Note L. Employee Benefit Plans

The information below provides detail concerning the Company’s benefit obligations under the defined benefit and postretirement benefit plans it sponsors.

Defined benefit plans provide pre-determined benefits to employees that are distributed upon retirement. Cabot is making all sponsor required contributions to these plans. The accumulated benefit obligation was $160 million for the U.S. defined benefit plans and $351 million for the foreign plans as of September 30, 2017 and $175 million for the U.S. defined benefit plans and $373 million for the foreign plans as of September 30, 2016.

In addition to benefits provided under the defined benefit and postretirement benefit plans, the Company provides benefits under defined contribution plans. Cabot recognized expenses related to these plans of $18 million in fiscal 2017, $17 million in fiscal 2016 and $20 million in fiscal 2015.

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

	Years Ended September 30
	2017						2016						2017						2016
	Pension Benefits												Postretirement Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
	(In millions)
Change in Benefit Obligations:
Benefit obligation at beginning of year	$	175		$	400		$	170		$	348		$	37		$	20		$	38		$	15
Service cost		1			10			1			8			—			—			—			—
Interest cost		4			6			4			8			1			1			1			1
Plan participants’ contribution		—			2			—			2			—			—			—			—
Foreign currency exchange rate changes		—			16			—			(9	)		—			—			—			(1	)
(Gain) Loss from changes in actuarial assumptions and plan experience		(7	)		(42	)		14			62			(2	)		(1	)		1			5
Benefits paid		(7	)		(12	)		(7	)		(14	)		(3	)		—			(3	)		—
Settlements or curtailments		(5	)		(3	)		(6	)		(4	)		—			—			—			—
Other		(1	)		(1	)		(1	)		(1	)		—			—			—			—
Benefit obligation at end of year	$	160		$	376		$	175		$	400		$	33		$	20		$	37		$	20

	Years Ended September 30
	2017						2016						2017						2016
	Pension Benefits												Postretirement Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
	(In millions)
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	157		$	305		$	153		$	279		$	—		$	—		$	—		$	—
Actual return on plan assets		12			6			18			43			—			—			—			—
Employer contribution		1			9			—			10			3			—			3			1
Plan participants’ contribution		—			2			—			2			—			—			—			—
Foreign currency exchange rate changes		—			12			—			(11	)		—			—			—			—
Benefits paid		(7	)		(12	)		(7	)		(14	)		(3	)		—			(3	)		(1	)
Settlements		(6	)		(3	)		(6	)		(3	)		—			—			—			—
Expenses paid from assets		(1	)		(1	)		(1	)		(1	)		—			—			—			—
Fair value of plan assets at end of year	$	156		$	318		$	157		$	305		$	—		$	—		$	—		$	—
Funded status	$	(4	)	$	(58	)	$	(18	)	$	(95	)	$	(33	)	$	(20	)	$	(37	)	$	(20	)
Recognized liability	$	(4	)	$	(58	)	$	(18	)	$	(95	)	$	(33	)	$	(20	)	$	(37	)	$	(20	)

Pension Assumptions and Strategy

The following assumptions were used to determine the pension benefit obligations and periodic benefit costs as of and for the years ended September 30:

	2017						2016						2015
	Pension Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
Actuarial assumptions as of the year-end measurement date:
Discount rate		3.6	%		2.4	%		3.4	%		1.8	%		4.2	%		2.9	%
Rate of increase in compensation	N/A				2.7	%	N/A				2.8	%	N/A				2.8	%
Actuarial assumptions used to determine net periodic benefit cost during the year:
Discount rate - benefit obligation		3.4	%		1.8	%		4.2	%		2.9	%		4.0	%		3.0	%
Discount rate - service cost	N/A				1.8	%	N/A				2.8	%	N/A				3.0	%
Discount rate - interest cost		2.7	%		1.5	%		3.3	%		2.4	%		4.0	%		3.0	%
Expected long-term rate of return on plan assets		6.8	%		4.7	%		7.5	%		5.1	%		7.5	%		5.4	%
Rate of increase in compensation	N/A				2.8	%	N/A				2.8	%	N/A				2.8	%

Postretirement Assumptions and Strategy

The following assumptions were used to determine the postretirement benefit obligations and net costs as of and for the years ended September 30:

	2017						2016						2015
	Postretirement Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
Actuarial assumptions as of the year-end measurement date:
Discount rate		3.4	%		3.1	%		3.0	%		2.8	%		3.7	%		3.9	%
Initial health care cost trend rate		7.0	%		7.1	%		7.0	%		6.1	%		6.5	%		6.8	%
Actuarial assumptions used to determine net cost during the year:
Discount rate - benefit obligation		3.0	%		2.8	%		3.7	%		3.9	%		3.8	%		3.9	%
Discount rate - service cost		2.6	%		3.2	%		3.4	%		4.1	%		3.8	%		3.9	%
Discount rate - interest cost		2.4	%		2.6	%		2.8	%		3.7	%		3.8	%		3.9	%
Initial health care cost trend rate		7.0	%		6.1	%		6.5	%		6.8	%		7.0	%		7.1	%

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 Canada, the Eurozone, Japan, Mexico, Switzerland, the United Arab Emirates, the United Kingdom and the U.S. 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.

Amounts recognized in the Consolidated Balance Sheets at September 30, 2017 and 2016 related to the Company's defined benefit pension and postretirement benefit plans were as follows:

	September 30
	2017						2016						2017						2016
	Pension Benefits												Postretirement Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
	(In millions)
Noncurrent assets	$	1		$	12		$	—		$	8		$	—		$	—		$	—		$	—
Current liabilities	$	(1	)	$	(1	)	$	—		$	(1	)	$	(3	)	$	(1	)	$	(3	)	$	(1	)
Noncurrent liabilities	$	(4	)	$	(69	)	$	(18	)	$	(102	)	$	(30	)	$	(19	)	$	(34	)	$	(19	)

Amounts recognized in AOCI at September 30, 2017 and 2016 related to the Company's defined benefit pension and postretirement benefit plans were as follows:

	September 30
	2017					2016					2017					2016
	Pension Benefits										Postretirement Benefits
	U.S.		Foreign			U.S.		Foreign			U.S.			Foreign		U.S.			Foreign
	(In millions)
Net actuarial (gain) loss	$	3	$	52		$	12	$	92		$	(6	)	$	5	$	(4	)	$	6
Net prior service credit		—		(1	)		—		(1	)		(5	)		—		(7	)		—
Balance in accumulated other comprehensive income (loss), pretax	$	3	$	51		$	12	$	91		$	(11	)	$	5	$	(11	)	$	6

In fiscal 2018, the Company expects an estimated net loss of $3 million will be amortized from AOCI to net periodic benefit cost. In addition, the Company expects prior service credits of $3 million for other postretirement benefits will be amortized from AOCI to net periodic benefit costs in fiscal 2018.

Estimated Future Benefit Payments

The Company expects that the following benefit payments will be made to plan participants in the years from 2018 to 2027:

	Pension Benefits				Postretirement Benefits
Years Ended September 30	U.S.		Foreign		U.S.		Foreign
	(In millions)
2018	$	13	$	13	$	3	$	1
2019	$	12	$	14	$	3	$	1
2020	$	10	$	13	$	3	$	1
2021	$	10	$	17	$	3	$	1
2022	$	10	$	16	$	3	$	1
2023 - 2027	$	50	$	86	$	12	$	5

Postretirement medical benefits are unfunded and impact Cabot’s cash flows as benefits become due, which is expected to be insignificant in fiscal 2018. The Company expects to contribute $8 million to its foreign pension plans in fiscal 2018.

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

	Years Ended September 30
	2017						2016						2015						2017					2016					2015
	Pension Benefits																		Postretirement Benefits
	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign			U.S.			Foreign		U.S.			Foreign		U.S.			Foreign
	(In millions)
Service cost	$	1		$	10		$	1		$	8		$	1		$	9		$	—		$	—	$	—		$	—	$	—		$	—
Interest cost		4			6			4			8			7			11			1			1		1			1		2			1
Expected return on plan assets		(9	)		(14	)		(10	)		(14	)		(11	)		(14	)		—			—		—			—		—			—
Amortization of prior service cost		—			—			—			—			—			3			(3	)		—		(3	)		—		(4	)		—
Net losses		—			5			—			3			—			4			—			—		—			—		—			—
Settlements or Curtailments cost		—			—			—			1			—			18			—			—		(1	)		—		—			—
Net periodic (benefit) cost	$	(4	)	$	7		$	(5	)	$	6		$	(3	)	$	31		$	(2	)	$	1	$	(3	)	$	1	$	(2	)	$	1

Other changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) are as follows:

	Years Ended September 30
	2017						2016					2015					2017						2016				2015
	Pension Benefits																Postretirement Benefits
	U.S.			Foreign			U.S.		Foreign			U.S.		Foreign			U.S.			Foreign			U.S.		Foreign		U.S.			Foreign
	(In millions)
Net (gains) losses	$	(9	)	$	(35	)	$	7	$	31		$	14	$	(8	)	$	(3	)	$	(1	)	$	2	$	5	$	1		$	—
Prior service (credit) cost		—			—			—		—			—		(2	)		—			—			—		—		(11	)		—
Amortization of prior service credit		—			—			—		—			—		—			3			—			3		—		—			—
Amortization of prior unrecognized loss		—			(5	)		—		(3	)		—		(4	)		—			—			—		—		4			—
Other		—			—			—		(1	)		—		(27	)		—			—			1		—		—			—
Net changes recognized in Total other comprehensive (income) loss ⁽¹⁾	$	(9	)	$	(40	)	$	7	$	27		$	14	$	(41	)	$	—		$	(1	)	$	6	$	5	$	(6	)	$	—

⁽¹⁾	The tax impact on pension and other postretirement benefit liability adjustments arising during the period was a tax provision of $7 million, tax benefit of $7 million, and tax provision of $5 million for fiscal years 2017, 2016, and 2015, respectively.

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 net losses of less than $1 million, less than $1 million, and $17 million in fiscal 2017, 2016 and 2015, respectively.

Effective October 1, 2014, the Company transferred the defined benefit obligations and pension plan assets in one of its foreign defined benefit plans to a multi-employer plan. This action effectively moves the administrative, asset custodial, asset investment, actuarial, communication and benefit payment obligations to the multi-employer fund administrator. Cabot is required to make contributions to the multi-employer plan, which is over 80% funded. Contributed assets by one participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. As a result of the transfer, a pre-tax charge of $18 million was recorded in the first quarter of fiscal 2015. In addition, there was an approximately $85 million reduction in plan assets and plan obligations as a result of the transfer of assets and obligations of this foreign plan.

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 2017 weighted-average assumed health care cost trend rate is 7.0% for U.S. plans and 6.1% for foreign plans. A one percentage point change in the 2017 assumed health care cost trend rate would have an immaterial impact to the aggregate of the service and interest cost components of the net periodic postretirement benefit and would have the following effect on the postretirement benefit obligation:

	1-Percentage-Point
	Increase				Decrease
	U.S.		Foreign		U.S.		Foreign
	(In millions)
Effect on postretirement benefit obligation	$	—	$	3	$	—	$	(3	)

Plan Assets

The Company’s defined benefit pension plans weighted-average asset allocations at September 30, 2017 and 2016, by asset category, are as follows:

	September 30
	2017						2016
	Pension Assets
	U.S.			Foreign			U.S.			Foreign
Equity securities		48	%		39	%		50	%		39	%
Debt securities		5	%		53	%		50	%		53	%
Cash and other securities⁽¹⁾		47	%		8	%		—	%		8	%
Total		100	%		100	%		100	%		100	%

⁽¹⁾

Prior to year-end, within the U.S. defined benefit pension plan, the Company transitioned the majority of its fixed income assets held in a mutual fund investment to a separately managed account. This transition process temporarily resulted in a larger percentage of the assets being held in cash or cash equivalents on September 30, 2017.

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 50% in equity and 50% in fixed income and for the foreign plans is 38% in equity, 54% in fixed income, 3% in real estate and 5% in cash and other securities.

For pension 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 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.

The fair value of the Company’s pension plan assets at September 30, 2017 and 2016 by asset category is as follows:

	September 30
	2017						2016
	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
	(In millions)
Cash	$	1	$	—	$	1	$	1	$	—	$	1
Direct investments:
U.S. equity securities		—		—		—		18		—		18
Total direct investments		—		—		—		18		—		18
Investment funds:
Equity funds⁽¹⁾		75		124		199		59		119		178
Fixed income funds⁽²⁾		8		168		176		79		162		241
Real estate funds⁽³⁾		—		9		9		1		8		9
Cash equivalent funds		74		—		74		—		1		1
Total investment funds		157		301		458		139		290		429
Alternative investments:
Insurance contracts⁽⁴⁾		—		15		15		—		14		14
Total alternative investments		—		15		15		—		14		14
Total pension plan assets	$	158	$	316	$	474	$	158	$	304	$	462

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