Cabot Corp: Form 10-Q for the period ended Dec 31, 2024

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 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 “First Quarter of Fiscal 2025 versus First Quarter of Fiscal 2024—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 2025 versus First quarter of Fiscal 2024—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.

• 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 and investment losses related to the utilization of government bond programs established for the settlement of certain foreign payables.
• 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.
• Legal and environmental matters and reserves, 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.
• 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.
• Asset impairment charges, which primarily include charges associated with an impairment of goodwill, other long-lived assets or assets held for sale.
• 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.

Overview

During the first quarter of fiscal 2025, Income (loss) before income taxes and equity in earnings of affiliated companies increased compared to the first quarter of fiscal 2024. The increase was driven by lower foreign currency exchange losses primarily in Argentina and higher earnings in both our Reinforcement Materials and Performance Chemicals segments.

First quarter of Fiscal 2025 versus First quarter of Fiscal 2024—Consolidated

Net Sales and Other Operating Revenues and Gross Profit

(In millions)

The $3 million decrease in Net sales and other operating revenues in the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 was driven by less favorable pricing and product mix in both our Reinforcement Materials and Performance Chemicals segments ($40 million combined), partially offset by higher volumes in both our Reinforcement Materials and Performance Chemical segments ($39 million combined). The less favorable pricing and product mix in both our Reinforcement Materials and Performance Chemical segments was primarily due to lower raw material costs that are generally passed through to our customers. The higher volumes was due to higher volumes in Asia Pacific and EMEA in Reinforcement Materials and higher volumes in Performance Chemicals as volumes reconnected to underlying demand drivers in key end markets.

For the three months ended December 31, 2024, gross profit increased by $17 million compared to the same period of fiscal 2024. The increase in Gross profit in the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 was driven primarily by higher volumes in both our Reinforcement Materials and Performance Chemicals segments ($22 million combined). The higher volumes in the Reinforcement Materials segment was primarily in Asia Pacific and EMEA and the higher volumes in the Performance Chemicals segment was primarily due to volumes reconnecting to underlying demand drivers in key end markets.

Selling and Administrative Expenses

(In millions)

Selling and administrative expenses decreased by $1 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024.

Research and Technical Expenses

(In millions)

Research and technical expenses decreased by $1 million in the first quarter of fiscal 2025, compared to the same period of fiscal 2024.

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

(In millions)

Interest and dividend income decreased by $3 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024, primarily due to lower interest rates and lower average cash balances.

Interest expense decreased by $4 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024, due to lower average short-term borrowings and lower interest rates.

Other income increased by $30 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024, primarily due to lower foreign exchange losses primarily 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, 2024, the (Provision) benefit for income taxes was a provision of $41 million compared to a $34 million provision for the same period in fiscal 2024, 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 2025, we expect the Operating tax rate 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,” 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)

21

Equity in earnings of affiliated companies, net of tax, remained flat in the first quarter of fiscal 2025, compared to the same period of fiscal 2024.

Net income (loss) attributable to noncontrolling interests, net of tax, remained flat in the first quarter of fiscal 2025, compared to the same period of fiscal 2024.

Net Income Attributable to Cabot Corporation

In the first quarter of fiscal 2025 and fiscal 2024, we reported Net income (loss) attributable to Cabot Corporation of $93 million ($1.67 per diluted common share) and $50 million ($0.88 per dilution common share), respectively. The higher net income in the first quarter of fiscal 2025 compared with the same period in fiscal 2024 is primarily due to lower Argentina controlled currency devaluation and other losses ($33 million) and higher Total segment EBIT ($12 million).

First quarter of Fiscal 2025 versus First quarter of Fiscal 2024—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, 2024 and 2023 are included in the following table, and details of each item is set forth in the sections below.

(In millions)

Certain Items

Details of the certain items for the three months ended December 31, 2024 and 2023 are as follows:

(In millions)

Other Unallocated Items

(In millions)

Total other unallocated items decreased by $2 million for the three months ended December 31, 2024, when compared to the same periods in fiscal 2024, primarily due to lower Interest expense and lower Unallocated Corporate costs, partially offset by lower General unallocated income.

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. This does not include items of income or expense from the items that are separately treated as Certain items.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for the first quarter of fiscal 2025 and 2024 were as follows:

(In millions)

Sales in Reinforcement Materials decreased by $30 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024, primarily due to less favorable pricing and product mix ($28 million) and lower energy center revenue ($5 million), partially offset by higher volumes primarily in Asia Pacific and EMEA ($5 million). The less favorable pricing and product mix was primarily due to lower raw material costs that are generally passed through to our customers, partially offset by higher pricing in our calendar year 2024 customer agreements.

EBIT in Reinforcement Materials in the first quarter of fiscal 2025 increased by $1 million compared to the same period of fiscal 2024. The increase in EBIT was driven by volume growth of approximately 1% primarily in Asia Pacific and EMEA ($2 million), partially offset by lower gross profit per ton ($1 million). The lower gross profit per ton was primarily due to lower energy center revenue and a less favorable geographic mix, partially offset with favorable pricing and product mix in our 2024 calendar year customer agreements.

As we look to the second quarter of the fiscal year, we expect the Reinforcement Materials segment EBIT to modestly improve sequentially from the first quarter of fiscal 2025 due to an anticipated favorable geographic mix. We anticipate relatively flat volumes sequentially with seasonal improvement and calendar year 2025 customer agreement gains in EMEA, partially offset with lower volumes in Asia Pacific due to the Lunar New Year holiday.

Performance Chemicals

Sales and EBIT for Performance Chemicals for the first quarter of fiscal 2025 and 2024 were as follows:

(In millions)

Sales in Performance Chemicals increased by $26 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024, primarily due to higher volumes ($34 million) and the favorable impact from foreign currency translation ($3 million), partially offset by less favorable pricing and product mix ($12 million). The higher volumes were primarily due to volumes reconnecting to underlying demand drivers in key end markets. The less favorable pricing and product mix was primarily due to lower raw material costs which, in certain instances, are passed through to our customers through formulas and other market-based adjustments.

EBIT in Performance Chemicals increased by $11 million in the first quarter of fiscal 2025 compared to the same period of fiscal 2024 primarily due to 8% higher volumes ($20 million), partially offset by lower gross profit per ton ($8 million). The higher volumes in the first quarter of fiscal 2025 was primarily due to volumes reconnecting to underlying demand drivers in key end markets. The lower gross profit per ton was primarily due to higher costs associated with maintenance spend and new assets.

As we look to the second quarter of the fiscal year, we expect the Performance Chemicals segment EBIT to modestly improve sequentially from the first quarter of fiscal 2025 due to anticipated higher volumes, primarily from higher seasonal demand in North America and Europe.

Tariffs

Our current outlook does not include any adverse impacts from tariffs announced in February 2025 between the United States and Mexico, Canada and China. Given the dynamic nature of the tariff announcements, related delays and ongoing negotiations between countries, we are assessing the potential impact. In China and Mexico, we expect minimal direct impact as our production is sold mainly within the country. In Canada, a large portion of the production at our Canadian plants is sold in Canada, but also there is production sold to customers in the US. For reinforcing carbons and specialty carbons products, sales from our Canadian operations to almost all of these customers are pursuant to agreements that allow Cabot to pass through taxes and similar charges, such as tariffs. We are also working with our customers on potential alternative supply sources within our large plant network to minimize any negative impact from tariffs, where it is feasible. However, in all cases, if these (or other) tariffs are implemented, there could be a downstream impact on our customer's businesses, and this could impact underlying demand levels for our products.

Liquidity and Capital Resources

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by $118 million during the first three months of fiscal 2025, which was largely due to a higher outstanding commercial paper balance at the end of the period. As of December 31, 2024, we had cash and cash equivalents of $183 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 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, 2024, 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, including the utilization of customer supply chain financing programs, 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.

As of each of December 31, 2024 and September 30, 2024, we had $113 million of borrowings under the Euro Credit Agreement and no outstanding borrowings under the U.S. Credit Agreement. There was $100 million and $45 million of commercial paper outstanding as of December 31, 2024 and September 30, 2024, respectively.

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 both the next twelve months and 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 $124 million in the first three months of fiscal 2025 compared to $105 million of cash provided by operating activities during the same period of fiscal 2024.

Cash provided by operating activities in the first three months of fiscal 2025 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $37 million and cash dividends received from one of our equity investments of $12 million, which was partially offset by an increase in net working capital of $38 million. The increase in net working capital was largely driven by a decrease in Accounts Payable and accrued liabilities, and an increase in inventories, partially offset by a decrease in Accounts and notes receivable.

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 Flows from Investing Activities

Investing activities consumed $104 million of cash in the first three months of fiscal 2025 compared to $54 million of cash consumed in the first three months of fiscal 2024.

In the first three months of fiscal 2025 and 2024, investing activities included $77 million and $54 million, respectively, of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital. In addition, in the first three months of fiscal 2025, investing activities included $27 million for cash paid for the asset acquisition described in Note C of our Notes to the Consolidated Financial Statements.

Capital expenditures for fiscal 2025 are expected to be between $250 million and $300 million. Our planned capital spending program for fiscal 2025 is for sustaining, compliance and improvement capital projects at our operating facilities as well as capacity expansion capital expenditures.

Province of Ontario Regulation 419 Update

As described in Part 1, Item 1 of the 2024 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. We are out of compliance with this new air standard. MECP has approved our proposed abatement plan, which requires us to install air pollution controls at the plant by July 1, 2028. As part of our abatement plan, we will continue to engage with MECP and other stakeholders. To date, our operations in Sarnia have not been restricted because of this matter. 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 $24 million of cash in the first three months of fiscal 2025 compared to $29 million of cash consumed during the same period of fiscal 2024.

In the first three months of fiscal 2025, financing activities primarily consisted of share repurchases of $42 million, dividend payments to stockholders of $24 million, and cash dividends paid to noncontrolling interests of $20 million. These payments were partially offset by net proceeds from the issuance of commercial paper of $55 million and proceeds from long-term debt of $6 million under our Euro Credit Agreement.

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.

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 earnings, geographic mix and volumes in our Reinforcement Materials segment in the second quarter of fiscal 2025, and for earnings and volumes in our Performance Chemicals segment in the second quarter of fiscal 2025, and the principal assumptions underlying these expectations; the possible impact of recently announced trade tariffs between the United States and Mexico, Canada, and China on our operations, results of operations, and 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 in both the next twelve months and the foreseeable future; anticipated capital spending; regulatory developments, including regulatory compliance costs and potential impact on our operations; 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 or joint venture relationship or the failure of a customer or joint venture partner 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 2024 10-K and in our subsequent SEC filings.

Information about market risks for the period ended December 31, 2024 does not differ materially from that discussed under Item 7A of our 2024 10-K.

As of December 31, 2024, 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.