UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
|
|
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☒ |
Accelerated filer |
☐ |
|
|
|
|
|
|
Non-accelerated filer |
☐ |
Smaller reporting company |
|
|
|
|
|
|
|
Emerging growth company |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The Company had
INDEX
|
Part I. |
|
||
|
|
|
|
|
|
|
Item 1. |
|
|
|
|
|
3 |
|
|
|
|
4 |
|
|
|
|
5 |
|
|
|
|
7 |
|
|
|
|
8 |
|
|
|
|
10 |
|
|
|
|
|
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
|
|
Item 3. |
39 |
|
|
|
Item 4. |
39 |
|
|
|
|
|
|
|
Part II. |
|
||
|
|
Item 2. |
40 |
|
|
|
Item 6. |
40 |
|
2
Part I. Financial Information
|
Item 1. |
Financial Statements |
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
|
|
|
Three Months Ended December 31 |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In millions, except per share amounts) |
|
|||||
|
Net sales and other operating revenues |
|
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
|
|
|
Research and technical expenses |
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Other income (expense) |
|
|
( |
) |
|
|
|
|
|
Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies |
|
|
|
|
|
|
|
|
|
(Provision) benefit for income taxes |
|
|
( |
) |
|
|
|
|
|
Equity in earnings of affiliated companies, net of tax |
|
|
— |
|
|
|
— |
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests, net of tax |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cabot Corporation |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
|
|
|
Three Months Ended December 31 |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In millions) |
|
|||||
|
Net income (loss) |
|
$ |
|
|
|
$ |
|
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax (provision) benefit of $( |
|
|
|
|
|
|
( |
) |
|
Derivatives: net investment hedges |
|
|
|
|
|
|
|
|
|
(Gains) losses reclassified to interest expense, net of tax provision (benefit) of $— and $— |
|
|
( |
) |
|
|
( |
) |
|
Pension and other postretirement benefit liability adjustments |
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit liability adjustments arising during the period, net of tax |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests, net of tax |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment attributable to noncontrolling interests, net of tax |
|
|
|
|
|
|
— |
|
|
Comprehensive income (loss) attributable to noncontrolling interests, net of tax |
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Cabot Corporation |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
UNAUDITED
|
|
|
December 31, 2019 |
|
|
September 30, 2019 |
|
||
|
|
|
(In millions) |
|
|||||
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Accounts and notes receivable, net of reserve for doubtful accounts of $ |
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
|
Raw materials |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total inventories |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
Equity affiliates |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
UNAUDITED
|
|
|
December 31, 2019 |
|
|
September 30, 2019 |
|
||
|
|
|
(In millions, except share |
|
|||||
|
|
|
and per share amounts) |
|
|||||
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
|
|
|
$ |
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note G) |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
Preferred stock: |
|
|
|
|
|
|
|
|
|
Authorized: |
|
|
|
|
|
|
|
|
|
Issued and Outstanding: |
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
Authorized: |
|
|
|
|
|
|
|
|
|
Issued: |
|
|
|
|
|
|
|
|
|
Outstanding: |
|
|
|
|
|
|
|
|
|
Less cost of |
|
|
( |
) |
|
|
( |
) |
|
Additional paid-in capital |
|
|
— |
|
|
|
— |
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
( |
) |
|
|
( |
) |
|
Total Cabot Corporation stockholders' equity |
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
|
|
|
Three Months Ended December 31 |
|
|||||
|
|
|
2019 |
|
|
2018 |
|
||
|
|
|
(In millions) |
|
|||||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit) |
|
|
( |
) |
|
|
( |
) |
|
Employee benefit plan settlement |
|
|
— |
|
|
|
|
|
|
Non-cash compensation |
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
|
|
|
|
|
|
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
( |
) |
|
Income taxes payable |
|
|
( |
) |
|
|
( |
) |
|
Other liabilities |
|
|
( |
) |
|
|
( |
) |
|
Cash dividends received from equity affiliates |
|
|
|
|
|
|
|
|
|
Cash provided (used) by operating activities |
|
|
|
|
|
|
( |
) |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
|
Cash paid for acquisition of business (Note C) |
|
|
( |
) |
|
|
— |
|
|
Other |
|
|
( |
) |
|
|
— |
|
|
Cash provided (used) by investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Borrowings under financing arrangements |
|
|
— |
|
|
|
|
|
|
Proceeds from (repayments of) issuance of commercial paper, net |
|
|
( |
) |
|
|
|
|
|
Proceeds from long-term debt |
|
|
|
|
|
|
— |
|
|
Repayments of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Repayments of redeemable preferred stock |
|
|
— |
|
|
|
( |
) |
|
Purchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from sales of common stock |
|
|
|
|
|
|
— |
|
|
Cash dividends paid to noncontrolling interests |
|
|
( |
) |
|
|
( |
) |
|
Cash dividends paid to common stockholders |
|
|
( |
) |
|
|
( |
) |
|
Cash provided (used) by financing activities |
|
|
( |
) |
|
|
|
|
|
Effects of exchange rate changes on cash |
|
|
|
|
|
|
( |
) |
|
Increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
UNAUDITED
|
|
|
Common Stock, Net of Treasury Stock |
|
|
Additional Paid-in |
|
|
Retained |
|
|
Accumulated Other Comprehensive |
|
|
Total Cabot Corporation Stockholders’ |
|
|
Noncontrolling |
|
|
Total Stockholders’ |
|
|||||||||||
|
|
|
Shares |
|
|
Cost |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
||||||||
|
|
|
(In millions, except share amounts) |
|
|||||||||||||||||||||||||||||
|
Balance at September 30, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Adoption of accounting standards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
( |
) |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Cash dividends declared to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Issuance of stock under equity compensation plans |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance at December 31, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
UNAUDITED
|
|
|
Common Stock, Net of Treasury Stock |
|
|
Additional Paid-in |
|
|
Retained |
|
|
Accumulated Other Comprehensive |
|
|
Total Cabot Corporation Stockholders’ |
|
|
Noncontrolling |
|
|
Total Stockholders’ |
|
|||||||||||
|
|
|
Shares |
|
|
Cost |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
||||||||
|
|
|
(In millions, except share amounts) |
|
|||||||||||||||||||||||||||||
|
Balance at September 30, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Cash dividends declared to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Issuance of stock under equity compensation plans |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Amortization of share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Balance at December 31, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
CABOT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
UNAUDITED
A. Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting policies generally accepted in the United States (“U.S.”) and include the accounts of Cabot Corporation (“Cabot” or the “Company”) and its wholly owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights. Intercompany transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for its fiscal year ended September 30, 2019 (“2019 10-K”).
The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended December 31, 2019 and 2018. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.
In June 2019, the Company completed the sale of its Specialty Fluids business. The transaction did not meet the criteria to be reported as a discontinued operation. Therefore, prior periods’ consolidated financial statements and disclosures have not been recast.
Effective October 1, 2019, the Company adopted the accounting standard for leases issued by the Financial Accounting Standards Board (“FASB”) in February 2016. The Company used a modified retrospective optional transition method, which is discussed in detail in Note B.
B. Significant Accounting Policies
Revenue Recognition
Cabot recognizes revenue when its customers obtain control of promised goods or services. The revenue recognized is the amount of consideration that the Company expects to receive in exchange for those goods or services. The Company’s contracts with customers are generally for products only and do not include other performance obligations. Generally, Cabot considers purchase orders, which in some cases are governed by master supply agreements, to be contracts with customers. The transaction price as specified on the purchase order or sales contract is considered the standalone selling price for each distinct product. To determine the transaction price at the time when revenue is recognized, the Company evaluates whether the price is subject to adjustments, such as for returns, discounts or volume rebates, which are stated in the customer contract, to determine the net consideration to which the Company expects to be entitled. Revenue from product sales is recognized based on a point in time model when control of the product is transferred to the customer, which typically occurs upon shipment or delivery of the product to the customer and title, risk and rewards of ownership have passed to the customer. The Company has an immaterial amount of revenue that is recognized over time. Payment terms typically range from zero to
Shipping and handling costs incurred after the transfer of control of a product to the customer are billed to the customer and are recorded as sales revenue, as the Company considers these to be fulfillment costs. Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the Consolidated Statement of Operations. Taxes collected on sales to customers are excluded from the transaction price.
The Company generally provides a warranty that its products will substantially conform to the identified specifications. The Company’s liability typically is limited to either a credit equal to the purchase price or replacement of the non-conforming product. Returns under warranty have historically been immaterial.
The Company does not have contract assets or liabilities that are material.
As permitted by the FASB’s revenue recognition standard, Revenue from Contracts with Customers, when the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, the Company does not consider there to be a significant financing component associated with the contract.
10
Intangible Assets and Goodwill Impairment
The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for assets acquired and liabilities assumed in an acquisition are allocated to the assets and liabilities based on their fair values at the date of acquisition. The Company uses assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets requires the use of significant judgment with regard to assumptions used in the valuation model. The Company estimates the fair value of identifiable acquisition-related intangible assets principally based on projections of cash flows that will arise from these assets. The projected cash flows are discounted to determine the fair value of the assets at the dates of acquisition.
Definite-lived intangible assets, which are comprised of trademarks, customer relationships and developed technologies, are amortized over their estimated useful lives and are reviewed for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets.
Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is reviewed for impairment annually as of August 31, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Reinforcement Materials, and the fumed metal oxides and specialty compounds product lines within Performance Chemicals, which are considered separate reporting units, carry the Company’s goodwill balances as of December 31, 2019.
For the purpose of the goodwill impairment test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed. Alternatively, the Company may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result. The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The fair value is also benchmarked against a market approach using the guideline public company method. The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. Based on the Company’s most recent annual goodwill impairment test performed as of August 31, 2019, the fair values of the Reinforcement Materials, Fumed Metal Oxides and Specialty Compounds reporting units were substantially in excess of their carrying values.
Long-lived Assets Impairment
The Company’s long-lived assets primarily include property, plant and equipment, intangible assets and long-term investments. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable.
To test for impairment of assets, the Company generally uses a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.
An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable fair value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separately identifiable cash flows, an impairment charge is recorded when the Company no longer intends to use the asset.
The Company continues to consider strategic options for its Purification Solutions business. Depending on the actions taken, there could be a negative impact on the fair value of the Purification Solutions reporting unit, which may lead to an impairment.
11
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the related assets. The depreciable lives for buildings, machinery and equipment, and other fixed assets are between twenty and