CABOT CORPORATION Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with accounting policies generally accepted inthe United States ("GAAP"). 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. Our critical accounting policies have not substantially changed from those described in the 2019 10-K.
Recently Issued Accounting Pronouncements
Refer to the discussion under the headings "Recently Adopted Accounting Standards" and "Recent Accounting Pronouncements" in Note B of our Notes to the Consolidated Financial Statements.
Results of Operations Cabot was organized into four reportable business segments throughJune 28, 2019 : Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The Specialty Fluids business was divested as ofJune 28, 2019 and since that time Cabot has been organized into the three remaining reportable business segments. Cabot is also organized for operational purposes into three geographic regions: theAmericas ;Europe ,Middle East andAfrica ; andAsia Pacific . The discussions of our results of operations for the periods presented reflect these structures.
Our analysis of our financial condition and operating results should be read with our consolidated financial statements and accompanying notes.
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 and/or
segment.
Our discussion under the heading "(Provision) Benefit for Income Taxes and
Reconciliation of Effective Tax Rate to Operating Tax Rate" includes a
discussion of our historical and expected "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 or
establishment 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. When the tax
impact of a certain item is also a discrete tax item, it is classified as a
certain item for our definition of operating tax rate. Our definition of the
operating tax rate may not be comparable to the definition used by other
companies. Management believes that this 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 to understand what our tax rate on
current operations would be without the impact of these items.
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Our discussion under the heading "Second Quarter and First Six Months of Fiscal
2020 versus Second Quarter and First Six Months of Fiscal 2019-By Business
Segment" includes a discussion of Total segment EBIT, which is a non-GAAP
financial measure defined as Income (loss) before income taxes and equity in
earnings from affiliated companies less certain items and other unallocated
items. Our Chief Operating Decision Maker, who is our President and Chief
Executive Officer, uses segment EBIT to evaluate the operating results of each
segment and to allocate resources to the segments. We believe Total segment
EBIT, which reflects the sum of EBIT from our reportable segments, provides
useful supplemental information for our investors as it is an important
indicator of our operational strength and performance, allows investors to see
our results through the eyes of management, and provides context for our
discussion of individual business segment performance. Total segment EBIT should
not be considered an alternative for Income (loss) before income taxes and
equity in earnings of affiliated companies, which is the most directly
comparable GAAP financial measure. A reconciliation of Total segment EBIT to
Income (loss) before income taxes and equity in earnings of affiliated companies
is provided under the heading "Second Quarter of Fiscal 2020 versus Second
Quarter of Fiscal 2019-By Business Segment". 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.
In calculating Total segment EBIT, we exclude from our Income (loss) before
income taxes and equity in earnings of affiliated companies (i) items of expense
and income that management does not consider representative of our fundamental
on-going segment results, which we refer to as "certain items", and (ii) items
that, because they are not controlled by the business segments and primarily
benefit corporate objectives, are not allocated to our business segments, such
as interest expense and other corporate costs, which include unallocated
corporate overhead expenses such as certain corporate salaries and headquarter
expenses, plus costs related to special projects and initiatives, which we refer
to as "other unallocated items". Management believes excluding the items
identified as certain items facilitates operating performance comparisons from
period to period by eliminating differences caused by the existence and timing
of certain expense and income items that would not otherwise be apparent on a
GAAP basis and also facilitates an evaluation of our operating performance
without the impact of these costs or benefits. The items of income and expense
that we exclude from Total segment EBIT but that are included in our GAAP Income
(loss) before income taxes and equity in earnings of affiliated companies, as
applicable in a particular reporting period, include, but are not limited to,
the following:
• Asset impairment charges, which primarily include charges associated with
an impairment of goodwill or other long-lived assets.
• Inventory reserve adjustment, which resulted from an evaluation performed
as part of an impairment analysis.
• Global restructuring activities, which include costs or benefitsassociated with cost reduction initiatives or plant closures and are
primarily related to (i) employee termination costs, (ii) asset impairment
charges associated with restructuring actions, (iii) costs to close
facilities, including environmental costs and contract termination
penalties and (iv) gains realized on the sale of land or equipment
associated with restructured plants or locations.
• Indirect tax settlement credits, which includes favorable settlements
resulting in the recoveries of indirect taxes.
• Acquisition and integration-related charges, which include transaction
costs, redundant costs incurred during the period of integration, and
costs associated with transitioning certain management and business
processes to our processes.
• Legal and environmental matters and reserves, which consist of costs or
benefits for matters typically related to former businesses or that are
otherwise incurred outside of the ordinary course of business.
• Gains (losses) on sale of investments, which primarily relate to the sale
of investments accounted for using the cost method.
• Gains (losses) on sale of businesses.
• Non-recurring gains (losses) on foreign exchange, which primarily relate
to the impact of controlled currency devaluations on our net monetary
assets denominated in that currency.
• Executive transition costs, which include incremental charges, including
stock compensation charges, associated with the retirement or termination
of employment of senior executives of the Company.
• Employee benefit plan settlements, which consist of either charges or
benefits associated with the termination of a pension plan or the transfer
of a pension plan to a multi-employer plan.
Overview
During the second quarter of fiscal 2020, Income (loss) before income taxes and equity in earnings of affiliated companies decreased compared to the second quarter of fiscal 2019. The decrease primarily reflects the decrease in Total Segment EBIT of$17 million and a$50 million charge related to a legal settlement recorded during the second quarter of fiscal 2020. Total Segment EBIT in the second quarter of fiscal 2019 included$12 million related to our Specialty Fluids business, which we divested in the third 28 -------------------------------------------------------------------------------- quarter of fiscal 2019. Excluding the impact from the divestiture of our Specialty Fluids business, Total Segment EBIT decreased$5 million driven by lower volumes in Reinforcement Materials and lower margins in Performance Chemicals, partially offset by higher margins due to pricing and mix benefits in both our tire and industrial products product lines.
COVID-19 Impact and Outlook
InDecember 2019 , a novel coronavirus disease ("COVID-19") was first reported and inJanuary 2020 , theWorld Health Organization ("WHO") declared it a Public Health Emergency of International Concern. OnMarch 11, 2020 , the WHO characterized COVID-19 as a global pandemic, due to the continued increase in the number of cases and affected countries. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed "essential," isolate residents in their places of residence, and practice social distancing when engaging in essential activities. The coronavirus pandemic and the associated containment efforts have had a serious adverse impact on the economy, the severity and duration of which are uncertain. Government stabilization efforts will only partially mitigate the consequences. The coronavirus pandemic is adversely affecting and is expected to continue to adversely affect, our business, results of operations and cash flows. While most of our facilities remain open given the "essential" status of many of our end-markets, such as infrastructure, agriculture and pharmaceutical production, we are operating at low production and utilization rates due to declined demand from the halt of customer operations within the tire and automotive sectors. Beginning during our second fiscal quarter, as the virus spread inChina , we experienced volume declines principally in our Reinforcement Materials segment as operations at many of our customers' plants inChina were completely or partially curtailed and a more competitive pricing environment in our fumed metal oxides product line. As COVID-19 began to further spread around the globe, on the recommendation or mandate of public health officials, a number of our key customers, notably most automotive and tire manufacturers in theAmericas andEurope , temporarily closed their manufacturing operations beginning inMarch 2020 . As a result, we have experienced and expect to continue to experience further reductions in demand for certain of our products, particularly in our Reinforcement Materials segment. In response to this reduced demand for our products, we have operated at significantly lower manufacturing levels at many of our plants. Also, in order to comply with government mandates to cease operations inArgentina andMalaysia , we temporarily suspended operations or idled production lines at our facilities in those countries. This decline in demand is expected to have an adverse effect on our results of operations and cash flows. Although we are beginning to see some of our customers in the tire and automotive sector resume operations, we are unable to predict with certainty the speed and shape of a recovery to more normal customer demand levels for our products or more normal manufacturing operating levels at our facilities. In addition, the coronavirus pandemic could materially affect our ability to adequately staff and maintain our operations in the future, particularly as government authorities impose mandatory closures, work-from-home orders and social distancing protocols, and seek voluntary facility closures and impose other restrictions to mitigate the further spread of the virus. We continue to supply our customers around the globe, however, because we are reducing inventory to respond to this unusually low customer demand environment, a prolonged duration of this interruption in our manufacturing operations could impact our ability to meet customer demand in the future. In addition, the sudden, steep decline in oil prices inApril 2020 will adversely affect margins and profitability most significantly in our Reinforcement Materials segment in the near term. Lower oil prices will also reduce revenues from our energy center operations. We have taken, and will continue to take, actions to mitigate the impact of the coronavirus and the decline in oil prices on our cash flow and results of operations and financial condition. Through the curtailments we have implemented at our manufacturing operations, we are managing inventory levels, and reducing our manufacturing costs. We have reduced discretionary spending. Our net working capital is being reduced with lower raw material costs and reductions in our accounts receivable and inventories. In addition, we have reduced our expectations for capital expenditures in fiscal 2020 to approximately$200 million and have temporarily halted our share repurchases. There can be no assurance that our mitigation actions will be adequate to offset the impact from the decline in demand for our products that we are anticipating in the near term. We expect COVID-19 to continue to have an adverse impact on our revenue as well as our overall profitability and may lead to an increase in inventory reserves, allowances for doubtful accounts, and valuation allowances on certain of our deferred tax assets. Additionally, if the business impacts of COVID-19 carry on for an extended period, it could cause us to recognize impairments for certain long-lived assets including goodwill, intangible assets or property, plant and equipment. 29
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Second Quarter of Fiscal 2020 versus Second Quarter of Fiscal 2019-Consolidated
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inmillions)
Net sales and other operating revenues $ 710 $ 844$ 1,437 $ 1,665 Gross profit $ 153 $ 178$ 294 $ 344 Net sales in the second quarter of fiscal 2020 decreased by$134 million compared to the second quarter of fiscal 2019. The second quarter of fiscal 2019 included$24 million of revenue for our Specialty Fluids business. The remaining$110 million decline in net sales was primarily driven by lower volumes ($63 million ), a less favorable price and product mix (combined$35 million ), and the unfavorable impact from foreign currency translation ($10 million ). The lower volumes were driven by lower volumes in our Reinforcement Materials segment due to weaker demand related to declines in automotive and tire production resulting from the impact of the recent coronavirus disease ("COVID-19"). The less favorable price and product mix was due to lower prices from lower feedstock costs that are passed through to our customers in the Reinforcement Materials segment and unfavorable product mix in the Performance Chemicals segment due to the weaker product mix in the fumed metal oxides product line inChina andEurope . Net sales in the first six months of fiscal 2020 declined by$228 million compared to the first six months of fiscal 2019. The first six months of fiscal 2019 included$43 million of revenue for our Specialty Fluids business. The remaining$185 million decline in net sales was primarily driven by a less favorable price and product mix (combined$101 million ), lower volumes primarily in Reinforcement Materials and Purification Solutions ($59 million ), and the unfavorable impact from foreign currency translation ($20 million ). The less favorable price and product mix was due to lower sales in Reinforcement Materials due to the pass through of lower feedstock costs and a weaker product mix in the Performance Chemicals segment due to the weaker product mix in the fumed metal oxides product line inChina andEurope . The lower volumes were driven by lower volumes in the Reinforcement Materials segment due to weak automotive and tire production and the impact of COVID-19 on demand. The lower volumes in the Purification Solutions segment was due to lower sales in mercury removal and other industrial gas and air applications. Gross profit decreased by$25 million in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. Excluding the impact of the divestiture of our Specialty Fluids business, the gross profit decline was primarily due to lower volumes from Reinforcement Materials due to declining demand from weaker automotive and tire production related to the impacts of COVID-19 on demand. Gross profit decreased by$50 million in the first six months of fiscal 2020 compared to the first six months of fiscal 2019. Excluding the impact of the divestiture of our Specialty Fluids business, the gross profit decline was primarily due to lower volumes in Reinforcement Materials and Purification Solutions and lower unit margins in the Performance Chemicals segment.
Selling and Administrative Expenses
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inmillions)
Selling and administrative expenses $ 114 $ 70
$ 178 $ 143 Selling and administrative expenses increased by$44 million and$35 million in the second quarter and first six months of fiscal 2020 compared to the same periods of fiscal 2019, primarily due to the$50 million charge related to a legal settlement recorded during the second quarter of fiscal 2020. This increase was partially offset by a decrease in the accrual for incentive compensation and other cost reduction activities in the current fiscal year. 30 --------------------------------------------------------------------------------
Research and Technical Expenses
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inmillions)
Research and technical expenses $ 14 $ 15 $ 28 $ 31 Research and technical expenses decreased by$1 million and$3 million in the second quarter and the first six months of fiscal 2020 compared to the same periods of fiscal 2019, due to cost reduction activities in the current fiscal year.
Interest and Dividend Income, Interest Expense and Other Income (Expense)
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inmillions)
Interest and dividend income $ 3 $ 2 $ 6 $ 4 Interest expense $ (14 ) $ (14 )$ (28 ) $ (29 ) Other income (expense) $ (1 ) $ (12 ) $ (3 ) $ (6 ) Interest and dividend income increased$1 million and$2 million in the second quarter of fiscal 2020 and for the six months endedMarch 31, 2020 , respectively, as compared to the same periods of fiscal 2019 primarily due to interest earned on higher average cash balances.
Interest expense remained consistent in the second quarter of fiscal 2020
compared to the same period of fiscal 2019. For the six months ended
Other income (expense) changed by$11 million in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019, primarily due to the impairment of our equity affiliate inVenezuela in the second quarter of fiscal 2019 that did not reoccur. For the six months endedMarch 31, 2020 , Other income (expense) changed by$3 million compared to the same period of fiscal 2019. The change was primarily due to the impairment of our equity affiliate inVenezuela partially offset by pension benefits both of which were in the first six months of fiscal 2019 and did not reoccur. (Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate Three Months Ended March 31 Six Months Ended March 31 2020 2019 2020 2019 (Dollars in
millions)
(Provision) benefit for income taxes$ (10 ) $ (20 ) $ (14 ) $ (13 ) Effective tax rate 81 % 41 % 22 % 11 % Impact of discrete tax items(1): Unusual or infrequent items - % (1 )% 9 % 17 % Items related to uncertain tax positions 12 % 1 % 9 % 3 % Other discrete tax items 3 % (1 )% 4 % - % Impact of certain items (67 )% (16 )% (15 )% (7 )% Operating tax rate 29 % 24 % 29 % 24 %
(1) For the three and six months ended
items included a net discrete tax benefit of
respectively. For the three and six months ended
of discrete tax items included a net discrete tax expense of less than
million and a net discrete tax benefit of
nature of the discrete tax items for the periods ended
2019 were as follows:
(a) Unusual or infrequent items during the three and six months ended March
31, 2020 consisted of the net tax impact of
legislation (net tax benefit of a nil amount and
infrequent items during the three and six months ended
consisted of the net tax impacts of the Tax Cuts and Jobs Act of 2017 (the
"Act") (net tax benefit of nil and $17 million ), excludible foreign
exchange gains and losses in certain jurisdictions, impacts related to
stock compensation deductions, and the tax impacts of a pension
settlement;
(b) Items related to uncertain tax positions during the three and six months
ended
of accruals for uncertain tax positions due to the expiration of statutes
of limitations, and the accrual of interest on uncertain tax positions,
the accrual of an uncertain tax position (fiscal 2020 only), and the
settlement of tax audits;
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(c) Other discrete tax items during the three and six months ended
2020 and 2019 included net tax impacts as a result of changes in non-US
tax laws, return to provision adjustments related to tax return filing,
and other items.
For fiscal year 2020, the Operating tax rate is expected to be in the range of 29% to 30%. Cabot is not providing a forward-looking reconciliation of the operating tax rate range with an effective tax rate range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to "certain items," including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on the effective tax rate in future periods. We fileU.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. We are under audit in a number of jurisdictions. It is possible that some of these audits will be resolved in fiscal 2020 and could impact our anticipated effective tax rate. We have filed our tax returns in accordance with the tax laws, in all material respects, in each jurisdiction and maintain tax reserves for uncertain tax positions. Equity in Earnings of Affiliated Companies and Net Income (Loss) Attributable to Noncontrolling Interests Three Months Ended March 31 Six Months Ended March 31 2020 2019 2020 2019 (In
millions)
Equity in earnings of affiliated companies, net of tax $ 1 $ - $ 1 $ -
Net income (loss) attributable to
noncontrolling interests, net of tax $ 4 $ 6 $ 9 $ 14 Equity in earnings of affiliated companies, net of tax, increased$1 million in both the second quarter and the first six months of fiscal 2020 compared to the same period of fiscal 2019. The$1 million of income in 2020 relates to income from our affiliates inIndia andMexico . In fiscal 2019, this income was consistent with fiscal 2020, but also included losses from our equity affiliate inVenezuela , which has since been impaired. Net income (loss) attributable to noncontrolling interests, net of tax, decreased by$2 million in the second quarter of fiscal 2020 and$5 million in the first six months of fiscal 2020 compared to the same periods of fiscal 2019, primarily due to the lower profitability from our joint ventures inChina andCzech Republic .
Net Income Attributable to
In the second quarter and first six months of fiscal 2020, we reported net income (loss) attributable toCabot Corporation of$(1) million and$40 million or$(0.01) and$0.70 per diluted common share, respectively. This compares to net income (loss) attributable toCabot Corporation of$23 million and$92 million , or$0.39 and$1.53 per diluted common share, respectively, in the second quarter and first six months of fiscal 2019. The net loss in the second quarter of fiscal 2020 and lower net income in the first six months of fiscal 2020 is primarily due to the$50 million charge related to a legal settlement recorded during the quarter and lower Segment EBIT due to the impact of COVID-19 on demand. The net income (loss) attributable toCabot Corporation for the second quarter and first six months of fiscal 2019 includes impairment charges associated with our divested Specialty Fluids business and Venezuelan equity affiliate both of which did not recur in fiscal 2020.
Second Quarter of Fiscal 2020 versus Second Quarter of Fiscal 2019-By Business Segment
Income (loss) before income taxes and equity in earnings of affiliated companies, certain items, other unallocated items, and Total segment EBIT for the three and six months endedMarch 31, 2020 and 2019 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note N of our Notes to the Consolidated Financial Statements. Three Months Ended March 31 Six Months Ended March 31 2020 2019 2020 2019 (In millions) Income (loss) before income taxes and equity in earnings of affiliated companies $ 12 $ 49 $ 62$ 119 Less: Certain items (56 ) (37 ) (67 ) (47 ) Less: Other unallocated items (27 ) (26 ) (52 ) (51 ) Total segment EBIT $ 95 $ 112$ 181 $ 217 32
-------------------------------------------------------------------------------- In the second quarter of fiscal 2020, Income (loss) before income taxes and equity in earnings of affiliated companies decreased by$37 million and Total segment EBIT decreased by$17 million . Included in the second quarter of fiscal 2019 is$12 million of EBIT related to our Specialty Fluids business, which we divested in the third quarter of fiscal 2019. Excluding the Specialty Fluids impact, Total Segment EBIT decreased$5 million . The decrease in Income (loss) before income taxes and equity in earnings of affiliated companies was driven by a$50 million charge related to a legal settlement entered into during the second quarter of fiscal 2020. The decrease in Total segment EBIT is driven by lower volumes in Reinforcement Materials and Purification Solutions, partially offset by higher margins in Reinforcement Materials. Lower volumes in Reinforcement Materials ($22 million ) were primarily due to weaker automotive and tire demand related to the impacts from COVID-19. Lower volumes in Purification Solutions ($6 million ) were due to weaker demand in mercury removal applications. Higher margins in Reinforcement Materials ($22 million ) were primarily due to pricing gains in the calendar year 2020 customer agreements. In the first six months of fiscal 2020, Income (loss) before income taxes and equity in earnings of affiliated companies decreased$57 million and total Segment EBIT decreased by$36 million . Included in the first six months of fiscal 2019 is$22 million of EBIT related to our Specialty Fluids business, which we divested in the third quarter of fiscal 2019. Excluding the Specialty Fluids impact, Total segment EBIT decreased$14 million . The decrease in Income (loss) before income taxes and equity earnings of affiliated companies was driven by a$50 million charge related to a legal settlement entered into during the first six months of fiscal 2020. The decrease in Total segment EBIT was driven by lower volumes in Reinforcement Materials and Purification Solutions and lower margins in Performance Chemicals, partially offset by higher volumes in the Performance Chemicals segment. Lower volumes in Reinforcement Materials ($27 million ) were primarily due to weaker automotive and tire production and the impacts of COVID-19 on demand while lower volumes in Purification Solutions ($12 million ) were due to lower volumes in mercury removal applications. Higher volumes in the Performance Chemicals segment ($18 million ) were driven by higher demand in the specialty carbons and specialty compounds product lines.
Certain Items
Details of the certain items for the second quarter and first six months of fiscal 2020 and fiscal 2019 are as follows:
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(In millions)
Legal and environmental matters and
reserves $ (51 ) $ (1 ) $ (50 ) $ (1 )
Global restructuring activities (Note K) (5 ) (2 ) (13 ) (11 )
Employee benefit plan settlements (1 ) - (3 ) 3
Acquisition and integration-related
charges (1 ) (1 ) (2 ) (4 )
Specialty Fluids loss on sale and asset
impairment charge (1 ) (20 ) $ (1 ) $ (20 )
Indirect tax settlement credits 3 - 3 -
Equity affiliate investment impairment
charge - (11 ) $ - $ (11 )
Other - (2 ) (1 ) (3 )
Total certain items, pre-tax (56 ) (37 ) (67 ) (47 )
Tax-related certain items:
Tax impact of certain items 8 1 10 3
Discrete tax items 3 - 13 24
Total tax-related certain items 11 1 23 27
Total certain items, after tax $ (45 ) $ (36 ) $ (44 ) $ (20 )
The tax impact of certain items is determined by (1) starting with the current
and deferred income tax expense or benefit included in Net income (loss)
attributable to Cabot Corporation , and (2) subtracting the tax expense or
benefit on "adjusted earnings". Adjusted earnings is defined as the pre-tax
income attributable to Cabot Corporation excluding certain items. The tax
expense or benefit on adjusted earnings is calculated by applying the operating
tax rate, as defined under the heading "Definition of Terms and Non-GAAP
Financial Measures", to adjusted earnings.
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Other Unallocated Items
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(In millions)
Interest expense $ (14 ) $ (14 ) $ (28 ) $ (29 )
Unallocated corporate costs (12 ) (13 ) (22 ) (25 )
General unallocated income (expense) - 1 (1 ) 3
Less: Equity in earnings of affiliated
companies, net of tax 1 - 1 - Total other unallocated items $ (27 ) $ (26 )$ (52 ) $ (51 ) A discussion of items that we refer to as "other unallocated items" can be found under the heading "Definition of Terms and Non-GAAP Financial Measures". 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 ongoing corporate projects. The balances of General unallocated income (expense) consist of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, the profit or loss related to the corporate adjustment for unearned revenue, and the impact of including the full operating results of a contractual joint venture in Purification Solutions segment EBIT.
Reinforcement Materials
Sales and EBIT for Reinforcement Materials for the second quarter and first six months of fiscal 2020 and 2019 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(Inmillions)
Reinforcement Materials Sales $ 355 $ 445
Sales in Reinforcement Materials decreased by$90 million in the second quarter of fiscal 2020 compared to the same period of fiscal 2019, primarily due to lower volumes ($61 million ), a less favorable price and product mix (combined$23 million ), and the unfavorable impact from foreign currency translation ($7 million ). The lower volumes were primarily due to weaker automotive and tire demand resulting from the impact of COVID-19. The less favorable pricing was primarily due to the pass-through of lower feedstock prices. In the first six months of fiscal 2020, sales in Reinforcement Materials decreased by$168 million when compared to the first six months of fiscal 2019. The decrease was primarily driven by a less favorable price and product mix (combined$80 million ), lower volumes ($76 million ), and the unfavorable impact from foreign currency translation ($12 million ). The less favorable price and product mix was due to the pass-through of lower feedstock prices. The lower volumes were primarily due to weaker automotive and tire demand and the impacts of COVID-19 on demand. EBIT in Reinforcement Materials in the second quarter of fiscal 2020 was flat compared to the same period of fiscal 2019. During the second quarter of fiscal 2020, the segment had 14% lower volumes ($22 million ) which were offset by higher unit margins ($22 million ). The lower volumes were primarily due to weaker tire and automotive demand resulting from the impacts of COVID-19. The higher unit margins were due to pricing and mix benefits in both our tire and industrial products product lines. EBIT in Reinforcement Materials decreased$15 million in the first six months of fiscal 2020 compared to the same period of fiscal 2019. The decrease was driven by lower volumes ($27 million ) and an unfavorable impact from foreign currency translation ($5 million ), which was partially offset by higher unit margins ($13 million ) and lower fixed costs ($4 million ). Lower volumes were primarily due to weaker automotive and tire demand and the impacts from COVID-19. The higher unit margins were due to pricing and mix benefits in both our tire and industrial products product lines. 34
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Performance Chemicals
Sales and EBIT for Performance Chemicals for the second quarter and first six months of fiscal 2020 and 2019 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(In millions)
Performance Additives Sales $ 168 $ 179 $ 338 $ 346
Formulated Solutions Sales 77 75 149 139
Performance Chemicals Sales $ 245 $ 254 $ 487 $ 485
Performance Chemicals EBIT $ 31 $ 38 $ 72 $ 74
Sales in Performance Chemicals decreased by $9 million in the second quarter of
fiscal 2020 compared to the same period of fiscal 2019, primarily due to a less
favorable price and product mix (combined $16 million ) and the unfavorable
impact from foreign currency translation ($2 million ), partially offset by
higher volumes ($9 million ). The less favorable price and product mix was
primarily due to a more competitive pricing environment and weaker product mix
in the fumed metal oxides product line in China and Europe . The higher volumes
were driven by the specialty carbons and specialty compounds product lines.
In the first six months of fiscal 2020, sale in Performance Chemicals increased
$2 million when compared to the same period of fiscal 2019. The increase was
primarily due to higher volumes ($40 million ), partially offset by a less
favorable price and product mix (combined $33 million ) and the unfavorable
impact from foreign currency translation ($6 million ). The higher volumes were
primarily due to higher demand in the specialty carbons and specialty compounds
product lines. The less favorable price and product mix was primarily due to a
more competitive pricing environment and weaker product mix in the fumed metal
oxides product line in China and Europe .
EBIT in Performance Chemicals decreased by $7 million in the second quarter of
fiscal 2020 compared to the second quarter of fiscal 2019 primarily due to lower
unit margins from a more competitive pricing environment and weaker product mix
in the fumed metal oxides product line in China and Europe , partially offset by
higher volumes in the specialty carbons and specialty compounds product lines.
EBIT in Performance Chemicals decreased by $2 million in the first six months of
fiscal 2020 when compared to the same period of fiscal 2019 primarily due to
lower unit margins ($7 million ), higher fixed costs ($6 million ), the
unfavorable impact of inventory comparisons ($5 million ), partially offset by
higher volumes ($18 million ). Lower unit margins were due to a more competitive
pricing environment and weaker product mix in the fumed metal oxides product
line in China and Europe . The higher volumes were driven by our specialty
carbons and specialty compounds product lines due to higher demand in the
specialty carbons and specialty compounds product lines and new capacity in our
fumed metal oxides product line.
Purification Solutions
Sales and EBIT for Purification Solutions for the second quarter and first six months of fiscal 2020 and 2019 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2020 2019 2020 2019
(In millions)
Purification Solutions Sales $ 64 $ 72 $ 123 $ 137
Purification Solutions EBIT $ 3 $ 1 $ 1 $ (2 )
Sales in Purification Solutions decreased by $8 million in the second quarter of
fiscal 2020 compared to the same period of fiscal 2019 due to lower volumes ($11
million ) and the unfavorable impact from foreign currency translation ($1
million ), partially offset by improved pricing and a more favorable product mix
(combined $5 million ). The lower volumes were primarily due to lower sales in
mercury removal and other industrial gas and air applications.
Sale in Purification Solutions decreased $14 million in the first six months of
fiscal 2020 when compared to the same period of fiscal 2019 due to lower volumes
($24 million ) and the unfavorable impact from foreign currency translation ($2
million ), partially offset by improved pricing and a more favorable product mix
(combined $12 million ). The lower volumes were primarily due to lower sales in
mercury removal and other industrial gas and air applications.
EBIT in Purification Solutions increased by $2 million in the first quarter of
fiscal 2020 compared to the second quarter of fiscal 2019 due to higher unit
margins ($4 million ), lower fixed costs ($2 million ) as a result of prior year
restructuring activities and the favorable impact of changing inventory levels
($1 million ), partially offset by lower volumes ($6 million ). The higher unit
margins were primarily due to an improved product mix and higher prices. The
lower volumes were primarily due to lower sales in mercury removal and other
industrial gas and air applications.
35
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EBIT in Purification Solutions improved by $3 million in the first six months of
fiscal 2020 when compared to the same period of fiscal 2019 due to higher unit
margins ($9 million ), lower fixed costs ($5 million ) as a result of prior year
restructuring activities and the favorable impact of inventory comparisons ($2
million ), partially offset by lower volumes ($12 million ). The higher unit
margins were primarily due to an improved product mix and higher prices while
the lower volumes were primarily due to lower sales in mercury removal and other
industrial gas and air applications.
Specialty Fluids
We divested our Specialty Fluids business onJune 28, 2019 . Refer to our fiscal 2019 10-K filing for further details. Sales and EBIT for Specialty Fluids for the second quarter and first six months of fiscal 2020 and 2019 were as follows: Three Months Ended March 31 Six Months Ended March 31 2020 2019 2020 2019 (In millions) Specialty Fluids Sales $ - $ 24 $ - $ 43 Specialty Fluid EBIT $ - $ 12 $ - $ 22 Cash Flows and Liquidity Overview Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by$136 million during the first six months of fiscal 2020, which was largely attributable to capital expenditures, share repurchases and cash dividends, partially offset by lower net working capital. As ofMarch 31, 2020 , we had cash and cash equivalents of$142 million , restricted cash of$35 million and borrowing availability under our revolving credit agreements of$1.2 billion . The restricted cash was classified within Prepaid expenses and other current assets. OurU.S. revolving credit agreement supports our working capital and commercial paper program. During the second quarter, one of our short-term credit ratings was downgraded, which decreased our access to, and increased our cost to borrow through, the commercial paper market. As a result, during the second quarter, we transitioned our borrowing forU.S. cash needs from our commercial paper program to our revolving credit facility. As ofMarch 31, 2020 , our borrowings on theU.S. revolving credit facility were$100 million , and we had no commercial paper outstanding. Our non-U.S. revolving credit agreements may be used for repatriation of earnings of our foreign subsidiaries to theU.S. , the repayment of indebtedness of our foreign subsidiaries owing to us or any of our subsidiaries, and for working capital and general corporate purposes. As ofMarch 31, 2020 , our borrowings under these facilities was$144 million . A significant portion of our business occurs outside theU.S. and our cash generation does not always align geographically with our cash needs. The vast majority of our cash and cash equivalent holdings tend to be held outside theU.S. Cash held by foreign subsidiaries is generally used to finance the subsidiaries' operational activities and future investments. In the event that additional funds are needed in theU.S. , we expect to be able to repatriate funds or to access debt under our revolving credit facilities. AtMarch 31, 2020 , we were in compliance with all covenants under our revolving credit facilities, including the total consolidated debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) covenant. 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. Although we cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, we are actively managing the business to maintain cash flow and we anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from our revolving credit facilities to meet our operational and capital investment needs and financial obligations for the foreseeable future.
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$129 million in the first six months of fiscal 2020 compared to$51 million of cash provided by operating activities during the same period of fiscal 2019. 36 -------------------------------------------------------------------------------- Cash provided by operating activities in the first six months of fiscal 2020 was driven primarily by our net income of$49 million , the non-cash impacts of depreciation and amortization of$78 million and a decrease in Accounts and notes receivable of$56 million , partially offset by an increase in Prepaid expenses and other current assets of$33 million and the non-cash impact of a decrease in our deferred tax provision of$23 million . Cash provided by operating activities in the first six months of fiscal 2019 was driven primarily by our net income of$106 million , a decrease in Accounts and notes receivable of$39 million and the non-cash impacts of depreciation and amortization of$73 million and the impairments of our held for sale assets and of our investment in our Venezuelan equity affiliate of$20 million and$11 million , respectively. This activity was partially offset by an increase in Inventories of$51 million , a decrease in Accounts payable and accrued liabilities of$77 million , a decrease in Income taxes payable of$21 million , a decrease in Other liabilities of$27 million and the non-cash impact of a decrease in our deferred tax provision of$29 million .
In addition to the factors noted above, the following other elements of operations have a bearing on operating cash flows:
Restructurings - As ofMarch 31, 2020 , we had$10 million of total restructuring costs in accrued expenses in the Consolidated Balance Sheets related to certain of our global restructuring activities. In the first six months of fiscal 2020, we paid$9 million related to these restructuring activities, and we expect to make cash payments totaling approximately$13 million in the remainder of fiscal 2020 and thereafter. Environmental Reserves and Litigation Matters - As ofMarch 31, 2020 , we had a$9 million reserve for environmental remediation costs at various sites. These sites are primarily associated with businesses divested in prior years. In the first six months of fiscal 2020, we paid$5 million related to these environmental matters. Additionally, as ofMarch 31, 2020 , we had a$23 million reserve for existing and future respirator claims that we expect to pay over multiple years. We also had a$65 million payable for settled respirator claims as ofMarch 31, 2020 that we will pay in two equal installments in our third quarter of fiscal 2020 and first quarter of fiscal 2021. We also have other litigation costs arising in the ordinary course of business.
Cash Flows from Investing Activities
Investing activities consumed$126 million of cash in the first six months of fiscal 2020 compared to$98 million of cash consumed in the first six months of fiscal 2019. In both periods, investing activities primarily consisted of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as capacity expansion capital expenditures in Reinforcement Materials and Performance Chemicals. In addition, in the first six months of fiscal 2020, we paid$8 million for the plant that we acquired fromNSCC inSeptember 2018 . Capital expenditures for fiscal 2020 are expected to be approximately$200 million . Our planned capital spending program for fiscal 2020 is primarily for sustaining, compliance and improvement capital projects at our operating facilities as well as expansion capital expenditures in Reinforcement Materials and Performance Chemicals. InApril 2020 , we completed the purchase of SUSN for approximately$105 million through cash consideration of$90 million , of which$5 million represents contingent consideration to be paid out based on certain milestones over the next two years, and debt assumed of$15 million .
Cash Flows from Financing Activities
Financing activities provided$10 million of cash in the first six months of fiscal 2020 compared to$58 million of cash provided in the first six months of fiscal 2019. In the first six months of fiscal 2020, financing activities primarily consisted of the proceeds from borrowing under our revolvers of$197 million , partially offset by the repayment of$50 million of long-term debt, share repurchases of$44 million , dividend payments to stockholders of$40 million , and the repayment of$33 million of commercial paper. In the first six months of fiscal 2019, financing activities primarily consisted of$297 million of proceeds from the issuance of commercial paper and$29 million of short-term borrowings, which was partially offset by share repurchases of$112 million , dividend payments to stockholders of$40 million , the repayment of$75 million of fixed rate debt and the redemption of$25 million of preferred stock held by our former NHUMO joint venture partner.
Off-Balance Sheet Arrangements
As of
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--------------------------------------------------------------------------------Forward-Looking Information
This report on Form 10-Q contains "forward-looking statements" under the Federal securities laws. These forward-looking statements address expectations or projections about the future, including our expectations for future financial performance and the factors we expect to impact our results of operations, including how we expect the COVID-19 pandemic to impact demand for our products, our results of operations and our cash flows and our related mitigation efforts; when we expect the NSCC Carbon plant upgrades to be completed; the amount and timing of the charge to earnings we will record and the cash outlays we will make in connection with our reorganization and the closing of certain manufacturing facilities, restructuring initiatives and under our transformation plan for our Purification Solutions business; our estimated future amortization expenses for our intangible assets; when we expect to make payments under the settlement agreement we entered into settling certain respirator liability claims; the timing of expected payments from our reserve for existing and future respirator claims; the amount of any future gain or loss we may record upon the settlement, and the timing of the completion, of certain defined benefit obligations and pension plan terminations; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit facilities to fund our cash requirements; uses of available cash including anticipated capital spending and future cash outlays associated with long-term contractual obligations; our expected tax rate for fiscal 2020; and the possible outcome of legal and environmental proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control or difficult to predict. If known or unknown risks materialize, our actual results could differ materially from those expressed in the forward-looking statements. Importantly, as we cannot predict the duration or scope of the COVID-19 pandemic, the negative impact to our results cannot be estimated. Factors that will influence the impact on our business and operations include the duration and extent of the pandemic, the extent of imposed or recommended containment and mitigation measures, and the general economic consequences of the pandemic. In addition to factors described elsewhere in this report, other important the following are some of the factors that could cause our actual results to differ materially from those expressed in the forward-looking statements include: changes in raw material costs; lower than expected demand for our products; changes in environmental requirements in theU.S. ; the loss of one or more of our important customers; our inability to complete capacity expansions or other development projects; the availability of raw materials; our failure to develop new products or to keep pace with technological developments; fluctuations in currency exchange rates; patent rights of others; stock and credit market conditions; the timely commercialization of products under development (which may be disrupted or delayed by technical difficulties, market acceptance, competitors' new products, as well as difficulties in moving from the experimental stage to the production stage); demand for our customers' products; competitors' reactions to market conditions; unanticipated disruptions or delays in plant operations or development projects; delays in the successful integration of structural changes, including acquisitions or joint ventures; severe weather events that cause business interruptions, including plant and power outages or disruptions in supplier or customer operations; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations or global health matters; the accuracy of the assumptions we used in establishing reserves for environmental matters and for our share of liability for respirator claims; and the outcome of pending litigation. These other factors and risks are discussed more fully in our 2019 10-K or in our subsequentSEC filings.
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