | | 15 | | Notes due 2028, 6.57%—7.28% | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | | | | | | | Total Medium Term Notes | | $ | 53 | | | $ | 53 | | | $ | 53 | | | $ | 53 | | ESOP Note, 8.29% | | | — | | | | 2 | | | Chinese Renminbi Notes, due through 2018, 4.63%—6.15% | | | 31 | | | | 16 | | | | | | | | | | | Chinese Renminbi Notes, due through 2017, 4.63%—6.15% | | | | 5 | | | | 31 | | Total fixed rate debt | | | 984 | | | | 971 | | | | 958 | | | | 984 | | Capital lease obligations, due through 2031 | | | 17 | | | | 18 | | | | 14 | | | | 17 | | Unamortized debt discount | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | (1 | ) | | | | | | | | | Total debt | | | 1,028 | | | | 1,034 | | | | 971 | | | | 1,028 | | Less current portion of long-term debt | | | (24 | ) | | | (14 | ) | | | (1 | ) | | | (24 | ) | | | | | | | | | Total long-term debt | | $ | 1,004 | | | $ | 1,020 | | | $ | 970 | | | $ | 1,004 | | | | | | | | | |
$750 million Revolving Credit Facility—Facility—The amount available for borrowing under the revolving credit agreement, after consideration of letters of credit and commercial paper outstanding, was $720$738 million as of September 30, 2014.2015. Effective October 3, 2014,23, 2015, the Company entered into a new revolving credit agreement that amended and extended the $750 million revolving credit agreement, which was scheduled to mature on August 25, 2016.October 3, 2019. The borrowing capacity on the new revolving credit agreement, which matures on October 3, 2019,23, 2020, subject to two one-year options to extend afteron the first and second anniversaries of the effective date, is $1 billion and continues to support ourthe Company’s commercial paper program. Borrowings under the new revolving credit agreement may be used for working capital, letters of credit and other general corporate purposes. The new revolving credit agreement contains affirmative and negative covenants, a single financial covenant (debt-to-EBITDA)(consolidated total debt to consolidated EBITDA) and events of default customary for financings of this type. Chinese Renminbi Debt—Debt—The Company’s consolidated Chinese subsidiaries had $59$5 million and $63$59 million of unsecured long-term debt outstanding as of September 30, 20142015 and September 30, 2013,2014, respectively. 5% Notes due fiscal 2017—In fiscal 2009, Cabot issued $300 million in registered notes with a coupon of 5% that will mature on October 1, 2016. These notes are unsecured and pay interest on April 1 and October 1. The net proceeds of this offering were $296 million after deducting discounts and issuance costs. The discount of approximately $2 million was recorded at issuance and is being amortized over the life of the notes. 2.55% Notes due fiscal 2018—In July 2012, Cabot issued $250 million in registered notes with a coupon of 2.55% that will mature on January 15, 2018. These notes are unsecured and pay interest on January 15 and July 15. The net proceeds of this offering were $248 million after deducting discounts and issuance costs. The discount of less than $1 million was recorded at issuance and is being amortized over the life of the notes. 3.7% Notes due fiscal 2022—In July 2012, Cabot issued $350 million in registered notes with a coupon of 3.7% that will mature on July 15, 2022. These notes are unsecured and pay interest on January 15 and July 15. The net proceeds of this offering were $347 million after deducting discounts and issuance costs. The discount of less than $1 million was recorded at issuance and is being amortized over the life of the notes. 62
Medium Term Notes—At both September 30, 20142015 and 2013,2014, there were $53 million of unsecured medium term notes outstanding issued to numerous lenders with various fixed interest rates and maturity dates. The weighted average maturity of the total outstanding medium term notes is 76 years with a weighted average interest rate of 7.65%. ESOP Debt—In November 1988, Cabot’s Employee Stock Ownership Plan (“ESOP”) borrowed $75 million from an institutional lender in order to finance its purchase of Cabot shares. This debt bore interest at 8.29% per annum and matured on December 31, 2013. Cabot, as guarantor, has reflected the outstanding balance of $2 million at September 30, 2013. An equal amount, representing deferred employee benefits, has been recorded as a reduction to stockholders’ equity. Cabot contributed $1 million to the ESOP to service the debt during fiscal 2014, $4 million during fiscal 2013, and $5 million during fiscal 2012. Dividends on ESOP shares used for debt service were less than $1 million for fiscal 2014 and $2 million in fiscal years 2013 and 2012. In addition, interest incurred on the ESOP debt was less than $1 million during fiscal 2014 and 2013 and $1 million during fiscal 2012.
Capital Lease Obligations—Cabot had capital lease obligations for certain equipment and buildings with a recorded value of $17$14 million and $18$17 million at September 30, 20142015 and 2013,2014, respectively. Cabot will make payments totaling $39$33 million over the next 1716 years, including $11$9 million of imputed interest. At September 30, 20142015 and 2013,2014, the original cost of capital lease assets was $22$20 million and $24$22 million, respectively, and the associated accumulated depreciation of assets under capital leases was $9 million at both September 30, 20142015 and 2013.2014. The amortization related to those assets under capital lease is included in depreciation expense. Future Years Payment Schedule The aggregate principal amounts of long-term debt and capital lease obligations due in each of the five years from fiscal 20152016 through 20192020 and thereafter are as follows: Fiscal Years Ending September 30, | | | Principal Payments on Long-Term Debt | | | Payments on Capital Lease Obligations | | | Total | | | | | | | | | | (Dollars in millions) | | Fiscal Years Ending | | Principal payments on long-term debt | | | Payments on Capital Lease Obligations | | Total | | | | | (Dollars in millions) | | | 2015 | | $ | 23 | | | $ | 4 | | | $ | 27 | | | 2016 | | | 7 | | | | 4 | | | | 11 | | | $ | — | | | $ | 3 | | | $ | 3 | | 2017 | | | 314 | | | | 4 | | | | 318 | | | | 305 | | | | 4 | | | | 309 | | 2018 | | | 265 | | | | 3 | | | | 268 | | | | 250 | | | | 3 | | | | 253 | | 2019 | | | 30 | | | | 3 | | | | 33 | | | | 30 | | | | 3 | | | | 33 | | 2020 | | | | — | | | | 3 | | | | 3 | | Thereafter | | | 373 | | | | 21 | | | | 394 | | | | 373 | | | | 17 | | | | 390 | | Less: executory costs and interest | | | — | | | | (22 | ) | | | (22 | ) | | | — | | | | (19 | ) | | | (19 | ) | | | | | | | | | | | | Total | | $ | 1,012 | | | $ | 17 | | | $ | 1,029 | | | $ | 958 | | | $ | 14 | | | $ | 972 | | | | | | | | | | | | |
Standby letters of credit—At September 30, 2014,2015, the Company had provided standby letters of credit that were outstanding and not drawn totaling $10$11 million, which expire through fiscal 2015.2016. Short-term Obligations Short-term Notes Payable—The Company had unsecured short-term notes of $44$22 million and $264$44 million as of September 30, 20142015 and 2013,2014, respectively, with maturities of less than one year. The weighted-average interest rate on short-term notes payable, including commercial paper, was 3.9%4.6% and 0.7%3.9% as of September 30, 20142015 and 2013,2014, respectively. In January 2013, Cabot entered into agreements to initiateThe Company has a commercial paper program under which Cabot may issue unsecured commercial paper. Theand the maximum aggregate balance of commercial paper notes outstanding and the amounts borrowed under the revolving credit facility may not exceed the current maximum sizeborrowing capacity of the revolving credit facility, $750 million.million (increased to $1 billion in October 2015). The proceeds from the issuance of the commercial paper have been used for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, and acquisitions. The revolving credit facility is available to repay the outstanding commercial paper, if necessary. The commercial paper will typically be sold at a discount from par at rates that will vary based upon market conditions at the time of the issuance of the commercial paper. The maturities of the commercial paper will vary, but may not exceed 364 days from the date of issue. The definitive documents relating to the commercial paper program contain customary representations, warranties, default and indemnification provisions.necessary.
The outstanding balance of commercial paper, included within the Notes payable caption on the Consolidated Balance Sheets, was $12 million as of September 30, 2015 bearing a weighted-average interest rate of 0.36% with a weighted-average maturity of 1 day. The outstanding balance of commercial paper was $30 million as of September 30, 2014 bearing a weighted-average interest rate of 0.25% with a weighted-average maturity of 1 day. The outstanding balance of commercial paper was $241 million as of September 30, 2013 bearing a weighted-average interest rate of 0.32% with a weighted-average maturity of 28 days. Note J.K. Financial Instruments and Fair Value Measurements The FASB authoritative guidance on fair value measurements defines fair value, provides a framework, for measuring fair value in generally accepted accounting principles, and requires certain disclosures about fair value measurements. The 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 |
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There were no transfers of financial assets or liabilities measured at fair value between Level 1 and Level 2, or transfers into or out of Level 3, during fiscal 20142015 or 2013.2014. At September 30, 20142015 and 2013,2014, the fair value of Guaranteed investment contracts, included in Other assets on the Consolidated Balance Sheets, was $13$12 million and $14$13 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 September 30, 20142015 and 2013,2014, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and notes payable and variable rate debt approximated their carrying values due to the short-term nature of these instruments. The carrying value and fair value of the long-term fixed rate debt were $0.98$0.96 billion and $1.05$1.02 billion, respectively, as of September 30, 2014.2015. The carrying value and fair value of the long-term fixed rate debt were $0.97$0.98 billion and $1.01$1.05 billion, respectively, as of September 30, 2013.2014. The fair values of Cabot’s fixed rate long-term debt and capital lease obligations 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. Note K.L. Derivatives Risk Management Cabot’s business operations are exposed to changes in interest rates, foreign currency exchange rates and commodity prices because Cabot finances certain operations through long and short-term borrowings, denominates transactions in a variety of foreign currencies and purchases certain commoditized raw materials. Changes in these rates and prices may have an impact on future cash flows and earnings. The Company manages these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company has policies governing the use of derivative instruments and does not enter into financial instruments for trading or speculative purposes. By using derivative instruments, Cabot is subject to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, Cabot’s credit risk will equal the fair value of the derivative. Generally, when the fair value of a derivative contract is positive, the counterparty owes Cabot, thus creating a payment risk for Cabot. The Company minimizes counterparty credit (or repayment) risk by entering into transactions with major financial institutions of investment grade credit rating. As of September 30, 2014,2015, the counterpartiescounterparty with which the Company has executed derivatives carried a Standard and Poor’s credit rating between A- and AA-, inclusive.of AA-. Cabot’s exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flow. No significant concentration of credit risk existed at September 30, 2014.2015. Interest Rate Risk Management Cabot’s objective is to maintain a certain fixed-to-variable interest rate mix on the Company’s debt obligations. Cabot may enter into interest rate swaps as a hedge of the underlying debt instruments to effectively change the characteristics of the interest rate without changing the debt instrument. As of both September 30, 20142015 and 2013,2014, there were no derivatives held to manage interest rate risk. 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 a currency where the Company expects long-term, stable cash receipts. Additionally, the Company has foreign currency exposure arising from its net investments in foreign operations. Cabot, from time to time, enters 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. 64
The following table provides details of the derivatives held as of September 30, 20142015 and 20132014 to manage foreign currency risk. | | | | | | | | | | | | | Notional Amount | | | Description | | Borrowing | | September 30, 2015 | | September 30, 2014 | | September 30, 2013
| | Hedge Designation | Forward Foreign Currency Contracts(1) | | N/A | | USD 2 million | | USD 32 million | | USD 31 million | | No designation |
(1) | Cabot’s forward foreign exchange contracts are denominated primarily in the British pound sterling, Brazilian real, Chinese renminbi,and Czech koruna and Indian rupee.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 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. 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 Accumulated other comprehensive (loss) income 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. 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 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. During fiscal 2015 and 2014, there were no derivatives designated as hedges. During fiscal 2013, and 2012, for derivatives designated as hedges, the change in unrealized gains in Accumulated other comprehensive (loss) income, the hedge ineffectiveness recognized in earnings, the realized gains or losses reclassified from Accumulated other comprehensive (loss) income, and the losses reclassified from Accumulated other comprehensive (loss) income to earnings were immaterial. During fiscal 2013 and 2012, respectively, a gain of $4 million and a loss of $10 million werewas recognized in earnings as a result of the remeasurement to Euros of the $175 million bond held by one of Cabot’s European subsidiaries. Both theThe gain and loss werewas recognized in earnings through Other (expense) income (expense) within the Consolidated Statements of Operations. The 2013 gain was offset by a loss of $2 million and the 2012 loss was offset by a gain of $12 million, both from Cabot’s cross currency swaps that are not designated as hedges, but which Cabot entered into to offset the foreign currency remeasurement exposure on the debt. Additionally, during fiscal 2013, and 2012, Cabot recognized in earnings through Other (expense) income (expenses) within the Consolidated Statements of Operations, gainsa gain of $5 million and $10 million, respectively, related to its foreign currency forward contracts, which were not designated as hedges. At both September 30, 20142015 and 2013,2014, the fair value of derivative instruments were immaterial and were presented in Prepaid expenses and other current assets and Accounts payable and accrued liabilities on the Consolidated Balance Sheets. 65
Note L.M. Venezuela Cabot owns 49% of an operating carbon black affiliate in Venezuela, which is accounted for as an equity affiliate, through wholly-owned subsidiaries that carry the investment and receive its dividends. As of September 30, 2014,2015, these subsidiaries carried the operating affiliate investment of $17$14 million and held 1918 million bolivars (less than $1 million) in cash. During fiscal 2015, 2014 and 2013, and 2012, the operating affiliate declaredCompany received dividends in the amounts of $6 million, $5 million $3 million and $6$3 million, respectively, which were paid in U.S. dollars and repatriated to the Company’s wholly-owned subsidiaries.dollars. During the second quarter of fiscal 2014, the Venezuelan government enacted several changes to Venezuela’s foreign exchange regime, introducing a multi-tier foreign exchange system whereby there are now three exchange rate mechanisms available to convert Venezuelan bolivars to U.S. dollars. In March 2014, the Venezuelan government created a currency exchange mechanism referred to as SICAD 2 (Supplementary System for the Administration of Foreign Currency) and allowed its use by all entities for all transactions. The exchange rate on March 31, 2014 under SICAD 2 was 50.8 bolivars to the U.S. dollar (B/$) compared to the previously used official exchange rate of 6.3 B/$. A significant portion of 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. SinceThe operating affiliate and the Company’s wholly owned subsidiaries used an exchange rate that was made available to the CompanyCabot when converting these dollars into bolivars was the SICAD 2 exchange rate, the operating affiliate remeasured itsto remeasure their bolivar denominated monetary accounts at that rate.accounts. The negative impact of the exchange rate devaluationmade available to us on the operating affiliate’s results was $8 million, of which Cabot’s share was $4 million as of September 30, 2014. The SICAD 2 rate at September 30, 20142015 was 50.0 B/$.
In addition, in the second quarter of fiscal 2014, the Company remeasured the bolivar denominated monetary accounts in its wholly-owned subsidiaries at the SICAD 2 rate as it was determined that this exchange mechanism is applicable to these subsidiaries. This resulted in the recognition of a $2 million loss which was recorded within Other income (expense) within the Consolidated Statements of Operations. The Company also recognized a tax benefit of $2 million from a reduction in its bolivar denominated deferred tax liability due52 bolivars to the impact of the devaluation of the bolivar on unremitted earnings.U.S. dollar (B/S).
The operating entity has generally been profitable and has significant export operations from which it is entitled to retain a certain percentage of the foreign currency that it collects, which is principally the U.S. dollar.profitable. The Company continues to closely monitor developments in Venezuela and their potential impact on the recoverability of its equity affiliate investment. The Company closely monitors its ability to convert its bolivar holdings into U.S. dollars, as the Company intends to convert substantially all bolivars held by its wholly-owned subsidiaries in Venezuela to U.S. dollars as soon as practical. Any future change in the SICAD 2exchange rate made available to the Company or opening of additional parallel markets 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. Note M.N. Employee Benefit Plans The information below provides detail concerning the Company’s benefit obligations under the defined benefit and postretirement benefit plans it sponsors. The information included in this footnote and the related tables also includes amounts pertaining to the Company’s former Supermetals business, unless indicated otherwise. Defined benefit plans provide pre-determined benefits to employees that are distributed upon retirement. Cabot is making all required contributions to these plans. The accumulated benefit obligation was $170 million for the U.S. defined benefit plans and $326 million for the foreign plans as of September 30, 2015 and $173 million for the U.S. defined benefit plans and $462 million for the foreign plans as of September 30, 2014 and $170 million for the U.S. defined benefit plans and $412 million for the foreign plans as of September 30, 2013.2014. In addition to benefits provided under the defined benefit and postretirement benefit plans, the Company provided benefits under defined contribution plans. One of these plans included an Employee Stock Ownership Plan (“ESOP”) component, which is described below. Cabot recognized expenses related to these plans, not including the expenses related to the ESOP, of $20 million in fiscal 2015, $14 million in fiscal 2014 and $9 million in fiscal 2013 and $7 million in fiscal 2012.2013. Employee Stock Ownership Plan In the first quarter of fiscal 2014, all shares that remained available for distribution under the ESOP were allocated to participant accounts and no further contributions under the plan have been or will be made. Compensation expense related to the ESOP, which is based on the fair value of the shares on the date of allocation, was $1 million in fiscal 2014 and $4 million in fiscal 2013 and $5 million in fiscal 2012. 2013.66
The following provides information about benefit obligations, plan assets, the funded status and weighted-average assumptions of the defined benefit pension and postretirement benefit plans: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2014 | | 2013 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | Pension Benefits | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | | (Dollars in millions) | | Change in Benefit Obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation at beginning of year | | $ | 170 | | | $ | 439 | | | $ | 195 | | | $ | 423 | | | $ | 55 | | | $ | 17 | | | $ | 64 | | | $ | 18 | | | $ | 173 | | | $ | 491 | | | $ | 170 | | | $ | 439 | | | $ | 50 | | | $ | 17 | | | $ | 55 | | | $ | 17 | | Service cost | | | 2 | | | | 9 | | | | 6 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 9 | | | | 2 | | | | 9 | | | | — | | | | — | | | | — | | | | — | | Interest cost | | | 7 | | | | 16 | | | | 6 | | | | 15 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | | | 7 | | | | 11 | | | | 7 | | | | 16 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | Plan participants’ contribution | | | — | | | | 2 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | Foreign currency exchange rate changes | | | — | | | | (28 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | (45 | ) | | | — | | | | (28 | ) | | | — | | | | (2 | ) | | | — | | | | — | | Loss (gain) from changes in actuarial assumptions | | | 6 | | | | 75 | | | | (19 | )(1) | | | 12 | | | | (3 | ) | | | — | | | | (6 | ) | | | — | | | Benefits paid(2) | | | (11 | ) | | | (18 | ) | | | (11 | ) | | | (17 | ) | | | (4 | ) | | | (1 | ) | | | (5 | ) | | | (1 | ) | | Settlements or curtailment gain | | | — | | | | (7 | ) | | | (7 | ) | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | Loss (gain) from changes in actuarial assumptions and plan experience | | | | 3 | | | | (23 | ) | | | 6 | | | | 75 | | | | 1 | | | | (1 | ) | | | (3 | ) | | | — | | Benefits paid(1) | | | | (13 | ) | | | (13 | ) | | | (11 | ) | | | (18 | ) | | | (4 | ) | | | — | | | | (4 | ) | | | (1 | ) | Settlements or curtailment gain(2) | | | | — | | | | (85 | ) | | | — | | | | (7 | ) | | | — | | | | — | | | | — | | | | — | | Acquisition / business combination | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | | Divestiture of Supermetals business | | | — | | | | — | | | | — | | | | (5 | ) | | | — | | | | — | | | | — | | | | — | | | Plan amendments | | | | — | | | | — | | | | — | | | | — | | | | (11 | ) | | | — | | | | — | | | | — | | Other | | | (1 | ) | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation at end of year | | $ | 173 | | | $ | 491 | | | $ | 170 | | | $ | 439 | | | $ | 50 | | | $ | 17 | | | $ | 55 | | | $ | 17 | | | $ | 170 | | | $ | 348 | | | $ | 173 | | | $ | 491 | | | $ | 38 | | | $ | 15 | | | $ | 50 | | | $ | 17 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2014 | | 2013 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | Pension Benefits | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | | (Dollars in millions) | | Change in Plan Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 155 | | | $ | 375 | | | $ | 149 | | | $ | 356 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 167 | | | $ | 388 | | | $ | 155 | | | $ | 375 | | | | — | | | | — | | | $ | — | | | $ | — | | Actual return on plan assets | | | 21 | | | | 41 | | | | 17 | | | | 22 | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | 11 | | | | 21 | | | | 41 | | | | — | | | | — | | | | — | | | | — | | Employer contribution | | | 3 | | | | 12 | | | | — | | | | 13 | | | | 4 | | | | 1 | | | | 5 | | | | — | | | | 1 | | | | 10 | | | | 3 | | | | 12 | | | | 4 | | | | — | | | | 4 | | | | 1 | | Plan participants’ contribution | | | — | | | | 2 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | — | | Foreign currency exchange rate changes | | | — | | | | (20 | ) | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (34 | ) | | | — | | | | (20 | ) | | | — | | | | — | | | | — | | | | — | | Benefits paid(2) | | | (11 | ) | | | (18 | ) | | | (10 | ) | | | (17 | ) | | | (4 | ) | | | (1 | ) | | | (5 | ) | | | — | | | Settlements | | | — | | | | (4 | ) | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | Benefits paid(1) | | | | (13 | ) | | | (13 | ) | | | (11 | ) | | | (18 | ) | | | (4 | ) | | | — | | | | (4 | ) | | | (1 | ) | Settlements(2) | | | | — | | | | (85 | ) | | | — | | | | (4 | ) | | | — | | | | — | | | | — | | | | — | | Acquisition / business combination | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | Divestiture of Supermetals business | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | Expenses paid from assets | | | (1 | ) | | | (1 | ) | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at end of year | | $ | 167 | | | $ | 388 | | | $ | 155 | | | $ | 375 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 153 | | | $ | 279 | | | $ | 167 | | | $ | 388 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded status | | $ | (6 | ) | | $ | (103 | ) | | $ | (15 | ) | | $ | (64 | ) | | $ | (50 | ) | | $ | (17 | ) | | $ | (55 | ) | | $ | (17 | ) | | $ | (17 | ) | | $ | (69 | ) | | $ | (6 | ) | | $ | (103 | ) | | $ | (38 | ) | | $ | (15 | ) | | $ | (50 | ) | | $ | (17 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Recognized liability | | $ | (6 | ) | | $ | (103 | ) | | $ | (15 | ) | | $ | (64 | ) | | $ | (50 | ) | | $ | (17 | ) | | $ | (55 | ) | | $ | (17 | ) | | $ | (17 | ) | | $ | (69 | ) | | $ | (6 | ) | | $ | (103 | ) | | $ | (38 | ) | | $ | (15 | ) | | $ | (50 | ) | | $ | (17 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1)(1) | During fiscal 2013, the Company approved the freezing of the U.S. pension plan that resulted in the remeasurement of the plan assets and liabilities. The remeasurement decreased the net pension obligation of the plan, which is included within the Other liabilities caption on the Consolidated Balance Sheets, by $19 million and increased Accumulated other comprehensive (loss) income by $13 million, net of tax. The impact to the Company’s Net periodic benefit cost was less than $1 million. |
(2) | Included in this amount isare $6 million and $7 million that the Company paid directly to the participants in its defined benefit plans in both fiscal 2015 and 2014, and 2013.respectively. |
(2) | The $85 million settlement amount is primarily driven by the transfer of certain plan assets and obligations to a third party, as discussed further under Curtailments and Settlements of Employee Benefit Plans. |
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Pension Assumptions and Strategy The following assumptions were used to determine the pension benefit obligations at September 30: | | | Assumptions as of September 30 | | | Assumptions as of September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | Pension Benefits | | | Pension Benefits | | | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | Actuarial assumptions as of the year-end measurement date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 4.0 | % | | | 3.0 | % | | | 4.5 | % | | | 3.8 | % | | | 3.5 | % | | | 3.6 | % | | | 4.2 | % | | | 2.9 | % | | | 4.0 | % | | | 3.0 | % | | | 4.5 | % | | | 3.8 | % | Rate of increase in compensation | | | N/A | | | | 2.8 | % | | | 3.0 | % | | | 3.1 | % | | | 3.5 | % | | | 3.1 | % | | N/A | | | | 2.8 | % | | N/A | | | | 2.8 | % | | | 3.0 | % | | | 3.1 | % | Actuarial assumptions used to determine net periodic benefit cost during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 4.5 | % | | | 3.8 | % | | | 3.5 | % | | | 3.6 | % | | | 4.5 | % | | | 4.8 | % | | | 4.0 | % | | | 3.0 | % | | | 4.5 | % | | | 3.8 | % | | | 3.5 | % | | | 3.6 | % | Expected long-term rate of return on plan assets | | | 7.8 | % | | | 5.3 | % | | | 7.8 | % | | | 5.3 | % | | | 7.8 | % | | | 5.3 | % | | | 7.5 | % | | | 5.4 | % | | | 7.8 | % | | | 5.3 | % | | | 7.8 | % | | | 5.3 | % | Rate of increase in compensation | | | 3.0 | % | | | 3.1 | % | | | 3.5 | % | | | 3.1 | % | | | 3.8 | % | | | 3.2 | % | | N/A | | | | 2.8 | % | | | 3.0 | % | | | 3.1 | % | | | 3.5 | % | | | 3.1 | % |
Postretirement Assumptions and Strategy The following assumptions were used to determine the postretirement benefit obligations at September 30: | | | Assumptions as of September 30 | | | Assumptions as of September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | Postretirement Benefits | | | Postretirement Benefits | | | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | Actuarial assumptions as of the year-end measurement date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 3.8 | % | | | 3.9 | % | | | 4.0 | % | | | 4.4 | % | | | 3.3 | % | | | 3.9 | % | | | 3.7 | % | | | 3.9 | % | | | 3.8 | % | | | 3.9 | % | | | 4.0 | % | | | 4.4 | % | Initial health care cost trend rate | | | 7.0 | % | | | 7.1 | % | | | 7.5 | % | | | 7.5 | % | | | 8.0 | % | | | 7.4 | % | | | 6.5 | % | | | 6.8 | % | | | 7.0 | % | | | 7.1 | % | | | 7.5 | % | | | 7.5 | % | Actuarial assumptions used to determine net cost during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 4.0 | % | | | 4.4 | % | | | 3.3 | % | | | 3.9 | % | | | 4.5 | % | | | 4.9 | % | | | 3.8 | % | | | 3.9 | % | | | 4.0 | % | | | 4.4 | % | | | 3.3 | % | | | 3.9 | % | Initial health care cost trend rate | | | 7.5 | % | | | 7.5 | % | | | 8.0 | % | | | 7.4 | % | | | 8.5 | % | | | 7.9 | % | | | 7.0 | % | | | 7.1 | % | | | 7.5 | % | | | 7.5 | % | | | 8.0 | % | | | 7.4 | % |
Cabot uses discount rates as of September 30, the plans’ measurement date, to determine future benefit obligations under its U.S. and foreign defined benefit plans. The discount rates for the defined benefit plans in the U.S., Canada, Mexico, UAE, Euro-zone, Japan, Switzerland and the U.K. are derived from yield curves that reflect high quality corporate bond yield or swap rate information in each region and reflect the characteristics of Cabot’s employee benefit plans. The discount rates for the defined benefit plans in the Czech Republic and Indonesia are based on government bond indices that best reflect the durations of the plans, adjusted for credit spreads presented in selected AA corporate bond indices. The rates utilized are selected because they represent long-term, high quality, fixed income benchmarks that approximate the long-term nature of Cabot’s pension obligations and related payouts. | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2014 | | 2013 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | Pension Benefits | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | | (Dollars in millions) | | Net Amounts Recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noncurrent assets | | $ | — | | | $ | 4 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Current liabilities | | | — | | | | (1 | ) | | | — | | | | (1 | ) | | | (5 | ) | | | — | | | | (5 | ) | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | (1 | ) | | | (4 | ) | | | — | | | | (5 | ) | | | — | | Noncurrent liabilities | | | (6 | ) | | | (106 | ) | | | (15 | ) | | | (67 | ) | | | (45 | ) | | | (17 | ) | | | (50 | ) | | | (17 | ) | | | (16 | ) | | | (73 | ) | | | (6 | ) | | | (106 | ) | | | (34 | ) | | | (15 | ) | | | (45 | ) | | | (17 | ) |
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Amounts recognized in Accumulated other comprehensive (loss) income (loss) at September 30, 20142015 and 20132014 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2014 | | | 2013 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Net actuarial (gain) loss | | $ | (9 | ) | | $ | 118 | | | $ | (4 | ) | | $ | 78 | | | $ | (7 | ) | | $ | 2 | | | $ | (3 | ) | | $ | 3 | | Net prior service (credit) | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (7 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance in accumulated other comprehensive income, pretax | | $ | (9 | ) | | $ | 118 | | | $ | (4 | ) | | $ | 78 | | | $ | (10 | ) | | $ | 2 | | | $ | (10 | ) | | $ | 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Net actuarial loss (gain) | | $ | 5 | | | $ | 65 | | | $ | (9 | ) | | $ | 118 | | | $ | (6 | ) | | $ | 1 | | | $ | (7 | ) | | $ | 2 | | Net prior service credit | | | — | | | | (1 | ) | | | — | | | | — | | | | (11 | ) | | | — | | | | (3 | ) | | | — | | Balance in accumulated other comprehensive (loss) income, pretax | | $ | 5 | | | $ | 64 | | | $ | (9 | ) | | $ | 118 | | | $ | (17 | ) | | $ | 1 | | | $ | (10 | ) | | $ | 2 | |
In fiscal 2015,2016, the Company expects an estimated net loss of $5$3 million will be amortized from Accumulated other comprehensive (loss) income to net periodic benefit cost. In addition, the Company expects prior service credits of $3$4 million for other postretirement benefits will be amortized from Accumulated other comprehensive (loss) income to net periodic benefit costs in fiscal 2015.2016. Estimated Future Benefit Payments The Company expects that the following benefit payments will be made to plan participants in the years from 20152016 to 2024:2025: | | | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | | (Dollars in millions) | | Years Ended: | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | $ | 12 | | | $ | 16 | | | $ | 4 | | | $ | 1 | | | 2016 | | | 12 | | | | 14 | | | | 4 | | | | 1 | | | $ | 12 | | | $ | 14 | | | $ | 4 | | | $ | — | | 2017 | | | 14 | | | | 15 | | | | 4 | | | | 1 | | | | 10 | | | | 12 | | | | 4 | | | | — | | 2018 | | | 13 | | | | 16 | | | | 5 | | | | 1 | | | | 11 | | | | 13 | | | | 3 | | | | 1 | | 2019 | | | 12 | | | | 16 | | | | 5 | | | | 1 | | | | 11 | | | | 13 | | | | 3 | | | | 1 | | 2020-2024 | | | 61 | | | | 97 | | | | 19 | | | | 4 | | | 2020 | | | | 11 | | | | 14 | | | | 3 | | | | 1 | | 2021-2025 | | | | 55 | | | | 77 | | | | 14 | | | | 4 | |
Postretirement medical benefits are unfunded and impact Cabot’s cash flows as benefits become due. The Company expects to contribute less than $1 million to its U.S. pension plan and $9$8 million to its foreign pension planplans in fiscal 2015.2016. Net periodic defined benefit pension and other postretirement benefit costs include the following components: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2012 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Service cost | | $ | 2 | | | $ | 9 | | | $ | 6 | | | $ | 9 | | | $ | 5 | | | $ | 7 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | Interest cost | | | 7 | | | | 16 | | | | 6 | | | | 15 | | | | 7 | | | | 11 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | Expected return on plan assets | | | (10 | ) | | | (19 | ) | | | (10 | ) | | | (18 | ) | | | (9 | ) | | | (13 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Amortization of prior service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | — | | Net losses | | | — | | | | 3 | | | | 1 | | | | 4 | | | | 1 | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Settlements or Curtailments cost (income) | | | — | | | | — | | | | 1 | | | | 2 | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | (1 | ) | | $ | 9 | | | $ | 4 | | | $ | 12 | | | $ | 5 | | | $ | 9 | | | $ | (1 | ) | | $ | 1 | | | $ | (1 | ) | | $ | 1 | | | $ | (1 | ) | | $ | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Service cost | | $ | 1 | | | $ | 9 | | | $ | 2 | | | $ | 9 | | | $ | 6 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Interest cost | | | 7 | | | | 11 | | | | 7 | | | | 16 | | | | 6 | | | | 15 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | | | 2 | | | | 1 | | Expected return on plan assets | | | (11 | ) | | | (14 | ) | | | (10 | ) | | | (19 | ) | | | (10 | ) | | | (18 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Amortization of prior service cost | | | — | | | | 3 | | | | — | | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | (3 | ) | | | — | | | | (3 | ) | | | — | | Net losses | | | — | | | | 4 | | | | — | | | | 3 | | | | 1 | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Settlements or Curtailments cost | | | — | | | | 18 | | | | — | | | | — | | | | 1 | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Net periodic (benefit) cost | | $ | (3 | ) | | $ | 31 | | | $ | (1 | ) | | $ | 9 | | | $ | 4 | | | $ | 12 | | | $ | (2 | ) | | $ | 1 | | | $ | (1 | ) | | $ | 1 | | | $ | (1 | ) | | $ | 1 | |
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Other changes in plan assets and benefit obligations recognized in other comprehensive income are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2012 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Net (gains) losses | | $ | (4 | ) | | $ | 50 | | | $ | (32 | ) | | $ | 8 | | | $ | (3 | ) | | $ | 27 | | | $ | (4 | ) | | $ | — | | | $ | (6 | ) | | $ | — | | | $ | 1 | | | $ | 1 | | Prior service cost | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | 3 | | | | — | | | | 3 | | | | — | | | | 1 | | | | — | | Amortization of prior service credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | — | | Amortization of prior unrecognized loss | | | — | | | | (3 | ) | | | (2 | ) | | | (4 | ) | | | (1 | ) | | | (3 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | — | | | | (1 | ) | | | — | | | | (4 | ) | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other Comprehensive (income) loss | | $ | (4 | ) | | $ | 46 | | | $ | (34 | ) | | $ | — | | | $ | (5 | ) | | $ | 25 | | | $ | (1 | ) | | $ | — | | | $ | (3 | ) | | $ | — | | | $ | 5 | | | $ | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | 2015 | | | 2014 | | | 2013 | | | | Pension Benefits | | | Postretirement Benefits | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Net losses (gains) | | $ | 14 | | | $ | (8 | ) | | $ | (4 | ) | | $ | 50 | | | $ | (32 | ) | | $ | 8 | | | $ | 1 | | | $ | — | | | $ | (4 | ) | | $ | — | | | $ | (6 | ) | | $ | — | | Prior service (credit) cost | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | (11 | ) | | | — | | | | 3 | | | | — | | | | 3 | | | | — | | Amortization of prior service credit | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Amortization of prior unrecognized loss | | | — | | | | (4 | ) | | | — | | | | (3 | ) | | | (2 | ) | | | (4 | ) | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | Other | | | — | | | | (27 | ) | | | — | | | | (1 | ) | | | — | | | | (4 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Total other Comprehensive loss (income) | | $ | 14 | | | $ | (41 | ) | | $ | (4 | ) | | $ | 46 | | | $ | (34 | ) | | $ | — | | | $ | (6 | ) | | $ | — | | | $ | (1 | ) | | $ | — | | | $ | (3 | ) | | $ | — | |
Curtailments and settlementsSettlements of employee benefit plansEmployee Benefit Plans In recent years, the Company incurred curtailments and settlements of certain of its employee benefit plans. Associated with these curtailments and settlements, the Company recognized net losses of $17 million, less than $1 million, $3 million, and $1$3 million in fiscal 2015, 2014 and 2013, and 2012, respectively. Effective October 1, 2014, the Company transferred the defined benefit obligations and pension plan assets in one of its foreign defined benefit plans to a multi-employer plan. This action effectively moves the administrative, asset custodial, asset investment, actuarial, communication and benefit payment obligations to the multi-employer fund administrator. Cabot is required to make contributions to the multi-employer plan which is over 80% funded. Contributed assets by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. As a result of the transfer an estimateda pre-tax charge of $18 million will bewas recorded in the first quarter of fiscal 2015. In addition, there was an approximately $85 million reduction in plan assets and plan obligations as a result of the transfer of assets and obligations of this foreign plan. Sensitivity Analysis Measurement of postretirement benefit expense is based on actuarial assumptions used to value the postretirement benefit liability at the beginning of the year. Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. The fiscal 20142015 weighted-average assumed health care cost trend rate is 7.5%7.0% for U.S. plans and 7.1% for foreign plans. The ultimate weighted-average health care cost trend rate has been designated as 5%5.0% for U.S. plans and 6.6% for foreign plans, and is anticipated to be achieved during 20182019 and 2016, respectively. A one percentage point change in the 20142015 assumed health care cost trend rate would have the following effects: | | | | | | | | | | | | | | | | | | | 1-Percentage-Point | | | | Increase | | | Decrease | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Effect on postretirement benefit obligation | | $ | — | | | $ | 3 | | | $ | (1 | ) | | $ | (2 | ) |
| | 1-Percentage-Point | | | | Increase | | | Decrease | | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | | | (Dollars in millions) | | Effect on postretirement benefit obligation | | $ | — | | | $ | 3 | | | $ | — | | | $ | (2 | ) |
Plan Assets The Company’s defined benefit pension plans weighted-average asset allocations at September 30, 20142015 and 2013,2014, by asset category, are as follows: | | | Pension Assets | | | Pension Assets | | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | U.S. | | Foreign | | U.S. | | Foreign | | | U.S. | | | Foreign | | | U.S. | | | Foreign | | Asset Category: | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities | | | 55 | % | | | 37 | % | | | 63 | % | | | 41 | % | | | 55 | % | | | 39 | % | | | 55 | % | | | 37 | % | Debt securities | | | 45 | % | | | 47 | % | | | 37 | % | | | 54 | % | | | 45 | % | | | 54 | % | | | 45 | % | | | 47 | % | Cash and other securities | | | — | | | | 16 | % | | | — | | | | 5 | % | | | — | | | | 7 | % | | | — | | | | 16 | % | | | | | | | | | | | | | | | Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | | | | | | | | | | | | |
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To develop the expected long-term rate of return on plan assets assumption, the Company used a capital asset pricing model. The model considers the current level of expected returns on risk-free investments comprised of government bonds, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns for each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return for each plan. Cabot’s investment strategy for each of its defined benefit plans in the U.S. and abroad is generally based on a set of investment objectives and policies that cover time horizons and risk tolerance levels consistent with plan liabilities. Periodic studies are performed to determine the asset mix that will meet pension obligations at a reasonable cost to the Company. The assets of the defined benefit plans are comprised principally of investments in equity and high quality fixed income securities, which are broadly diversified across the capitalization and style spectrum and are managed using both active and passive strategies. The weighted average target asset allocation for the U.S. plans is 60% in equity and 40% in fixed income and for the foreign plans is 36%40% in equity, 55%53% in fixed income, 4%3% in real estate and 5%4% in cash and other securities. For pension plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs. For pension plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks. The fair value of the Company’s pension plan assets at September 30, 20142015 and 20132014 by asset category is as follows: | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | | | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | | | | | | 2014 | | | 2013 | | | | 2015 | | | Total | | | 2014 | | | Total | | Asset Category: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | $ | 69 | | | $ | — | | | $ | 69 | | | $ | 2 | | | $ | 1 | | | $ | 3 | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | 69 | | | $ | — | | | $ | 69 | | Direct investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. equity securities | | | 22 | | | | — | | | | 22 | | | | 21 | | | | — | | | | 21 | | | | 22 | | | | — | | | | 22 | | | | 22 | | | | — | | | | 22 | | Non-U.S. equity securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Non-U.S. government bonds | | | — | | | | — | | | | — | | | | 52 | | | | — | | | | 52 | | | Non-U.S. corporate bonds | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total direct investments | | $ | 22 | | | $ | — | | | $ | 22 | | | $ | 73 | | | $ | — | | | $ | 73 | | | | 22 | | | | — | | | | 22 | | | | 22 | | | | — | | | | 22 | | Investment funds: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity funds(1) | | | 68 | | | | 120 | | | | 188 | | | | 132 | | | | 101 | | | | 233 | | | | 60 | | | | 108 | | | | 168 | | | | 68 | | | | 120 | | | | 188 | | Fixed income funds(2) | | | 90 | | | | 163 | | | | 253 | | | | 93 | | | | 111 | | | | 204 | | | | 70 | | | | 150 | | | | 220 | | | | 90 | | | | 163 | | | | 253 | | Real estate funds(3) | | | — | | | | 9 | | | | 9 | | | | — | | | | 1 | | | | 1 | | | | — | | | | 9 | | | | 9 | | | | — | | | | 9 | | | | 9 | | Common and collective investment trust funds(4) | | | — | | | | 1 | | | | 1 | | | | — | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | Money market funds | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | 3 | | | | | | | | | | | | | | | | | | | | | | | Cash equivalent funds | | | | — | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | Total investment funds | | | 158 | | | $ | 293 | | | $ | 451 | | | $ | 228 | | | $ | 214 | | | $ | 442 | | | | 130 | | | | 268 | | | | 398 | | | | 158 | | | | 293 | | | | 451 | | Alternative investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Insurance contracts(5) | | | — | | | | 13 | | | | 13 | | | | — | | | | 12 | | | | 12 | | | | — | | | | 11 | | | | 11 | | | | — | | | | 13 | | | | 13 | | Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total alternative investments | | | — | | | $ | 13 | | | $ | 13 | | | $ | — | | | $ | 12 | | | $ | 12 | | | | — | | | | 11 | | | | 11 | | | | — | | | | 13 | | | | 13 | | | | | | | | | | | | | | | | | | | | | | Total pension plan assets | | $ | 249 | | | $ | 306 | | | $ | 555 | | | $ | 303 | | | $ | 227 | | | $ | 530 | | | $ | 153 | | | $ | 279 | | | $ | 432 | | | $ | 249 | | | $ | 306 | | | $ | 555 | | | | | | | | | | | | | | | | | | | | | |
(1) | The equity funds asset class includes funds that invest in U.S. equities as well as equity securities issued by companies incorporated, listed or domiciled in countries in developed and/or emerging markets. These companies may be in the small-, mid- or large-cap categories. |
(2) | The fixed income funds asset class includes investments in high quality funds. High quality fixed income funds primarily invest in low risk U.S. and non-U.S. government securities, investment-grade corporate bonds, mortgages and asset-backed securities. A significant portion of the fixed income funds include investment in long-term bond funds. |
(3) | The real estate funds asset class includes funds that primarily invest in entities which are principally engaged in the ownership, acquisition, development, financing, sale and/or management of income-producing real estate properties, both commercial |
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| and residential. These funds typically seek long-term growth of capital and current income that is above average relative to public equity funds. |
(4) | The investment objective of the portfolio of this common and collective investment trust is to achieve long-term, total return in excess of the MSCI World Index Benchmark by investing in equity securities of companies worldwide, emphasizing those with above-average potential for capital appreciation. |
(5) | Insurance contracts held by the Company’s non-U.S. plans are issued by well-known, highly rated insurance companies. |
Note N.O. Stock-Based Compensation The Company has established equity compensation plans that provide stock-based compensation to eligible employees. The 2009 Long-Term Incentive Plan (the “2009 Plan”), which was approved by Cabot’s stockholders on March 12, 2009 and amended on March 8, 2012, authorizes the issuance of approximately 8.9 million shares of common stock. This is the Company’s only equity incentive plan under which awards may currently be made to employees. The terms of awards made under Cabot’s equity compensation plans are generally determined by the Compensation Committee of Cabot’s Board of Directors. The 2009 Plan allows for grants of stock options, restricted stock, restricted stock units and other stock-based awards to employees. The awards made in fiscal 2015, 2014 2013 and 20122013 under the 2009 Plan consist of grants of stock options, time-based restricted stock units, performance-based restricted stock units, and restricted stock units that will be settled in cash. The options were issued with an exercise price equal to 100% of the market price of Cabot’s common stock on the date of grant, vest over a three year period (30% on each of the first and second anniversaries of the date of grant and 40% on the third anniversary of the date of grant) and have a ten-year term. The restricted stock units vest three years from the date of the grant. The number of shares issuable, if any, when a performance-based restricted stock unit award vests will depend on the degree of achievement (threshold, target or maximum performance) of the corporate performance metrics for each year within the three-year performance period of the award. Accordingly, future compensation costs associated with outstanding awards of performance-based restricted stock units may increase or decrease based on the probability of the Company achieving the performance metrics. As of September 30, 2014,2015, there were 42,11035,769 outstanding time-based and performance-based restricted stock units which will be settled by the payment of cash.cash, assuming unbanked awards will be settled at target performance. Compensation expense related to these awards is remeasured throughout the vesting period and until ultimate settlement of the award. Cumulative compensation expense and the associated liability is recorded equal to the fair value of Cabot common stock multiplied by the applicable vesting percentage. The Company recorded liabilities associated with these cash settled awards of $1 million at both September 30, 20142015 and 2013.2014. Stock-based employee compensation expense was $8 million, $9 million $8 million and $10$8 million, after tax, for fiscal 2015, 2014 2013 and 2012,2013, respectively. The Company recognized the full impact of its stock-based employee compensation expense in the Consolidated Statements of Operations for fiscal 2015, 2014 2013 and 20122013 and did not capitalize any such costs on the Consolidated Balance Sheets because those that qualified for capitalization were not material. The following table presents stock-based compensation expenses included in the Company’s Consolidated Statements of Operations: | | | | | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Cost of sales | | $ | 5 | | | $ | 4 | | | $ | 5 | | | $ | 4 | | | $ | 5 | | | $ | 4 | | Selling and administrative expenses | | | 8 | | | | 7 | | | | 9 | | | | 7 | | | | 8 | | | | 7 | | Research and technical expenses | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | | | | | | | | | | Stock-based compensation expense | | | 14 | | | | 12 | | | | 15 | | | | 12 | | | | 14 | | | | 12 | | Income tax benefit | | | (5 | ) | | | (4 | ) | | | (5 | ) | | | (4 | ) | | | (5 | ) | | | (4 | ) | | | | | | | | | | | | Net stock-based compensation expense | | $ | 9 | | | $ | 8 | | | $ | 10 | | | $ | 8 | | | $ | 9 | | | $ | 8 | | | | | | | | | | | | |
As of September 30, 2014,2015, Cabot has $12 million and $3$2 million of total unrecognized compensation cost related to restricted stock units and options, respectively, granted under the Company’s equity incentive plans. These costs are expected to be recognized over a weighted-average period of 1.21.3 years and 0.8 years for restricted stock units and options, respectively. 72
Equity Incentive Plan Activity The following table summarizes the total stock option restricted stock, and restricted stock unit activity in the equity incentive plans for fiscal 2014:2015: | | | | | | | | | | | | | | | | Stock Options | | | Restricted Stock Units | | | | Stock Options | | Restricted Stock | | Restricted Stock Units | | | Total Options | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | | | Restricted Stock Units(1) | | | Weighted Average Grant Date Fair Value | | | | Total Options | | Weighted Average Exercise Price | | Weighted Average Grant Date Fair Value | | Restricted Stock | | Weighted Average Grant Date Fair Value | | Restricted Stock Units(1) | | Weighted Average Grant Date Fair Value | | | (Shares in thousands) | | | | (Shares in thousands) | | | Outstanding at September 30, 2013 | | | 1,623 | | | $ | 26.93 | | | $ | 8.71 | | | | 1 | | | $ | 9.56 | | | | 1,039 | | | $ | 34.39 | | | Outstanding at September 30, 2014 | | | | 1,421 | | | | $31.22 | | | | $10.71 | | | | 946 | | | | $39.31 | | Granted | | | 203 | | | | 47.62 | | | | 18.37 | | | | — | | | | — | | | | 322 | | | | 47.63 | | | | 245 | | | | 46.03 | | | | 15.68 | | | | 345 | | | | 45.85 | | Performance-based adjustment(2) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (25 | ) | | | 39.76 | | | | — | | | | — | | | | — | | | | (202 | ) | | | 41.72 | | Exercised / Vested(3) | | | (403 | ) | | | 22.18 | | | | 6.49 | | | | (1 | ) | | | 9.56 | | | | (344 | ) | | | 34.79 | | | Exercised / Vested | | | | (137 | ) | | | 26.47 | | | | 8.50 | | | | (289 | ) | | | 33.10 | | Cancelled / Forfeited | | | (2 | ) | | | 35.25 | | | | 12.46 | | | | — | | | | — | | | | (46 | ) | | | 36.99 | | | | (19 | ) | | | 41.97 | | | | 15.81 | | | | (65 | ) | | | 42.88 | | | | | | | | | | | | | | | | | | | | | Outstanding at September 30, 2014 | | | 1,421 | | | | 31.22 | | | | 10.71 | | | | — | | | | — | | | | 946 | | | | 39.31 | | | | | | | | | | | | | | | | | | | | | | Exercisable at September 30, 2014 | | | 895 | | | | 26.34 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vested and expected to vest(4) | | | 1,411 | | | | 31.16 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at September 30, 2015 | | | | 1,510 | | | | 33.91 | | | | 11.65 | | | | 735 | | | | 43.84 | | Exercisable at September 30, 2015 | | | | 1,023 | | | | 29.10 | | | | | | | | | | | | | | Vested and expected to vest(3) | | | | 1,500 | | | | 33.85 | | | | | | | | | | | | | |
(1) | The number granted represents the number of shares issuable upon vesting of time-based restricted stock units and performance-based restricted stock units, assuming the Company performs at the target performance level in each year of the three-year performance period. |
(2) | Represents the number of units cancelled upon vesting of outstanding performance-basedperformance based restricted stock units cancelled based on the Company’s actual performance against thecertain performance targets for the 2014 performance period of theapplicable to outstanding restricted stock units. |
((3)3 | Exercised / Vested includes 122,119 restricted stock units that vested during the year ended September 30, 2014 but were withheld at the request of the award recipient to cover withholding taxes associated with the vesting. These units were added back to the shares available for future issuance under our 2009 Long-Term Incentive Plan.
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(4)) | Stock options vested and expected to vest in the future, net of estimated forfeitures, have a weighted average remaining contractual life of 6.76.3 years. |
Stock Options The following table summarizes information related to the outstanding and vested options on September 30, 2014:2015: | | | | | | | | Total Options Outstanding | | | Exercisable Options | | | Vested and Expected to Vest | | | | Total Options Outstanding | | Exercisable Options | | Vested and Expected to Vest | | | Aggregate Intrinsic Value (in millions) | | $ | 28 | | | $ | 22 | | | $ | 28 | | | Aggregate Intrinsic Value (in millions of dollars) | | | $ | (4 | ) | | $ | 3 | | | $ | (3 | ) | Weighted Average Remaining Contractual Term (in years) | | | 6.7 | | | | 5.8 | | | | 6.7 | | | | 6.30 | | | | 5.30 | | | | 6.30 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing common stock price of $50.77$31.56 on September 30, 2014,2015, which would have been received by the option holders had all option holders exercised their options and immediately sold their shares on that date. The intrinsic value of options exercised during fiscal 2015, 2014 and 2013 and 2012 was $2 million, $12 million $5 million and $9$5 million, respectively, and the Company received cash of $4 million, $9 million $5 million and $9$5 million, respectively, from these exercises. The Company uses the Black-Scholes option-pricing model to estimate the fair value of the options at the grant date. The estimated weighted average grant date fair values of options granted during fiscal 2015, 2014 and 2013 was $15.68, $18.36, and 2012 was $18.36, $12.51 and $11.64 per option, respectively. The fair values on the grant date were calculated using the following weighted-average assumptions: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | Expected stock price volatility | | | 45 | % | | | 46 | % | | | 45 | % | | | 41 | % | | | 45 | % | | | 46 | % | Risk free interest rate | | | 1.9 | % | | | 0.9 | % | | | 1.3 | % | | | 2.0 | % | | | 1.9 | % | | | 0.9 | % | Expected life of options (years) | | | 6 | | | | 6 | | | | 6 | | | | 6 | | | | 6 | | | | 6 | | Expected annual dividends per year | | $ | 0.80 | | | $ | 0.80 | | | $ | 0.72 | | | $ | 0.88 | | | $ | 0.80 | | | $ | 0.80 | |
The expected stock price volatility assumption was determined using the historical volatility of the Company’s common stock over the expected life of the option. The expected term reflects the anticipated time period between the measurement date and the exercise date or post-vesting cancellation date. 73
Restricted Stock Units The value of restricted stock unit awards is the closing stock price at the date of the grant. The estimated weighted average grant date fair values of restricted stock unit awards granted during fiscal 2015, 2014 and 2013 was $45.85, $47.63 and 2012 was $47.63, $35.28, and $33.15, respectively. The intrinsic value of restricted stock units (meaning the fair value of the units on the date of vest) that vested during fiscal 2015, 2014 and 2013 and 2012 were $14 million, $17 million $16 million and $1$16 million, respectively. Restricted Stock The fair value of restricted stock awards is derived by calculating the difference between the share price and the purchase price at the date of the grant. There were no restricted stock awards granted during fiscal 2015, 2014 2013 or 2012.2013. There was no restricted stock activity during 2015, as all awards were vested as of September 2014. The intrinsic value of restricted stock that vested during each of fiscal 2014 2013 and 20122013 was less than $1 million. Supplemental 401(k) Plan Cabot’s Deferred Compensation and Supplemental Retirement Plan (“SERP 401(k)”) provides benefits to highly compensated employees in circumstances in which the maximum limits established under ERISA and the Internal Revenue Code prevent them from receiving all of the Company matching and retirement contributions that would otherwise be provided under the qualified 401(k) plan. The SERP 401(k) is non-qualified and unfunded. Contributions under the SERP 401(k) are treated as if invested in Cabot common stock. The majority of the distributions made under the SERP 401(k) are required to be paid with shares of Cabot common stock. The remaining distributions, which relate to certain grandfathered accounts, will be paid in cash based on the market price of Cabot common stock at the time of distribution. The aggregate value of the accounts that will be paid out in stock, which is equivalent to approximately 146,000150,000 and 133,000146,000 shares of Cabot common stock as of September 30, 20142015 and 2013,2014, respectively, is reflected at historic cost in stockholders’ equity, and the aggregate value of the accounts that will be paid in cash, which is $1 million as of both September 30, 20142015 and 2013,2014, is reflected in other long-term liabilities and marked-to-market quarterly. Note O.P. Restructuring Cabot’s restructuring activities were recorded in the Consolidated Statements of Operations as follows: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Cost of sales | | $ | 12 | | | $ | 28 | | | $ | 13 | | | $ | 10 | | | $ | 12 | | | $ | 28 | | Selling and administrative expenses | | | 17 | | | | 7 | | | | 2 | | | | 11 | | | | 17 | | | | 7 | | Research and technical expenses | | | — | | | | — | | | | — | | | | | | | | | | | | | | Total | | $ | 29 | | | $ | 35 | | | $ | 15 | | | $ | 21 | | | $ | 29 | | | $ | 35 | | | | | | | | | | | | |
Details of these restructuring activities and the related reserves for fiscal 20142015 and 20132014 were as follows: | | | | | | | | | | | | | | Severance and Employee Benefits | | | Environmental Remediation | | | Asset Impairment and Accelerated Depreciation | | | Asset Sales | | | Other | | | Total | | | | Severance and Employee Benefits | | Environmental Remediation | | Asset Impairment and Accelerated Depreciation | | Asset Sales | | Other | | Total | | | | | (Dollars in millions) | | | Reserve at September 30, 2012 | | $ | 2 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 5 | | | Charges | | | 11 | | | | 1 | | | | 19 | | | | — | | | | 4 | | | | 35 | | | Costs charged against assets and other | | | — | | | | — | | | | (19 | ) | | | — | | | | (2 | ) | | | (21 | ) | | Cash paid | | | (6 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | (9 | ) | | Foreign currency translation adjustment | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Reserve at September 30, 2013 | | $ | 7 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 10 | | | $ | 7 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 10 | | Charges | | | 18 | | | | 1 | | | | 4 | | | | 1 | | | | 5 | | | | 29 | | | | 18 | | | | 1 | | | | 4 | | | | 1 | | | | 5 | | | | 29 | | Costs charged against assets and other | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) | Cash paid | | | (8 | ) | | | (1 | ) | | | — | | | | (1 | ) | | | (5 | ) | | | (15 | ) | | | (8 | ) | | | (1 | ) | | | — | | | | (1 | ) | | | (5 | ) | | | (15 | ) | Foreign currency translation adjustment | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | Reserve at September 30, 2014 | | $ | 16 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 19 | | | $ | 16 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 19 | | | | | | | | | | | | | | | | | | | | | | Charges | | | | 9 | | | | — | | | | 5 | | | | — | | | | 7 | | | | 21 | | Costs charged against assets and other | | | | — | | | | — | | | | (5 | ) | | | — | | | | — | | | | (5 | ) | Cash paid | | | | (18 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | | (24 | ) | Foreign currency translation adjustment | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | Reserve at September 30, 2015 | | | $ | 5 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 9 | |
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2016 Plan On October 20, 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. In addition, on November 11, 2015, the Company announced that it had committed to a plan to close its carbon black manufacturing facility in Merak, Indonesia. It is anticipated that manufacturing operations at this location will cease by the end of January 2016 and the production in Asia will be consolidated in the Company’s Cilegon, Indonesia and other global carbon black production sites to meet demand. As proposed, these combined 2016 plan actions would result in a reduction of approximately 370 positions across the Company’s global locations. In response to current market conditions, these actions are intended to result in a more competitive cost structure. Business Service Center Transition In January 2014, the Company announced its intention to open a new Europe, Middle East and Africa (“EMEA”) business service center in Riga, Latvia, and to close its Leuven, Belgium site, subject to the Belgian information and consultation process, which was successfully completed in June 2014. These actions were developed following an extensive evaluation of the Company’s business service capabilities in the EMEA region and a determination that the future EMEA business service center will enable the Company to provide the highest quality of service at the most competitive cost. TheDuring fiscal 2015 and 2014, the Company has recorded pre-tax restructuring charges of $6 million and $18 million, of charges during fiscal 2014 related to this plan,respectively, comprised primarily of employee severance costs and other transition costs. The Company expects that the majority of actions related to the transition of the business service center will behave been completed by the end of fiscal 2015 and resulthave resulted in total cash charges of approximately $25$24 million comprised of $18$16 million of severance charges and $7$8 million of other transition costs including training costs and redundant salaries. Through September 30, 2014,2015, the Company has made $3$20 million in cash payments related to this plan, mainlycomprised of $13 million of severance payments and $7 million of other transition related to transition costs, and expects to make cash payments of approximately $22$2 million, comprised of $18 millionmainly of severance, costs and $4 million of other transition costs, in fiscal 2015.2016. The difference between the initial accrual and subsequent cash payments was due to changes in foreign exchange rates.
As of September 30, 2014,2015, Cabot has $14$2 million of accrued restructuring costs in the Consolidated Balance Sheet related to this closure, which is mainly comprised of accrued severance charges. Closure of Port Dickson, Malaysia Manufacturing Facility On April 26, 2013, the Company announced that the Board of its carbon black joint venture, Cabot Malaysia Sdn. Bhd. (“CMSB”), decided to cease production at its Port Dickson, Malaysia facility. The facility ceased production in June 2013. The Company holds a 50.1 percent equity share in CMSB. The decision, which affected approximately 90 carbon black employees, was driven by the facility’s manufacturing inefficiencies and raw materials costs. During fiscal 2015, 2014 and fiscal 2013, the Company recorded pre-tax restructuring charges related to this plan of less than $1 million, $2 million and $18 million, respectively. These pre-tax restructuring costs were comprised mainly of accelerated depreciation and asset write-offs of $15 million, severance charges of $2 million, site demolition, clearing and environmental remediation charges of $2 million, and other closure related charges of $1 million. CMSB’s net income or loss is attributable to Cabot Corporation and to the noncontrolling interest in the joint venture. The portion of the charges that are allocable to the noncontrolling interest in CMSB (49.9%) are recorded within Net income (loss) attributable to noncontrolling interests, net of tax, in the Consolidated Statements of Operations. The majority of actions related to closure of the plant have beenwere completed in fiscal 2014 with future environmental charges of $3 million forecasted for fiscal 2015.2014. Cumulative net cash outlays related to this plan are expected to be approximately $8$4 million comprised primarily of $5$1 million for site demolition, clearing and environmental remediation, $2 million for severance, and $1 million for other closure related charges.charges and does not include any gain expected to be recorded on the sale of land. Through September 30, 2014,2015, CMSB has made approximately $4$3 million in cash payments related to this plan related mainly to severance and site demolition and clearing costs. CMSB expects to make net cash payments of $4$1 million during fiscal 20152016 and thereafter mainly comprised of site demolition, clearing and environmental remediation costs. These amounts exclude any proceeds that mayApproximately $8 million is expected to be received from the sale of land or other manufacturing assets.in fiscal 2016, pending the completion of certain activities. As of September 30, 2014,2015, Cabot has less than $1 million of accrued restructuring costs in the Consolidated Balance Sheets related to this closure which is mainly comprised of accrued environmental and other charges. 75
Other Activities The Company has recorded pre-tax charges of approximately $13 million, $8 million $13 million and $1$13 million during fiscal 2015, 2014 2013 and 2012,2013, respectively, related to restructuring activities at several other locations. Fiscal 2015 charges are comprised of $7 million of severance charges, $4 million of assets write-offs and accelerated depreciation and $2 million of other costs and were comprised of charges at the Company’s corporate headquarters in Boston, Massachusetts and Specialty Fluids facility in Bergen, Norway, as well as other locations. Fiscal 2014 charges are comprised of accelerated depreciation and asset write-offs of $5 million and severance charges of $3 million.million and were comprised of charges at the Company’s carbon black facilities in Port Dickson, Malaysia and Maua, Brazil, as well as other locations. Fiscal 2013 costs are comprised of $8 million of severance charges, $3 million of accelerated depreciation and asset write-offs and $2 million of other expenses. Fiscal 2012 isexpenses and were comprised mainly of severance charges.charges at the Company’s research and development facility in Billerica, Massachusetts, certain Purification Solutions sites, and other locations. The Company anticipates that it will record additional charges of $2less than $1 million in fiscal 20152016 related to these actions. Through September 30, 2014,2015, Cabot has made cash payments of $18$23 million related to these activities and expects to pay $3$5 million in fiscal 20152016 mainly for severance and other closure related costs at the impacted locations. As of September 30, 2014,2015, Cabot has $1$5 million of accrued severance and other closure related costs in the Consolidated Balance Sheets related to these activities. Previous Actions and Sites Pending Sale Beginning in fiscal 2009, the Company entered into several different restructuring plans which have been substantially completed, pending the sale of former manufacturing sites in Thane, India, Stanlow, U.K. and Hong Kong. The Company has incurred total cumulative pre-tax charges of approximately $163$165 million related to these plans through September 30, 2014,2015, comprised of $67 million for severance charges, $65$66 million for accelerated depreciation and asset impairments, $10 million for environmental, demolition and site clearing costs, and $22$23 million of other closure related charges partially offset by gains on asset sales of $1 million. These amounts do not include any gain that may be recorded if the Company successfully sells its land rights and certain manufacturing related assets in India andor Hong Kong or its land in the U.K.Kong. Pre-tax restructuring expenses related to these plans were approximately $2 million, $1 million $3 million and $14$3 million during fiscal 2015, 2014 and 2013, respectively. Fiscal 2015 charges are comprised mainly of severance, accelerated depreciation and 2012, respectively.other expenses. Fiscal 2014 charges are comprised mainly of environmental charges and other post closure costs. Fiscal 2013 charges are comprised mainly of severance, accelerated depreciation and other expenses. Fiscal 2012 charges are comprised of $6 million of accelerated depreciation and impairment charges, $3 million of severance charges, $3 million of environmental, demolition and site clearing costs and $2 million of net other charges. Since fiscal 2009, Cabot has made net cash payments of $85$87 million related to these plans and expects to pay approximately $3$1 million in fiscal 20152016 and thereafter. The remaining payments consist mainly of environmental and other closure related costs. These amounts do not include any proceeds that may be received if the Company successfully sells its land rights and certain manufacturing related assets in India andor Hong Kong or its land in the U.K.Kong. As of September 30, 2014,2015, Cabot has $3$2 million of accrued environmental, severance and other closure related costs in the Consolidated Balance Sheets related to these activities. 76
Note P.Q. Accumulated Other Comprehensive (Loss) Income Comprehensive income combines net income and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets.
Changes in each component of Accumulated other comprehensive (loss) income, net of tax, are as follows for fiscal 2013:2014 and 2015: | | | | | | | | | | | | | | | | | | | Currency Translation Adjustment | | | Unrealized Gains on Investment | | | Pension and Other Postretirement Benefit Liability Adjustment | | | Total | | | | (Dollars in millions) | | Balance at September 30, 2012 attributable to Cabot Corporation | | $ | 167 | | | $ | — | | | $ | (75 | ) | | $ | 92 | | Other comprehensive loss before reclassifications | | | (10 | ) | | | 2 | | | | 20 | | | | 12 | | Amounts reclassified from accumulated other comprehensive income | | | — | | | | — | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | | | Net other comprehensive items | | | 157 | | | | 2 | | | | (53 | ) | | | 106 | | | | | | | | | | | | | | | | | | | Less: Noncontrolling interest | | | 3 | | | | — | | | | — | | | | 3 | | Balance at September 30, 2013 attributable to Cabot Corporation | | $ | 154 | | | $ | 2 | | | $ | (53 | ) | | $ | 103 | | | | | | | | | | | | | | | | | | |
Changes in each component of Accumulated other comprehensive (loss) income, net of tax, are as follows for fiscal 2014:
| | Currency Translation Adjustment | | | Unrealized Gains on Investment | | | Pension and Other Postretirement Benefit Liability Adjustment | | | Total | | | | (Dollars in millions) | | Balance at September 30, 2013 attributable to Cabot Corporation | | $ | 154 | | | $ | 2 | | | $ | (53 | ) | | $ | 103 | | Other comprehensive loss before reclassifications | | | (131 | ) | | | — | | | | (40 | ) | | | (171 | ) | Amounts reclassified from accumulated other comprehensive (loss) income | | | — | | | | — | | | | — | | | | — | | Net other comprehensive items | | | 23 | | | | 2 | | | | (93 | ) | | | (68 | ) | Less: Noncontrolling interest | | | (4 | ) | | | — | | | | — | | | | (4 | ) | Balance at September 30, 2014 attributable to Cabot Corporation | | | 27 | | | | 2 | | | | (93 | ) | | | (64 | ) | Other comprehensive (loss) income before reclassifications | | | (270 | ) | | | — | | | | 7 | | | | (263 | ) | Amounts reclassified from accumulated other comprehensive income | | | — | | | | — | | | | 24 | | | | 24 | | Net other comprehensive items | | | (243 | ) | | | 2 | | | | (62 | ) | | | (303 | ) | Less: Noncontrolling interest | | | (4 | ) | | | — | | | | — | | | | (4 | ) | Balance at September 30, 2015 attributable to Cabot Corporation | | $ | (239 | ) | | $ | 2 | | | $ | (62 | ) | | $ | (299 | ) |
| | | | | | | | | | | | | | | | | | | Currency Translation Adjustment | | | Unrealized Gains on Investment | | | Pension and Other Postretirement Benefit Liability Adjustment | | | Total | | | | (Dollars in millions) | | Balance at September 30, 2013 attributable to Cabot Corporation | | $ | 154 | | | $ | 2 | | | $ | (53 | ) | | $ | 103 | | Other comprehensive loss before reclassifications | | | (131 | ) | | | — | | | | (40 | ) | | | (171 | ) | Amounts reclassified from accumulated other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net other comprehensive items | | | 23 | | | | 2 | | | | (93 | ) | | | (68 | ) | | | | | | | | | | | | | | | | | | Less: Noncontrolling interest | | | (4 | ) | | | — | | | | — | | | | (4 | ) | Balance at September 30, 2014 attributable to Cabot Corporation | | $ | 27 | | | $ | 2 | | | $ | (93 | ) | | $ | (64 | ) | | | | | | | | | | | | | | | | | |
The amounts reclassified out of Accumulated other comprehensive (loss) income and into the Statements of Operations for the fiscal year ended September 30, 2015, 2014 2013 and 20122013 are as follows: | | | Affected Line Item in the Consolidated Statements of Operations | | September 30 | | | Affected Line Item in the Consolidated | | September 30 | | | | 2014 | | 2013 | | 2012 | | | Statements of Operations | | 2015 | | | 2014 | | | 2013 | | | | | | (Dollars in Millions) | | | | | (Dollars in Millions) | | Pension and other postretirement benefit liability adjustment | | | | | | | | | | | | | | | | | | | | | | | Amortization of actuarial losses | | Net Periodic Benefit Cost- see Note M for details | | $ | 3 | | | $ | 5 | | | $ | 4 | | | Net Periodic Benefit Cost- see Note N for details | | $ | (1 | ) | | $ | 3 | | | $ | 5 | | Amortization of prior service cost | | Net Periodic Benefit Cost- see Note M for details | | | (3 | ) | | | (3 | ) | | | (3 | ) | | Net Periodic Benefit Cost- see Note N for details | | | 4 | | | | (3 | ) | | | (3 | ) | | | | | | | | | | | | | | Settlement costs | | | Net Periodic Benefit Cost - see Note N for details | | | 27 | | | | — | | | | — | | Total before tax | | | | | — | | | | 2 | | | | 1 | | | | | | 30 | | | | — | | | | 2 | | | | | | | | | | | | | | | Tax impact | | Provision for income taxes | | | — | | | | — | | | | — | | | Provision for income taxes | | | (6 | ) | | | — | | | | — | | | | | | | | | | | | | | | Total after tax | | | | $ | — | | | $ | 2 | | | $ | 1 | | | | | $ | 24 | | | $ | — | | | $ | 2 | | | | | | | | | | | | | | |
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Note Q.R. Earnings Per Share The following tables summarize the components of the basic and diluted earnings per common share computations: | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (In millions, except per share amounts) | | Basic EPS: | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 199 | | | $ | 153 | | | $ | 388 | | Less: Dividends and dividend equivalents to participating securities | | | 1 | | | | — | | | | — | | Less: Undistributed earnings allocated to participating securities(1) | | | 1 | | | | 1 | | | | 3 | | | | | | | | | | | | | | | Earnings allocated to common shareholders (numerator) | | $ | 197 | | | $ | 152 | | | $ | 385 | | | | | | | | | | | | | | | Weighted average common shares and participating securities outstanding | | | 65.0 | | | | 64.4 | | | | 64.0 | | Less: Participating securities(1) | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | | | | | | | | | | | | Adjusted weighted average common shares (denominator) | | | 64.4 | | | | 63.8 | | | | 63.4 | | | | | | | | | | | | | | | Per share amounts—basic: | | | | | | | | | | | | | Income from continuing operations attributable to Cabot Corporation | | $ | 3.04 | | | $ | 2.39 | | | $ | 2.88 | | Income (loss) from discontinued operations | | | 0.02 | | | | (0.01 | ) | | | 3.19 | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 3.06 | | | $ | 2.38 | | | $ | 6.07 | | | | | | | | | | | | | | | Diluted EPS: | | | | | | | | | | | | | Earnings allocated to common shareholders | | $ | 197 | | | $ | 152 | | | $ | 385 | | Plus: Earnings allocated to participating securities | | | 1 | | | | 1 | | | | 3 | | Less: Adjusted earnings allocated to participating securities(2) | | | (1 | ) | | | (1 | ) | | | (3 | ) | | | | | | | | | | | | | | Earnings available to common shares (numerator) | | $ | 197 | | | $ | 152 | | | $ | 385 | | | | | | | | | | | | | | | Adjusted weighted average common shares outstanding | | | 64.4 | | | | 63.8 | | | | 63.4 | | Effect of dilutive securities: | | | | | | | | | | | | | Common shares issuable(3) | | | 0.7 | | | | 0.7 | | | | 0.8 | | | | | | | | | | | | | | | Adjusted weighted average common shares (denominator) | | | 65.1 | | | | 64.5 | | | | 64.2 | | | | | | | | | | | | | | | Per share amounts—diluted: | | | | | | | | | | | | | Income from continuing operations attributable to Cabot Corporation | | $ | 3.01 | | | $ | 2.37 | | | $ | 2.84 | | Income (loss) from discontinued operations | | | 0.02 | | | | (0.01 | ) | | | 3.15 | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 3.03 | | | $ | 2.36 | | | $ | 5.99 | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (In millions, except per share amounts) | | Basic EPS: | | | | | | | | | | | | | Net (loss) income attributable to Cabot Corporation | | $ | (334 | ) | | $ | 199 | | | $ | 153 | | Less: Dividends and dividend equivalents to participating securities | | | — | | | | 1 | | | | — | | Less: Undistributed earnings allocated to participating securities(1) | | | — | | | | 1 | | | | 1 | | (Loss) earnings allocated to common shareholders (numerator) | | $ | (334 | ) | | $ | 197 | | | $ | 152 | | Weighted average common shares and participating securities outstanding | | | 63.9 | | | | 65.0 | | | | 64.4 | | Less: Participating securities(1) | | | 0.5 | | | | 0.6 | | | | 0.6 | | Adjusted weighted average common shares (denominator) | | | 63.4 | | | | 64.4 | | | | 63.8 | | Per share amounts—basic: | | | | | | | | | | | | | (Loss) income from continuing operations attributable to Cabot Corporation | | $ | (5.29 | ) | | $ | 3.04 | | | $ | 2.39 | | Income (loss) from discontinued operations | | | 0.02 | | | | 0.02 | | | | (0.01 | ) | Net (loss) income attributable to Cabot Corporation | | $ | (5.27 | ) | | $ | 3.06 | | | $ | 2.38 | | Diluted EPS: | | | | | | | | | | | | | (Loss) earnings allocated to common shareholders | | $ | (334 | ) | | $ | 197 | | | $ | 152 | | Plus: Earnings allocated to participating securities | | | — | | | | 1 | | | | 1 | | Less: Adjusted earnings allocated to participating securities(2) | | | — | | | | 1 | | | | 1 | | (Loss) earnings available to common shares (numerator) | | $ | (334 | ) | | $ | 197 | | | $ | 152 | | Adjusted weighted average common shares outstanding | | | 63.4 | | | | 64.4 | | | | 63.8 | | Effect of dilutive securities: | | | | | | | | | | | | | Common shares issuable(3) | | | — | | | | 0.7 | | | | 0.7 | | Adjusted weighted average common shares (denominator) | | | 63.4 | | | | 65.1 | | | | 64.5 | | Per share amounts—diluted: | | | | | | | | | | | | | (Loss) income from continuing operations attributable to Cabot Corporation | | $ | (5.29 | ) | | $ | 3.01 | | | $ | 2.37 | | Income (loss) from discontinued operations | | | 0.02 | | | | 0.02 | | | | (0.01 | ) | Net (loss) income attributable to Cabot Corporation | | $ | (5.27 | ) | | $ | 3.03 | | | $ | 2.36 | |
| (1) | Participating securities consist of shares of unvested restricted stock, vested restricted stock awards held by employees in which Cabot has a security interest, and unvested time-based restricted stock units. |
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Undistributed earnings are the earnings 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 distributions. The calculation of undistributed earnings is as follows: | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Calculation of undistributed earnings: | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 199 | | | $ | 153 | | | $ | 388 | | Less: Dividends declared on common stock | | | 54 | | | | 51 | | | | 49 | | Less: Dividends and dividend equivalents to participating securities | | | 1 | | | | — | | | | — | | | | | | | | | | | | | | | Undistributed earnings | | $ | 144 | | | $ | 102 | | | $ | 339 | | | | | | | | | | | | | | | Allocation of undistributed earnings: | | | | | | | | | | | | | Undistributed earnings allocated to common shareholders | | $ | 143 | | | $ | 101 | | | $ | 336 | | Undistributed earnings allocated to participating securities | | | 1 | | | | 1 | | | | 3 | | | | | | | | | | | | | | | Undistributed earnings | | $ | 144 | | | $ | 102 | | | $ | 339 | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Calculation of undistributed earnings: | | | | | | | | | | | | | Net (loss) income attributable to Cabot Corporation | | $ | (334 | ) | | $ | 199 | | | $ | 153 | | Less: Dividends declared on common stock | | | 56 | | | | 54 | | | | 51 | | Less: Dividends and dividend equivalents to participating securities | | | — | | | | 1 | | | | — | | Undistributed (loss) earnings | | $ | (390 | ) | | $ | 144 | | | $ | 102 | | Allocation of undistributed earnings: | | | | | | | | | | | | | Undistributed (loss) earnings allocated to common shareholders | | $ | (390 | ) | | $ | 143 | | | $ | 101 | | Undistributed earnings allocated to participating securities | | | — | | | | 1 | | | | 1 | | Undistributed (loss) earnings | | $ | (390 | ) | | $ | 144 | | | $ | 102 | |
| (2) | Undistributed (loss) 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 Supplemental 401(k) Plan; and (iii) assumed issuance of shares for outstanding and achieved performance-based stock unit awards issued under Cabot’s equity incentive plans using the treasury stock method. For fiscal 2015, 2014 and 2013, respectively, 897,056, 197,072 and 2012, respectively, 197,072, 301,328 and 395,532 incremental shares of common stock were not included in the calculation of diluted earnings per share because the inclusion of these shares would have been antidilutive. |
Note R.S. Income Taxes Income from continuing operations before income taxes and equity in net earnings of affiliated companies was as follows: | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Income from continuing operations: | | | | | | | | | | | | | | | | | Domestic | | $ | 50 | | | $ | 40 | | | $ | 14 | | | $ | (439 | ) | | $ | 50 | | | $ | 40 | | Foreign | | | 258 | | | | 170 | | | | 232 | | | | 62 | | | | 258 | | | | 170 | | | | | | | | | | | | | Total | | $ | 308 | | | $ | 210 | | | $ | 246 | | | $ | (377 | ) | | $ | 308 | | | $ | 210 | | | | | | | | | | | | |
Tax provision (benefit) for income taxes consisted of the following: | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | U.S. federal and state: | | | | | | | | | | | | | | | | | | | Current | | $ | (4 | ) | | $ | (3 | ) | | $ | (1 | ) | | $ | (7 | ) | | $ | (4 | ) | | $ | (3 | ) | Deferred | | | (4 | ) | | | (6 | ) | | | (8 | ) | | | (74 | ) | | | (4 | ) | | | (6 | ) | | | | | | | | | | | | Total | | | (8 | ) | | | (9 | ) | | | (9 | ) | | | (81 | ) | | | (8 | ) | | | (9 | ) | | | | | | | | | | | | Foreign: | | | | | | | | | | | | | | | | | | | Current | | | 86 | | | | 70 | | | | 62 | | | | 48 | | | | 86 | | | | 70 | | Deferred | | | 14 | | | | (1 | ) | | | 2 | | | | (12 | ) | | | 14 | | | | (1 | ) | | | | | | | | | | | | Total | | | 100 | | | | 69 | | | | 64 | | | | 36 | | | | 100 | | | | 69 | | | | | | | | | | | | | Total U.S. and foreign | | $ | 92 | | | $ | 60 | | | $ | 55 | | | $ | (45 | ) | | $ | 92 | | | $ | 60 | | | | | | | | | | | | |
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The provision (benefit) for income taxes differed from the provision for income taxes as calculated using the U.S. statutory rate as follows: | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Computed tax expense at the federal statutory rate | | $ | 108 | | | $ | 74 | | | $ | 85 | | | $ | (132 | ) | | $ | 108 | | | $ | 74 | | Foreign income: | | | | | | | | | | | | | | | | | | | Impact of taxation at different rates, repatriation and other | | | (29 | ) | | | (27 | ) | | | (28 | ) | | | (24 | ) | | | (29 | ) | | | (27 | ) | Impact of increase in valuation allowance on deferred taxes | | | 20 | | | | — | | | | — | | | Impact of (decrease) increase in valuation allowance on deferred taxes | | | | (7 | ) | | | 20 | | | | — | | Impact of investment incentive credits | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | Impact of foreign losses for which a current tax benefit is not available | | | 7 | | | | 9 | | | | 5 | | | | 9 | | | | 7 | | | | 9 | | Impact of non-deductible net currency losses | | | — | | | | 18 | | | | — | | | | (1 | ) | | | — | | | | 18 | | U.S. and state benefits from research and experimentation activities | | | — | | | | (4 | ) | | | (2 | ) | | | (2 | ) | | | — | | | | (4 | ) | Tax settlements | | | (7 | ) | | | (6 | ) | | | (2 | ) | | | (7 | ) | | | (7 | ) | | | (6 | ) | Reversal of state tax valuation allowance | | | — | | | | — | | | | (8 | ) | | Impact of goodwill impairment charge | | | | 123 | | | | — | | | | — | | Nontaxable gain on existing equity investment | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | Permanent differences, net | | | 3 | | | | (4 | ) | | | 5 | | | | — | | | | 3 | | | | (4 | ) | State taxes, net of federal effect | | | — | | | | 1 | | | | — | | | | (4 | ) | | | — | | | | 1 | | | | | | | | | | | | | Total | | $ | 92 | | | $ | 60 | | | $ | 55 | | | $ | (45 | ) | | $ | 92 | | | $ | 60 | | | | | | | | | | | | |
Significant components of deferred income taxes were as follows: | | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Deferred tax assets: | | | | | | | | | | | | | Deferred expenses | | $ | 37 | | | $ | 29 | | | $ | 38 | | | $ | 37 | | Intangible assets | | | | 32 | | | | — | | Inventory | | | 11 | | | | — | | | | 9 | | | | 11 | | Other | | | 20 | | | | 28 | | | | 3 | | | | 20 | | Pension and other benefits | | | 74 | | | | 71 | | | | 72 | | | | 74 | | Net operating loss carry-forwards | | | 171 | | | | 187 | | | | 145 | | | | 171 | | Foreign tax credit carry-forwards | | | 40 | | | | 49 | | | | 42 | | | | 40 | | R&D credit carry-forwards | | | 28 | | | | 28 | | | | 31 | | | | 28 | | Other business credit carry-forwards | | | 38 | | | | 32 | | | | 40 | | | | 38 | | | | | | | | | | Subtotal | | | 419 | | | | 424 | | | | 412 | | | | 419 | �� | Valuation allowances | | | (186 | ) | | | (166 | ) | | | (161 | ) | | | (186 | ) | | | | | | | | | Total deferred tax assets | | $ | 233 | | | $ | 258 | | | $ | 251 | | | $ | 233 | | | | | | | | | |
| | | September 30 | | | September 30 | | | | 2014 | | 2013 | | | 2015 | | | 2014 | | | | (Dollars in millions) | | | (Dollars in millions) | | Deferred tax liabilities: | | | | | | | | | | | | | Intangible assets | | $ | (37 | ) | | $ | (28 | ) | | $ | — | | | $ | (37 | ) | Property, plant and equipment | | | (143 | ) | | | (149 | ) | | | (116 | ) | | | (143 | ) | | | | | | | | | Total deferred tax liabilities | | $ | (180 | ) | | $ | (177 | ) | | $ | (116 | ) | | $ | (180 | ) | | | | | | | | |
In the fiscal 2015 tax benefit, Cabot recorded $13 million of discrete tax benefits including benefits of $7 million for tax settlements, $4 million for repatriation, and $2 million for the renewal of the U.S. research and experimentation credit. In the fiscal 2014 tax provision, Cabot recorded $17 million of net discrete tax charges including a $20 million charge for a valuation allowance on deferred tax assets in a foreign jurisdiction, a $2 million charge for return to provision adjustments, a $2 80
million charge for interest on uncertain tax positions and a $4 million charge for miscellaneous tax items, offset by an $11 million net tax benefit for tax audit settlements. In the fiscal 2013 tax provision, Cabot recorded $3 million of net discrete tax charges including a $13 million foreign currency charge, offset by $10 million of net tax benefit related to tax settlements, renewal of the U.S. research and experimentation credit, and other miscellaneous tax items. In the fiscal 2012 tax provision, Cabot recorded $11 million of net discrete tax benefits including an $8 million state tax benefit from the release of a valuation allowance and $3 million related to settlements and other miscellaneous tax items.
Approximately $752$677 million of net operating loss carryforwards (“NOLs”) and $106$114 million of other tax credit carryforwards remain at September 30, 2014.2015. The benefits of these carryforwards are dependent upon taxable income during the carryforward period in the jurisdictions in which they arose. Accordingly, a valuation allowance has been provided where management has determined that it is more likely than not that the carryforwards will not be utilized. The following table provides detail surrounding the expiration dates of these carryforwards: | | | NOLs | | | Credits | | | NOLs | | | Credits | | | | (Dollars in millions) | | | (Dollars in millions) | | Expiration periods | | | | | | | | | | | | | 2015 to 2021 | | $ | 393 | | | $ | 45 | | | 2022 and thereafter | | | 65 | | | | 37 | | | 2016 to 2022 | | | $ | 323 | | | $ | 51 | | 2023 and thereafter | | | | 95 | | | | 41 | | Indefinite carry-forwards | | | 294 | | | | 24 | | | | 259 | | | | 22 | | | | | | | | | | Total | | $ | 752 | | | $ | 106 | | | $ | 677 | | | $ | 114 | | | | | | | | | |
As of September 30, 2014,2015, provisions have not been made for U.S. income taxes or non-U.S. withholding taxes on approximately $1.4$1.5 billion of undistributed earnings of non-U.S. subsidiaries, as these earnings are considered indefinitely reinvested. Cabot continually reviews the financial position and forecasted cash flows of its U.S. consolidated group and foreign subsidiaries in order to reaffirm the Company’s intent and ability to continue to indefinitely reinvest earnings of its foreign subsidiaries or whether such earnings will need to be repatriated in the foreseeable future. Such review encompasses operational needs and future capital investments. From time to time, however, the Company’s intentions relative to specific indefinitely reinvested amounts change because of certain unique circumstances. These earnings could become subject to U.S. income taxes and non-U.S. withholding taxes if they were remitted as dividends, were loaned to Cabot Corporation or a U.S. subsidiary, or if Cabot should sell its stock in the subsidiaries with the reinvested earnings. As of September 30, 2014,2015, net deferred tax assets of $76$155 million are in the U.S. Management believes that the Company’s history of generating domestic profits provides adequate evidence that it is more likely than not that all of the U.S. net deferred tax assets will be realized in the normal course of business. U.S. income from continuing operations adjusted for U.S. permanent differences and excluding the impairment of long-lived assets within the U.S. (see Note G) was a profit of $74$75 million for the year ended September 30, 20142015 and was a cumulative profit of $189$190 million for the three years ended September 30, 20142015 including dividends from non-U.S. subsidiaries. Realization of deferred tax assets is dependent upon future taxable income generated over an extended period of time. As of September 30, 2014,2015, the Company needs to generate approximately $218$443 million in cumulative future U.S. taxable income at various times over approximately 20 years to realize all of its net U.S. deferred tax assets. The Company reviews its forecast in relation to actual results and expected trends on a quarterly basis. Failure to achieve operating income targets may change the Company’s assessment regarding the realization of Cabot’s deferred tax assets and such change could result in a valuation allowance being recorded against some or all of the Company’s deferred tax assets. Any increase in a valuation allowance would result in additional income tax expense, lower stockholders’ equity and could have a significant impact on Cabot’s earnings in future periods. The valuation allowances at September 30, 20142015 and 20132014 represent management’s best estimate of the non-realizable portion of the deferred tax assets. The valuation allowance decreased by $25 million in 2015 primarily due to reduction in value of certain future tax benefits and net operating losses generated or acquired that are included in deferred tax assets. The valuation allowance increased by $20 million in 2014 primarily due to the uncertainty of the ultimate realization of certain future tax benefits and net operating losses generated or acquired that are included in deferred tax assets. The valuation allowance decreased by $3 million in 2013 due to the expiration and utilization of net operating carryforwards in certain tax jurisdictions. 81
Cabot has filed its tax returns in accordance with the tax laws in each jurisdiction and recognizes tax benefits for uncertain tax positions when the position would more likely than not be sustained based on its technical merits and recognizes measurement adjustments when needed. As of September 30, 2014,2015, the total amount of unrecognized tax benefits was $41$30 million, of which $26$16 million was recorded in the Company’s Consolidated Balance Sheet and $15$14 million of deferred tax assets, principally related to state net operating loss carry-forwards, have not been recorded. In addition, accruals of $1 million and $11$8 million have been recorded for penalties and interest, respectively, as of September 30, 20142015 and $2$1 million and $14$11 million, respectively, as of September 30, 2013.2014. Total penalties and interest recorded in the tax provision in the Consolidated Statement of Operations was $2 million in fiscal 2015 and $3 million in each ofboth fiscal years 2014 2013, and 2012.2013. If the unrecognized tax benefits were recognized at a given point in time, there would be approximately $35$20 million favorable impact on the Company’s tax provision before consideration of the impact of the potential need for valuation allowances. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal years 2015, 2014 2013 and 20122013 is as follows: | | | Years ended September 30 | | | Years ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Balance at beginning of the year | | $ | 50 | | | $ | 55 | | | $ | 65 | | | $ | 41 | | | $ | 50 | | | $ | 55 | | Additions based on tax provisions related to the current year | | | 1 | | | | 1 | | | | 4 | | | | 1 | | | | 1 | | | | 1 | | Additions for tax positions of prior years | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 2 | | Reductions of tax provisions of prior years | | | (1 | ) | | | (5 | ) | | | (10 | ) | | | (1 | ) | | | (1 | ) | | | (5 | ) | Reductions related to settlements | | | (5 | ) | | | — | | | | — | | | | (9 | ) | | | (5 | ) | | | — | | Reductions from lapse of statute of limitations | | | (4 | ) | | | (3 | ) | | | (4 | ) | | | (2 | ) | | | (4 | ) | | | (3 | ) | | | | | | | | | | | | Balance at end of the year | | $ | 41 | | | $ | 50 | | | $ | 55 | | | $ | 30 | | | $ | 41 | | | $ | 50 | | | | | | | | | | | | |
Certain Cabot subsidiaries are under audit in jurisdictions outside of the U.S. 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 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. During fiscal 2014, the Company settled an uncertain tax benefit of $14 million, arising from losses included in cumulative translation adjustment that did not impact the effective tax rate.
Cabot files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The 20072012 through 20132014 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 20132014 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2002 through 20132014 remain subject to examination by their respective tax authorities. As of September 30, 2014,2015, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands. Note S.T. Commitments and Contingencies Operating Lease Commitments Cabot leases certain transportation vehicles, warehouse facilities, office space, machinery and equipment under cancelable and non-cancelable operating leases, most of which expire within ten years and may be renewed by Cabot. Escalation clauses, lease payments dependent on existing rates/indexes and other lease concessions are included in the minimum lease payments and such lease payments are recognized on a straight-line basis over the minimum lease term. Rent expense under such arrangements for fiscal 2015, 2014 and 2013 and 2012 totaled $29 million, $26 million $23 million and $15$23 million, respectively. Future minimum rental commitments under non-cancelable leases are as follows: | | | | (Dollars in millions) | | | | (Dollars in millions) | | | 2015 | | $ | 24 | | | 2016 | | | 19 | | | $ | 21 | | 2017 | | | 13 | | | | 14 | | 2018 | | | 11 | | | | 12 | | 2019 | | | 10 | | | | 10 | | 2020 and thereafter | | | 70 | | | | | | | | 2020 | | | | 8 | | 2021 and thereafter | | | | 67 | | Total future minimum rental commitments | | $ | 147 | | | $ | 132 | | | | | | |
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Other Long-Term 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. Raw materials purchased under these agreements by segment for fiscal 2015, 2014 2013 and 20122013 are as follows: | | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Reinforcement Materials | | $ | 354 | | | $ | 371 | | | $ | 312 | | | $ | 276 | | | $ | 354 | | | $ | 371 | | Performance Materials | | | 43 | | | | 34 | | | | 47 | | | Purification Solutions(1) | | | 32 | | | | 34 | | | | 4 | | | Advanced Technologies | | | — | | | | — | | | | 6 | | | Performance Chemicals | | | | 62 | | | | 43 | | | | 34 | | Purification Solutions | | | | 14 | | | | 32 | | | | 34 | | Other | | | 3 | | | | 2 | | | | 1 | | | | — | | | | 3 | | | | 2 | | | | | | | | | | | | | Total | | $ | 432 | | | $ | 441 | | | $ | 370 | | | $ | 352 | | | $ | 432 | | | $ | 441 | | | | | | | | | | | | |
| (1) | The year ended September 30, 2012 includes two months of purchases for Purification Solutions.
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Included in the table above are raw materials purchases from noncontrolling shareholders of consolidated subsidiaries. These purchases were $169 million, $241 million $150 million and $116$150 million during fiscal 2015, 2014 2013 and 2012,2013, respectively, and accounts payable and accrued liabilities owed to noncontrolling shareholders as of September 30, 2015 and 2014, and 2013, were $16$8 million and $11$16 million, respectively. The purchase commitments for Reinforcement Materials, Performance Materials,Chemicals, and Purification Solutions and Advanced Technologies covered by these agreements are with various suppliers and purchases are expected to take place as follows: | | | Payments Due by Fiscal Year | | | Payments Due by Fiscal Year | | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Thereafter | | | Total | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | Thereafter | | | Total | | | | (Dollars in millions) | | | (Dollars in millions) | | Reinforcement Materials | | $ | 302 | | | $ | 254 | | | $ | 233 | | | $ | 226 | | | $ | 220 | | | $ | 2,308 | | | $ | 3,543 | | | $ | 228 | | | $ | 177 | | | $ | 176 | | | $ | 173 | | | $ | 137 | | | $ | 1,821 | | | $ | 2,712 | | Performance Materials | | | 43 | | | | 35 | | | | 30 | | | | 30 | | | | 29 | | | | 168 | | | | 335 | | | Performance Chemicals | | | | 60 | | | | 38 | | | | 33 | | | | 33 | | | | 30 | | | | 178 | | | | 372 | | Purification Solutions | | | 21 | | | | 12 | | | | 10 | | | | 10 | | | | 9 | | | | 14 | | | | 76 | | | | 14 | | | | 10 | | | | 7 | | | | 6 | | | | 7 | | | | 2 | | | | 46 | | Advanced Technologies | | | 2 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | — | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 368 | | | $ | 302 | | | $ | 274 | | | $ | 267 | | | $ | 259 | | | $ | 2,490 | | | $ | 3,960 | | | $ | 302 | | | $ | 225 | | | $ | 216 | | | $ | 212 | | | $ | 174 | | | $ | 2,001 | | | $ | 3,130 | | | | | | | | | | | | | | | | | | | | | | | | |
These commitments have been estimated using current market prices. As noted above, these will fluctuate based on the actual market price at the time of purchase. 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. Self-Insurance and Retention for Certain Contingencies The Company is partially self-insured for certain third-party liabilities globally, as well as workers’ compensation and employee medical benefits in the United States. The third-party and workers’ compensation liabilities are managed through a wholly-owned insurance captive and the related liabilities are included in the consolidated financial statements. The employee medical obligations are managed by a third-party provider and the related liabilities are included in the consolidated financial statements. To limit Cabot’s potential liabilities for these risks, however, the Company purchases insurance from third-parties that provides individual and aggregate stop-loss protection. The aggregate self-insured liability in fiscal 20142015 for combined U.S. / Canadian third-party liabilities and U.S. workers’ compensation was $6$6.9 million, and the retention for medical costs in the United States is at most $225,000 per person per annum. There is no aggregate self-insurance limitation outside of the U.S. and Canada for third party liabilities. 83
Contingencies Cabot is a defendant, or potentially responsible party, in various lawsuits and environmental proceedings wherein substantial amounts are claimed or at issue. Environmental Matters As of September 30, 20142015 and September 30, 2013,2014, Cabot had $17$16 million and $5$17 million, respectively, reserved for environmental matters, substantially all of which is accounted for on an undiscounted basis.matters. These environmental matters mainly relate to closed sites. These reserves represent Cabot’s best estimates of the probable costs to be incurred at those sites where costs are reasonably estimable based on the Company’s analysis of the extent of clean up required, alternative clean-up methods available, abilities of other responsible parties to contribute and its interpretation of laws and regulations applicable to each site. In fiscal 20142015 and 2013,2014, there was $4 million and $2$4 million in Accounts payable and accrued liabilities and $13$12 million and $3$13 million in Other liabilities, respectively, in the Consolidated Balance Sheets for environmental matters. 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. Charges for environmental expense were $1 million, $15 million, $1 million, and $3$1 million in fiscal 2015, 2014 2013 and 2012,2013, respectively, which are included in Cost of sales in the Consolidated Statements of Operations. Cash payments related to these environmental matters were $2 million in fiscal 2015, $3 million in fiscal 2014, and $2 million in each of fiscal 2013 and 2012.2013. The operation and maintenance component of the $17$16 million reserve for environmental matters was $7 million at September 30, 2014.2015. Cabot expects to make payments of $4$2 million in fiscal 2015, $62016, $3 million in fiscal 2016,2017 and 2018, less than $1 million in each of fiscal 2017 through 2019 and 2020, and a total of $4$6 million thereafter. When deemed appropriate, the Company discounts its liability for environmental matters. A weighted average risk free rate of 3% was used for the environmental liability at September 30, 2014. The book value of the liabilities will be accreted up to the undiscounted liability value through interest expense over the expected period of cash flows. The accreted interest expense was less than $1 million for each of fiscal 2014, 2013 and 2012.
In November 2013, Cabot entered into a Consent Decree with the United States Environmental Protection Agency (“EPA”) and the Louisiana Department of Environmental Quality (“LDEQ”) regarding Cabot’s three carbon black manufacturing facilities in the United States. This settlement is related to EPA’s national enforcement initiative focused on the U.S. carbon black manufacturing sector alleging non-compliance with certain regulatory and permitting requirements under The Clean Air Act, including the New Source Review (“NSR”) construction permitting requirements. Pursuant to this settlement, Cabot paid a combined $975,000 civil penalty to EPA and LDEQ, willagreed to fund $450,000 in environmental mitigation projects in the three communities where the plants are located for a total cost of approximately $450,000, two of which have been completed, and will install technology controls for sulfur dioxide and nitrogen oxide. The Company expects that the capital costs to install these controls will total approximately $85 million through calendar year 2020. Other Matters Respirator Liabilities Cabot has exposure in connection with a safety respiratory products business that a subsidiary acquired from American Optical Corporation (“AO”) in an April 1990 asset purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (i) AO’s insurance coverage for the period prior to the 1990 acquisition and (ii) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. Generally, these respirator liabilities involve claims for personal injury, including asbestosis, silicosis and coal worker’s pneumoconiosis, allegedly resulting from the use of respirators that are alleged to have been negligently designed and/or labeled. Neither Cabot, nor its past or present subsidiaries, at any time manufactured asbestos or asbestos-containing products. At no time did this respiratory product line represent a significant portion of the respirator market. The subsidiary transferred the business to Aearo Corporation (“Aearo”) in July 1995. Cabot agreed to have the subsidiary retain certain liabilities associated with exposure to asbestos and silica while using respirators prior to the 1995 transaction so long as Aearo paid, and continues to pay, Cabot an annual fee of $400,000. Aearo can discontinue payment of the fee at any time, in which case it will assume the responsibility for and indemnify Cabot against those liabilities which Cabot’s subsidiary had agreed to retain. The Company anticipates that it will continue to receive payment of the $400,000 fee from Aearo and thereby retain these liabilities for the foreseeable future. Cabot has no liability in connection with any products manufactured by Aearo after 1995. 84
In addition to Cabot’s subsidiary and as described above, other parties are responsible for significant portions of the costs of respirator liabilities, leaving Cabot’s subsidiary with a portion of the liability in only some of the pending cases. These parties include Aearo, AO, AO’s insurers, another former owner and its insurers and a third-party manufacturer of respirators formerly sold under the AO brand and its insurers (collectively, with the Company’s subsidiary, the “Payor Group”). As of September 30, 20142015 and 2013,2014, there were approximately 41,00038,000 and 42,00041,000 claimants, respectively, in pending cases asserting claims against AO in connection with respiratory products. Cabot has contributed to the Payor Group’s defense and settlement costs with respect to a percentage of pending claims depending on several factors, including the period of alleged product use. In order to quantify Cabot’s estimated share of liability for pending and future respirator liability claims, Cabot has engaged, through counsel, the assistance of Hamilton, Rabinovitz & Alschuler, Inc. (“HR&A”), a leading consulting firm in the field of tort liability valuation. The methodology used by HR&A addresses the complexities surrounding Cabot’s potential liability by making assumptions about future claimants with respect to periods of asbestos, silica and coal mine dust exposure and respirator use. Using those and other assumptions, HR&A estimates the number of future asbestos, silica and coal mine dust claims that will be filed and the related costs that would be incurred in resolving both currently pending and future claims. On this basis, HR&A then estimates the value of the share of these liabilities that reflect Cabot’s period of direct manufacture and Cabot’s contractual obligations. Based on the HR&A estimates, Cabot has recorded a $13an $11 million reserve to accrue for its estimated share of liability for pending and future respirator claims. The Company made payments related to its respirator liability of $2 million in each of fiscal 2015, 2014 2013 and 2012.2013. 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 silica and non-malignant asbestos claims, (iii) significant changes in the average cost of resolving claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received, (vi) changes in the law and procedure applicable to these claims, (vii) the financial viability of members of the Payor Group, (viii) a change in the availability of AO’sthe insurance coverage of the members of the Payor Group or the indemnity provided by AO’s former owner, (ix) changes in the allocation of costs among the Payor Group and (x) a determination that the assumptions that were used to estimate the Company’s share of liability are no longer reasonable. The Company cannot determine the impact of these potential developments on its current estimate of its share of liability for existing and future claims. Accordingly, the actual amount of these liabilities for existing and future claims could be different than the reserved amount. Other The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business and with respect to the Company’s divested businesses. In the opinion of the Company, although final disposition of some or all of these other suits and claims may impact the Company’s consolidated financial statements in a particular period, they are not expected in the aggregate to have a material adverse effect on the Company’s consolidated financial position.statements. Note T.U. Concentration of Credit Risk Credit risk represents the loss that would be recognized if counterparties failed to completely perform as contracted. Financial instruments that subject Cabot to credit risk consist principally of cash and cash equivalents, investments, trade receivables and derivatives. Cabot maintains financial instruments with major banks and financial institutions. The Company has not experienced any material credit losses related to these instruments held at these financial institutions. Furthermore, concentrations of credit risk exist for groups of customers when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. No customer individually represented 10% or more of consolidated net sales for fiscal 2015, 2014 2013 and 2012.2013. Tire manufacturers comprise a significant portion of Cabot’s trade receivable balance. The accounts receivable balance for these significant customers as a group areis as follows: | | | | | | | | | | | September 30 | | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Tire manufacturers | | $ | 311 | | | $ | 298 | |
| | September 30 | | | | 2015 | | | 2014 | | | | (Dollars in millions) | | Tire manufacturers | | $ | 217 | | | $ | 311 | |
Cabot has not experienced significant losses in the past from these customers. Cabot monitors its exposure to customers to manage potential credit losses. 85
Note U.V. Financial Information by Segment & Geographic Area Segment Information 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”) 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. TheIn the first quarter of fiscal 2015, the Company hasrealigned its business reporting structure into four reportable segments:segments that consist of Reinforcement Materials, Performance Materials, Advanced TechnologiesChemicals, Purification Solutions and Purification Solutions.Specialty Fluids. Segment results have been recast for all periods presented to reflect the realignment of the Company’s global business segments. The new segment structure is designed to improve efficiency and resource prioritization and reflects how the Company’s CODM reviews segment results to assess performance and allocate resources.
The Reinforcement Materials representssegment combines the Company’s Rubber Blacks business. Purification Solutions representsrubber blacks and elastomer composites product lines. The Performance Chemicals segment combines the Company’s Activated Carbon business. Performance Materials is an aggregation ofspecialty carbons and compounds and inkjet colorants product lines into the Specialty Carbons and CompoundsFormulations business, and Fumedcombines the fumed metal oxides and aerogel product lines into the Metal Oxides business. These businesses which are similar in terms of economic characteristics, nature of products, processes, customer class and product distribution methods.methods, and therefore have been aggregated into one reportable segment. The Company has combinedPurification Solutions segment represents the Company’s activated carbon business and disclosed four of its operating segments (Specialtythe Specialty Fluids Inkjet Colorants, Aerogelsegment includes cesium formate oil and Elastomer Composites) in its Advanced Technologies segment. The Security Materials business was previously included in the Advanced Technologies reportable segment. In fiscal 2014, as discussed in Note D, the Company sold its Security Materials business. Accordingly, results of the Security Materials business for all periods presented have been recast as discontinued operations.gas drilling fluids and high-purity fine cesium chemicals product lines. Reportable segment operating profit (loss) before interest and taxes (“Segment EBIT”) is presented for each reportable segment in the financial information by the reportable segment table below on the line entitled Income (loss) from continuing operations before taxes. Segment EBIT excludes certain items, meaning items management does not consider representative of 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, the effects of LIFO accounting for inventory, general unallocated expense and unallocated corporate costs. Segment assets exclude cash, short-term investments, cost investments, income taxes receivable, deferred taxes and headquarters’ assets, which are included in unallocated and other. Expenditures for additions to long-lived assets include total equity and other investments (including available-for-sale securities) and property, plant and equipment. In 2014,Reinforcement Materials
Carbon black is a reclassification has been madeform of elemental carbon that is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Rubber grade carbon blacks are used to enhance the Purification Solutions segment information to include shipping and handling costs in Revenue from external customers in order to align the presentation with thatphysical properties of the Company’s other businesses. There is no impact on Segment EBIT as a result of the reclassification. Historical periods have been adjusted to reflect this reclassification.systems and applications in which they are incorporated. Reinforcement Materials
RubberOur rubber blacks products are used in tires and industrial products. These productsRubber blacks have traditionally been used in the tire industry as a rubber reinforcing agent to increase tread durability and are also used as a performance additive.additive to reduce rolling resistance and improve traction. In industrial products such as hoses, belts, extruded profiles and molded goods, rubber blacks are used to improve the physical performance of the product. product, including the product’s physical strength, fluid resistance, conductivity and resistivity.86
Performance MaterialsChemicals Performance MaterialsChemicals is comprised of two businesses that sell the following products:businesses: (i) our Specialty Carbons and Formulations business, which manufactures and sells specialty grades of carbon black, specialty compounds and thermoplastic concentratesinkjet colorants, and compounds (the Specialty Carbons(ii) our Metal Oxides business, which manufactures and Compounds business); andsells fumed silica, fumed alumina and dispersions thereof (the Fumed Metal Oxides business).and aerogel. In Performance Chemicals, we design, manufacture and sell materials that deliver performance in a broad range of customer applications across the automotive, construction and infrastructure, inkjet printing, electronics, and consumer products sectors. The net sales from each of these businesses for fiscal 2015, 2014 2013 and 20122013 are as follows: | | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Specialty Carbons and Compounds | | $ | 647 | | | $ | 622 | | | $ | 664 | | Fumed Metal Oxides | | | 300 | | | | 282 | | | | 250 | | | | | | | | | | | | | | | Total Performance Materials | | $ | 947 | | | $ | 904 | | | $ | 914 | | | | | | | | | | | | | | |
| | Years Ended September 30 | | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | Specialty Carbons and Formulations | | $ | 630 | | | $ | 709 | | | $ | 686 | | Metal Oxides | | | 297 | | | | 313 | | | | 303 | | Total Performance Chemicals | | $ | 927 | | | $ | 1,022 | | | $ | 989 | |
Cabot’sSpecialty Carbons and Formulations Business
Carbon black is a form of elemental carbon that is manufactured in a highly controlled process to produce particles and aggregates of varied structure and surface chemistry, resulting in many different performance characteristics for a wide variety of applications. Our specialty grades of carbon black are used to impart color, provide rheology control, enhance conductivity and static charge control, provide UV protection, enhance mechanical properties, and provide formulation flexibility through surface treatment. These specialty carbon products are used in a wide variety of applications, such as inks, coatings, cables, pipes, toners and electronics. In addition, Cabot manufactures and sourcesOur thermoplastic concentrates and compounds, which we refer to as “specialty compounds”, are derived from our specialty grades of carbon black mixed with polymers and other additives. These products are generally used by plastics formulators in thermoplastic polymer applications, such as cable jacketings, films, fibers, moldings, pipes and sheets, as they are generally easier to handle, mix and disperse for these applications than carbon black alone. In addition, our electrically conductive compound products generally are used to reduce the risk of damage from electrostatic discharge in plastics applications. Our inkjet colorants are high-quality pigment-based black and color dispersions based on our patented, carbon black, surface modification technology. The dispersions are used in aqueous inkjet inks to impart color, sharp print characteristics and durability, while maintaining high printhead reliability. These products are used in various inkjet printing applications, including commercial printing, small office/home office and corporate office, and niche applications that require a high level of dispersibility and colloidal stability. Our inkjet inks, which utilize our pigment-based colorant dispersions, are marketed toused in the plastics industry.emerging commercial printing segment for digital print. Metal Oxides Business Fumed silica is an ultra-fine, high-purity particle used as a reinforcing, thickening, abrasive, thixotropic, suspending or anti-caking agent in a wide variety of products produced for the automotive, construction, microelectronics, and consumer products industries. These products include adhesives, sealants, cosmetics, inks, toners, silicone rubber, coatings, polishing slurries and pharmaceuticals. Fumed alumina, also an ultra-fine, high-purity particle, is used as an abrasive, absorbent or barrier agent in a variety of products, such as inkjet media, lighting, coatings, cosmetics and polishing slurries. Advanced Technologies
The net sales from each of the Advanced Technologies businesses are as follows:
| | | | | | | | | | | | | | | Years Ended September 30 | | | | 2014 | | | 2013 | | | 2012 | | | | (Dollars in millions) | | Inkjet Colorants | | $ | 62 | | | $ | 64 | | | $ | 66 | | Aerogel | | | 13 | | | | 21 | | | | 18 | | Elastomer Composites | | | 32 | | | | 29 | | | | 23 | | Specialty Fluids | | | 98 | | | | 101 | | | | 94 | | | | | | | | | | | | | | | Total Advanced Technologies | | $ | 205 | | | $ | 215 | | | $ | 201 | | | | | | | | | | | | | | |
The Inkjet Colorants business produces and sells aqueous inkjet colorants primarily to the inkjet printing market. Cabot’s inkjet colorants serve various inkjet printing applications, including commercial printing, small office/home office, and corporate office, as well as other niche applications that require a high level of dispersibility and colloidal stability. Cabot also sells inks with its pigment-based colorant dispersions into the emerging commercial printing segment for digital print.
Aerogel is a hydrophobic, silica-based particle with a high surface area that is used in a variety of thermal insulation and specialty chemical applications. Aerogel has several applications inIn the building and construction oilindustry, the product is used in insulative sprayable plasters and gascomposite building products, as well as translucent skylight, window, wall and roof systems for insulating eco-daylighting applications. In the specialty chemicals industries mainly as an insulativeindustry, the product is used to provide matte finishing, insulating and thickening materialproperties for use in a variety of applications. Cabot has developed a patented elastomer composites manufacturing process that is used to manufacture compounds of natural latex rubber and carbon black that improve abrasion/wear resistance, reduce fatigue and reduce rolling resistance compared to natural rubber/carbon black compounds made by conventional methods. The Elastomer Composites business has licensed this process to Manufacture Francaise des Pneumatiques Michelin for their exclusive use in tire applications.
The Specialty Fluids business principally produces and markets cesium formate as a drilling and completion fluid for use primarily in high pressure and high temperature oil and gas well construction. The fluid is resistant to high temperatures, minimizes damage to producing reservoirs and is readily biodegradable in accordance with testing guidelines set by the Organization for Economic Cooperation and Development. The business also manufactures and sells fine cesium chemicals that are used in a wide range of applications, including catalysts and brazing fluxes.
Purification Solutions The Company’s activated carbon products are used for the purification of water, air, food and beverages, pharmaceuticals and other liquids and gases, as either a colorant or a decoloring agent in the production of products for food and beverage applications and as a chemical carrier in slow release applications. In gas and air applications, one of the uses of activated carbon is for the removal of mercury in flue gas streams. In certain applications, used activated carbon can be reactivated for further use by removing the contaminants from the pores of the activated carbon product. In addition to activated carbon production and reactivation, the Company also provides activated carbon solutions through on-site equipment and services, including delivery systems for activated carbon injection in coal-fired utilities, mobile water filter units and carbon reactivation services. Purification Solutions Segment EBIT includes 87
Specialty Fluids The Specialty Fluids segment principally produces and markets cesium formate as a drilling and completion fluid for use primarily in fiscal 2013high-pressure and 2014 an allocationhigh-temperature oil and gas well construction. The fluid is resistant to high temperatures, minimizes damage to producing reservoirs and is readily biodegradable in accordance with testing guidelines set by the Organization for Economic Cooperation and Development. The business also manufactures and sells fine cesium chemicals that are used in a wide range of corporate administrativeapplications, including catalysts and functional support costs. In fiscal 2012, these allocations were reflected in unallocated corporate costs and other segment results. Revenue in fiscal 2014 includes $9 million of insurance proceeds related to business interruption and property damage insurance recoveries for operating issues the business experienced in late fiscal 2013 and early fiscal 2014. brazing fluxes.Financial information by reportable segment is as follows: | | | Reinforcement Materials | | Performance Materials | | Advanced Technologies | | Purification Solutions | | Segment Total | | Unallocated and Other(1), (3) | | Consolidated Total | | | Reinforcement Materials | | | Performance Chemicals | | | Purification Solutions | | | Specialty Fluids | | | Segment Total | | | Unallocated and Other(1), (3) | | | Consolidated Total | | | | (Dollars in millions) | | | (Dollars in millions) | | Years Ended September 30 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers(2) | | | $ | 1,507 | | | $ | 927 | | | $ | 296 | | | $ | 42 | | | $ | 2,772 | | | $ | 99 | | | $ | 2,871 | | Depreciation and amortization | | | 83 | | | 54 | | | 45 | | | 2 | | | 184 | | | | (1 | ) | | 183 | | Equity in earnings of affiliated companies | | | 2 | | | 1 | | | 6 | | | | — | | | 9 | | | | (5 | ) | | 4 | | Income (loss) from continuing operations before taxes(3) | | | 143 | | | 178 | | | 5 | | | 6 | | | 332 | | | | (709 | ) | | | (377 | ) | Assets(4) | | | | 1,220 | | | | 625 | | | | 789 | | | | 119 | | | | 2,753 | | | | 322 | | | | 3,075 | | Total expenditures for additions to long-lived assets(5) | | | 44 | | | 29 | | | 48 | | | 16 | | | 137 | | | 4 | | | | 141 | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers(2) | | $ | 2,076 | | | $ | 947 | | | $ | 205 | | | $ | 315 | | | $ | 3,543 | | | $ | 104 | | | $ | 3,647 | | | | 2,108 | | | | 1,022 | | | | 315 | | | | 98 | | | | 3,543 | | | | 104 | | | | 3,647 | | Depreciation and amortization | | | 87 | | | | 50 | | | | 10 | | | | 54 | | | | 201 | | | | — | | | | 201 | | | | 88 | | | | 56 | | | | 54 | | | | 3 | | | | 201 | | | | — | | | | 201 | | Equity in earnings of affiliated companies | | | (3 | ) | | | 1 | | | | — | | | | 6 | | | | 4 | | | | (4 | ) | | | — | | | | (3 | ) | | | 1 | | | | 6 | | | | — | | | | 4 | | | | (4 | ) | | | — | | Income (loss) from continuing operations before taxes(3) | | | 242 | | | | 158 | | | | 66 | | | | (19 | ) | | | 447 | | | | (139 | ) | | | 308 | | | | 259 | | | | 168 | | | | (19 | ) | | | 39 | | | | 447 | | | | (139 | ) | | | 308 | | Assets(4) | | | 1,628 | | | | 670 | | | | 180 | | | | 1,389 | | | | 3,867 | | | | 217 | | | | 4,084 | | �� | | 1,632 | | | | 731 | | | | 1,389 | | | | 115 | | | | 3,867 | | | | 217 | | | | 4,084 | | Total expenditures for additions to long-lived assets(5) | | | 65 | | | | 28 | | | | 8 | | | | 64 | | | | 165 | | | | 6 | | | | 171 | | | | 65 | | | | 29 | | | | 64 | | | | 7 | | | | 165 | | | | 6 | | | | 171 | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers(2) | | $ | 1,902 | | | $ | 904 | | | $ | 215 | | | $ | 328 | | | $ | 3,349 | | | $ | 107 | | | $ | 3,456 | | | | 1,931 | | | | 989 | | | | 328 | | | | 101 | | | | 3,349 | | | | 107 | | | | 3,456 | | Depreciation and amortization | | | 81 | | | | 49 | | | | 10 | | | | 54 | | | | 194 | | | | (4 | ) | | | 190 | | | | 82 | | | | 56 | | | | 54 | | | | 2 | | | | 194 | | | | (4 | ) | | | 190 | | Equity in earnings of affiliated companies | | | 9 | | | | 2 | | | | — | | | | 4 | | | | 15 | | | | (4 | ) | | | 11 | | | | 9 | | | | 2 | | | | 4 | | | | — | | | | 15 | | | | (4 | ) | | | 11 | | Income (loss) from continuing operations before taxes(3) | | | 188 | | | | 132 | | | | 70 | | | | (4 | ) | | | 386 | | | | (176 | ) | | | 210 | | | | 195 | | | | 149 | | | | (4 | ) | | | 46 | | | | 386 | | | | (176 | ) | | | 210 | | Assets(4) | | | 1,512 | | | | 688 | | | | 185 | | | | 1,388 | | | | 3,773 | | | | 460 | | | | 4,233 | | | | 1,523 | | | | 752 | | | | 1,388 | | | | 110 | | | | 3,773 | | | | 460 | | | | 4,233 | | Total expenditures for additions to long-lived assets(5) | | | 172 | | | | 46 | | | | 5 | | | | 38 | | | | 261 | | | | 3 | | | | 264 | | | | 172 | | | | 46 | | | | 38 | | | | 5 | | | | 261 | | | | 3 | | | | 264 | | 2012 | | | | | | | | | | | | | | | | Revenues from external customers(2) | | $ | 2,019 | | | $ | 914 | | | $ | 201 | | | $ | 61 | | | $ | 3,195 | | | $ | 96 | | | $ | 3,291 | | | Depreciation and amortization | | | 82 | | | | 47 | | | | 12 | | | | 8 | | | | 149 | | | | 5 | | | | 154 | | | Equity in earnings of affiliated companies | | | 9 | | | | 1 | | | | — | | | | 1 | | | | 11 | | | | — | | | | 11 | | | Income (loss) from continuing operations before taxes(3) | | | 227 | | | | 128 | | | | 50 | | | | 5 | | | | 410 | | | | (164 | ) | | | 246 | | | Assets(4) | | | 1,527 | | | | 717 | | | | 198 | | | | 1,433 | | | | 3,875 | | | | 524 | | | | 4,399 | | | Total expenditures for additions to long-lived assets(5) | | | 163 | | | | 87 | | | | 16 | | | | 350 | | | | 616 | | | | 6 | | | | 622 | | |
(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 Chief Operating Decision Maker.CODM. |
(2) | Revenue from external customers that are categorized as Unallocated and Other reflects royalties, other operating revenues, 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. |
| | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Royalties, other operating revenues, the impact of unearned revenue, the removal of 100% of the sales of an equity method affiliate and discounting charges for certain Notes receivable | | $ | (7 | ) | | $ | 5 | | | $ | 11 | | | $ | 9 | | | $ | (7 | ) | | $ | 5 | | Shipping and handling fees | | | 111 | | | | 102 | | | | 85 | | | | 90 | | | | 111 | | | | 102 | | | | | | | | | | | | | Total | | $ | 104 | | | $ | 107 | | | $ | 96 | | | $ | 99 | | | $ | 104 | | | $ | 107 | | | | | | | | | | | | |
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(3) | Income (loss) from continuing operations before taxes that are categorized as Unallocated and Other includes: |
| | | Years Ended September 30 | | | Years Ended September 30 | | | | 2014 | | 2013 | | 2012 | | | 2015 | | | 2014 | | | 2013 | | | | (Dollars in millions) | | | (Dollars in millions) | | Interest expense | | $ | (55 | ) | | $ | (62 | ) | | $ | (46 | ) | | $ | (53 | ) | | $ | (55 | ) | | $ | (62 | ) | Total certain items, pre-tax(a) | | | (28 | ) | | | (54 | ) | | | (51 | ) | | | (617 | ) | | | (28 | ) | | | (54 | ) | Equity in earnings of affiliated companies, net of tax(b) | | | — | | | | (11 | ) | | | (11 | ) | | | (4 | ) | | | — | | | | (11 | ) | Unallocated corporate costs(c) | | | (54 | ) | | | (48 | ) | | | (56 | ) | | | (46 | ) | | | (54 | ) | | | (48 | ) | General unallocated expense(d) | | | (2 | ) | | | (1 | ) | | | — | | | | 11 | | | | (2 | ) | | | (1 | ) | | | | | | | | | | | | Total | | $ | (139 | ) | | $ | (176 | ) | | $ | (164 | ) | | $ | (709 | ) | | $ | (139 | ) | | $ | (176 | ) | | | | | | | | | | | |
| (a) | Certain items are items that management does not consider representative of operating segment results and they are, therefore, excluded from Segment EBIT. Certain items, pre-tax for fiscal 2015 include $562 million related to goodwill and long-lived asset impairment charges for the Purification Solutions business (refer to Note G), $21 million related to global restructuring activities (Refer to Note P), $5 million for acquisition and integration-related charges, $21 million related to employee benefit plan settlement and other charges (refer to note N), and $2 million related to foreign currency loss on revaluations, and $6 million related to an inventory reserve adjustment (refer to Note E). Certain items, pre-tax, for fiscal 2014 primarily include $29 million related to global restructuring activities, $7 million for acquisition and integration-related charges, $18 million for legal and environmental matters and reserves and $3 million of certain foreign currency gains recorded by foreign subsidiaries offset by a $29 million non-cash gain recognized on the Company’s pre-existing investment in NHUMO as a result of the NHUMO transaction. Certain items, pre-tax, for fiscal 2013 primarily include $35 million related to global restructuring activities, $21 million for acquisition and integration-related charges (consisting of $10 million for certain other one-time integration costs and $11 million of additional charges related to acquisition accounting adjustments for the acquired inventory) and $1 million for legal and environmental matters and reserves offset by $3 million of certain foreign currency gains recorded by foreign subsidiaries. Certain items, pre-tax, for fiscal 2012 primarily include $17 million related to global restructuring activities, $26 million for acquisition and integration-related charges (consisting of $14 million of legal and professional fees, $3 million for certain other one-time integration costs and $9 million of additional charges related to acquisition accounting adjustments for the acquired inventory), and $8 million for legal and environmental matters and reserves. |
| (b) | Equity in earnings of affiliated companies, net of tax is included in Segment EBIT and is removed from Unallocated and other to reconcile to income (loss) from operations before taxes. |
| (c) | Unallocated corporate costs are not controlled by the segments and primarily benefit corporate interests. |
| (d) | General unallocated expense consists of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, the impact of accounting for certain |
| inventory on a LIFO basis, the profit or loss related to the corporate adjustment for unearned revenue, and the impact of including the full operating results of an equity affiliate in Purification Solutions Segment EBIT. |
(4) | Unallocated and Other assets includes cash, marketable securities, cost investments, income taxes receivable, deferred taxes, headquarters’ assets, and current and non-current assets held for sale. |
(5) | Expenditures for additions to long-lived assets include total equity and other investments (including available-for-sale securities) and property, plant and equipment. |
Geographic Information Sales are attributed to the United States and to all foreign countries based on the location from which the sale originated. Revenues from external customers and long-lived assets attributable to an individual country, other than the United States, China and The Netherlands, were not material for disclosure. Revenues from external customers and long-lived asset information by geographic area are summarized as follows: | | | United States | | | China | | | The Netherlands | | | Other Foreign Countries | | | Consolidated Total | | | United States | | | China | | | The Netherlands | | | Other Foreign Countries | | | Consolidated Total | | | | (Dollars in millions) | | | (Dollars in millions) | | Years Ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers | | | $ | 705 | | | $ | 548 | | | $ | 176 | | | $ | 1,442 | | | $ | 2,871 | | Net property, plant and equipment | | | $ | 480 | | | $ | 311 | | | $ | 157 | | | $ | 435 | | | $ | 1,383 | | 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 847 | | | $ | 628 | | | $ | 220 | | | $ | 1,952 | | | $ | 3,647 | | | $ | 847 | | | $ | 628 | | | $ | 220 | | | $ | 1,952 | | | $ | 3,647 | | Net property, plant and equipment | | $ | 496 | | | $ | 355 | | | $ | 197 | | | $ | 533 | | | $ | 1,581 | | | $ | 496 | | | $ | 355 | | | $ | 197 | | | $ | 533 | | | $ | 1,581 | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues from external customers | | $ | 818 | | | $ | 558 | | | $ | 224 | | | $ | 1,856 | | | $ | 3,456 | | | $ | 818 | | | $ | 558 | | | $ | 224 | | | $ | 1,856 | | | $ | 3,456 | | Net property, plant and equipment | | $ | 488 | | | $ | 385 | | | $ | 211 | | | $ | 516 | | | $ | 1,600 | | | $ | 488 | | | $ | 385 | | | $ | 211 | | | $ | 516 | | | $ | 1,600 | | 2012 | | | | | | | | | | | | Revenues from external customers | | $ | 686 | | | $ | 543 | | | $ | 131 | | | $ | 1,931 | | | $ | 3,291 | | | Net property, plant and equipment | | $ | 481 | | | $ | 305 | | | $ | 208 | | | $ | 553 | | | $ | 1,547 | | |
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Note V.W. Unaudited Quarterly Financial Information Unaudited financial results by quarter for fiscal 20142015 and 20132014 are summarized below: | | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | | | | | December | | | March | | | June | | | September | | | Year | | | | (Dollars in millions, except per share amounts) | | Fiscal 2014 | | | | | | | | | | | | | | | | | | | | | Consolidated Net Income | | | | | | | | | | | | | | | | | | | | | Net sales and other operating revenues | | $ | 898 | | | $ | 898 | | | $ | 940 | | | $ | 911 | | | $ | 3,647 | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 179 | | | | 176 | | | | 184 | | | | 182 | | | | 721 | | Selling and administrative expenses | | | 77 | | | | 92 | | | | 76 | | | | 81 | | | | 326 | | Research and technical expenses | | | 15 | | | | 16 | | | | 15 | | | | 14 | | | | 60 | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 87 | | | | 68 | | | | 93 | | | | 87 | | | | 335 | | Net interest expense and other charges | | | 22 | | | | (20 | ) | | | (13 | ) | | | (16 | ) | | | (27 | ) | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations before taxes and equity earnings of affiliated companies | | | 109 | | | | 48 | | | | 80 | | | | 71 | | | | 308 | | Provision for income taxes | | | (24 | ) | | | (7 | ) | | | (20 | ) | | | (41 | ) | | | (92 | ) | Equity in earnings of affiliated companies | | | 2 | | | | (2 | ) | | | (2 | ) | | | 2 | | | | — | | (Loss) income from discontinued operations, net of tax | | | (1 | ) | | | — | | | | (1 | ) | | | 4 | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | Net income | | | 86 | | | | 39 | | | | 57 | | | | 36 | | | | 218 | | Net income attributable to noncontrolling interests, net of tax | | | 6 | | | | 3 | | | | 5 | | | | 5 | | | | 19 | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 80 | | | $ | 36 | | | $ | 52 | | | $ | 31 | | | $ | 199 | | | | | | | | | | | | | | | | | | | | | | | Income per share—basic: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 1.25 | | | $ | 0.56 | | | $ | 0.80 | | | $ | 0.43 | | | $ | 3.04 | | Income from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | 0.05 | | | | 0.02 | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 1.24 | | | $ | 0.55 | | | $ | 0.79 | | | $ | 0.48 | | | $ | 3.06 | | | | | | | | | | | | | | | | | | | | | | | Income per share—diluted: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 1.24 | | | $ | 0.55 | | | $ | 0.79 | | | $ | 0.43 | | | $ | 3.01 | | Income from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | 0.05 | | | | 0.02 | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 1.23 | | | $ | 0.54 | | | $ | 0.78 | | | $ | 0.48 | | | $ | 3.03 | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | | | | | | | December | | | March | | | June | | | September | | | Year | | | | (Dollars in millions, except per share amounts) | | Fiscal 2015 | | | | | | | | | | | | | | | | | | | | | Consolidated Net Income | | | | | | | | | | | | | | | | | | | | | Net sales and other operating revenues | | $ | 812 | | | $ | 694 | | | $ | 694 | | | $ | 671 | | | $ | 2,871 | | Gross profit | | | 157 | | | | 139 | | | | 150 | | | | 139 | | | | 585 | | Purification Solutions long-lived assets impairment charge | | | — | | | | — | | | | 209 | | | | 1 | | | | 210 | | Purification Solutions goodwill impairment charge | | | — | | | | — | | | | 353 | | | | (1 | ) | | | 352 | | Income from discontinued operations, net of tax | | | — | | | | — | | | | 1 | | | | 1 | | | | 2 | | Net income (loss) | | | 49 | | | | 27 | | | | (443 | ) | | | 41 | | | | (326 | ) | Net income (loss) attributable to Cabot Corporation | | | 45 | | | | 26 | | | | (445 | ) | | | 40 | | | | (334 | ) | Income per share—basic: | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | $ | 0.70 | | | $ | 0.41 | | | $ | (7.05 | ) | | $ | 0.63 | | | $ | (5.29 | ) | Income from discontinued operations | | | — | | | | — | | | | 0.01 | | | | 0.01 | | | | 0.02 | | Net income (loss) attributable to Cabot Corporation | | $ | 0.70 | | | $ | 0.41 | | | $ | (7.04 | ) | | $ | 0.64 | | | $ | (5.27 | ) | Income per share—diluted: | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | $ | 0.69 | | | $ | 0.41 | | | $ | (7.05 | ) | | $ | 0.62 | | | $ | (5.29 | ) | Income from discontinued operations | | | — | | | | — | | | | 0.01 | | | | 0.01 | | | | 0.02 | | Net income (loss) attributable to Cabot Corporation | | $ | 0.69 | | | $ | 0.41 | | | $ | (7.04 | ) | | $ | 0.63 | | | $ | (5.27 | ) |
| | Quarter Ended | | | | | | | | December | | | March | | | June | | | September | | | Year | | | | (Dollars in millions, except per share amounts) | | Fiscal 2014 | | | | | | | | | | | | | | | | | | | | | Consolidated Net Income | | | | | | | | | | | | | | | | | | | | | Net sales and other operating revenues | | $ | 898 | | | $ | 898 | | | $ | 940 | | | $ | 911 | | | $ | 3,647 | | Gross profit | | | 179 | | | | 176 | | | | 184 | | | | 182 | | | | 721 | | (Loss) income from discontinued operations, net of tax | | | (1 | ) | | | — | | | | (1 | ) | | | 4 | | | | 2 | | Net income | | | 86 | | | | 39 | | | | 57 | | | | 36 | | | | 218 | | Net income attributable to Cabot Corporation | | | 80 | | | | 36 | | | | 52 | | | | 31 | | | | 199 | | Income per share—basic: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 1.25 | | | $ | 0.56 | | | $ | 0.80 | | | $ | 0.43 | | | $ | 3.04 | | Income from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | 0.05 | | | | 0.02 | | Net income attributable to Cabot Corporation | | $ | 1.24 | | | $ | 0.55 | | | $ | 0.79 | | | $ | 0.48 | | | $ | 3.06 | | Income per share—diluted: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 1.24 | | | $ | 0.55 | | | $ | 0.79 | | | $ | 0.43 | | | $ | 3.01 | | (Loss) income from discontinued operations | | | (0.01 | ) | | | (0.01 | ) | | | (0.01 | ) | | | 0.05 | | | | 0.02 | | Net income attributable to Cabot Corporation | | $ | 1.23 | | | $ | 0.54 | | | $ | 0.78 | | | $ | 0.48 | | | $ | 3.03 | |
| | | | | | | | | | | | | | | | | | | | | | | Quarter Ended | | | | December | | | March | | | June | | | September | | | Year | | | | (Dollars in millions, except per share amounts) | | Fiscal 2013 | | | | | | | | | | | | | | | | | | | | | Consolidated Net Income | | | | | | | | | | | | | | | | | | | | | Net sales and other operating revenues | | $ | 819 | | | $ | 840 | | | $ | 901 | | | $ | 896 | | | $ | 3,456 | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 147 | | | | 143 | | | | 176 | | | | 167 | | | | 633 | | Selling and administrative expenses | | | 73 | | | | 77 | | | | 72 | | | | 75 | | | | 297 | | Research and technical expenses | | | 17 | | | | 16 | | | | 17 | | | | 18 | | | | 68 | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 57 | | | | 50 | | | | 87 | | | | 74 | | | | 268 | | Net interest expense and other charges | | | (14 | ) | | | (13 | ) | | | (13 | ) | | | (18 | ) | | | (58 | ) | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations before taxes and equity earnings of affiliated companies | | | 43 | | | | 37 | | | | 74 | | | | 56 | | | | 210 | | Provision for income taxes | | | (20 | ) | | | (16 | ) | | | (16 | ) | | | (8 | ) | | | (60 | ) | Equity in earnings of affiliated companies | | | 3 | | | | 3 | | | | 3 | | | | 2 | | | | 11 | | (Loss) income from discontinued operations, net of tax | | | (2 | ) | | | (1 | ) | | | 1 | | | | 1 | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | Net income | | | 24 | | | | 23 | | | | 62 | | | | 51 | | | | 160 | | Net income (loss) attributable to noncontrolling interests, net of tax | | | 4 | | | | (4 | ) | | | 3 | | | | 4 | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 20 | | | $ | 27 | | | $ | 59 | | | $ | 47 | | | $ | 153 | | | | | | | | | | | | | | | | | | | | | | | Income per share—basic: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.35 | | | $ | 0.43 | | | $ | 0.88 | | | $ | 0.73 | | | $ | 2.39 | | (Loss) income from discontinued operations | | | (0.04 | ) | | | (0.01 | ) | | | 0.04 | | | | — | | | | (0.01 | ) | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 0.31 | | | $ | 0.42 | | | $ | 0.92 | | | $ | 0.73 | | | $ | 2.38 | | | | | | | | | | | | | | | | | | | | | | | Income per share—diluted: | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | $ | 0.35 | | | $ | 0.43 | | | $ | 0.87 | | | $ | 0.72 | | | $ | 2.37 | | (Loss) income from discontinued operations | | | (0.04 | ) | | | (0.01 | ) | | | 0.03 | | | | 0.01 | | | | (0.01 | ) | | | | | | | | | | | | | | | | | | | | | | Net income attributable to Cabot Corporation | | $ | 0.31 | | | $ | 0.42 | | | $ | 0.90 | | | $ | 0.73 | | | $ | 2.36 | | | | | | | | | | | | | | | | | | | | | | |
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REPORT OF INDEPENDENT REGISTEREDREGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Cabot Corporation Boston, Massachusetts We have audited the accompanying consolidated balance sheets of Cabot Corporation and subsidiaries (the “Company”) as of September 30, 20142015 and 2013,2014, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2014.2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cabot Corporation and subsidiaries as of September 30, 20142015 and 2013,2014, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014,2015, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2014,2015, based on the criteria established inInternal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 26, 201425, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/ Deloitte & Touche LLP Boston, Massachusetts November 26, 2014 25, 201591
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Cabot Corporation Boston, Massachusetts We have audited the internal control over financial reporting of Cabot Corporation and subsidiaries (the “Company”) as of September 30, 2014,2015, based on criteria established inInternal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at NHUMO and its subsidiaries (“NHUMO”), which was acquired in November 2013 and whose financial statements constitute total assets and revenues of 3% and 4%, respectively, of the consolidated financial statement amounts as of and for the year ended September 30, 2014. Accordingly, our audit did not include the internal control over financial reporting at NHUMO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014,2015, based on the criteria established inInternal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 20142015 of the Company and our report dated November 26, 201425, 2015 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP Boston, Massachusetts November 26, 2014 PART II25, 2015
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PART II Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None. Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures Cabot carried out an evaluation, under the supervision and with the participation of its management, including the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2014.2015. Based on that evaluation, Cabot’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Securities and Exchange Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control Over Financial Reporting Cabot’s management is responsible for establishing and maintaining adequate internal control over financial reporting for Cabot. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Cabot’s management assessed the effectiveness of Cabot’s internal control over financial reporting as of September 30, 20142015 based on the framework established inInternal Control—Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management excluded from its assessment the internal control over financial reporting at NHUMO and its subsidiaries, which was acquired in November 2013 and whose financial statements reflect total assets and revenues constituting 3% and 4%, respectively, of the consolidated financial statement amounts as of and for the year ended September 30, 2014. Based on this assessment, Cabot’s management concluded that Cabot’s internal control over financial reporting was effective as of September 30, 2014.2015. Cabot’s internal control over financial reporting as of September 30, 20142015 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report above. Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ending September 30, 20142015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 93
Item 9B. | Other Information |
None.
PART IIIFollowing the issuance of the Company’s earnings release on November 2, 2015 for the fourth quarter and fiscal year ended September 30, 2015, the Company made certain adjustments to the recorded amounts for taxes and value added tax credits. The adjustments, which were identified in connection with the Company’s fiscal year end procedures, are reflected in the consolidated financial statements included in this annual report on Form 10-K. If these adjustments had been reflected in the results the Company reported in its earnings release, the Company would have reported diluted earnings per share for the fourth quarter ended September 30, 2015 of $0.63 compared to $0.68 and diluted earnings per share loss for the fiscal year ended September 30, 2015 of $5.27 compared to $5.23. The adjustment also lowered adjusted earnings per share for the fourth quarter and fiscal year ended September 30, 2015 by $0.04 from the amounts reported in the earnings release. The adjustment primarily impacted the results of Reinforcement Materials.
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PART III Item 10. | Directors, Executive Officers and Corporate Governance |
Certain information regarding our executive officers is included at the end of Part I of this annual report under the heading “Executive Officers of the Registrant.” Cabot has adopted a Code of Business Ethics that applies to all of the Company’s employees and directors, including the Chief Executive Officer, the Chief Financial Officer, the Controller and other senior financial officers. The Code of Business Ethics is posted on our website, www.cabotcorp.com (under the “About Cabot” caption under “Company”). We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Business Ethics applicable to the Chief Executive Officer, the Chief Financial Officer, the Controller or other senior financial officers by posting such information on our website. The other information required by this item will be included in our Proxy Statement for the 20152016 Annual Meeting of Stockholders (“Proxy Statement”) and is herein incorporated by reference. Item 11. | Executive Compensation |
The information required by this item will be included in our Proxy Statement and is incorporated herein by reference. Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information relating to security ownership of certain beneficial owners of our common stock, and information relating to the security ownership of our management required by this item will be included in our Proxy Statement and is incorporated herein by reference The following table provides information as of September 30, 20142015 about: (i) the number of shares of common stock that may be issued upon exercise of outstanding options and vesting of restricted stock units; (ii) the weighted-average exercise price of outstanding options; and (iii) the number of shares of common stock available for future issuance under our active plans: the 2009 Long-Term Incentive Plan and the Non-Employee2015 Directors’ Stock Compensation Plan. All of our equity compensation plans have been approved by our stockholders. | | | | | | | | | | | | | Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)(1) | | | Weighted-average exercise price of outstanding option, warrants and rights (b)(2) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)(3) | | Equity compensation plans approved by security holders | | | 2,454,002 | | | $ | 31.22 | | | | 3,171,241 | | Equity compensation plans not approved by security holders | | | N/A | | | | N/A | | | | N/A | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)(1) | | | Weighted-average exercise price of outstanding option, warrants and rights (b)(2) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)(3) | | Equity compensation plans approved by security holders | | | 2,320,862 | | | $ | 33.91 | | | | 3,294,265 | | Equity compensation plans not approved by security holders | | N/A | | | N/A | | | N/A | |
(1) | Includes (i) 1,421,3531,510,126 shares issuable upon exercise of outstanding stock options, (ii) 534,303490,336 shares issuable upon vesting of time-based restricted stock units, (iii) 239,68692,055 shares issuable upon vesting of performance-based restricted stock units based upon the achievement of the annual financial performance metrics for the three years within the three-year performance period of the fiscal 20122013 awards, the first two years within the three-year performance period of the fiscal 20132014 awards, and the first year within the three-year performance period of the fiscal 20142015 awards; and (iv) 258,660228,345 shares issuable upon vesting of the performance-based stock units attributable to year three of the 20132014 awards and years two and three of the 20142015 awards, assuming Cabot performs at the maximum performance level in each of those years. If, instead, Cabot performs at the target level of |
| performance in those years, a total of 172,440152,230 shares would be issuable for year three of the 20132014 awards and years two and three of the 20142015 awards. |
(2) | The weighted-average exercise price includes all outstanding stock options but does not include restricted stock units which do not have an exercise price. |
(3) | Of these shares, (i) 3,046,7552,944,265 shares remain available for future issuance under our 2009 Long-Term Incentive Plan, and (ii) 124,486350,000 remain available for future issuance under our Non-Employee2015 Directors’ Stock Compensation Plan. |
The other information required by this item will be included in our Proxy Statement and is incorporated herein by reference. Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be included in our Proxy Statement and is incorporated herein by reference. Item 14. | Principal Accounting Fees and Services |
The information required by this item will be included in our Proxy Statement and is incorporated herein by reference.
Item 14.
| Principal Accounting Fees and Services |
The information required by this item will be included in our Proxy Statement and is incorporated herein by reference.
PART IV Item 15. | Exhibits, Financial Statement Schedules |
(a) | Financial Statements. See “Index to Financial Statements” under Item 8 on page 5242 of this Form 10-K. |
(b) | Exhibits. (Certain exhibits not included in copies of the Form 10-K sent to stockholders.) |
The exhibit numbers in the following list correspond to the numbers assigned to such exhibits in the Exhibit Table of Item 601 of Regulation S-K. Cabot will furnish to any stockholder, upon written request, any exhibit listed below, upon payment by such stockholder of the Company’s reasonable expenses in furnishing such exhibit. | | | Exhibit
Number | | | Description | | | | 3(a) | | Restated Certificate of Incorporation of Cabot Corporation effective January 9, 2009 (incorporated herein by reference to Exhibit 3.1 of Cabot’s Quarterly Report onForm 10-Q for the quarterly period ended December 31, 2008, file reference 1-5667, filed with the SEC on February 9, 2009). | | | | 3(b) | | The By-laws of Cabot Corporation as amended September 9, 2011 (incorporated herein by reference to Exhibit 3(b) of Cabot’s Annual Report on Form 10-K for the year ended September 30, 2011, file reference 1-5667, filed with the SEC on November 29, 2011). | | | | 4(a)(i) | | Indenture, dated as of December 1, 1987, between Cabot Corporation and The First National Bank of Boston, Trustee (the “Indenture”) (incorporated herein by reference to Exhibit 4 of Amendment No. 1 to Cabot’s Registration Statement on Form S-3, Registration Statement No. 33-18883, filed with the SEC on December 10, 1987). | | | | 4(a)(ii) | | First Supplemental Indenture, dated as of June 17, 1992, to the Indenture (incorporated herein by reference to Exhibit 4.3 of Cabot’s Registration Statement on Form S-3, Registration Statement No. 33-48686, filed with the SEC on June 18, 1992). | | | | 4(a)(iii) | | Second Supplemental Indenture, dated as of January 31, 1997, between Cabot Corporation and State Street Bank and Trust Company, Trustee (incorporated herein by reference to Exhibit 4 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996, file reference 1-5667, filed with the SEC on February 14, 1997). | | | | 4(a)(iv) | | Third Supplemental Indenture, dated as of November 20, 1998, between Cabot Corporation and State Street Bank and Trust Company, Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K, dated November 20, 1998, file reference 1-5667, filed with the SEC on November 20, 1998). | | | | 4(a)(v) | | Indenture, dated as of September 21, 2009, between Cabot Corporation and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Registration Statement on Form S-3 ASR, Registration StatementNo. 333-162021, filed with the SEC on September 21, 2009). | | | | 4(a)(vi) | | First Supplemental Indenture, dated as of September 24, 2009, between Cabot Corporation and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K dated September 24, 2009, file reference 1-5667, filed with the SEC on September 24, 2009). | | | | 4(a)(vii) | | Second Supplemental Indenture, dated as of July 12, 2012 between Cabot Corporation, as Issuer, and U.S. Bank National Association, as Trustee, including the form of Global Note attached as Annex A thereto, supplementing the Indenture dated as of September 21, 2009 (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K dated July 9, 2012, file reference 1-5667, filed with the SEC on July 12, 2012). |
| | | Exhibit
Number | | Description
| | | | 10(a)† | | Credit Agreement, dated October 3, 2014,23, 2015, among Cabot Corporation, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Citibank, N.A., Bank of America, N.A., Mizuho Bank, Ltd., and TD Bank, N.A., and Wells Fargo Bank, National Association, and the other lenders party thereto. | | | | 10(b)(i)* | | 2009 Long-Term Incentive Plan (incorporated herein by reference to Appendix B of Cabot’s Proxy Statement on Schedule 14A relating to the 2012 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 30, 2012). | | | | 10(b)(ii)* | | Non-Employee2015 Directors’ Stock Compensation Plan (incorporated herein by reference to Appendix B of Cabot’s Proxy Statement on Schedule 14A relating to the 20062015 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 30, 2006)28, 2015). | | | |
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Exhibit Number | | Description | 10(b)(iii)* | | Cabot Corporation Short-Term Incentive Compensation Plan (incorporated herein by reference to Appendix A of Cabot’s Proxy Statement on Schedule 14A relating to the 2011 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 28, 2011). | | | | 10(c)*† | | Summary of Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2012, file reference 1-5667, filed with the SEC on February 8, 2013).Directors. | | | | 10(d)* | | Cabot Corporation Amended and Restated Senior Management Severance Protection Plan, dated March 9, 2012 (incorporated herein by reference to Exhibit 10.5 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, file reference 1-5667, filed with the SEC on May 7, 2012). | | | | 10(e)* | | Form of Restricted Stock Unit Award Certificate under the Cabot Corporation 2009 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10(i)(i) of Cabot’s Annual Report on Form 10-K for the period ended September 30, 2013, file reference1-5667, filed with the SEC on November 27, 2013). | | | | 10(f)* | | Form of Non-Qualified Stock Option Award Agreement under the Cabot Corporation 2009 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10(i)(ii) of Cabot’s Annual Report on Form 10-K for the period ended September 30, 2013, file reference 1-5667, filed with the SEC on November 27, 2013). | | | | 10(g)* | | Cabot Corporation Deferred Compensation and Supplemental Retirement Plan, amended and restated January 1, 2014 (incorporated herein by reference to Exhibit 10.1 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, file reference 1-5667, filed with the SEC on February 6, 2014). | | | | 10(h)* | | Cabot Corporation Non-Employee Directors’ Deferral Plan, amended and restated January 1, 2014 (incorporated herein by reference to Exhibit 10.2 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, file reference 1-5667, filed with the SEC on February 6, 2014). |
| | | Exhibit
Number | | Description
| | | | 10(i)* | | The Separation Agreement between Cabot Corporation and David A. Miller dated November 28, 2014 (incorporated herein by reference to Exhibit 10.1 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, file reference 1-5667, filed with the SEC on February 5, 2015). | | | | 10(j)* | | Employment Agreement between Nicholas Stewart Cross and Cabot Switzerland GmbH effective April 1, 2010, as modified by the Assignment Letter between Nicholas Cross and Cabot Corporation effective May 15, 2015 (incorporated herein by reference to Exhibit 10.1 of Cabot Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, file reference 1-5667, filed with the SEC on May 7, 2015). | | | | 10(k) | | Asset Transfer Agreement, dated as of June 13, 1995, among Cabot Safety Corporation, Cabot Canada Ltd., Cabot Safety Limited, Cabot Corporation, Cabot Safety Holdings Corporation and Cabot Safety Acquisition Corporation (incorporated herein by reference to Exhibit 2(a) of Cabot Corporation’s Current Report on Form 8-K dated July 11, 1995, file reference 1-5667, filed with the SEC on July 26, 1995). | | | | 21† | | Subsidiaries of Cabot Corporation. | | | | 23† | | Consent of Deloitte & Touche LLP. | | | | 31(i)† | | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | | | | 31(ii)† | | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | | | | 32†† | | Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | | | | 101.INS† | | XBRL Instance Document. | | | | 101.SCH† | | XBRL Taxonomy Extension Schema Document. | | | | 101.CAL† | | XBRL Taxonomy Calculation Linkbase Document. | | | | 101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | 101.LAB† | | XBRL Taxonomy Label Linkbase Document. | | | | 101.PRE† | | XBRL Taxonomy Presentation Linkbase Document. |
* | Management contract or compensatory plan or arrangement. |
97
| Attached as Exhibit 101 to the report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the years ended September 30, 2015, 2014, 2013, 2012;2013; (ii) Consolidated Statements of Comprehensive Income for years ended September 30, 2015, 2014, 2013, or 2012.2013. (iii) the Consolidated Balance Sheets at September 30, 20142015 and September 30, 2013;2014; (iv) the Consolidated Statement of Cash flows for the years ended September 30, 2015, 2014 2013 and 2012;2013; (v) the Consolidated Statement of Changes in Stockholders’ Equity September 30, 2015, 2014 2013 and 2012;2013; and (vi) Notes to the Consolidated Financial Statements, September 30, 2014.2015. |
(c) | Schedules. The Schedules have been omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. |
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SIGNATURESSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | CABOT CORPORATION | | | BY: | | /S/ PATRICK M. PREVOST CABOT CORPORATION | | | | BY: | /S/ PATRICK M. PREVOST | | Patrick M. Prevost President and Chief Executive Officer |
Date: November 26, 201425, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures | | Title | | Date | Signatures
| | Title
| | Date
| | | | /s/ PATRICK M. PREVOST Patrick M. Prevost
| | Director, President and | | November 25, 2015 | Patrick M. Prevost | | Chief Executive Officer | | November 26, 2014 | | | | | | | | | /s/ EDUARDO E. CORDEIRO Eduardo E. Cordeiro
| | Executive Vice President and Chief Financial Officer (principal | | November 25, 2015 | Eduardo E. Cordeiro | | (principal financial officer) | | November 26, 2014 | | | | | | | | | /s/ JAMES P. KELLY James P. Kelly
| | Vice President and Controller | | November 25, 2015 | James P. Kelly | | (principal accounting officer) | | November 26, 2014 | | | | | | | | | /s/ JOHN F. O’BRIEN John F. O’Brien
| | Director, Non-Executive | | November 25, 2015 | John F. O’Brien | | Chairman of the Board | | November 26, 2014 | | | | /s/ JOHN S. CLARKESON
John S. Clarkeson
| | Director | | November 26, 2014 | | | | /s/ JUAN ENRIQUEZ Juan Enriquez
| | Director | | November 26, 2014 | | | 25, 2015 | Juan Enriquez | | | | | | | | | | /s/ WILLIAM C. KIRBY | | Director | | November 25, 2015 | William C. Kirby | | Director | | November 26, 2014 | | | | | | | | | /s/ RODERICK C.G. MACLEOD | | Director | | November 25, 2015 | Roderick C.G. MacLeod | | Director | | November 26, 2014 | | | | | | | | | /s/ HENRY F. MCCANCE | | Director | | November 25, 2015 | Henry F. McCance | | Director | | November 26, 2014 | | | | | | | | | /s/ JOHN K. MCGILLICUDDY | | Director | | November 25, 2015 | John K. McGillicuddy | | Director | | November 26, 2014 | | | | | | | | | /s/ SUE H. RATAJ | | Director | | November 25, 2015 | Sue H. Rataj | | Director | | November 26, 2014 |
| | | | | Signatures
| | Title
| | Date
| /s/ RONALDO H. SCHMITZ | | Director | | November 25, 2015 | /s/ RONALDO H. SCHMITZ
Ronaldo H. Schmitz | | Director | | November 26, 2014 | | | | | | | | | /s/ LYDIA W. THOMAS | | Director | | November 25, 2015 | Lydia W. Thomas | | Director | | November 26, 2014 | | | | /s/ MATTHIAS WOLFGRUBER
Matthias Wolfgruber
| | Director | | November 26, 2014 | | | | /s/ MATTHIAS L. WOLFGRUBER | | Director | | November 25, 2015 | Matthias L. Wolfgruber | | | | | | | | | | /s/ MARK S. WRIGHTON | | Director | | November 25, 2015 | Mark S. Wrighton | | Director | | November 26, 2014 |
99
EXHIBIT INDEX | | | Exhibit
Number | | | Description | 3(a) | | | 3(a) | | Restated Certificate of Incorporation of Cabot Corporation effective January 9, 2009 (incorporated herein by reference to Exhibit 3.1 of Cabot’s Quarterly Report onForm 10-Q for the quarterly period ended December 31, 2008, file reference 1-5667, filed with the SEC on February 9, 2009). | | | | 3(b) | | The By-laws of Cabot Corporation as amended September 9, 2011 (incorporated herein by reference to Exhibit 3(b) of Cabot’s Annual Report on Form 10-K for the year ended September 30, 2011, file reference 1-5667, filed with the SEC on November 29, 2011). | | | | 4(a)(i) | | Indenture, dated as of December 1, 1987, between Cabot Corporation and The First National Bank of Boston, Trustee (the “Indenture”) (incorporated herein by reference to Exhibit 4 of Amendment No. 1 to Cabot’s Registration Statement on Form S-3, Registration Statement No. 33-18883, filed with the SEC on December 10, 1987). | | | | 4(a)(ii) | | First Supplemental Indenture, dated as of June 17, 1992, to the Indenture (incorporated herein by reference to Exhibit 4.3 of Cabot’s Registration Statement on Form S-3, Registration Statement No. 33-48686, filed with the SEC on June 18, 1992). | | | | 4(a)(iii) | | Second Supplemental Indenture, dated as of January 31, 1997, between Cabot Corporation and State Street Bank and Trust Company, Trustee (incorporated herein by reference to Exhibit 4 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1996, file reference 1-5667, filed with the SEC on February 14, 1997). | | | | 4(a)(iv) | | Third Supplemental Indenture, dated as of November 20, 1998, between Cabot Corporation and State Street Bank and Trust Company, Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K, dated November 20, 1998, file reference 1-5667, filed with the SEC on November 20, 1998). | | | | 4(a)(v) | | Indenture, dated as of September 21, 2009, between Cabot Corporation and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Registration Statement on Form S-3 ASR, Registration StatementNo. 333-162021, filed with the SEC on September 21, 2009). | | | | 4(a)(vi) | | First Supplemental Indenture, dated as of September 24, 2009, between Cabot Corporation and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K dated September 24, 2009, file reference 1-5667, filed with the SEC on September 24, 2009). | | | | 4(a)(vii) | | Second Supplemental Indenture, dated as of July 12, 2012 between Cabot Corporation, as Issuer, and U.S. Bank National Association, as Trustee, including the form of Global Note attached as Annex A thereto, supplementing the Indenture dated as of September 21, 2009 (incorporated herein by reference to Exhibit 4.1 of Cabot’s Current Report on Form 8-K dated July 9, 2012, file reference 1-5667, filed with the SEC on July 12, 2012). | | | | 10(a)† | | Credit Agreement, dated October 3, 2014,23, 2015, among Cabot Corporation, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Citibank, N.A., Bank of America, N.A., Mizuho Bank, Ltd., and TD Bank, N.A., and Wells Fargo Bank, National Association, and the other lenders party thereto. |
| | | Exhibit
Number | | Description
| | | | 10(b)(i)* | | 2009 Long-Term Incentive Plan (incorporated herein by reference to Appendix B of Cabot’s Proxy Statement on Schedule 14A relating to the 2012 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 30, 2012). | | | | 10(b)(ii)* | | Non-Employee2015 Directors’ Stock Compensation Plan (incorporated herein by reference to Appendix B of Cabot’s Proxy Statement on Schedule 14A relating to the 20062015 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 30, 2006)28, 2015). | | | | 10(b)(iii)* | | Cabot Corporation Short-Term Incentive Compensation Plan (incorporated herein by reference to Appendix A of Cabot’s Proxy Statement on Schedule 14A relating to the 2011 Annual Meeting of Stockholders, file reference 1-5667, filed with the SEC on January 28, 2011). | | | | 10(c)*† | | Summary of Compensation for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2012, file reference 1-5667, filed with the SEC on February 8, 2013).Directors. | | | | 10(d)* | | Cabot Corporation Amended and Restated Senior Management Severance Protection Plan, dated March 9, 2012 (incorporated herein by reference to Exhibit 10.5 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, file reference 1-5667, filed with the SEC on May 7, 2012). | | | |
100
Exhibit Number | | Description | 10(e)* | | Form of Restricted Stock Unit Award Certificate under the Cabot Corporation 2009Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10(i)(i) of Cabot’s Annual Report on Form 10-K for the period ended September 30, 2013, file reference1-5667, filed with the SEC on November 27, 2013). | | | | 10(f)* | | Form of Non-Qualified Stock Option Award Agreement under the Cabot Corporation 2009 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10(i)(ii) of Cabot’s Annual Report on Form 10-K for the period ended September 30, 2013, file reference 1-5667, filed with the SEC on November 27, 2013). | | | | 10(g)* | | Cabot Corporation Deferred Compensation and Supplemental Retirement Plan, amended and restated January 1, 2014 (incorporated herein by reference to Exhibit 10.1 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, file reference 1-5667, filed with the SEC on February 6, 2014). | | | | 10(h)* | | Cabot Corporation Non-Employee Directors’ Deferral Plan, amended and restated January 1, 2014 (incorporated herein by reference to Exhibit 10.2 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, file reference 1-5667, filed with the SEC on February 6, 2014). | | | | 10(i)* | | The Separation Agreement between Cabot Corporation and David A. Miller dated November 28, 2014 (incorporated herein by reference to Exhibit 10.1 of Cabot’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, file reference 1-5667, filed with the SEC on February 5, 2015). | | | | 10(j)* | | Employment Agreement between Nicholas Stewart Cross and Cabot Switzerland GmbH effective April 1, 2010, as modified by the Assignment Letter between Nicholas Cross and Cabot Corporation effective May 15, 2015 (incorporated herein by reference to Exhibit 10.1 of Cabot Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, file reference 1-5667, filed with the SEC on May 7, 2015). | | | | 10(k) | | Asset Transfer Agreement, dated as of June 13, 1995, among Cabot Safety Corporation, Cabot Canada Ltd., Cabot Safety Limited, Cabot Corporation, Cabot Safety Holdings Corporation and Cabot Safety Acquisition Corporation (incorporated herein by reference to Exhibit 2(a) of Cabot Corporation’s Current Report on Form 8-K dated July 11, 1995, file reference 1-5667, filed with the SEC on July 26, 1995). | | | | 21† | | Subsidiaries of Cabot Corporation. | | | | 23† | | Consent of Deloitte & Touche LLP. |
| | | Exhibit
Number | | Description
| | | | 31(i)† | | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | | | | 31(ii)† | | Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. | | | | 32†† | | Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | | | | 101.INS† | | XBRL Instance Document. | | | | 101.SCH† | | XBRL Taxonomy Extension Schema Document. | | | | 101.CAL† | | XBRL Taxonomy Calculation Linkbase Document. | | | | 101.DEF† | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | 101.LAB† | | XBRL Taxonomy Label Linkbase Document. | | | | 101.PRE† | | XBRL Taxonomy Presentation Linkbase Document. |
* | Management contract or compensatory plan or arrangement. |
| Attached as Exhibit 101 to the report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations for the years ended September 30, 2015, 2014, 2013, 2012;2013; (ii) Consolidated Statements of Comprehensive Income for years ended September 30, 2015, 2014, 2013, or 2012.2013. (iii) the Consolidated Balance Sheets at September 30, 20142015 and September 30, 2013;2014; (iv) the Consolidated Statement of Cash flows for the years ended September 30, 2015, 2014 2013 and 2012;2013; (v) the Consolidated Statement of Changes in Stockholders’ Equity September 30, 2015, 2014 2013 and 2012;2013; and (vi) Notes to the Consolidated Financial Statements, September 30, 2014.2015. |
(c) | Schedules. The Schedules have been omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. |
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