CABOT CORPORATION Critical Accounting Policies
Our critical accounting policies have not substantially changed from those described in the 2020 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 is organized into three reportable business segments: Reinforcement
Materials, Performance Chemicals, and Purification Solutions. Cabot is also
organized for operational purposes into three geographic regions: the
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 and reconciliation of our "effective tax rate" and our "operating tax rate" for the periods presented, as well as management's projection of our operating tax rate range for the full fiscal year. 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.
Our discussion under the heading "First Quarter of Fiscal 2021 versus First Quarter Fiscal 2020-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 "First quarter of Fiscal 2021 versus First quarter of Fiscal 2020-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.
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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 generally result from an evaluation
performed as part of an impairment analysis.
• Global restructuring activities, which include costs or benefits
associated 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
Our business, results of operations and cash flows in fiscal 2020 were adversely
affected by the COVID-19 pandemic and its impact on our customers and our
operations, predominately in the second and third fiscal quarters. As our
customers in
Despite this improvement in demand for our products, the duration and scope of the COVID-19 pandemic continues to be uncertain. Infection rates remain high in many parts of the world, and the level and timing of COVID-19 vaccine distribution across the world will impact the stability of the economic recovery and growth. In addition, the COVID-19 pandemic has had a negative impact on global logistics and our Performance Chemicals segment may begin to experience this in our supply chain in terms of the availability and cost of transportation. These factors could result in an adverse impact on our revenue as well as our overall profitability. Additionally, if a resurgence impacts our business to the magnitude of the impact we experienced in the third quarter of fiscal 2020 for an extended period, it could cause us to recognize write-downs or impairments for certain assets, or a reduction in our borrowing availability under our credit agreements.
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During the first quarter of fiscal 2021, Income (loss) before income taxes and
equity in earnings of affiliated companies increased compared to the first
quarter of fiscal 2020. The increase primarily reflects the increase in Total
Segment EBIT of
First quarter of Fiscal 2021 versus First quarter of Fiscal 2020-Consolidated
Three Months Ended December 31
2020 2019
(In millions)Net sales and other operating revenues $ 746 $ 727 Gross profit
$ 193 $ 141
The
Gross profit increased by
Selling and Administrative Expenses
Three Months Ended December 31
2020 2019
(In millions)
Selling and administrative expenses $ 61 $ 64
Selling and administrative expenses decreased by
Research and Technical Expenses
Three Months Ended December 31
2020 2019
(In millions)
Research and technical expenses $ 14 $ 14
Research and technical expenses were flat when comparing the first quarter of fiscal 2021 to the same period of fiscal 2020.
Interest and Dividend Income, Interest Expense and Other Income (Expense)
Three Months Ended December 31
2020 2019
(In millions)
Interest and dividend income $ 2 $ 3
Interest expense $ (12 ) $ (14 )
Other income (expense) $ (9 ) $ (2 )
Interest and dividend income decreased by
Other expense increased by
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(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to
Operating Tax Rate
Three Months Ended December 31
2020 2019
(Dollars in millions)
(Provision) benefit for income taxes $ (29 )
Effective tax rate 29 % 7 % Impact of discrete tax items(1): 3 % 21 % Impact of certain items (2 )% (2 )% Operating tax rate 30 % 26 %
(1) For purposes of determining our Operating Tax Rate for the three months ended
December 31, 2020 and 2019, the impact of discrete tax items included a net discrete tax benefit of$2 million and$10 million , respectively. Discrete tax items are comprised of unusual or infrequent items, items related to uncertain tax positions, and other discrete tax items, as further defined above under the heading "Definition of Terms and Non-GAAP Financial Measures". For the three months endedDecember 31, 2019 , discrete tax items are primarily comprised of changes in uncertain tax positions and the impact of tax reform legislation in a foreign jurisdiction.
For fiscal year 2021, the Operating tax rate is expected to be in the range of 28% to 30%. We are 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 file
Net Income (Loss) Attributable to Noncontrolling Interests
Three Months Ended December 31
2020 2019
(In millions)Net income (loss) attributable to
noncontrolling interests, net of tax $ 10$ 5
Net income (loss) attributable to noncontrolling interests, net of tax,
increased by
Net Income Attributable to
In the first quarter of fiscal 2021, we reported net income (loss) attributable
to
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First quarter of Fiscal 2021 versus First quarter of Fiscal 2020-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 months ended
Three Months Ended December 31
2020 2019
(In millions)Income (loss) before income taxes and
equity in earnings of affiliated companies $ 99 $ 50 Less: Certain items
(11 ) (11 )
Less: Other unallocated items (30 ) (25 )
Total segment EBIT $ 140 $ 86
In the first quarter of fiscal 2021, Income (loss) before income taxes and
equity in earnings of affiliated companies increased by
Certain Items
Details of the certain items for the first quarter of fiscal 2021 and fiscal
2020 are as follows:
Three Months Ended December 31
2020 2019
(In millions)Employee benefit plan settlement and other charges (Note D) $ (6 ) $ (2 ) Global restructuring activities (Note J)
(3 ) (8 )
Acquisition and integration-related charges (1 ) (1 )
Legal and environmental matters and reserves - 1
Other (1 ) (1 )
Total certain items, pre-tax (11 ) (11 )
Tax-related certain items:
Tax impact of certain items 2 2
Discrete tax items 2 10
Total tax-related certain items 4 12
Total certain items, after tax $ (7 ) $ 1
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
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Other Unallocated Items
Three Months Ended December 31
2020 2019
(In millions)
Interest expense $ (12 ) $ (14 )
Unallocated corporate costs (13 ) (10 )
General unallocated income (expense) (5 ) (1 )
Less: Equity in earnings of affiliated
companies, net of tax - - Total other unallocated items $ (30 ) $ (25 )
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 first three months of fiscal 2020 and 2019 were as follows:
Three Months Ended December 31
2020 2019
(In millions)Reinforcement Materials Sales $ 375 $ 379 Reinforcement Materials EBIT $ 88 $ 47
Sales in Reinforcement Materials decreased by
EBIT in Reinforcement Materials increased by
We currently expect EBIT in Reinforcement Materials in the second fiscal quarter
to be negatively impacted by lower unit margins driven by higher feedstock costs
in
Performance Chemicals
Sales and EBIT for Performance Chemicals for the first quarter of fiscal 2021
and 2020 were as follows:
Three Months Ended December 31
2020 2019
(In millions)
Performance Additives Sales $ 184 $ 170
Formulated Solutions Sales 83 72
Performance Chemicals Sales $ 267 $ 242
Performance Chemicals EBIT $ 54 $ 41
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Sales in Performance Chemicals increased by
EBIT in Performance Chemicals increased by
Looking ahead to the second fiscal quarter as compared to the first fiscal quarter, we anticipate that EBIT in Performance Chemicals will be negatively impacted by higher raw material costs in the specialty carbons and compounds product lines and higher fixed costs.
Purification Solutions
Sales and EBIT for Purification Solutions for the first quarter of fiscal 2021
and 2020 were as follows:
Three Months Ended December 31
2020 2019
(In millions)
Purification Solutions Sales $ 59 $ 59
Purification Solutions EBIT $ (2 ) $ (2 )
Sales in Purification Solutions were flat when comparing the first quarter of
fiscal 2021 to the same period of fiscal 2020 due to a more favorable price and
product mix (combined
EBIT in Purification Solutions was flat when comparing the first quarter of
fiscal 2021 to the first quarter of fiscal 2020 due to lower fixed costs (
As we look to the second fiscal quarter, we expect EBIT in Purification Solutions to continue to benefit from lower fixed costs resulting from our previously executed transformation plan actions and an improved price and product mix in specialty applications.
Cash Flows and Liquidity Overview
Our liquidity position, as measured by cash and cash equivalents plus borrowing
availability, increased by
We have access to borrowings under the following three credit agreements:
• $1 billion unsecured revolving credit agreement (the "JPM Credit
Agreement") with JPMorgan Chase Bank, N.A ., as Administrative Agent,
Citibank, N.A ., as Syndication Agent, and the other lenders party
thereto, which matures in October 2022 . The JPM Credit Agreement
provides liquidity for working capital and general corporate purposes
and supports our commercial paper program.
• $100 million unsecured revolving credit agreement (the "Canadian Credit
Agreement") with TD Bank, NA , as Lender, which matures in September
2021 . The Canadian Credit Agreement provides liquidity for working
capital and general corporate purposes for certain of our Canadian
subsidiaries.
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• €300 million unsecured revolving credit agreement (the "Euro Credit
Agreement", and together with the JPM Credit Agreement and the Canadian
Credit Agreement, the "Credit Agreements"), with Wells Fargo Bank,
National Association , as Administrative Agent, and the other lenders
party thereto, which matures in May 2024 or earlier upon maturity of the
JPM Credit Agreement. Borrowings under the Euro Credit Agreement may be
used for the repatriation of earnings of our foreign subsidiaries to the
United States , 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 of
A significant portion of our business occurs outside the
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 Credit Agreements and our commercial paper program to meet our operational and capital investment needs and financial obligations for the foreseeable future. The liquidity we derive 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.
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
Cash provided by operating activities in the first three months of fiscal 2021
was driven by business earnings excluding the non-cash impact of depreciation
and amortization of
Cash provided by operating activities in the first three months of fiscal 2020
was driven by business earnings excluding the non-cash impacts of depreciation
and amortization of
In addition to the factors noted above, the following other elements of operations have a bearing on operating cash flows:
Restructurings - As of
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Litigation Matters - As of
Cash Flows from Investing Activities
Investing activities consumed
Capital expenditures for fiscal 2021 are expected to be between
Cash Flows from Financing Activities
Financing activities consumed
In the first three months of fiscal 2020, financing activities primarily
consisted of share repurchases of
Off-Balance Sheet Arrangements
As of
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 our results of operations and the factors we expect to impact results in our Reinforcement Materials, Performance Chemicals, and Purification Solutions segment in the second quarter of fiscal 2021; the amount and the timing of the contingent consideration we expect to pay related to the SUSN acquisition; 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; the timing of expected payments from our reserve for pending and future respirator claims; our entry into cross-currency swaps and other financial instruments to manage foreign currency risks; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit facilities and commercial paper program to fund our cash requirements; our expectations regarding our ability to repatriate funds or access additional debt under our revolving credit facilities; uses of available cash including anticipated capital spending; our expected tax rate for fiscal 2021; and the possible outcome of legal 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 level and timing of vaccine distribution around the world and its impact on the stability of economic recovery and growth, the degree of disruption in our supply chain from global logistics matters resulting from the COVID-19 pandemic, and the general economic consequences of the pandemic.
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In addition to factors described elsewhere in this report, the following are
some of the factors that could cause our actual results to differ materially
from those expressed in our forward-looking statements: industry capacity
utilization and competition from other specialty chemical companies; safety,
health and environmental requirements and related constraints imposed on our
business; volatility in the price and availability of energy and raw materials;
a significant adverse change in a customer relationship or the failure of a
customer to perform its obligations under agreements with us; failure to achieve
growth expectations from new products, applications and technology developments;
failure to realize benefits from acquisitions, alliances, or joint ventures or
achieve our portfolio management objectives; negative or uncertain worldwide or
regional economic conditions and market opportunities, including from trade
relations or global health matters; litigation or legal proceedings; tax rates
and fluctuations in foreign currency exchange and interest rates; our inability
to complete capacity expansions or other development projects; and the accuracy
of the assumptions we used in establishing reserves for our share of liability
for respirator claims. These other factors and risks are discussed more fully in
our 2020 10-K and in our subsequent
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