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Employee Benefit Plans
 12 Months Ended
Sep. 30, 2012
Employee Benefit Plans

Note N. Employee Benefit Plans

The information below provides detail concerning the Company’s benefit obligations under the defined benefit and post-retirement benefit plans it sponsors, including the obligations the Company assumed in its acquisition of Norit. The information included in this footnote and the related tables also includes amounts pertaining to the Company’s former Supermetals Business, unless indicated otherwise.

Defined benefit plans provide pre-determined benefits to employees that are distributed upon retirement. Cabot used a September 30 measurement date for all U.S. and foreign plan obligations and assets in both fiscal 2012 and 2011. Cabot is making all required contributions to these plans. The accumulated benefit obligation was $187 million for the U.S. defined benefit plans and $398 million for the foreign plans as of September 30, 2012 and $140 million for the U.S. defined benefit plans and $218 million for the foreign plans as of September 30, 2011.

In addition to benefits provided under the defined benefit and post-retirement benefit plans, the Company provides benefits under defined contribution plans. One of these plans includes an Employee Stock Ownership Plan (“ESOP”) component, which is described below. Cabot recognized expenses related to these plans, not including the expenses related to the ESOP, of $7 million in fiscal 2012, $7 million in fiscal 2011 and $9 million in fiscal 2010.

Employee Stock Ownership Plan

Eligible employees of Cabot and its participating subsidiaries in the U.S. participate in the ESOP. Under the ESOP, which is 100% Company funded, 108,696.645 shares of Cabot common stock are allocated to participants’ accounts at the end of each quarter. Cabot has established a minimum and maximum contribution percentage of total eligible pay. The actual contribution percentage in any given quarter varies depending on Cabot’s stock price on the last day of the relevant quarter, the total eligible compensation and the amount of the dividends allocated to participants. Compensation expense related to the ESOP was $5 million in fiscal 2012 and $4 million in each of fiscal 2011 and 2010.

The following provides information about benefit obligations, plan assets, the funded status and weighted-average assumptions of the defined benefit pension and postretirement benefit plans:

 

     Years Ended September 30  
     2012     2011     2012     2011  
     Pension Benefits     Postretirement Benefits  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
     (Dollars in millions)  

Change in Benefit Obligations:

                 

Benefit obligation at beginning of year

    $ 147      $ 236      $ 143      $ 241      $ 64      $ 15      $ 69      $ 15   

Service cost

      5       7       5       6       1       —        1       —   

Interest cost

      7       11       6       11       2       1       2       1  

Plan participants’ contribution

      —        1       —        1       —        —        —        —   

Foreign currency exchange rate changes

      —        5       —        1       —        1       —        —   

Loss (gain) from changes in actuarial assumptions

      12       38       2       (9 )      1       2       (1 )      (1 ) 

Benefits paid(1)

      (11 )      (11 )      (9 )      (16 )      (5 )      (1 )      (5 )      —   

Plan amendments

      —        —        —        —        —        —        (2 )      —   

Settlements or curtailment gain

      (1 )      (4 )      —        (1 )      (1 )      —        —        —   

Acquisition of Norit

      36       140       —        —        2       —        —        —   

Other

      —        (1 )      —        2       —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Benefit obligation at end of year

    $ 195      $ 422      $ 147      $ 236      $ 64      $ 18      $ 64      $ 15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

     Years Ended September 30  
     2012     2011     2012     2011  
     Pension Benefits     Postretirement Benefits  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
     (Dollars in millions)  

Change in Plan Assets:

                 

Fair value of plan assets at beginning of
year

    $ 103      $ 197      $ 104      $ 197      $ —      $ —      $ —      $ —   

Actual return on plan assets

      23       24       8       2       —        —        —        —   

Employer contribution

      8       13       —        13       5       1       5       —   

Plan participants’ contribution

      —        1       —        1       —        —        —        —   

Foreign currency exchange rate changes

      —        5       —        —        —        —        —        —   

Benefits paid(1)

      (11 )      (11 )      (9 )      (16 )      (5 )      (1 )      (5 )      —   

Settlements

      —        (5 )      —        —        —        —        —        —   

Acquisition of Norit

      27       133       —        —        —        —        —        —   

Expenses paid from assets

      (1 )      (1 )      —        —        —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Fair value of plan assets at end of year

    $ 149      $ 356      $ 103      $ 197      $ —      $ —      $ —      $ —   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Funded status

    $ (46 )    $ (66 )    $ (44 )    $ (39 )    $ (64 )    $ (18 )    $ (64 )    $ (15 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Recognized liability(2)

    $ (46 )    $ (66 )    $ (44 )    $ (39 )    $ (64 )    $ (18 )    $ (64 )    $ (15 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Included in this amount is $7 million and $2 million that the Company paid directly to the participants in its defined benefit plans in fiscal 2012 and 2011, respectively.
(2) 

Included in this amount is $4 million of net pension liability as of September 30, 2011 related to the Supermetals Business presented as Noncurrent liabilities held for sale in the Consolidated Balance Sheet.

Pension Assumptions and Strategy

The following assumptions were used to determine the pension benefit obligations at September 30:

 

     Assumptions as of September 30  
     2012     2011     2010  
     Pension Benefits  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  

Actuarial assumptions as of the year-end measurement date:

             

Discount rate

      3.5 %      3.6 %      4.5 %      4.8 %      4.5 %      4.4 % 

Rate of increase in compensation

      3.5 %      3.1 %      3.8 %      3.1 %      3.8 %      3.3 % 

Actuarial assumptions used to determine net periodic benefit cost during the year:

             

Discount rate

      4.5 %      4.8 %      4.5 %      4.3 %      5.3 %      5.0 % 

Expected long-term rate of return on plan assets

      7.8 %      5.3 %      7.8 %      6.1 %      7.8 %      6.1 % 

Rate of increase in compensation

      3.8 %      3.2 %      3.8 %      3.3 %      3.8 %      3.4 % 

Post Retirement Assumptions and Strategy

The following assumptions were used to determine the post retirement benefit obligations at September 30:

 

     Assumptions as of September 30  
     2012     2011     2010  
     Postretirement Benefits  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  

Actuarial assumptions as of the year-end measurement date:

             

Discount rate

      3.3 %      3.9 %      4.5 %      4.9 %      4.5 %      4.8 % 

Initial health care cost trend rate

      8.0 %      7.4 %      8.5 %      8.0 %      7.5 %      8.0 % 

Actuarial assumptions used to determine net cost during the year:

             

Discount rate

      4.5 %      4.9 %      4.5 %      4.8 %      5.3 %      5.2 % 

Initial health care cost trend rate

      8.5 %      7.9 %      7.5 %      8.0 %      8.0 %      9.0 % 

Cabot uses discount rates as of September 30, the plans’ measurement date, to determine future benefit obligations under its U.S. and foreign defined benefit plans. The discount rates for the defined benefit plans in the U.S., Canada, UAE, Euro-zone, Japan, Switzerland and the U.K. are derived from yield curves that reflect high quality corporate bond yield or swap rate information in each region and reflect the characteristics of Cabot’s employee benefit plans. The discount rates for the defined benefit plans in the Czech Republic and Indonesia are based on government bond indices that best reflect the durations of the plans, adjusted for credit spreads presented in selected AA corporate bond indices.

 

The rates utilized are selected because they represent long-term, high quality, fixed income benchmarks that approximate the long-term nature of Cabot’s pension obligations and related payouts.

 

     Years Ended September 30  
     2012     2011     2012     2011  
     Pension Benefits     Postretirement Benefits  
     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
     (Dollars in millions)  

Net Amounts Recognized in the Consolidated Balance Sheets

                 

Noncurrent assets

    $ —      $ 4     $ —      $ 10     $ —      $ —      $ —      $ —   

Current liabilities

      —        (1 )      —        (1 )      (6 )      (1 )      (6 )      —   

Noncurrent liabilities

      (46 )      (69 )      (44 )      (48 )      (58 )      (17 )      (58 )      (15 ) 

Amounts recognized in Accumulated other comprehensive income at September 30, 2012 and 2011 were as follows:

 

     Years Ended September 30  
     2012      2011      2012      2011  
     Pension Benefits      Postretirement Benefits  
     U.S.      Foreign      U.S.      Foreign      U.S.     Foreign      U.S.     Foreign  
     (Dollars in millions)  

Net actuarial loss

    $ 29      $ 77      $ 34      $ 52      $ 3     $ 3      $ 2     $ 2  

Net prior service cost (credit)

      1        —         1        —         (10 )      —         (14 )      —   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

Balance in accumulated other comprehensive income, pretax

    $ 30      $ 77      $ 35      $ 52      $ (7 )    $ 3      $ (12 )    $ 2  
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

 

     

 

 

    

 

 

  

In fiscal 2013, an estimated net loss of $6 million will be amortized from accumulated other comprehensive income to net periodic benefit cost. In addition, amortization of estimated prior service credits of $3 million for other postretirement benefits will be amortized from accumulated other comprehensive income to net periodic benefit costs in fiscal 2013.

Estimated Future Benefit Payments

The Company expects that the following benefit payments will be made to plan participants in the years from 2013 to 2022:

 

     Pension Benefits      Postretirement Benefits  
     U.S.      Foreign      U.S.      Foreign  
     (Dollars in millions)  

Years Ended:

            

2013

    $ 13       $ 17       $ 6       $ 1   

2014

      12         17         6         1   

2015

      12         19         6         1   

2016

      13         21         5         1   

2017

      14         20         5         1   

2018-2022

      76         116         22         5   

Post retirement medical benefits are unfunded and impact Cabot’s cash flows. The Company expects to contribute less than $1 million and $12 million related to its U.S. and foreign pension plans, respectively, in fiscal 2013.

 

Net periodic defined benefit pension and other postretirement benefit costs include the following components:

 

    Years Ended September 30  
    2012     2011     2010     2012     2011     2010  
    Pension Benefits     Postretirement Benefits  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
    (Dollars in millions)  

Service cost

   $ 5      $ 7      $ 5      $ 6      $ 5      $ 5      $ 1      $ —      $ 1      $ —      $ 1      $ —   

Interest cost

     7       11       6       11       7       11       2       1       2       1       3       1  

Expected return on plan assets

     (9 )      (13 )      (8 )      (13 )      (9 )      (11 )      —        —        —        —        —        —   

Amortization of prior service cost (credit)

     —        —        —        —        —        —        (3 )      —        (3 )      —        (4 )      —   

Net losses (gains)

     1       3       —        3       —        2       —        —        —        —        —        —   

Settlements or curtailments cost (income)

     1       1       —        —        —        1       (1 )      —        —        —        —        —   

Other

     —        —        —        2       —        —        —        —        —        —        —        —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net periodic benefit cost

   $ 5      $ 9      $ 3      $ 9      $ 3      $ 8      $ (1 )    $ 1      $ —      $ 1      $ —      $ 1   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Other changes in plan assets and benefit obligations recognized in other comprehensive income are as follows:

 

    Years Ended September 30  
    2012     2011     2010     2012     2011     2010  
    Pension Benefits     Postretirement Benefits  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
    (Dollars in millions)  

Net losses (gains)

   $ (3 )    $ 27      $ 2      $ 1      $ 5      $ 12      $ 1      $ 1      $ (1 )    $ (1 )    $ 1      $ —   

Prior service cost

     (1 )      —        —        —        —        —        1       —        (2 )      —        —        —   

Amortization of prior service (cost) credit

     —        —        —        —        —        —        3       —        4       —        4       —   

Amortization of prior unrecognized loss

     (1 )      (3 )      —        (3 )      —        (2 )      —        —        —        —        —        —   

Other

     —        1       —        —        —        1       —        —        —        —        —        —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other comprehensive loss (income)

   $ (5 )    $ 25      $ 2      $ (2 )    $ 5      $ 11      $ 5      $ 1      $ 1      $ (1 )    $ 5      $ —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Curtailments and settlements of employee benefit plans

In recent years, the Company incurred curtailments and settlements of certain of its employee benefit plans. Associated with these curtailments and settlements, the Company recognized a net loss of $1 million, a net gain of less than $1 million and a net loss of $1 million in fiscal 2012, 2011 and 2010, respectively.

Sensitivity Analysis

Measurement of postretirement benefit expense is based on actuarial assumptions used to value the postretirement benefit liability at the beginning of the year. Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. The fiscal 2012 weighted-average assumed health care cost trend rate is 8.5% for U.S. plans and 7.9% for foreign plans. The ultimate weighted-average health care cost trend rate has been designated as 5.0% for U.S. plans and 6.0% for foreign plans and is anticipated to be achieved during 2018 and 2016, respectively. A one percentage point change in the 2012 assumed health care cost trend rate would have the following effects:

 

     1-Percentage-Point  
     Increase      Decrease  
     U.S.      Foreign      U.S.      Foreign  
     (Dollars in millions)  

Effect on postretirement benefit obligation

    $ —       $ 3      $ —       $ (2 ) 

Plan Assets

The Company’s defined benefit pension plans weighted-average asset allocations at September 30, 2012 and 2011, by asset category are as follows:

 

     Pension Assets  
     September 30  
     2012     2011  
     U.S.     Foreign     U.S.     Foreign  

Asset Category:

         

Equity securities

      62 %      39 %      57 %      44 % 

Debt securities

      38 %      56 %      43 %      50 % 

Cash and other securities

      —        5 %      —        6 % 
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

      100 %      100 %      100 %      100 % 
  

 

 

    

 

 

    

 

 

    

 

 

  

To develop the expected long-term rate of return on plan assets assumption, the Company used a capital asset pricing model. The model considers the current level of expected returns on risk-free investments comprised of government bonds, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns for each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return for each plan.

Cabot’s investment strategy for each of its defined benefit plans in the U.S. and abroad is generally based on a set of investment objectives and policies that cover time horizons and risk tolerance levels consistent with plan liabilities. Periodic studies are performed to determine the asset mix that will meet pension obligations at a reasonable cost to the Company. The assets of the defined benefit plans are comprised principally of investments in equity and high quality fixed income securities, which are broadly diversified across the capitalization and style spectrum and are managed using both active and passive strategies. The weighted average target asset allocation for the U.S. plans is 61% in equity and 39% in fixed income and for the foreign plans is 39% in equity, 55% in fixed income, 2% in real estate and 4% in cash and other securities.

For pension or other postretirement benefit plan assets classified as Level 1 measurements (measured using quoted prices in active markets), total fair value is either the price of the most recent trade at the time of the market close or the official close price, as defined by the exchange on which the asset is most actively traded on the last trading day of the period, multiplied by the number of units held without consideration of transaction costs.

For pension or other postretirement benefit plan assets classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.

Some pension or other postretirement benefit plan assets are held in funds where a net asset value is calculated based on the fair value of the underlying assets and the number of shares owned. The classification of the fund (Level 1, 2 or 3 measurements) is determined based on the classification of the significant holdings within the fund. For all other pension or other postretirement benefit plan assets for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.

The fair value of the Company’s pension plan assets at September 30, 2012 and 2011 by asset category is as follows:

 

     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		     Significant
Observable
Inputs
(Level 2)		     Total     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		     Significant
Observable
Inputs
(Level 2)		     Total  
    2012       2011    

Asset Category:

            

Cash

   $ 4     $ 1     $ 5     $ 4     $ 1     $ 5  

Direct investments:

            

U.S. equity securities

     19       —        19       13       —        13  

Non-U.S. equity securities

     5       —        5       1       —        1  

Non-U.S. government bonds

     50       —        50       47       —        47  

Non-U.S. corporate bonds

     11       —        11       1       —        1  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total direct investments

   $ 85     $ —      $ 85     $ 62     $ —      $ 62  

Investment funds:

            

Equity funds(1)

     97       108       205       20       86       106  

Fixed income funds(2)

     66       126       192       43       50       93  

Real estate funds(3)

     —        2       2       —        1       1  

Common and collective investment trust funds(4)

     —        —        —        —        24       24  

Money market funds

     1       —        1       1       —        1  

Other

     4       —        4       —        —        —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total investment funds

     168     $ 236     $ 404     $ 64     $ 161     $ 225  

Alternative investments:

            

Insurance contracts(5)

     —        10       10       —        8       8  

Other

     —        1       1       —        —        —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total alternative investments

     —      $ 11     $ 11     $ —      $ 8     $ 8  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total pension plan assets

   $ 257     $ 248     $ 505     $ 130     $ 170     $ 300  
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The equity funds asset class includes funds that invest in U.S. equities as well as equity securities issued by companies incorporated, listed or domiciled in countries in developed and/or emerging markets. These companies may be in the small-, mid- or large-cap categories.
(2) 

The fixed income funds asset class includes investments in high quality funds. High quality fixed income funds primarily invest in low risk U.S. and non-U.S. government securities, investment-grade corporate bonds, mortgages and asset-backed securities. A significant portion of the fixed income funds asset includes investment in long-term bond funds.
(3) 

The real estate funds asset class includes funds that primarily invest in entities which are principally engaged in the ownership, acquisition, development, financing, sale and/or management of income-producing real estate properties, both commercial and residential. These funds typically seek long-term growth of capital and current income that is above average relative to public equity funds.
(4)

The investment objective of the portfolio of this common and collective investment trust is to achieve long-term, total return in excess of the MSCI World Index Benchmark by investing in equity securities of companies worldwide, emphasizing those with above-average potential for capital appreciation
(5)

Insurance contracts held by the Company’s non-U.S. plans are issued by well-known, highly rated insurance companies.