News Release Details

Diluted EPS of $0.71 and Adjusted EPS of $0.81

BOSTON--(BUSINESS WIRE)--Aug. 1, 2017-- Cabot Corporation (NYSE: CBT) today announced results for its third quarter of fiscal year 2017.

Key Highlights

• Reinforcement Materials EBIT up 46% year over year, supported by favorable pricing and product mix
• Announced investment in new Fumed Silica plant in Carrollton, KY
• Strong cash flow generation with third quarter cash flows from operations of $132 million
• Returned cash to shareholders: $19 million in dividends and $13 million in share repurchases

Commenting on the results, Cabot President and CEO Sean Keohane said, “We achieved solid operating results in the third quarter. Reinforcement Materials delivered strong results with 46% growth in EBIT on a year over year basis from benefits in both contract and spot sales. Performance Chemicals experienced a more challenging quarter primarily due to lower margins from higher feedstock costs compared to the same quarter last year and the impact of unplanned downtime on volumes and costs. Results in Purification Solutions were lower than the prior year quarter due to lower mercury removal volumes and pricing and the impact of a plant disruption that occurred in the quarter at one of our facilities.”

Keohane continued, “In the quarter, the tax rate benefited from a change in the geographic mix of earnings. This benefit was largely offset by FX losses in the emerging market currencies and a negative LIFO adjustment. In keeping with our capital allocation strategy, we continued to invest in growth projects, including the announcement of our new Fumed Silica plant, and returned $32 million to shareholders during the quarter.”

Financial Detail

For the third quarter of fiscal 2017, net income attributable to Cabot Corporation was $45 million ($0.71 per diluted common share). Net income includes a per share charge of $0.10 from certain items, which includes a charge on the repatriation of previously taxed foreign earnings. Adjusted EPS for the third quarter of fiscal 2017 was $0.81 per share.

Segment Results

Reinforcement Materials – Third quarter fiscal 2017 EBIT in Reinforcement Materials increased by $16 million compared to the third quarter of fiscal 2016. The increase in EBIT was principally driven by higher unit margins from favorable spot market pricing as well as better product mix. Reinforcement Materials EBIT decreased by $3 million compared to the second quarter of fiscal 2017 driven by higher costs. Sequentially, volumes decreased by 1% largely due to reduced demand in the tire markets in Asia.

Global and regional volume changes for Reinforcement Materials for the third quarter of fiscal 2017 as compared to the same quarter of the prior year and the second quarter of fiscal 2017 are provided in the table below:

Performance Chemicals – Third quarter fiscal 2017 EBIT in Performance Chemicals decreased by $13 million compared to the third quarter of fiscal 2016 primarily due to higher feedstock costs and the impact of unplanned downtime on volume and costs in Specialty Carbons and Formulations. Volumes decreased by 3% in the Specialty Carbons and Formulations business and increased by 3% in the Metal Oxides business as compared with volumes in the prior year quarter. Performance Chemicals EBIT decreased by $5 million compared to the second quarter of fiscal 2017, primarily due to unplanned downtime and higher feedstock costs in the Specialty Carbons and Formulations business, partially offset by improved volumes in the Metal Oxides business. Volumes decreased 9% in the Specialty Carbons and Formulations business and increased by 10% in the Metal Oxides business as compared with the second quarter of fiscal 2017.

Purification Solutions – Third quarter fiscal 2017 EBIT in Purification Solutions decreased by $2 million compared to the third quarter of fiscal 2016 due to lower volumes, unfavorable product mix and an increase in fixed costs related to a plant disruption, which were partially offset by a favorable impact from lower inventory drawdowns. Purification Solutions EBIT decreased by $4 million compared to the second quarter of fiscal 2017 primarily due to unfavorable product mix and higher fixed costs related to the plant disruption, partially offset by an increase in volumes.

Specialty Fluids – Third quarter fiscal 2017 EBIT in Specialty Fluids decreased by $6 million compared to the third quarter of fiscal 2016 primarily due to lower project activity in the North Sea. Specialty Fluids EBIT increased by $4 million compared to the second quarter of fiscal 2017 primarily due to higher project activity, partially offset by lower volumes in Fine Cesium Chemicals.

Cash Performance – The Company ended the third quarter of fiscal 2017 with a cash balance of $198 million. During the quarter, cash flows from operating activities were a source of cash of $132 million, which included a $31 million decrease in net working capital. Capital expenditures in the quarter were $41 million. Additional uses of cash during the third quarter included $19 million for dividends and $13 million for share repurchases.

Taxes – During the third quarter of fiscal 2017, the Company recorded a tax provision of $16 million for an effective tax rate of 22%. This included a charge of $5 million from tax-related certain items. Excluding the impact of certain items on both operating income and the tax provision, the operating tax rate on continuing operations for the third quarter of fiscal 2017 was 21%.

Outlook
Commenting on the outlook for the Company, Keohane said, “While we faced challenges in the quarter from higher costs and unplanned downtime, we remain confident in the underlying strength of the businesses. We believe that Reinforcement Materials will continue to generate strong results, although we expect to see modestly higher fixed costs in the fourth quarter. We expect the end markets in Performance Chemicals to remain robust and for the segment’s volumes and product mix to improve with the resolution of the unplanned downtime. Purification Solutions is expected to benefit from seasonal volume growth and lower fixed costs in the fourth quarter. We remain focused on delivering shareholder value by growing our annual Adjusted EPS by 7-10% over time and expect to be toward the high end of that range this year."

Earnings Call
The Company will host a conference call with industry analysts at 2:00 p.m. Eastern time on Wednesday, August 2, 2017. The call can be accessed through Cabot’s investor relations website at http://investor.cabot-corp.com

About Cabot Corporation
Cabot Corporation (NYSE: CBT) is a global specialty chemicals and performance materials company, headquartered in Boston, Massachusetts. The Company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants, cesium formate drilling fluids, fumed silica, and aerogel. Cabot routinely posts information that may be important to investors in the “Investors” section of its website at www.cabotcorp.com. The Company encourages investors and potential investors to consult the Cabot website regularly.

Forward-Looking Statements -- This earnings release contains forward-looking statements. All statements that address expectations or projections about the future, including our expectations for adjusted EPS growth, volumes and costs in the remaining quarter of fiscal 2017, and the factors that we expect will impact volumes, demand for our products, margins, and adjusted EPS growth are forward-looking statements. These 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 and difficult to predict. If known or unknown risks materialize, or should underlying assumptions prove inaccurate, our actual results could differ materially from past results and from those expressed or implied by forward-looking statements. Important factors that could cause our results to differ materially from those expressed or implied in the forward-looking statements include, but are not limited to, volatility in the price of energy and raw materials; competition from other specialty chemical companies; safety, health and environmental requirements; a significant adverse change in a customer relationship; negative or uncertain worldwide or regional economic conditions; unanticipated disruptions or delays in plant operations or development projects; and fluctuations in foreign currency exchange and interest rates. These factors are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly under the heading “Risk Factors” in our annual report on Form 10-K for our fiscal year ended September 30, 2016, filed with the SEC at www.sec.gov. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Use of Non-GAAP Financial Measures
To supplement Cabot’s consolidated financial statements presented on a generally accepted accounting principles (“GAAP”) basis, the preceding discussion of our results and the accompanying financial tables report Adjusted EPS, total segment EBIT, and our operating tax rate, which are non-GAAP financial measures. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, GAAP. The table titled “Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate” provides a reconciliation of Adjusted EPS to net income (loss) per share attributable to Cabot Corporation, the most directly comparable GAAP financial measure, and a reconciliation of operating tax rate to effective tax rate, the most directly comparable GAAP financial measure. The accompanying financial tables also provide a reconciliation of total segment EBIT to income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, the most directly comparable GAAP financial measure.

Management believes these non-GAAP measures provide investors with greater transparency to the information used by Cabot management in its financial and operational decision-making, allow investors to see Cabot’s results through the eyes of management, and better enable Cabot’s investors to understand Cabot’s operating performance and financial condition.

Adjusted EPS. In calculating Adjusted EPS, we exclude from our net income (loss) per share from continuing operations items of expense and income that management does not consider representative of the Company’s business operations. Accordingly, reporting earnings on an adjusted basis supplements the GAAP measure of performance and provides additional information related to the underlying performance of the business. For example, certain of the items we exclude are items that we are required by GAAP to recognize in one period that relate to activities extending over several periods or relate to single events that management considers to be unusual and infrequent, although not necessarily non-recurring. We refer to these items as “certain items.” Management believes excluding these 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 evaluates the Company’s operating performance without the impact of these costs or benefits. Management also uses Adjusted EPS as a key measure in evaluating management performance for incentive compensation purposes.

The items of income and expense that we exclude from our calculations of Adjusted EPS, as applicable, but that are included in our GAAP net income (loss) per share, as applicable, are described below.

• 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.
• Non-recurring gains (losses) on foreign exchange, which primarily relate to the impact of controlled currency devaluations on the Company’s net monetary assets denominated in that currency.
• Legal and environmental reserves and matters, 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.
• 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.
• Asset impairment charges, which primarily include charges associated with an impairment of goodwill or other long-lived assets.
• 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 Cabot’s processes.
• Employee benefit plan settlement charges, which consist of the costs associated with transferring the obligations and assets held by one of the Company’s defined benefit plans to a multi-employer plan.

Cabot does not provide a target GAAP EPS growth rate range or reconciliation of the Adjusted EPS growth rate range with a GAAP EPS growth 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 GAAP EPS in future periods.

Total Segment EBIT. Total segment EBIT reflects the sum of EBIT from our four reportable segments. In calculating total segment EBIT we exclude from our income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, certain items and 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.

Operating Tax Rate. Our “operating tax rate” represents the tax rate on our recurring operating results. This rate excludes discrete tax items, which are unusual or infrequent items that are excluded from the estimated annual effective tax rate and other tax items, including the impact of the timing of losses in certain jurisdictions, cumulative tax rate adjustments and the impact of the items of expense and income we identify as certain items on both our operating income and the tax provision. Management believes that the operating tax rate 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.

Explanation of Terms Used

Product Mix. The term “product mix” refers to the mix of types and grade 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.

Net Working Capital. The term “net working capital” includes accounts receivable, inventory and accounts payable and accrued expenses.

^(A)Unallocated and other reflects royalties, other operating revenues, external shipping and handling fees, the impact of the corporate adjustment for unearned revenue, the removal of 100% of the sales of an equity method affiliate, and discounting charges for certain Notes receivable.

^(B)Segment EBIT is a measure used by Cabot's Chief Operating Decision-Maker to measure consolidated operating results, assess segment performance and allocate resources. Segment EBIT includes equity in earnings of affiliated companies, royalty income, and allocated corporate costs.

^(C)Details of certain items are presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(D)General unallocated income includes foreign currency transaction gains (losses), interest income, dividend income, the profit related to the corporate adjustment for unearned revenue, and the impact of LIFO accounting.

^(E)Adjusted EPS is a non-GAAP measure, and a reconciliation of Adjusted EPS to GAAP EPS is presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(A)Effective October 1, 2016, the Company adopted a new accounting standard simplifying the presentation of debt issuance costs by presenting debt issuance costs as a reduction of the corresponding debt liability. In addition, the Company early adopted a new accounting standard that simplifies the presentation of deferred income taxes by classifying all deferred taxes as noncurrent assets or liabilities. These new standards were applied retrospectively. The retrospective application of the standard that simplifies the presentation of debt issuance costs resulted in the reclassification of $1 million and $3 million of unamortized debt issuance costs from "Prepaid expenses and other current assets" and "Other assets", respectively, to "Long-term debt" within the consolidated balance sheets as of September 30, 2016. The retrospective application of the standard that simplifies the presentation of deferred income taxes resulted in the reclassification of $41 million of current deferred tax assets and $1 million of current deferred tax liabilities to noncurrent Deferred income tax accounts within the consolidated balance sheets as of September 30, 2016.

^(A)Effective October 1, 2016, the Company adopted a new accounting standard simplifying the presentation of debt issuance costs by presenting debt issuance costs as a reduction of the corresponding debt liability. In addition, the Company early adopted a new accounting standard that simplifies the presentation of deferred income taxes by classifying all deferred taxes as noncurrent assets or liabilities. These new standards were applied retrospectively. The retrospective application of the standard that simplifies the presentation of debt issuance costs resulted in the reclassification of $1 million and $3 million of unamortized debt issuance costs from "Prepaid expenses and other current assets" and "Other assets", respectively, to "Long-term debt" within the consolidated balance sheets as of September 30, 2016. The retrospective application of the standard that simplifies the presentation of deferred income taxes resulted in the reclassification of $41 million of current deferred tax assets and $1 million of current deferred tax liabilities to noncurrent Deferred income tax accounts within the consolidated balance sheets as of September 30, 2016.

^(A)Includes Accounts and notes receivable, Inventories, and Accounts payable and accrued liabilities

^(A)Unallocated and other reflects royalties, other operating revenues, external shipping and handling fees, the impact of the corporate adjustment for unearned revenue, the removal of 100% of the sales of an equity method affiliate and discounting charges for certain Notes receivable.

^(B)Segment EBIT is a measure used by Cabot's Chief Operating Decision-Maker to measure consolidated operating results, assess segment performance and allocate resources. Segment EBIT includes equity in earnings of affiliated companies, royalty income, and allocated corporate costs.

^(C)Details of certain items are presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(D)General unallocated income (expense) includes foreign currency transaction gains (losses), interest income, dividend income, the profit related to the corporate adjustment for unearned revenue, and the impact of LIFO accounting.

^(E)Amounts relate primarily to the previously divested Supermetals and Security Materials businesses.

^(F)The weighted average common shares outstanding used to calculate earnings per share for the three months ended December 31, 2015 excludes approximately 1 million shares as those shares would be antidilutive due to the Company’s net loss position in that period.

^(G)Adjusted EPS is a non-GAAP measure, and a reconciliation of Adjusted EPS to GAAP EPS is presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(A)The tax effect of certain items is determined by (1) starting with the current and deferred income tax expense or benefit, included in Net income 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, which includes both current and deferred taxes, as defined under the section Use of Non-GAAP Financial Measures of the earnings release.

^(B)This table indicates the line items where certain items are recorded in the table titled Cabot Corporation Consolidated Statements of Operations.

^(C)"The nature of the discrete tax items for the periods ended June 30, 2017 and 2016 were as follows: (i) Unusual or infrequent items during the three and nine months ended June 30, 2017 and 2016 included net tax impacts from nontaxable foreign exchange gains and losses in certain jurisdictions; and, the renewal of the U.S. Research and Experimentation credit and extraordinary dividends from subsidiaries (nine months ended June 30, 2016 only). Unusual or infrequent items during the three and nine months ended June 30, 2017 also included the net tax impacts from excess foreign tax credits upon repatriation of previously taxed foreign earnings and the accrual of U.S. tax on certain foreign earnings, (ii) Items related to uncertain tax positions during the three and nine months ended June 30, 2017 and 2016 included net tax impacts from the reversal of accruals for uncertain tax positions due to the expiration of statutes of limitations and the settlement of tax audits, the accrual of interest on uncertain tax positions, and the accrual of a prior year uncertain tax position (three and nine months ended June 30, 2017 only), and, (iii) Other discrete tax items during the three and nine months ended June 30, 2017 and 2016 included net tax impacts from various return to provision true ups related to tax return filings and changes in tax laws."

^(D)Per share amounts are calculated after tax and, where applicable, noncontrolling interest, net of tax.

^(E)Amounts relate primarily to the previously divested Supermetals and Security Materials businesses.

^(A) Per share amounts are calculated after tax and, where applicable, noncontrolling interest, net of tax.

^(B) Adjustments to depreciation includes the addition of the depreciation expense of a contractual joint venture in Purification Solutions less accelerated depreciation expense not allocated to a business.

^(C) As provided in the Consolidated Statement of Cash Flows.

^(D) Defined as changes in accounts receivable, inventory and accounts payable and accrued liabilities as presented on the Consolidated Statement of Cash Flows.

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Source: Cabot Corporation

Cabot Corporation
Steve Delahunt, 617-342-6255