Cabot Corp Reports Second Quarter Fiscal 2019 Results

Cabot
Corporation (NYSE: CBT) today announced results for its second
quarter of fiscal year 2019.

Key Highlights

• Positive impact from calendar year 2019 tire customer agreements
  more than offset by pricing weakness in China in Reinforcement
  Materials
• Performance Chemicals impacted by soft automotive demand and a less
  favorable product mix
• Announced agreement to divest Specialty Fluids segment in
  transaction valued at $135 million
• Continued commitment to return cash to shareholders with $70
  million of dividends and share repurchases in the quarter

Commenting on the results, Cabot President and CEO Sean Keohane said,
“Despite a challenging environment in the second quarter, we delivered
solid results with adjusted earnings per share of $0.99. Results in the
quarter were impacted by weakness in China, continued softness in
automotive demand and the unfavorable impact from higher raw material
costs. These items were partially offset by the improved results in our
Purification Solutions and Specialty Fluids segments.”

Keohane continued, “Cash return remains an important element of our
capital allocation framework and in the quarter, we returned $70 million
through share repurchases and dividends and a total of $319 million
returned to shareholders over the last year. We also remain committed to
investing for growth and are on track to start-up our new fumed metal
oxides facility in China in the coming months. Finally, we announced the
agreement to sell the Specialty Fluids business in the quarter and we
are pleased with the progress on our broader goal to divest non-core
businesses.”

Financial Detail

For the second quarter of fiscal 2019, net income attributable to Cabot
Corporation was $23 million ($0.39 per diluted common share). Net income
includes an after-tax per share charge of ($0.60) from certain items,
principally reflecting an asset impairment charge related to the
anticipated divestiture of our Specialty Fluids business and an
impairment charge related to our Venezuelan equity affiliate. Adjusted
EPS for the second quarter of fiscal 2019 was $0.99 per share.

Segment Results

Reinforcement Materials — Second quarter fiscal 2019 EBIT in
Reinforcement Materials decreased by $18 million compared to the second
quarter of fiscal 2018. The decrease in EBIT was principally due to
lower margins driven by pricing declines in China and higher raw
material costs from both higher feedstock differentials and the timing
of the flow-through of raw materials costs. These impacts were partially
offset by the improvement in our 2019 tire customer agreements.
Globally, volumes decreased 1% year over year as indicated in the table
below. Volumes improved 2% in Asia driven by China, decreased 6% in EMEA
due to softer automotive demand, and declined 1% in the Americas from
weaker volumes in South America.

Performance Chemicals — Second quarter fiscal 2019 EBIT in
Performance Chemicals decreased by $19 million compared to the second
quarter of fiscal 2018 primarily due to lower volumes and a less
favorable mix of sales. Volumes decreased by 1% in the Performance
Additives business and decreased 16% in the Formulated Solutions
business year-over-year, primarily due to softer automotive demand in
EMEA and China and de-stocking. The less favorable product mix was
attributed primarily to our specialty carbons and specialty compounds
product lines where we saw continued weakness in automotive products and
lower sales in the fiber market due to sharp de-stocking.

Purification Solutions – Second quarter fiscal 2019 EBIT in
Purification Solutions increased by $7 million compared to the second
quarter of fiscal 2018 due to higher volumes and prices in specialty
applications and the benefit from lower fixed costs as a result of the
transformation plan announced last year.

Specialty Fluids – Second quarter fiscal 2019 EBIT in Specialty
Fluids increased by $15 million compared to the second quarter of fiscal
2018 due to higher project activity particularly in the Middle East.

Cash Performance – The Company ended the second quarter of
fiscal 2019 with a cash balance of $176 million. During the second
quarter of fiscal 2019, cash flows from operating activities were $90
million, which included a $22 million decrease in net working capital.
Capital expenditures for the second quarter of fiscal 2019 were $43
million. Additional uses of cash during the second quarter included $20
million for dividends and $50 million for repurchases of common stock.

Taxes – During the second quarter of fiscal 2019, the Company
recorded a tax charge of $20 million for an effective tax rate of 41%
and an operating tax rate of 24%. The charge included a $1 million net
benefit from certain items. The difference in rates is primarily due to
the impairment charges taken in the quarter for which no tax benefit was
recorded in our effective tax rate.

Outlook
Commenting on the
outlook for the Company, Keohane said, “As we look ahead, we anticipate
improving sequential results in our Reinforcement Materials and
Performance Chemicals segments driven by volume and margin recovery. We
are seeing some signs of recovery as we move into the third quarter and
anticipate the unfavorable impact from the timing of raw material
flow-through will not repeat. The sequential improvement in
Reinforcement Materials and Performance Chemicals will largely be offset
by the impact of our Specialty Fluids segment which remains on track for
divestiture in the third quarter.”

Keohane continued, “We are seeing the environment improve, albeit at a
slower pace than originally expected. As this anticipated improvement
develops gradually through the remainder of the year, our outlook for
the full year Adjusted EPS is in the range of $4.05 to $4.30. We
continue to manage costs for the company, including executing on the
Purification Solutions transformation plan and reducing discretionary
spending. We have repurchased $112 million of shares year-to-date and
remain focused on cash generation with a plan to reduce net working
capital through the remainder of the year. Finally, as we continue to
execute our ‘Advancing the Core’ strategy, we are committed to
delivering strong earnings growth over time, investing for the future in
our core businesses, divesting non-core assets, and returning cash to
our shareholders.”

Earnings Call
The Company will
host a conference call with industry analysts at 2:00 p.m. Eastern time
on Tuesday, May 7, 2019. 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 expectations
for adjusted EPS for fiscal 2019, our performance in the third and
fourth quarters, including in the Reinforcement Materials and
Performance Chemicals segments, the factors that we expect will impact
volumes, demand for our products, and margins, the timing of the
commencement of operations at our new fumed metal oxides facility in
China, and the timing of the divestiture of our Specialty Fluids segment
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, 2018, 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, Total
Segment EBIT, our operating tax rate, Adjusted EBITDA, and discretionary
free cash flow, all of which are non-GAAP financial measures. These
non-GAAP financial measures are not computed in accordance with, or as
an alternative to, GAAP. Reconciliations of Adjusted EPS to net income
(loss) per share attributable to Cabot Corporation, the most directly
comparable GAAP financial measure, 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
measures, and operating tax rate to effective tax rate, the most
directly comparable GAAP financial measure, are provided in the tables
titled “Cabot Corporation Certain Items and Reconciliation of Adjusted
EPS and Operating Tax Rate and “Cabot Corporation Reconciliation of
Non-GAAP Financial Measures.”

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) attributable to Cabot Corporation 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 the
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.

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
corporate 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
liabilities.

^(A)Beginning in fiscal 2019 as part of the adoption of the
new accounting standard for revenue recognition, the Company now
presents revenue from by-products produced in manufacturing operations
in Net sales and other operating revenues, which in prior years was
included as a reduction in Cost of sales.

^(B)Fiscal 2018 amounts have been recast to reflect the
retrospective application of the Company’s adoption of the new
accounting standard that amends the presentation of net periodic pension
and postretirement benefit costs. This adoption resulted in an increase
in Cost of sales of $2 million and $4 million, an increase in Selling
and administrative expenses of $1 million and $2 million, and an
increase in Other income (expense) of $3 million and $6 million for the
three and six months ended March 31, 2018, respectively.

^(C)The weighted average common shares outstanding used to
calculate earnings per share for the three and six months ended March
31, 2018 excludes approximately 1 million shares as those shares would
be antidilutive due to the Company’s net loss position.

^(A)In October 2018, the Company realigned its business
reporting structure under the Performance Chemicals segment and now
combines the specialty carbons, fumed metal oxides and aerogel product
lines into the Performance Additives business, and the specialty
compounds and inkjet product lines into the Formulated Solutions
business. Prior period Performance Chemicals segment revenues have been
recast to reflect the realignment.

^(B)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. Beginning in fiscal 2019 as part of the adoption of
the new accounting standard for revenue recognition, the Company now
presents revenue from by-products produced in manufacturing operations
in Unallocated and other.

^(C)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.

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

^(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 three and six months ended March
31, 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)In October 2018, the Company realigned its business
reporting structure under the Performance Chemicals segment and now
combines the specialty carbons, fumed metal oxides and aerogel product
lines into the Performance Additives business, and the specialty
compounds and inkjet product lines into the Formulated Solutions
business. Prior period Performance Chemicals segment revenues have been
recast to reflect the realignment.

^(B)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. Beginning in fiscal 2019 as part of the adoption of
the new accounting standard for revenue recognition, the Company now
presents revenue from by-products produced in manufacturing operations
in Unallocated and other.

^(C)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.

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

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

^(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)For fiscal year 2019, the Effective tax rate and Operating
tax rate are expected to be in a range of 19% to 21% and 23% to 25%,
respectively. The discrete tax items have the same impact on these
ranges. The table provided reconciles to the mid-point of these ranges.

^(D)For the three and six months ended March 31, 2019, Impact
of discrete tax items included a net discrete tax expense of less than
$1 million and a net discrete tax benefit of $24 million, respectively.
For the three and six months ended March 31, 2018, Impact of discrete
tax items included a net discrete tax expense of $5 million and $190
million, respectively. The nature of the discrete tax items for the
periods ended March 31, 2019 and 2018 were as follows: (i) Unusual or
infrequent items during the three and six months ended March 31, 2019
and 2018 consisted of the net tax impacts of the Tax Cuts and Jobs Act
of 2017 (net tax benefits of nil and $17 million and net tax expenses of
$4 million and $189 million, respectively), excludible foreign exchange
gains and losses in certain jurisdictions, impacts related to stock
compensation deductions, the tax impact of a pension settlement (fiscal
2019 six months only), and foreign exchange (gain)/loss on the
re-measurement of a deferred tax liability (fiscal 2018 six months
only); (ii) Items related to uncertain tax positions during the three
and six months ended March 31, 2019 and 2018 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 refinement
of the accrual for existing uncertain tax positions (fiscal 2018 only);
(iii) Other discrete tax items during the three and six months ended
March 31, 2019 and 2018 included net tax impacts as a result of changes
in non-US tax laws as well as various return to provision adjustments
related to tax return filings and audit settlements.

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

^(F)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.

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