Cabot Corp Reports Fourth Quarter Diluted EPS of $1.51 and Adjusted EPS of $1.00

Cabot Corporation (NYSE: CBT) today announced results for its fourth quarter and full fiscal year 2018.

Key Highlights

• Diluted full year EPS of ($1.85); Record full year Adjusted EPS of $4.03, up 14% versus prior year
• Reinforcement Materials achieved record full year EBIT; up 45% year over year
• Returned $222 million to shareholders in fiscal 2018 through dividends and share repurchases
• Acquired a carbon black manufacturing facility in Pizhou, China from Nippon Steel Carbon Co., Ltd. to support future growth for the Specialty Carbons and Formulations business

Commenting on the results, Cabot President and CEO Sean Keohane said, “I am very pleased that we delivered a record fiscal 2018, with 14% adjusted EPS growth year over year. Reinforcement Materials led the way delivering a 45% increase in EBIT while Performance Chemicals recorded steady results despite rising feedstock costs throughout the year and a significant increase in growth investments. In addition, cash flow from operations totaled $299 million in the fiscal year and we returned $222 million to shareholders in the form of dividends and share repurchases.”

Keohane continued, “In the fourth quarter, we achieved solid results despite some temporary headwinds. Reinforcement Materials posted 33% growth in EBIT on a year-over-year basis driven by the impact from our 2018 customer agreements and stronger spot pricing and volumes in Asia. Performance Chemicals results declined compared to the prior year quarter largely due to higher costs related to partner driven plant turnarounds in our fumed silica network and spending on advantaged growth investments. We also acquired a new manufacturing facility in China that will be used to support future growth of our specialty carbons products.”

Keohane concluded, “Our record 2018 financial performance demonstrates the commitment to and successful execution of our corporate strategy by our teams across the globe. Furthermore, the investments that we have made throughout the year will help to prepare us well for advantaged growth in the future.”

Financial Detail

For the fourth quarter of fiscal 2018, net income attributable to Cabot Corporation was $94 million ($1.51 per diluted common share). Net income includes a total after-tax per share benefit from certain items of $0.51. Adjusted EPS for the fourth quarter of fiscal 2018 was $1.00 per share.

Segment Results

Reinforcement Materials -- Fourth quarter fiscal 2018 EBIT in Reinforcement Materials increased by $16 million compared to the fourth quarter of fiscal 2017. The increase in EBIT was principally driven by strong volume growth and expanded margins in Asia, in addition to improved pricing and product mix from our 2018 customer agreements, partially offset by higher maintenance costs. Globally, volumes increased 4% year over year primarily due to growth in Asia, as indicated in the table below.

Performance Chemicals -- Fourth quarter fiscal 2018 EBIT in Performance Chemicals decreased by $15 million compared to the fourth quarter of fiscal 2017 despite 6% volume growth in our Specialty Carbons and Formulations business. The year-over-year decline was driven by 13% lower volumes and higher costs largely associated with maintenance turnarounds in the Metal Oxides business totaling $9 million in the quarter. In addition, we continued higher spending related to growth investments.

Purification Solutions – Fourth quarter fiscal 2018 EBIT in Purification Solutions decreased by $3 million compared to the fourth quarter of fiscal 2017 due to lower margins resulting from continued competitive intensity in mercury removal and other North American powdered activated carbon applications.

Specialty Fluids – Fourth quarter fiscal 2018 EBIT in Specialty Fluids increased by $7 million compared to the fourth quarter of fiscal 2017 due to revenue associated with ongoing larger projects as compared to the prior year.

Cash Performance - The Company ended the fourth quarter of fiscal 2018 with a cash balance of $175 million. During the fourth quarter of fiscal 2018, cash flows from operating activities were $163 million, which included a $85 million decrease in net working capital. Capital expenditures for the fourth quarter of fiscal 2018 were $69 million. Additional uses of cash during the fourth quarter included $20 million for dividends and $83 million for repurchases of common stock.

Taxes – During the fourth quarter of fiscal 2018, the Company recorded a tax benefit of $1 million for an effective tax rate of (2%) and an operating tax rate of 21%. The benefit includes a $19 million net benefit from certain items and discrete tax items primarily related to a revision of the estimate of the impact of the recent U.S. tax reform. Our effective and operating tax rates for fiscal 2019 are expected to be the same and range between 22% and 24%.

Outlook

Commenting on the outlook for the Company, Keohane said, “Looking forward to fiscal 2019, we believe favorable industry dynamics and Cabot’s leadership positions will enable another year of strong growth. There are some near term uncertainties, largely related to trade tariffs between the US and China as well as some new automotive engine regulations in Europe. These uncertainties are driving certain customers to be cautious in their short-term purchasing behavior, but we do not expect this to have a significant impact on the business. We remain confident in the fundamentals of our business, our leadership positions, and the robustness of the industries we serve and we continue to expect EBIT growth across all segments in fiscal 2019.”

Keohane continued, “Reinforcement Materials is expected to benefit from positive 2019 customer agreements and our strong market position in Asia. We anticipate that Performance Chemicals will return to a more normalized EBIT run-rate after the large turnarounds in the fourth quarter of fiscal 2018, and as we move through the year, we expect the benefits of our recent growth investments to materialize. We expect that Purification Solutions will benefit from a targeted improvement plan that is underway, and we anticipate that Specialty Fluids will continue its recent strong performance into fiscal 2019. Consistent with this outlook, we expect fiscal year 2019 adjusted earnings per share to be in the range of $4.35 to $4.75. Overall, we continue to focus on creating shareholder value by generating strong discretionary free cash flow and reinvesting that into our core businesses as well as returning cash to shareholders. We believe this will result in the optimal balance of long-term growth and a meaningful cash return, leading to top-tier total shareholder return.”

Earnings Call

The Company will host a conference call with industry analysts at 2:00 p.m. Eastern time on Tuesday, November 6, 2018. 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, masterbatches and conductive compounds, fumed silica, and aerogel. For more information on Cabot, please visit the company’s website at: http://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 with respect to our performance in fiscal 2019, including adjusted EPS, and the factors that we expect will impact volumes, demand for our products, fixed costs and margins 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 delays in site development projects; fluctuations in foreign currency exchange and interest rates; and changes in global trade policies. These factors are discussed more fully in the reports we file with the Securities and Exchange Commission (“SEC”), particularly under the heading “Risk Factors” in our annual report on Form 10-K for our fiscal year ended September 30, 2017, 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 principle (“GAAP”) basis, the preceding discussion of our results and the accompanying financial tables report Adjusted EPS and our operating tax rate, both of which are non-GAAP financial measures. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, GAAP. 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, are provided in the table titled “Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate.”

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 have excluded from our calculations of Adjusted EPS, as applicable, but that have been included in our GAAP net income (loss) per share, as applicable, are described below.

• Asset impairment charges, which primarily included 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 included costs or benefits associated with cost reduction initiatives or plant closures and were 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.
• Legal and environmental reserves and matters, which consisted of costs or benefits for matters typically related to former businesses or that were otherwise incurred outside of the ordinary course of business.
• Gains (losses) on sale of investments, which primarily related to the sale of investments accounted for under the cost-method.
• Executive transition costs, which included incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.
• Acquisition and integration-related charges, which included transaction costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to Cabot’s processes.
• Non-recurring gains (losses) on foreign currency, which primarily related to the impact of continued currency devaluations on our net monetary assets denominated in that currency.

Cabot does not provide a target GAAP EPS range or reconciliation of Adjusted EPS range with a GAAP EPS 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.

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 liabilities.

(A) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method, which resulted in a decrease in Cost of sales of $7 million, an increase to the (Provision) benefit for income taxes of $(3) million and an increase in Net income (loss) attributable to Cabot Corporation per diluted common share of $0.07 per share for the three months ended September 30, 2017. For more detail on the transition from the LIFO method to the FIFO method, please refer to the Company's fiscal 2018 10-Q filings.

(B) Included within the (Provision) benefit for income taxes for the three and twelve months ended September 30, 2018, respectively, is a tax (charge) benefit in the amount of $1 million and $29 million associated with the long-lived asset impairment charge that was recorded in the second quarter of fiscal 2018.

(C) The weighted average common shares outstanding used to calculate earnings per share for the twelve months ended September 30, 2018 excludes approximately 1 million shares as those shares would be antidilutive due to the Company’s net loss position.

(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) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in a decrease in General unallocated income (expense) of $7 million, an increase to the (Provision) benefit for income taxes of $(3) million, and an increase in both Net income (loss) attributable to Cabot Corporation per diluted common share and Adjusted earnings per share of $0.07 per share for the three months ended September 30, 2017. For more detail on the transition from the LIFO method to the FIFO method, please refer to the Company's fiscal 2018 10-Q filings.

(E) General unallocated income (expense) includes foreign currency transaction gains (losses), interest income, dividend income and the profit related to the corporate adjustment for unearned revenue.

(F) The weighted average common shares outstanding used to calculate earnings per share for the twelve months ended September 30, 2018 excludes approximately 1 million shares as those shares would be antidilutive due to the Company’s net loss position.

(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) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in an increase in Total inventories of $37 million and a decrease in Deferred income taxes of $13 million.

(A) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in an increase in Retained earnings of $24 million.

(A) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in an increase in Net income (loss) of $4 million, an increase in Other non-cash charges, net of $3 million and a decrease in Changes in certain working capital items of $7 million for the three months ended September 30, 2017. For more detail on the transition from the LIFO method to the FIFO method, please refer to the Company's fiscal 2018 10-Q filings.

(B) Fiscal 2017 amounts have been recast to reflect the retrospective change related to cash flow presentation of excess tax benefits from stock based compensation under the new stock compensation guidance adopted in the first quarter of fiscal 2018, which resulted in the reclassification of less than $1 million for tax benefits from stock based compensation awards from cash flows from financing activities to cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2017. For more detail on the adoption of the new standard that amends the accounting standard for stock compensation, please refer to the Company's fiscal 2018 10-Q filings.

(C) 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) Fiscal 2017 full year amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in an increase in General unallocated income of $11 million, an increase in (Provision) benefit for income taxes of ($4) million, an increase in Net income (loss) attributable to Cabot Corporation per diluted common share of $0.11 per share and an increase in Adjusted earnings per share of $0.11 per share. For more detail on the transition from the LIFO method to the FIFO method, please refer to the Company's fiscal 2018 10-Q filings.

(E) General unallocated income (expense) includes foreign currency transaction gains (losses), interest income, dividend income and the profit related to the corporate adjustment for unearned revenue.

(F) The weighted average common shares outstanding used to calculate earnings per share for all periods in fiscal 2018, except for the three months ended June 30 and September 30, 2018, excludes approximately 1 million shares as those shares would be antidilutive due to the Company’s net loss position in those periods.

(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 Consolidated Statements of Operations.

(C) Fiscal 2017 amounts have been recast to reflect the retrospective application of the Company’s election to change its inventory valuation method of accounting for its U.S. carbon black inventories from the LIFO method to the FIFO method, which resulted in an increase to the (Provision) benefit for income taxes of $(3) million and $(4) million and an increase in both Net income (loss) attributable to Cabot Corporation per diluted common share and Adjusted earnings per share of $0.07 and $0.11 per share for the three and twelve months ended September 30, 2017, respectively. For more detail on the transition from the LIFO method to the FIFO method, please refer to the Company's fiscal 2018 10-Q filings.

(D) Our effective and operating tax rates for fiscal 2019 are expected to be the same and range between 22% and 24%.

(E) Discrete tax items for the periods ended September 30, 2018 and 2017 were as follows: (i) Unusual or infrequent items during fiscal 2018 consisted of the net tax impacts of the Tax Cuts and Jobs Act of 2017 (net tax expense of $159 million), cash management activities, foreign exchange gain/loss on the remeasurement of a deferred tax liability, excludible foreign exchange gains and losses in certain jurisdictions as well as impacts related to stock compensation deductions. Unusual or infrequent items during fiscal 2017 consisted of the net tax impacts of 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 fiscal 2018 and 2017 included net tax impacts from the reversal of accruals for uncertain tax positions due to the expiration of statutes of limitations and settlement of tax audits, the accrual of interest on uncertain tax positions, and the accrual of prior year uncertain tax positions, and; (iii) Other discrete tax items during fiscal 2018 and 2017 included changes in valuation allowances on beginning of year tax balances, the net tax impact of various return to provision adjustments related to tax return filings, changes in non-U.S. tax laws and audit settlements (fiscal 2018 only).

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

(G) Due to the Company’s net loss position, GAAP EPS for all periods in fiscal 2018, except for the three months ended June 30 and September 30, 2018, has been calculated using basic weighted average shares to avoid anti-dilution. However, in order to provide an Adjusted Non-GAAP EPS with a weighted average share figure that is consistent with all other periods presented, the Company has included this reconciling item to quantify the difference between basic and diluted weighted average shares. This reconciling item is applicable to individual periods presented but does not sum cumulatively. The net loss for the twelve months ended September 30, 2018 is driven by a discrete tax item and impairment charges, so the Company believes this approach provides the most comparable presentation possible.

(D) As provided in the Condensed Consolidated Statements of Cash Flows.

(E) Defined as changes in accounts receivable, inventory and accounts payable and accrued liabilities as presented on the Condensed Consolidated Statements of Cash Flows.

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Cabot Corporation
Steve Delahunt, 617-342-6255