Cabot Corp: Form 10-Q for the period ended Jun 30, 2023

Critical Accounting Policies

Our critical accounting policies have not substantially changed from those described in the 2022 10-K.

Recently Issued Accounting Pronouncements

Refer to the discussion under the heading “Recent Accounting Pronouncements” in Note B of our Notes to the Consolidated Financial Statements.

Results of Operations

The Company has two reportable segments: Reinforcement Materials and Performance Chemicals. The Company’s former Purification Solutions business was a separate reporting segment prior to divestiture in the second quarter of fiscal 2022. Cabot is also organized for operational purposes into three geographic regions: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The discussion of our results of operations for the periods presented reflects these structures.

Our analysis of our financial condition and operating results should be read with our consolidated financial statements and accompanying notes.

Definition of Terms and Non-GAAP Financial Measures

When discussing our results of operations, we use several terms as described below.

The term “product mix” refers to the mix of types and grades 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 and/or segment.

Our discussion under the heading “(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate” includes a discussion and reconciliation of our “effective tax rate” and our “operating tax rate” for the periods presented, as well as management’s projection of our operating tax rate range for the full fiscal year. Our operating tax rate is a non-GAAP financial measure and should not be considered as an alternative to our effective tax rate, the most comparable GAAP financial measure. The operating tax rate is calculated based upon management's forecast of the annual operating tax rate for the fiscal year applied to adjusted pre-tax earnings. The operating tax rate excludes income tax (expense) benefit on certain items, discrete tax items and, on a quarterly basis the timing of losses in certain jurisdictions. The income tax (expense) benefit on certain items is determined using the applicable rates in the taxing jurisdictions in which the certain items occurred and includes both current and deferred income tax (expense) benefit based on the nature of the certain items. Discrete tax items include, but are not limited to, changes in valuation allowance, uncertain tax positions, and other tax items, such as the tax impact of legislative changes and tax accruals on historic earnings due to changes in indefinite reinvestment assertions. Our definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that this non-GAAP financial measure 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.

Our discussion under the heading “Third Quarter of Fiscal 2023 versus Third Quarter of Fiscal 2022—By Business Segment” includes a discussion of Total segment EBIT, which is a non-GAAP financial measure defined as Income (loss) before income taxes and equity in earnings from affiliated companies less certain items and other unallocated items. Our Chief Operating Decision Maker, who is our President and Chief Executive Officer, uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT, which reflects the sum of EBIT from our reportable segments, provides useful supplemental information for our investors as it is an important indicator of our operational strength and performance, allows investors to see our results through the eyes of management, and provides context for our discussion of individual business segment performance. Our definition of Total segment EBIT may not be comparable to the definition used by other companies and it should not be considered an alternative for Income (loss) before income taxes and equity in earnings of affiliated companies, which is the most directly comparable GAAP financial measure. A reconciliation of Total segment EBIT to Income (loss) before income taxes and equity in earnings of affiliated companies is provided under the heading “Third quarter of Fiscal 2023 versus Third quarter of Fiscal 2022—By Business Segment”. Investors should consider the limitations associated with this non-GAAP measure, including the potential lack of comparability of this measure from one company to another.

In calculating Total segment EBIT, we exclude from our Income (loss) before income taxes and equity in earnings of affiliated companies (i) items of expense and income that management does not consider representative of our fundamental on-going segment results, which we refer to as “certain items”, and (ii) 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 special projects and initiatives, which we refer to as “other unallocated items”. Management believes excluding the items identified as certain items facilitates operating performance comparisons from period to period by eliminating differences that would not otherwise be apparent on a GAAP basis and also facilitates an evaluation of our operating performance without the impact of these costs or benefits. The items of income and expense that we exclude from Total segment EBIT but that are included in our GAAP Income (loss) before income taxes and equity in earnings of affiliated companies, as applicable in a particular reporting period, include, but are not limited to, the following:

• Asset impairment charges, which primarily include charges associated with an impairment of goodwill, other long-lived assets or assets held for sale.
• Charges related to the divestiture of our Purification Solutions business, which include accelerated costs associated with the change in control and employee incentive compensation.
• Legal and environmental reserves and matters, which consist of costs or benefits for matters typically related to former businesses or that are otherwise incurred outside of the ordinary course of business.
• Global restructuring activities, which include costs or benefits associated with cost reduction initiatives or plant closures and are 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.
• Acquisition and integration-related charges, which include transaction costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to Cabot’s processes.
• Gains (losses) on sale of a business.
• Gain associated with the bargain purchase of a business.
• Gain realized on the sale of land.

Overview

During the third quarter of fiscal 2023, Income (loss) before income taxes and equity in earnings of affiliated companies decreased compared to the third quarter of fiscal 2022 due to a reduction in earnings in our Performance Chemicals segment partially offset by stronger results in our Reinforcement Materials segment.

Third quarter of Fiscal 2023 versus Third quarter of Fiscal 2022—Consolidated

Net Sales and Other Operating Revenues and Gross Profit

(In millions)

The $181 million decrease in net sales and other operating revenues in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 was driven by lower volumes in both segments ($92 million), unfavorable price and product mix (combined $56 million), the negative impact from foreign currency translation ($19 million), and lower by-product revenue ($8 million).

The $243 million decrease in net sales and other operating revenues in the first nine months of fiscal 2023 compared to the first nine months of fiscal 2022 was primarily driven by lower volumes ($198 million) the unfavorable impact from foreign currency translation ($130 million), the impact of the divestiture of our Purification Solutions business in fiscal 2022 ($97 million) and lower by-product revenue ($22 million). These decreases were partially offset by favorable price and product mix (combined $217 million) primarily in our Reinforcement Materials segment.

For the three and nine months ended June 30, 2023, gross profit decreased by $12 million and $51 million, respectively, compared to the same periods of fiscal 2022. The decrease was primarily due to lower volumes and higher fixed costs, partially offset by higher unit margins in our Reinforcement Materials segment.

Selling and Administrative Expenses

(In millions)

Selling and administrative expenses increased by $7 million in the third quarter of fiscal 2023 and decreased by $12 million for the nine months ended June 30, 2023, compared to the same periods of fiscal 2022.

The increase in selling and administrative expenses in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 was primarily due to a $17 million benefit from the sale of land in the fiscal 2022 period, partially offset by a decrease in the incentive compensation accrual for the fiscal 2023 period.

The decrease in selling and administrative expenses in the first nine months of fiscal 2023 compared to the first nine months of fiscal 2022 was primarily due to a decrease in the incentive compensation accrual for the fiscal 2023 period and prior year charges related to the Purification Solutions divestiture and our legal reserve for respirator matters, partially offset by the benefit from the sale of land in the fiscal 2022 period.

Research and Technical Expenses

(In millions)

Research and technical expenses increased by $1 million and $2 million for the third quarter and the first nine months of fiscal 2023, respectively, compared to the same periods of fiscal 2022.

Interest and Dividend Income, Interest Expense and Other Income (Expense)

(In millions)

Interest and dividend income increased by $7 million and $15 million in the three and nine months ended June 30, 2023, respectively, compared to the same periods of fiscal 2022, primarily due to higher interest rates.

Interest expense increased by $9 million and $31 million in the three and nine months ended June 30, 2023, respectively, compared to the same periods of fiscal 2022, primarily due to higher interest rates.

Other expense increased by $2 million and $4 million in the third quarter of fiscal 2023 and the first nine months of fiscal 2023, respectively, compared to the same periods of fiscal 2022, driven by higher foreign currency losses, primarily in Argentina, partially offset by an increase in investment income in Argentina and Brazil.

(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate

Dollars in millions

(1) Non-GAAP tax adjustments made to arrive at the operating tax provision include the income tax (expense) benefit on certain items, discrete tax items, and, on a quarterly basis, the timing of losses in certain jurisdictions, as further described above under the heading “Definition of Terms and Non-GAAP Financial Measures”.

For the three months ended June 30, 2023, the (Provision) benefit for income taxes was a provision of $41 million compared to $49 million for the same period in 2022. For the nine months ended June 30, 2023, the (Provision) benefit for income taxes was a provision of $90 million compared to $73 million for the same period in 2022. Included in the (Provision) benefit for income taxes in the nine months ended June 30, 2022 is a net discrete tax benefit of $22 million primarily comprised of $36 million related to the divestiture of the Purification Solutions business, and a tax expense of $8 million related to withholding tax accruals on historic earnings due to changes in indefinite reinvestment assertion on certain entities. Our income taxes are affected by the mix of earnings in the tax jurisdictions in which we operate, and by the presence of valuation allowances in certain tax jurisdictions.

For fiscal 2023, the Operating tax rate is expected to be in the range of 27% to 29%. We are not providing a forward-looking reconciliation of the operating tax rate range with an effective tax rate range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to “certain items,” which have historically included unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. Matters allocated to certain items are unpredictable, depend on various factors, and could have a material impact on the effective tax rate in future periods.

We regularly evaluate the realizability of our net deferred tax assets. As of June 30, 2023, substantially all our U.S. deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances. There is a reasonable possibility that within the next twelve months, sufficient positive evidence may become available to reach a conclusion that all or a significant portion of the valuation allowances will no longer be required. Such a release would result in a material non-cash income tax benefit in our Consolidated Statement of Operations in the period of release and an increase of net deferred tax assets on our Consolidated Balance Sheet.

Net Income (Loss) Attributable to Noncontrolling Interests

(In millions)

Equity in earnings of affiliated companies, net of tax, decreased by $2 million and $3 million in the third quarter and the first nine months of fiscal 2023, respectively, compared to the same periods of fiscal 2022 primarily due to lower profitability at our equity affiliate in India.

Net income (loss) attributable to noncontrolling interests, net of tax, decreased by $1 million in the third quarter and increased by $2 million for the nine months ended June 30, 2023, compared to the same periods of fiscal 2022. The lower income for the three month period was primarily due to the lower profitability of our joint ventures in China. The higher income for the nine month period was primarily due to the higher profitability of our joint venture in the Czech Republic.

Net Income Attributable to Cabot Corporation

In the third quarter and first nine months of fiscal 2023, we reported Net income (loss) attributable to Cabot Corporation of $82 million and $211 million, or $1.43 per diluted common share and $3.65 per diluted common share, respectively. This compares to Net income (loss) attributable to Cabot Corporation of $97 million and $115 million, or $1.69 per diluted common share and $1.99 per diluted common share, respectively, in the third quarter and first nine months of fiscal 2022. The lower net income in the third quarter of fiscal 2023 compared with the same period in fiscal 2022 is primarily due to lower volumes and higher fixed costs partially offset by higher unit margins. The higher net income in the first nine months of fiscal 2023 compared with the same period in fiscal 2022 is primarily due to an impairment charge associated with the divestiture of Purification Solutions in fiscal 2022 that did not reoccur in fiscal 2023.

Third quarter of Fiscal 2023 versus Third quarter of Fiscal 2022—By Business Segment

Income (loss) before income taxes and equity in earnings of affiliated companies, certain items, other unallocated items, and Total segment EBIT for the three and nine months ended June 30, 2023 and 2022 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note L of our Notes to the Consolidated Financial Statements.

(In millions)

In the third quarter of fiscal 2023, Income (loss) before income taxes and equity in earnings of affiliated companies decreased by $22 million and Total segment EBIT decreased by $12 million. The decreases in Income (loss) before income taxes and equity earnings of affiliated companies and in Total segment EBIT were driven by lower volumes, higher fixed costs and the unfavorable impact of foreign currency movements partially offset by higher unit margins in Reinforcement Materials. Lower volumes in the Reinforcement Materials ($19 million) and Performance Chemicals segments ($20 million) were primarily due to demand softness in key end markets. Higher unit margins in the Reinforcement Materials segment ($42 million) were primarily due to improved pricing and product mix in our annual tire customer agreements.

In the first nine months of fiscal 2023, Income (loss) before income taxes and equity in earnings of affiliated companies increased by $118 million. The increase is primarily due to the Purification Solutions loss on sale and asset impairment charge of $206 million in fiscal 2022, partially offset by the gain on the Tokai Carbon acquisition of $24 million that did not reoccur in fiscal 2023. Total segment EBIT decreased by $47 million in the first nine months of fiscal 2023 as compared to the same period in fiscal 2022 driven by lower volumes, higher fixed costs and the unfavorable impact of foreign currency movements in both segments, partially offset by higher unit margins in Reinforcement Materials. Lower volumes in the Reinforcement Materials ($44 million) and Performance Chemicals segments ($48 million) were primarily due to demand softness in key end markets and destocking. Higher unit margins in the Reinforcement Materials segment ($130 million) were primarily due to improved pricing and product mix in our annual tire customer agreements.

Certain Items

Details of the certain items for the three and nine months ended June 30, 2023 and 2022 are as follows:

(In millions)

Other Unallocated Items

(In millions)

A discussion of items that we refer to as “other unallocated items” can be found under the heading “Definition of Terms and Non-GAAP Financial Measures”. The balances of unallocated corporate costs are primarily comprised of expenditures related to managing a public company that are not allocated to the segments and corporate business development costs related to ongoing corporate projects. The balances of General unallocated income (expense) consist of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, the profit or loss related to the corporate adjustment for unearned revenue and unrealized holding gains (losses) for investments.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for the third quarter and first nine months of fiscal 2023 and 2022 were as follows:

(In millions)

Sales in Reinforcement Materials decreased by $106 million in the third quarter of fiscal 2023 compared to the same period of fiscal 2022, primarily due to lower volumes ($59 million), less favorable price and product mix (combined $29 million) the unfavorable impact from foreign currency translation ($12 million) and lower by-product revenue ($5 million). The less favorable price and product mix was primarily due to lower feedstock costs that are generally passed through to our customers. Volumes were lower across all regions primarily due to lower replacement tire demand.

In the first nine months of fiscal 2023, sales in Reinforcement Materials decreased by $8 million compared to the first nine months of fiscal 2022. The decrease was primarily due to lower volumes ($130 million), the unfavorable impact from foreign currency translation ($88 million) and lower by-product revenue ($15 million), partially offset by improved price and product mix (combined $225 million). Lower volumes were primarily due to lower replacement tire demand and customer destocking. The improved price and product mix was primarily due to favorable 2022 and 2023 calendar year customer agreements.

EBIT in Reinforcement Materials in the third quarter of fiscal 2023 increased by $19 million compared to the same period of fiscal 2022. During the third quarter of fiscal 2023, the segment had higher unit margins, net of higher costs ($38 million), partially offset by lower volumes ($19 million) and the unfavorable impact from foreign currency translation ($1 million). The higher unit margins were primarily driven by favorable pricing and product mix in the 2023 calendar year customer agreements. Volumes were lower across all regions primarily due to lower replacement tire demand.

EBIT in Reinforcement Materials increased by $49 million in the first nine months of fiscal 2023 compared to the same period of fiscal 2022. The increase was driven by higher unit margins, net of higher costs ($99 million) partially offset by lower volumes ($44 million) and the unfavorable impact from foreign currency translation ($6 million). The higher unit margins were primarily driven by favorable pricing and product mix in the 2022 and 2023 calendar year customer agreements. Volumes were lower across all regions primarily due to lower replacement tire demand and destocking at our major tire customers.

As we look to the fourth quarter of the fiscal year, we expect EBIT to decrease sequentially due to seasonally lower volumes in Europe and higher fixed costs related to the timing of maintenance activities.

Performance Chemicals

Sales and EBIT for Performance Chemicals for the third quarter and first nine months of fiscal 2023 and 2022 were as follows:

(In millions)

Sales in Performance Chemicals decreased by $69 million in the third quarter of fiscal 2023 compared to the same period of fiscal 2022, primarily due to lower volumes ($32 million), less favorable pricing and product mix ($27 million), the unfavorable impact of foreign currency translation ($6 million) and lower by-product revenue ($2 million). The lower volumes in the third quarter of fiscal 2023 were driven by demand softness in key end markets, particularly in our fumed metal oxides product line. The less favorable product mix was due to less favorable product mix in our battery materials and specialty carbons product lines.

In the first nine months of fiscal 2023, sales in Performance Chemicals decreased by $126 million compared to the same period of fiscal 2022 due to lower volumes ($68 million), the unfavorable impact of foreign currency translation ($42 million), lower by-product revenue ($7 million) and less favorable pricing and product mix ($9 million). The lower volumes were primarily due to customer destocking, demand softness in key end markets and the impact from COVID-19 outbreaks in China.

EBIT in Performance Chemicals decreased by $31 million in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022, due to lower volumes ($20 million), lower unit margins ($9 million) and higher costs associated with the unfavorable impact of the reduction in inventory levels ($4 million). The lower volumes in the third quarter of fiscal 2023 were driven by demand softness across all regions. Lower unit margins were primarily due to less favorable product mix in the specialty carbons and battery materials product lines.

EBIT in Performance Chemicals decreased by $96 million in the first nine months of fiscal 2023 compared to the same period of fiscal 2022, due to lower volumes ($48 million), lower unit margins ($24 million), the unfavorable impact of a reduction in inventory levels ($15 million) and the unfavorable impact of foreign currency translation ($9 million). Lower unit margins were largely due to less favorable product mix in the specialty carbons and battery materials product lines. The segment also experienced higher costs associated with the unfavorable impact of reduction in inventory levels ($15 million). Lower volumes were driven by customer destocking, demand softness in key end markets, and the impact from COVID-19 outbreaks in China.

As we look ahead to the fourth quarter of the fiscal year, we expect EBIT to improve sequentially due to higher volumes in our battery materials and inkjet product lines.

Purification Solutions

Sales and EBIT for Purification Solutions for the third quarter and first nine months of fiscal 2023 and 2022 were as follows:

(In millions)

28

We divested the Purification Solutions business in March 2022. Refer to Note D of our Notes to the Consolidated Financial Statements.

Liquidity and Capital Resources

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, increased by $233 million during the first nine months of fiscal 2023, which was primarily due to a higher cash balance, lower outstanding commercial paper and the impact of foreign currency rates partially offset by increased borrowing on the Euro Credit Agreement (as defined below). As of June 30, 2023, we had cash and cash equivalents of $220 million and borrowing availability under our revolving credit agreements of $1.1 billion.

We have access to borrowings under the following two credit agreements:

• $1 billion unsecured revolving credit agreement (the “U.S. Credit Agreement”)with JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and the other lenders party thereto, which matures in August 2026, subject to a one-year option to extend the maturity, exercisable on or prior to August 6, 2023. Effective August 4, 2023, we closed on the one-year option extending the maturity date to August 2027. The U.S. Credit Agreement supports our issuance of commercial paper, and borrowings under it may be used for working capital, letters of credit and other general corporate purposes.
• Effective May 17, 2023, we amended and restated our €300 million unsecured revolving credit agreement (the “Euro Credit Agreement”, and together with the U.S. Credit Agreement, the “Credit Agreements”), changing the Administrative Agent, updating the Designated Borrowers (as defined therein). The Euro Credit Agreement with PNC Bank, National Association, as Administrative Agent, and the other lenders party thereto, matures in August 2027. Borrowings under the Euro Credit Agreement may be used for the repatriation of earnings of our foreign subsidiaries to the United States, the repayment of indebtedness of our foreign subsidiaries owing to us or any of our subsidiaries and for working capital and general corporate purposes.

As of June 30, 2023, we were in compliance with the debt covenants under the Credit Agreements, which, with limited exceptions, require us to comply on a quarterly basis with a leverage test requiring the ratio of consolidated net debt to consolidated EBITDA not to exceed 3.50 to 1.00. Consolidated net debt is defined as consolidated debt offset by the lesser of (i) unrestricted cash and cash equivalents and (ii) $150 million.

A significant portion of our business occurs outside the U.S. and our cash generation does not always align geographically with our cash needs. The vast majority of our cash and cash equivalent holdings tend to be held outside the U.S. We generally use a combination of U.S. earnings, repatriation of certain foreign earnings, commercial paper issuances and borrowings under our U.S. Credit Agreement to meet our U.S. cash needs. With the exception of Argentina, which has currency controls that prevent the distribution of cash, we are generally able to move cash throughout the Company through our cash pooling structures, intercompany accounts and/or distributions, as needed. Although we repatriate certain foreign earnings, cash held by foreign subsidiaries is generally considered permanently reinvested and is used to finance the subsidiaries’ operational activities and future investments. We usually reduce our commercial paper balance and, if applicable, borrowings under our Credit Agreements, at quarter-end using cash derived from customer collections, settlement of intercompany balances and short-term intercompany loans. If additional funds are needed in the U.S., we expect to be able to repatriate cash, including cash from China, while paying any withholding or other taxes. Changes in tax laws in the U.S. or foreign countries could restrict our ability to transfer funds or impose material costs on such transfers.

As of June 30, 2023, we had $1.1 billion of availability under our Credit Agreements. As of June 30, 2023, we had $118 million of borrowings under the Euro Credit Agreement and no outstanding borrowings under the U.S. Credit Agreement. There was $134 million of commercial paper outstanding as of June 30, 2023.

We anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from the Credit Agreements and our commercial paper program to meet our operational and capital investment needs and financial obligations for the foreseeable future. The liquidity we derive from cash flows from operations is, to a large degree, predicated on our ability to collect our receivables in a timely manner, the cost of our raw materials, and our ability to manage inventory levels.

In addition, our subsidiary in Argentina may incur a foreign currency loss as a result of a significant government driven currency devaluation. The timing of any government action is uncertain, but could be in the near term and any loss we record would negatively impact earnings. As of June 30, 2023, we had approximately $35 million of Peso denominated net assets. As described above, currently there are currency controls that prevent the distribution or conversion of cash from Argentina, which makes up the majority of these net assets.

The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows.

Cash Flows from Operating Activities

Cash provided by operating activities, which consists of net income adjusted for the various non-cash items included in income, changes in working capital and changes in certain other balance sheet accounts, totaled $457 million in the first nine months of fiscal 2023 compared to $5 million of cash used by operating activities during the same period of fiscal 2022.

Cash provided by operating activities in the first nine months of fiscal 2023 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $107 million and a decrease in net working capital of $96 million. The decrease in net working capital was largely driven by a decrease in accounts receivable due to lower customer prices from lower cost of raw materials and decreased sales volumes and a decrease in inventories and accounts payable and accrued expenses driven by lower cost of raw materials.

Cash used by operating activities in the first nine months of fiscal 2022 was driven by an increase in net working capital of $390 million. The increase in net working capital was driven by an increase in accounts receivable due to higher sales and an increase in inventory driven by a higher cost of raw materials, partially offset by an increase in accounts payable.

Cash Flows from Investing Activities

Investing activities consumed $139 million of cash in the first nine months of fiscal 2023 compared to $31 million of cash consumed in the first nine months of fiscal 2022.

In the first nine months of fiscal 2023, investing activities included $166 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including capacity expansion projects in Performance Chemicals, partially offset by proceeds from the sale of land of $7 million, proceeds from the sale of our Purification Solutions business of $6 million, and proceeds from insurance settlements of $12 million.

In the first nine months of fiscal 2022, investing activities included $121 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as capacity expansion capital expenditures primarily in Performance Chemicals. In addition, the first nine months of fiscal 2022 includes $79 million of net cash proceeds from the sale of our Purification Solutions business, $18 million of proceeds from the sale of land, and $9 million of cash paid for the acquisition of Tokai Carbon, net of cash assumed of $5 million.

Capital expenditures for fiscal 2023 are expected to be approximately $250 million. Our planned capital spending program for fiscal 2023 is primarily for sustaining, compliance, and improvement capital projects at our operating facilities as well as capacity expansion expenditures in the Performance Chemicals segment.

Province of Ontario Regulation 419 Update

As described in Part I, Item 1 of the 2022 10-K under the heading “Safety, Health, Environment, and Sustainability”, under the Province of Ontario Ministry of Environment, Conservation and Parks’ (“MECP”) Regulation 419, a new requirement for sulfur dioxide (“SO2”) emissions went into effect on July 1, 2023 for our reinforcing carbons plant in Sarnia, Ontario. On June 30, 2023, we received a letter from the MECP indicating that as of July 1 we are out of compliance with the new air standards for SO2 and in response submitted our required abatement plan in accordance with the regulation. We are continuing discussions with the MECP on a new technical standard for SO2 emissions controls at our plant as an alternative to this requirement that in its current form would require the installation of air pollution controls at the plant by July 1, 2028. We intend to continue to engage with the MECP on this alternative, or another compliance plan approach that is acceptable to the MECP. We anticipate that we will need to incur significant capital costs for the installation of these new SO2 emissions controls, particularly during the 24-month period prior to the date of installation.

Cash Flows from Financing Activities

Financing activities consumed $371 million of cash in the first nine months of fiscal 2023 compared to $129 million of cash provided during the same period of fiscal 2022.

In the first nine months of fiscal 2023, financing activities primarily consisted of the repayment of commercial paper of $188 million, dividend payments to stockholders of $65 million, share repurchases of $48 million, cash dividends paid to noncontrolling interests of $41 million, net repayments of short-term borrowings of $24 million and repayments of long-term debt of $88 million. These payments were partially offset by proceeds from long-term borrowings of $79 million.

In the first nine months of fiscal 2022, financing activities primarily consisted of the issuance of commercial paper of $193 million and proceeds from short-term borrowings of $26 million. These proceeds were partially offset by dividend payments to stockholders of $63 million, share repurchases of $48 million, dividend payments to noncontrolling interests of $22 million, and repayments of long-term debt of $357 million.

Forward-Looking Information

This report on Form 10-Q contains “forward-looking statements” under the Federal securities laws. These forward-looking statements address expectations or projections about the future, including our expectations regarding segment performance in the fourth quarter of fiscal 2023 as compared with EBIT in the third quarter of fiscal 2023 and the factors we expect will decrease EBIT in our Reinforcement Materials segment and increase EBIT in our Performance Chemicals segment; demand for our products; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit and commercial paper facilities to fund our cash requirements; anticipated capital spending, including with respect to the installation of new SO2 emissions controls at our Sarnia, Ontario reinforcing carbons plant; regulatory developments; cash requirements and uses of available cash, including future cash outlays associated with respirator liabilities and the timing of such outlays; amortization expenses; our operating tax rate; and the possible outcome of legal and environmental proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers.

Forward-looking 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 or difficult to predict. If known or unknown risks materialize, our actual results could differ materially from those expressed in the forward-looking statements.

In addition to factors described elsewhere in this report, the following are some of the factors that could cause our actual results to differ materially from those expressed in our forward-looking statements: industry capacity utilization and competition from other specialty chemical companies; safety, health and environmental requirements and related constraints imposed on our business; regulatory and financial risks related to climate change developments; volatility in the price and availability of energy and raw materials, including with respect to the Russian invasion of Ukraine; a significant adverse change in a customer relationship or the failure of a customer to perform its obligations under agreements with us; failure to achieve growth expectations from new products, applications and technology developments; failure to realize benefits from acquisitions, alliances, or joint ventures or achieve our portfolio management objectives; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations, global health matters including the COVID-19 pandemic or geo-political conflicts; litigation or legal proceedings; tax rates and fluctuations in foreign currency exchange and interest rates; our inability to complete capacity expansions or other development projects; and the accuracy of the assumptions we used in establishing reserves for our share of liability for respirator claims. These other factors and risks are discussed more fully in our 2022 10-K and in our subsequent SEC filings.

Information about market risks for the period ended June 30, 2023 does not differ materially from that discussed under Item 7A of our 2022 10-K.

As of June 30, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of that date.

There were no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.