Cabot Corp: Form 10-Q for the period ended Dec 31, 2023

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. 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 next 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 “First Quarter of Fiscal 2024 versus First Quarter of Fiscal 2023—By Business Segment” includes a discussion of Total segment EBIT, which is a non-GAAP financial measure defined as Income (loss) from operations 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. Total segment EBIT should not be considered an alternative for Income (loss) from operations before income taxes and equity in earnings of affiliated companies, which is the most directly comparable U.S. GAAP financial measure. A reconciliation of Total segment EBIT to Income (loss) from operations before income taxes and equity in earnings of affiliated companies is provided under the heading “First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—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) from operations 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 have excluded from

Total segment EBIT, as applicable, but that are included in our GAAP Income (loss) from operations before income taxes and equity in earnings of affiliated companies, as applicable, are described below.

• 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.
• Benefit from the settlement of a royalty arrangement entered into in connection with the divestiture of our former Specialty Fluids business.
• 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.
• Employee benefit plan settlements, which consist of either charges or benefits associated with the termination of a pension plan or the transfer of a pension plan to a multi-employer plan.
• Gain associated with the bargain purchase of a business.
• Gain realized on the sale of land.
• Argentina controlled currency devaluation loss related to the foreign exchange loss from government-controlled currency devaluations on our net monetary assets denominated in the Argentine peso.

Overview

During the first quarter of fiscal 2024, Income (loss) before income taxes and equity in earnings of affiliated companies increased compared to the first quarter of fiscal 2023. The increase was driven by higher earnings in our Reinforcement Materials and Performance Chemicals segments and increased investment income in Argentina partially offset by foreign exchange losses primarily in Argentina.

First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—Consolidated

Net Sales and Other Operating Revenues and Gross Profit

(In millions)

The $7 million decrease in Net sales and other operating revenues in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was driven by unfavorable price and product mix (combined $48 million) across our Reinforcement Materials and Performance Chemicals segments driven by the pass through of lower raw material costs, partially offset by higher volumes ($35 million).

Gross profit increased by $37 million in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023. The increase was primarily due to higher volumes and higher unit margins within the Reinforcement Materials and Performance Chemicals segments.

Selling and Administrative Expenses

(In millions)

Selling and administrative expenses increased by $7 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to an increase in the incentive compensation expense.

Research and Technical Expenses

(In millions)

Research and technical expenses increased by $2 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023.

Loss on Sale of Business

(In millions)

There was no Loss on sale of business in the first quarter of fiscal 2024. Previously reported Loss on sale of business in fiscal 2023 is associated with the fiscal 2022 divesture of the Purification Solutions business.

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

(In millions)

Interest and dividend income increased by $3 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to higher interest rates.

Interest expense remained flat in the first quarter of fiscal 2024, as compared to the same period of fiscal 2023, primarily due to lower commercial paper balances, offset by higher rates.

Other expense increased by $24 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to foreign currency losses on the revaluation of our Argentine peso monetary assets and liability balances ($40 million), partially offset by investment income ($12 million) on our cash and cash equivalent balances in Argentina.

(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 December 31, 2023, the (Provision) benefit for income taxes was a provision of $34 million compared to a $20 million provision for the three months ended December 31, 2022, with the change primarily due to higher earnings in the current period. 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 2024, the Company expects the Operating tax rate to be in the range of 28% to 30%. 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,” 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 the effective tax rate in future periods.

Net Income (Loss) Attributable to Noncontrolling Interests

(In millions)

Equity in earnings of affiliated companies, net of tax, decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to lower profitability at our equity affiliate in Venezuela.

Net income (loss) attributable to noncontrolling interests, net of tax, decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023.

Net Income Attributable to Cabot Corporation

In the first quarter fiscal 2024, we reported Net income (loss) attributable to Cabot Corporation of $50 million, or $0.88 per diluted common share. This compares to Net income (loss) attributable to Cabot Corporation of $54 million, or $0.93 per diluted common share, in the first quarter of fiscal 2023. The lower net income in the first quarter of fiscal 2024 compared with the same period in fiscal 2023 is primarily due to higher foreign currency losses of $40 million in Argentina, a higher provision for income taxes of $14 million, partially offset by higher Total segment EBIT of $40 million and higher General unallocated income of $9 million.

First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—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 months ended December 31, 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 K of our Notes to the Consolidated Financial Statements.

(In millions)

In the first quarter of fiscal 2024, Income (loss) before income taxes and equity in earnings of affiliated companies increased by $10 million and Total segment EBIT increased by $40 million. The increase in Income (loss) before income taxes and equity in earnings of affiliated companies was largely driven by higher Total segment EBIT partially offset by higher foreign currency losses in Argentina. Total segment EBIT was driven by higher volumes in both the Reinforcement Materials and Performance Chemicals segments (combined $13 million) and higher pricing and improved product mix, net of costs in Reinforcement Materials ($28 million).

Certain Items

Details of the certain items for the three months ended December 31, 2023 and 2022 are as follows:

(In millions)

22

Other Unallocated Items

(In millions)

Total Other unallocated items increased by $8 million due to higher General unallocated income (expense) resulting from higher investment income on our cash and cash equivalent balances in Argentina.

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, interest and dividend income, the profit or loss related to the corporate adjustment for unearned revenue and unrealized holding gains (losses) for investments. General unallocated income (expense) does not include items of income or expense that are separately treated as Certain items.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for the first quarter of fiscal 2024 and 2023 were as follows:

(In millions)

Sales in Reinforcement Materials decreased by $2 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to less favorable price and product mix (combined $27 million), partially offset by higher volumes ($16 million) and the favorable impact from foreign currency translation ($9 million). The less favorable price and product mix was primarily due to lower raw material costs in China that are generally passed through to our customers and were partially offset by favorable price and product mix in the 2023 calendar year customer agreements. The higher volumes in the first quarter of fiscal 2024 were driven by higher volumes in Europe and Asia.

EBIT in Reinforcement Materials in the first quarter of fiscal 2024 increased by $35 million compared to the same period of fiscal 2023. During the first quarter of fiscal 2024, the segment had higher unit margins, net of costs ($28 million) and higher volumes ($5 million). The higher unit margins in the first quarter of fiscal 2024 were primarily driven by favorable pricing and product mix in the 2023 calendar year customer agreements. The higher volumes were driven by higher volumes in Europe and Asia. The higher costs were primarily driven by higher selling and administrative expense.

As we look to the second quarter of the fiscal year, we expect the Reinforcement Materials EBIT to improve sequentially due to higher pricing and product mix related to the outcome of negotiations on our calendar year 2024 customer agreements and modestly higher sequential volumes.

Performance Chemicals

Sales and EBIT for Performance Chemicals for the first quarter of fiscal 2024 and 2023 were as follows:

(In millions)

Sales in Performance Chemicals decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to less favorable price and product mix (combined $22 million), partially offset by higher volumes ($19 million) and the favorable impact from foreign currency translation ($3 million). The less favorable price and product mix was primarily due to lower raw material costs that are generally passed through to our customers in our specialty carbons product line.

The higher volumes in the first quarter of fiscal 2024 were primarily in our specialty carbons, specialty compounds and fumed metal oxides product lines.

EBIT in Performance Chemicals increased by $5 million in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 primarily due to higher volumes ($7 million). The higher volumes in the first quarter of fiscal 2024 were primarily in our specialty carbons, specialty compounds and fumed metal oxides product lines.

As we look ahead to the second quarter of the fiscal year, we expect seasonally higher volumes will be more than offset by higher fixed costs, including higher costs associated with maintenance activities and the reduction of inventory levels.

Liquidity and Capital Resources

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by $14 million during the first three months of fiscal 2024, which was largely due to a higher outstanding commercial paper balance at the end of the period. As of December 31, 2023, we had cash and cash equivalents of $244 million and borrowing availability under our revolving credit agreements of $1.0 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 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.
• €300 million unsecured revolving credit agreement (the “Euro Credit Agreement”, and together with the U.S. Credit Agreement, the “Credit Agreements”), with PNC Bank, National Association, as Administrative Agent, and the other lenders party thereto, which 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 December 31, 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 regulations and tax laws in the U.S. or foreign countries could restrict our ability to transfer funds or impose material costs on such transfers.

In addition to the currency controls that prevent the distribution of cash in Argentina, there are also regulations that require that all cash in Argentina be held in Argentine pesos and regulations that place restrictions related to how and when suppliers of imported goods and services into Argentina can be paid. These regulations likely come with increased costs and future regulations could further restrict our operations in Argentina.

As of December 31, 2023, we had $1.0 billion of availability under our Credit Agreements. As of December 31, 2023, we had $124 million of borrowings under the Euro Credit Agreement and no outstanding borrowings under the U.S. Credit Agreement. There was $205 million of commercial paper outstanding as of December 31, 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.

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 $105 million in the first three months of fiscal 2024 compared to $52 million of cash provided by operating activities during the same period of fiscal 2023 primarily due to improved segment EBIT.

Cash provided by operating activities in the first three months of fiscal 2024 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $41 million and foreign exchange losses of $34 million, primarily related to devaluation of the Argentine peso, which was partially offset by an increase in net working capital of $46 million. The increase in net working capital was largely driven by a decrease in Accounts payable and accrued expenses and an increase in Inventories and Accounts and notes receivable.

Cash used by operating activities in the first three months of fiscal 2023 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $35 million, which was partially offset by an increase in net working capital of $34 million. The increase in net working capital was largely driven by a decrease in Accounts payable and accrued expenses, partially offset by a decrease in Accounts receivables.

Cash Flows from Investing Activities

Investing activities consumed $54 million of cash in the first three months of fiscal 2024 compared to $17 million in the first three months of fiscal 2023.

In the first three months of fiscal 2024, investing activities included $54 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including capacity expansion capital projects.

In the first three months of fiscal 2023, investing activities included $35 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 $6 million.

Capital expenditures for fiscal 2024 are expected to be between $250 million and $275 million. Our planned capital spending program for fiscal 2024 is for sustaining, compliance and improvement capital projects at our operating facilities as well as capacity expansion capital expenditures.

Cash Flows from Financing Activities

Financing activities consumed $29 million of cash in the first three months of fiscal 2024 compared to $92 million of cash consumed during the same period of fiscal 2023.

In the first three months of fiscal 2024, financing activities primarily consisted of share repurchases of $33 million, dividend payments to stockholders of $22 million, and cash dividends paid to noncontrolling interests of $12 million. These payments were partially offset by net proceeds from commercial paper of $32 million and proceeds from sales of common stock of $7 million from stock option exercises.

In the first three months of fiscal 2023, financing activities primarily consisted of the repayment of commercial paper of $48 million, dividend payments to stockholders of $21 million, share repurchases of $17 million, cash dividends paid to noncontrolling interests of $14 million and repayments of long-term debt of $6 million. These payments were partially offset by proceeds from short-term borrowings of $11 million and proceeds from sales of common stock of $3 million from stock option exercises.

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 our future business performance and overall prospects, including for margins, price and product mix, volumes and operations in our Reinforcement Materials segment, for volumes and inventory levels in our Performance Chemicals segment, inventory levels and commercialization efforts in our Aerogel product line, and for costs in both our Reinforcement Materials and Performance Chemicals segments; the impact and cost of restructuring activities; 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; 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 and the U.S.-China trade relationship; 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 or geo-political conflicts; litigation or legal proceedings; interest rates, tax rates, currency exchange controls, and fluctuations in foreign currency, such as the recent currency movements in Argentina; 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 2023 10-K and in our subsequent SEC filings.

Information about market risks for the period ended December 31, 2023 does not differ materially from that discussed under Item 7A of our 2023 10-K.

As of December 31, 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 December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.