# CABOT CORP (CBT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CABOT CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/16040/000156459022038228/cbt-10k_20220930.htm
Accession: 0001564590-22-038228
Filing date: 2022-11-23
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CBT/
All MD&A years: /company/CBT/mda/
Previous year: /company/CBT/mda/fy2021/ (FY 2021)
Next year: /company/CBT/mda/fy2023/ (FY 2023)

Item  7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with U.S. GAAP. This preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements. On an ongoing basis, we evaluate our estimates and the application of our policies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The policies that we believe are critical to the preparation of the consolidated financial statements are presented below.

Revenue Recognition

We recognize revenue when our customers obtain control of promised goods or services. The revenue recognized is the amount of consideration which we expect to receive in exchange for those goods or services. Our contracts with customers are generally for products only and do not include other performance obligations. Generally, we consider purchase orders, which in some cases are governed by master supply agreements, to be contracts with customers. The transaction price as specified on the purchase order or sales contract is considered the standalone selling price for each distinct product. To determine the transaction price at the time when revenue is recognized, we evaluate whether the price is subject to adjustments, such as for returns, discounts or volume rebates, which are stated in the customer contract, to determine the net consideration to which we expect to be entitled. Revenue from product sales is recognized based on a point in time model when control of the product is transferred to the customer, which typically occurs upon shipment or delivery of the product to the customer and title, risk and rewards of ownership have passed to the customer. We have an immaterial amount of revenue that is recognized over time. Payment terms typically range from zero to ninety days.

Shipping and handling activities that occur after the transfer of control to the customer are billed to customers and are recorded as sales revenue, as we consider these to be fulfillment costs. Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the Consolidated Statements of Operations. Taxes collected on sales to customers are excluded from the transaction price.

We generally provide a warranty that our products will substantially conform to the identified specifications. Our liability typically is limited to either a credit equal to the purchase price or replacement of the non-conforming product. Returns under warranty have historically been immaterial.

We do not have contract assets or liabilities that are material.

When the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, we do not consider there to be a significant financing component associated with the contract.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. The cost of inventories is determined using the FIFO method.

We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory, and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Historically, such write-downs have not been material. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our gross profit and our earnings.

Goodwill Impairment

Goodwill is comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized and is subject to impairment testing annually, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value.

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A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Reinforcement Materials, and the fumed metal oxides, specialty compounds, and battery materials product lines within Performance Chemicals, which are considered separate reporting units, carried our goodwill balances as of September 30, 2022.

For the purpose of the goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed. Alternatively, we may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result. The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. The fair value is also benchmarked against the value calculated from a market approach using the guideline public companies method. Based on our most recent annual goodwill impairment test performed as of August 31, 2022, the fair values of the Reinforcement Materials, fumed metal oxides, specialty compounds, and battery materials reporting units were substantially in excess of their carrying values. 

Long-lived Assets Impairment

Our long-lived assets primarily include property, plant and equipment, and intangible assets. The carrying values of long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable.

To test for impairment of assets, we generally use a probability-weighted estimate of the future undiscounted net cash flows of the assets over their remaining lives to determine if the value of the asset is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows are determinable.

An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable fair value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separately identifiable cash flows, an impairment charge is recorded when we no longer intend to use the asset. 

Contingencies

We accrue costs related to contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. Contingencies could arise from litigation, environmental remediation or contractual arrangements. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, we accrue the amount that reflects the best estimate within that range or the low end of the range if no estimate within the range would be considered more likely than any other estimate. The amount accrued is determined through the evaluation of various information, which could include claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience. We do not reduce the estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by either the receipt of cash or a contractual agreement. Litigation is highly uncertain and there is always the possibility of an unusual result in any particular case that may reduce our earnings and cash flows.

We have recorded a significant reserve for respirator liability claims. Our current estimate of the cost of our share of pending and future respirator liability claims is based on facts and circumstances existing at this time, including the number and nature of the remaining claims. Developments that could affect our estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of dismissals without payment of pending claims, (iii) significant changes in the average cost of resolving claims, including potential settlements of groups of claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received or changes in our assessment of the viability of these claims, (vi) trial and appellate outcomes, (vii) changes in the law and procedure applicable to these claims, (viii) the financial viability of the parties that contribute to the payment of respirator claims and developments in the bankruptcy proceedings of one of those parties, (ix) exhaustion or changes in the recoverability of the insurance coverage maintained by certain of the parties that contribute to the settlement of respirator claims, or a change in the availability of the indemnity provided by a former owner of the business, (x) changes in the allocation of costs among the various parties paying legal and settlement costs, and (xi) a determination that the assumptions that were used to estimate our share of liability are no longer reasonable. We cannot determine the impact of these potential developments on our current estimate of our share of liability for these existing and future claims. Because reserves are limited to amounts that are probable and estimable as of a relevant measurement date, and there is inherent difficulty in projecting the impact of potential developments on our share of liability for these existing and future claims, it is reasonably possible that the

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liabilities for existing and future claims could change in the near term and that change could be material. Refer to Note S of our Notes to the Consolidated Financial Statements for details on the respirator liabilities and settlements.

Income Taxes

Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws.

Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. We have recorded reserves for taxes and associated interest and penalties when it becomes more likely than not that an amount would be payable to tax authorities in future years. Any significant impact as a result of changes in law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, and/or our cash flow.

We record benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities’ full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. We also accrue for interest and penalties on these uncertain tax positions and include such charges in the income tax provision in the Consolidated Statements of Operations.

Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, capital loss carryforwards, foreign tax credits, and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize these deferred tax assets is determined in accordance with U.S. GAAP. In jurisdictions where we have a three-year cumulative loss, we utilize recent historical results in order to assess the recoverability of deferred tax assets. Where we have a three-year cumulative profit, we review our forecast of future taxable income in relation to actual results and expected future trends. We perform this review on a quarterly basis. Failure to achieve our operating income targets, may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in an increase in the valuation allowance being recorded against some or all of our net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense, while a release of valuation allowances in periods when these tax attributes become realizable would reduce our income tax expense.

Significant Accounting Policies

We have other significant accounting policies that are discussed in Note A in Item 8 below. Certain of these policies include the use of estimates, but do not meet the definition of critical because they generally do not require estimates or judgments that are as difficult or subjective to measure. However, these policies are important to an understanding of the consolidated financial statements.

Recently Issued Accounting Pronouncements

Refer to the discussion in Note B of our Notes to the Consolidated Financial Statements.

Results of Operations

Cabot is organized into two reportable segments: Reinforcement Materials and Performance Chemicals. The Company’s former Purification Solutions business was a separate reportable segment prior to divestiture in the second quarter of fiscal 2022. Cabot is also organized for operational purposes into three geographic regions: the Americas; EMEA; and Asia Pacific. The discussions of our results of operations for the periods presented reflect these structures.

Our analysis of financial condition and operating results should be read with our consolidated financial statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to our fiscal years ended September 30.

This section discusses our fiscal 2022 and fiscal 2021 results of operations and year-to-year comparisons between fiscal 2022 and fiscal 2021. For the discussions of our fiscal 2020 results and year-to-year comparisons between fiscal 2021 and fiscal 2020, refer to our discussions under the headings “Results of Operations” and “Cash Flows and Liquidity” in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021, which was filed with the United States Securities and Exchange Commission on November 29, 2021.

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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 excludes income tax (expense) benefit on certain items and discrete tax items. 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 “Fiscal 2022 compared to Fiscal 2021—By Business Segment” includes a discussion of Total segment EBIT, which is a non-GAAP financial measure defined as Income (loss) from continuing 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 continuing 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 continuing operations before income taxes and equity in earnings of affiliated companies is provided under the heading “Fiscal 2022 compared to Fiscal 2021—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 continuing 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 caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a U.S. 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 U.S. GAAP Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, as applicable, are described below.

[[GREPCENT_TABLE]]
[["","\u2022","Asset impairment charges, which primarily include charges associated with an impairment of goodwill, other long-lived assets or assets held for sale."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Charges related to the divestiture of our Purification Solutions business, which include accelerated costs associated with the change in control and employee incentive compensation."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Benefit from the settlement of a royalty arrangement entered into in connection with the divestiture of our former Specialty Fluids business."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","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."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","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\u2019s processes."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Indirect tax settlement credits, which includes favorable settlements resulting in the recoveries of indirect taxes."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Gains (losses) on sale of a business."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Gain associated with the bargain purchase of a business."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Gain realized on the sale of land."]]
[[/GREPCENT_TABLE]]

Drivers of Demand and Key Factors Affecting Profitability

Drivers of demand and key factors affecting our profitability differ by segment. In Reinforcement Materials, longer term demand is driven primarily by: i) the number of vehicle miles driven globally; ii) the number of original equipment and replacement tires produced; and iii) the number of automotive builds. Over the past several years, operating results have been driven by a number of factors, including: i) increases or decreases in our sales volumes driven by changes in production levels for tires or industrial rubber products and the level at which we service that demand; ii) changes in raw material costs and our ability to adjust the sales price for our products commensurate with changes in raw material costs; iii) changes in pricing and product mix, which includes customer pricing as well as the mix of products sold or the region in which they are sold; iv) global and regional capacity utilization for carbon black; v) fixed cost savings achieved through restructuring and other cost saving activities; vi) the growth of our volumes and market position in emerging economies; vii) capacity management and technology investments, including the impact of energy utilization and yield improvement technologies at our manufacturing facilities; viii) royalties and technology payments related to our patented elastomer composites technology that is used in tire applications; and ix) changes in energy prices associated with our energy center sales and the cost of utilities.

In Performance Chemicals, longer term demand is driven primarily by the construction and infrastructure, automotive, including sales into batteries for electric vehicles, electronics, inkjet printing, and consumer products industries. In recent years, operating results in Performance Chemicals have been driven by: i) increases or decreases in sales volumes to the industries previously noted; ii) changes in pricing and product mix, which includes customer pricing as well as the mix of products sold or the region in which they are sold; iii) our ability to deliver differentiated products that drive enhanced performance in customers’ applications; iv) our ability to obtain value pricing for this differentiation; v) the cost of new capacity; vi) changes in selling prices relative to variations in the cost of raw materials; and vii) the adoption of new products for use in our customers’ applications.

Overview of Results for Fiscal 2022

During fiscal 2022, Income (loss) before income taxes and equity in earnings of affiliated companies decreased compared to fiscal 2021 primarily due to the impairment and loss on sale charges related to the divestiture of the Purification Solutions business. This decrease was partially offset by higher earnings in our Reinforcement Materials and Performance Chemicals segments.

Fiscal 2022 compared to Fiscal 2021—Consolidated

Net Sales and Other Operating Revenues and Gross Profit

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Net sales and other operating revenues","","$","4,321","","","$","3,409"],["Gross profit","","$","885","","","$","799"]]
[[/GREPCENT_TABLE]]

Net sales increased by $912 million in fiscal 2022 as compared to fiscal 2021. The increase in net sales was primarily driven by favorable price and product mix (combined $1.1 billion), higher volumes ($76 million) across our Reinforcement Materials and Performance Chemicals segments, and increased energy center by-product revenue ($49 million). These increases were partially offset by the divestiture of our Purification Solutions business ($160 million) and the unfavorable impact from foreign currency translation ($108 million). The favorable price and product mix was driven by favorable 2022 calendar year tire customer agreements and higher prices from higher feedstock and energy costs that are generally passed through to our customers in the Reinforcement Materials segment, and targeted growth initiatives and price increases ahead of rising input costs, including raw material and energy, and other costs, including packaging and transportation, in our Performance Chemicals segment. The higher volumes were driven by stronger demand in all regions across our Reinforcement Materials segment and continued momentum in battery materials and inkjet applications, partially offset by plant downtime in our Performance Chemicals segment. The increased energy center by-product revenue was driven by higher energy prices.

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Gross profit increased by $86 million in fiscal 2022 as compared to fiscal 2021. The gross profit increase was primarily due to higher volumes across all regions, higher unit margins in the Reinforcement Materials segment due to favorable pricing and product mix in our 2022 customer agreements and higher unit margins in the Performance Chemicals segment due to price increases and favorable product mix in our specialty carbons and fumed metal oxides product lines.

Selling and Administrative Expenses

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Selling and administrative expenses","","$","258","","","$","289"]]
[[/GREPCENT_TABLE]]

Selling and administrative expenses decreased by $31 million in fiscal 2022 as compared to fiscal 2021. The decrease was due primarily to a $17 million benefit from the sale of land in fiscal 2022 and reduced charges related to our legal reserve for respirator matters compared to fiscal 2021.

Research and Technical Expenses

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Research and technical expenses","","$","55","","","$","56"]]
[[/GREPCENT_TABLE]]

Research and technical expenses decreased by $1 million in fiscal 2022 as compared to fiscal 2021.

Impairment Charges and Loss on Sale

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Loss on sale of business and asset impairment charge","","$","207","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

The loss on sale and asset impairment charges associated with the sale of the Purification Solutions business are described in Note D of our Notes to the Consolidated Financial Statements.

Interest and Dividend Income

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Interest and dividend income","","$","11","","","$","8"]]
[[/GREPCENT_TABLE]]

Interest and dividend income in fiscal 2022 increased by $3 million as compared to fiscal 2021 primarily due to increases in interest rates.

Interest Expense

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Interest expense","","$","56","","","$","49"]]
[[/GREPCENT_TABLE]]

Interest expense increased by $7 million in fiscal 2022 as compared to fiscal 2021 primarily due to higher interest rates.

Other Income (Expense)

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Other income (expense)","","$","(9",")","","$","(7",")"]]
[[/GREPCENT_TABLE]]

Other expense increased during fiscal 2022 by $2 million as compared to fiscal 2021. The change was primarily due to unfavorable foreign currency impacts largely due to the significant depreciation of the Argentine peso against the U.S. dollar. This increase was partially offset by benefits from money market investments.  

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

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(Provision) / Benefit for Income Taxes","","Rate","","","(Provision) / Benefit for Income Taxes","","Rate"],["(Dollars in millions)"],["Effective tax rate(1)","","$","(102",")","","30","%","","$","(123",")","","30","%"],["Less: Non-GAAP tax adjustments(2)","","","32","","","","","","","(4",")"],["Operating tax rate","","$","(134",")","","26","%","","$","(119",")","","27","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Refer to the reconciliation of computed tax expense at the federal statutory rate to the Provision (benefit) for income taxes in Note Q of our Notes to the Consolidated Financial Statements."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Non-GAAP tax adjustments made to arrive at the operating tax provision include the income tax (expense) benefit on certain items and discrete tax items, as further described above under the heading \u201cDefinition of Terms and Non-GAAP Financial Measures\u201d."]]
[[/GREPCENT_TABLE]]

For the year ended September 30, 2022, the (Provision) benefit for income taxes was a $102 million expense compared to a $123 million expense for fiscal 2021. Included in the (Provision) benefit for income taxes for the year ended September 30, 2022, is the tax impact of the divestiture of our Purification Solutions business, and withholding tax accruals on historical and current 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 the presence of valuation allowances in certain tax jurisdictions.

For fiscal 2023, we expect our Operating tax rate to be in the range of 26% to 28%. 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.

Equity in Earnings of Affiliated Companies and Net Income (Loss) Attributable to Noncontrolling Interest, Net of Tax

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Equity in earnings of affiliated companies, net of tax","","$","10","","","$","3"],["Net income (loss) attributable to noncontrolling interests, net of tax","","$","34","","","$","36"]]
[[/GREPCENT_TABLE]]

Equity in earnings of affiliated companies, net of tax, increased by $7 million in fiscal 2022 compared to fiscal 2021 primarily due to higher profitability at our equity affiliates in India and Venezuela.

Net income (loss) attributable to noncontrolling interests, net of tax, decreased by $2 million in fiscal 2022 compared to fiscal 2021 primarily due to lower earnings of our joint ventures in China, partially offset by increased earnings of our joint venture in the Czech Republic.

Net Income (Loss) Attributable to Cabot Corporation

In fiscal 2022, we reported net income attributable to Cabot Corporation of $209 million ($3.62 earnings per diluted common share). In fiscal 2021, we reported net income attributable to Cabot Corporation of $250 million ($4.34 earnings per diluted common share). The decrease in fiscal 2022 was primarily due to the Purification Solutions loss on sale and asset impairment charge, partially offset by higher Total segment EBIT in Reinforcement Materials and Performance Chemicals.

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Fiscal 2022 compared to Fiscal 2021—By Business Segment

Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, certain items, pre-tax, other unallocated items and Total segment EBIT for fiscal 2022 and 2021 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note T of our Notes to the Consolidated Financial Statements.

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies","","$","335","","","$","406"],["Less: Certain items, pre-tax","","","(183",")","","","(34",")"],["Less: Other unallocated items","","","(124",")","","","(110",")"],["Total segment EBIT","","$","642","","","$","550"]]
[[/GREPCENT_TABLE]]

In fiscal 2022, Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies decreased by $71 million and Total Segment EBIT increased by $92 million. The decrease in Income (loss) before income taxes and equity earnings of affiliated companies is primarily due to the Purification Solutions loss on sale and asset impairment charge of $207 million, partially offset by increased Total segment EBIT of $92 million and the gain on a bargain purchase acquisition of $24 million.

Certain Items:

Details of the certain items for fiscal 2022 and 2021 are as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Gain on bargain purchase of a business (Note C)","","$","24","","","$","\u2014"],["Gain on sale of land","","","17","","","","\u2014"],["Specialty Fluids divestiture related benefit","","","5","","","","\u2014"],["Employee benefit plan settlement and other charges","","","1","","","","(4",")"],["Loss on sale of business and asset impairment charge (Note D)","","","(207",")","","","\u2014"],["Legal and environmental matters and reserves (Note S)","","","(9",")","","","(25",")"],["Purification Solutions divestiture related charges","","","(5",")","","","\u2014"],["Acquisition and integration-related charges","","","(6",")","","","(5",")"],["Global restructuring activities","","","(3",")","","","(11",")"],["Indirect tax settlement credits (Note S)","","","\u2014","","","","12"],["Other certain items","","","\u2014","","","","(1",")"],["Total certain items, pre-tax","","","(183",")","","","(34",")"],["Non-GAAP tax adjustments","","","32","","","","(4",")"],["Total certain items, net of tax","","$","(151",")","","$","(38",")"]]
[[/GREPCENT_TABLE]]

An explanation of these items of expense and income is included in our discussion under the heading “Definition of Terms and Non-GAAP Financial Measures”.

Other Unallocated Items:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Interest expense","","$","(56",")","","$","(49",")"],["Unallocated corporate costs","","","(59",")","","","(58",")"],["General unallocated income (expense)","","","1","","","","\u2014"],["Less: Equity in earnings of affiliated companies, net of tax","","","10","","","","3"],["Total other unallocated items","","$","(124",")","","$","(110",")"]]
[[/GREPCENT_TABLE]]

34

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 income, dividend income, and the profit or loss related to the corporate adjustment for unearned revenue.

In fiscal 2022, Total other unallocated items increased by $14 million as compared to fiscal 2021 primarily due to increased interest expense from higher interest rates and higher earnings in equity affiliates.

Reinforcement Materials

Sales and EBIT for Reinforcement Materials for fiscal 2022 and 2021 are as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Reinforcement Materials Sales","","$","2,575","","","$","1,781"],["Reinforcement Materials EBIT","","$","408","","","$","329"]]
[[/GREPCENT_TABLE]]

In fiscal 2022, sales in Reinforcement Materials increased by $794 million as compared to fiscal 2021, primarily due to a favorable price and product mix (combined $799 million) and higher volumes ($72 million), partially offset by unfavorable impact from foreign currency translation ($76 million). The favorable price and product mix was primarily due to favorable 2022 calendar year customer agreements and higher feedstock and energy costs that are generally passed through to our customers. The higher volumes in fiscal 2022 were driven by stronger demand across all regions. The unfavorable foreign exchange rate impact was primarily due to the weakening of foreign currencies against the U.S. dollar.

In fiscal 2022, Reinforcement Materials EBIT increased by $79 million as compared to fiscal 2021. The increase was driven by higher unit margins ($109 million) and higher volumes ($31 million), partially offset by higher fixed cost ($45 million) and unfavorable impact from foreign currency translation ($16 million). The higher unit margins were primarily driven by favorable 2022 calendar year customer agreements and the benefit of higher energy prices on our energy center and yield benefits. The higher volumes were due to increased demand in all regions. The higher fixed costs were primarily due to increased costs associated with utilities. The unfavorable foreign exchange rate impact was primarily due to the weakening of foreign currencies against the U.S. dollar.

Performance Chemicals

Sales and EBIT for Performance Chemicals for fiscal 2022 and 2021 are as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Performance Additives Sales","","$","1,013","","","$","796"],["Formulated Solutions Sales","","","359","","","","352"],["Performance Chemicals Sales","","$","1,372","","","$","1,148"],["Performance Chemicals EBIT","","$","234","","","$","211"]]
[[/GREPCENT_TABLE]]

In fiscal 2022, sales in Performance Chemicals increased by $224 million as compared to fiscal 2021. The increase was primarily due to favorable price and product mix (combined $251 million) and higher volumes ($4 million), partially offset by unfavorable impact from foreign currency translation ($32 million). The favorable price and product mix was due to increased pricing ahead of rising input costs across the segment. The higher volumes were driven by higher sales into battery applications due to increased demand for our battery materials product line partially offset by lower volumes in our fumed metal oxides product line. The unfavorable foreign exchange rate impact was primarily due to the weakening of foreign currencies against the U.S. dollar.

In fiscal 2022, EBIT in Performance Chemicals increased by $23 million compared to fiscal 2021 primarily due to higher unit margins ($64 million) and higher volumes ($1 million), partially offset by higher fixed cost ($33 million) and unfavorable impact from foreign currency translation ($7 million). Higher unit margins were driven by strong pricing and favorable product mix in our specialty carbons and fumed metal oxides product lines. The higher volume was due to increased demand for our battery materials product line partially offset by lower volumes in our fumed metal oxides product line. The unfavorable foreign currency exchange impact was primarily due to the weakening of foreign currencies against the U.S. dollar. Fixed costs increased in support of our growth vectors, higher utilities costs and general inflationary cost increases.

35

Purification Solutions

Sales and EBIT for Purification Solutions for fiscal 2022 and 2021 are as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended September 30"],["","","2022","","","2021"],["","","(In millions)"],["Purification Solutions Sales","","$","97","","","$","257"],["Purification Solutions EBIT","","$","\u2014","","","$","10"]]
[[/GREPCENT_TABLE]]

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

Fiscal 2023 Outlook

In Reinforcement Materials, we anticipate stable volumes along with higher pricing in our 2023 calendar year customer agreements to drive year-over-year growth in segment EBIT.

In Performance Chemicals, we anticipate results being negatively impacted in the first half of the fiscal year due to weaker demand for our specialty carbons and fumed metal oxides product lines, particularly in Europe and China. We expect results in the segment to improve throughout the year as destocking comes to an end and demand returns to more normalized levels and sales in our battery materials and inkjet product lines continue to grow.

We also expect headwinds from a strong U.S. dollar that will negatively impact the USD value of our foreign currency results upon translation, and rising interest rates which will increase interest rates on our floating rate debt.

Liquidity and Capital Resources

Overview

Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by $250 million during fiscal 2022, primarily due to a higher outstanding commercial paper balance at the end of the period. The higher commercial paper balance was used to fund an increase in net working capital resulting from the impact of rising raw material costs on our inventory balance and higher prices on our accounts receivables balance. As of September 30, 2022, we had cash and cash equivalents of $206 million and borrowing availability under our revolving credit agreements of $856 million.

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

[[GREPCENT_TABLE]]
[["","\u2022","$1 billion unsecured revolving credit agreement (the \u201cU.S. Credit Agreement\u201d) 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. 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","\u20ac300 million unsecured revolving credit agreement (the \u201cEuro Credit Agreement\u201d, and together with the U.S. Credit Agreement, the \u201cCredit Agreements\u201d), with Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, which matures in May 2024 or earlier if the U.S. Credit Agreement should terminate early. 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."]]
[[/GREPCENT_TABLE]]

As of September 30, 2022, 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.

36

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 September 30, 2022, we had $856 million of availability under our Credit Agreements. As of September 30, 2022, we had $114 million of borrowings outstanding under the Euro Credit Agreement and no outstanding borrowings under the U.S. Credit Agreement. There was $322 million and $71 million of commercial paper outstanding at September 30, 2022 and 2021, respectively.

In June 2022, we issued $400 million of notes with a coupon of 5% that mature on June 30, 2032.  These notes are unsecured and interest is payable semi-annually on June 30 and December 30, commencing on December 30, 2022. The net proceeds of this offering were $394 million after deducting discounts and issuance costs. We used a portion of these proceeds to repay $350 million of our notes with a coupon of 3.7% that were scheduled to mature on July 15, 2022.  

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 $100 million in fiscal 2022. Operating activities provided $257 million of cash in fiscal 2021.

Cash provided by operating activities in fiscal 2022 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $146 million, which was partially offset by an increase in net working capital of $431 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 provided by operating activities in fiscal 2021 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $160 million, which was partially offset by an increase in net working capital of $222 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 $118 million of cash in fiscal 2022 compared to $186 million in fiscal 2021. In fiscal 2022, the use of cash by investing activities primarily consisted of $211 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including a capacity expansion project in Performance Chemicals, partially offset by proceeds from the sale of our Purification Solutions business of $79 million and proceeds from the sale of land adjacent to our Billerica site of $18 million.

In fiscal 2021, the use of cash by investing activities primarily consisted of $195 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including a capacity expansion project in Performance Chemicals.

Capital expenditures for fiscal 2023 are expected to be between $300 million and $350 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 capital expenditures in Performance Chemicals.

37

Cash Flows from Financing Activities

Financing activities provided $145 million of cash in fiscal 2022 compared to $60 million of cash consumed in fiscal 2021. The cash provided by financing activities in fiscal 2022 primarily consisted of net proceeds from long-term debt of $22 million, which consisted of proceeds of $394 million less repayments of $372 million, net proceeds from the issuance of commercial paper of $250 million, and proceeds from short-term borrowings of $26 million, partially offset by dividend payments to stockholders of $84 million, purchases of common stock of $53 million and dividend payments to noncontrolling interests of $22 million.

The use of cash by financing activities in fiscal 2021 primarily consisted of dividend payments to stockholders of $80 million, dividend payments to noncontrolling interests of $19 million, and net repayments of long-term debt of $22 million, which consisted of proceeds of $200 million less repayments of $222 million, partially offset by net proceeds from the issuance of commercial paper of $58 million.

Our long-term total debt, of which $7 million is current, matures at various times as presented in Note I of our Notes to the Consolidated Financial Statements. The weighted-average interest rate on our fixed rate long-term debt was 4.29% as of September 30, 2022.

Share Repurchases

In fiscal 2018, our Board of Directors authorized us to repurchase up to an additional ten million shares of common stock. In fiscal 2022 we repurchased approximately 0.8 million shares of common stock on the open market for $49 million. We did not repurchase any shares during fiscal 2021. Additionally, during both fiscal 2022 and fiscal 2021 we repurchased 0.1 million shares of our common stock associated with employee tax obligations on stock-based compensation awards for $4 million and $3 million, respectively. As of September 30, 2022, we had approximately 4.3 million shares available for repurchase under the Board of Directors’ share repurchase authorization.

Dividend Payments

In fiscal 2022 and fiscal 2021, we paid cash dividends on our common stock of $1.48 and $1.40 per share, respectively. These cash dividend payments totaled $84 million and $80 million in fiscal 2022 and fiscal 2021, respectively.

Employee Benefit Plans

As of September 30, 2022, we had a consolidated pension obligation, net of the fair value of plan assets, of $29 million, primarily associated with postretirement benefit plan liabilities.

In fiscal 2022, we made cash contributions totaling $5 million to our pension benefit plans. In fiscal 2023, we expect to make cash contributions of $4 million to our pension plans.

The $29 million of unfunded postretirement benefit plan liabilities is comprised of $16 million for our U.S. and $13 million for our foreign postretirement benefit plans. These postretirement benefit plans provide certain health care and life insurance benefits for retired employees. Typical of such plans, our postretirement plans are unfunded and, therefore, have no plan assets. We fund these plans as claims or insurance premiums come due. In fiscal 2022, we paid postretirement benefits of $5 million. For fiscal 2023, our benefit payments for our postretirement plans are expected to be $3 million.

Contractual Obligations

The following table sets forth our long-term contractual obligations.

[[GREPCENT_TABLE]]
[["","","Payments Due by Fiscal Year"],["","","2023","","","2024","","","2025","","","2026","","","2027","","","Thereafter","","","Total"],["","","(In millions)"],["Purchase commitments","","$","294","","","$","244","","","$","237","","","$","236","","","$","221","","","$","1,960","","","$","3,192"],["Long-term debt","","","4","","","","114","","","","\u2014","","","","250","","","","\u2014","","","","708","","","","1,076"],["Fixed interest on long-term debt","","","41","","","","41","","","","41","","","","41","","","","33","","","","114","","","","311"],["Variable interest on long-term debt","","","4","","","","4","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","8"],["Finance leases(1)","","","5","","","","4","","","","4","","","","4","","","","3","","","","16","","","","36"],["Operating leases(1)","","","16","","","","14","","","","13","","","","11","","","","10","","","","51","","","","115"],["Total","","$","364","","","$","421","","","$","295","","","$","542","","","$","267","","","$","2,849","","","$","4,738"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Lease liabilities include interest."]]
[[/GREPCENT_TABLE]]

38

Purchase Commitments

We have entered into long-term, volume-based purchase agreements primarily for the purchase of raw materials and natural gas with various key suppliers for all of our business segments. Under certain of these agreements the quantity of material being purchased is fixed, but the price we pay changes as market prices change. For purposes of the table above, current purchase prices have been used to quantify total commitments. We have also entered into long-term purchase agreements primarily for services related to information technology, which are not included in the table above, that total $26 million as of September 30, 2022, the majority of which is expected to be paid within the next 5 years.

Leases

We have entered into various leases as the lessee, primarily related to certain transportation vehicles, warehouse facilities, office space, and machinery and equipment. These leases have remaining lease terms between one and seventeen years, some of which may include options to extend the leases for up to fifteen years or options to terminate the leases. Our land leases have remaining lease terms up to seventy-nine years.