Cabot Corp 10-Q for FY2024 Q1
Cabot Corp (CBT)
About this 10-Q
Cabot Corp filed this 10-Q on February 8, 2024, covering the quarter ended December 31, 2023 (FY2024 Q1).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $958M
- down 0.7% from $965M a year earlier
- Net income
- $50M
- down 7.4% from net income of $54M a year earlier
- Diluted EPS
- $0.88
- down 5.4% from $0.93 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The Company had
INDEX
Part I. |
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Item 1. |
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3 |
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4 |
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5 |
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7 |
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8 |
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10 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
26 |
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Item 4. |
26 |
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Part II. |
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Item 2. |
27 |
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Item 6. |
27 |
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2
Part I. Financial Information
Item 1. Financial Statements
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
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Three Months Ended December 31 |
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2023 |
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2022 |
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(In millions, except per share amounts) |
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Net sales and other operating revenues |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling and administrative expenses |
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Research and technical expenses |
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Loss on sale of business |
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— |
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Income (loss) from operations |
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Interest and dividend income |
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Interest expense |
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Other income (expense) |
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( |
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Income (loss) from operations before income taxes |
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(Provision) benefit for income taxes |
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Equity in earnings of affiliated companies, net of tax |
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Net income (loss) |
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Net income (loss) attributable to noncontrolling interests, net |
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Net income (loss) attributable to Cabot Corporation |
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$ |
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$ |
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Weighted-average common shares outstanding: |
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Basic |
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Diluted |
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Earnings (loss) per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
3
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
UNAUDITED
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Three Months Ended December 31 |
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2023 |
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2022 |
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(In millions) |
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Net income (loss) |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Foreign currency translation adjustment, net of tax |
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Derivatives: net investment hedges |
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(Gains) losses reclassified to interest expense, net of tax |
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Other comprehensive income (loss), net of tax of $ |
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Comprehensive income (loss) |
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Net income (loss) attributable to noncontrolling interests, net |
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Foreign currency translation adjustment attributable to |
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Comprehensive income (loss) attributable to noncontrolling interests |
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Comprehensive income (loss) attributable to Cabot Corporation |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
UNAUDITED
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December 31, 2023 |
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September 30, 2023 |
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(In millions) |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts and notes receivable, net of reserve for doubtful |
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Inventories: |
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Raw materials |
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Finished goods |
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Other |
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Total inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment |
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Accumulated depreciation |
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Net property, plant and equipment |
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Goodwill |
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Equity affiliates |
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Intangible assets, net |
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Deferred income taxes |
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Other assets |
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Total assets |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
UNAUDITED
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December 31, 2023 |
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September 30, 2023 |
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(In millions, except share |
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and per share amounts) |
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Current liabilities: |
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Short-term borrowings |
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$ |
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$ |
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Accounts payable and accrued liabilities |
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Income taxes payable |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt |
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Deferred income taxes |
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Other liabilities |
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(Note E) |
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Stockholders' equity: |
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Preferred stock: |
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Authorized: |
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Common stock: |
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Authorized: |
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Less cost of |
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Additional paid-in capital |
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— |
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— |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
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( |
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( |
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Total Cabot Corporation stockholders' equity |
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Noncontrolling interests |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
6
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
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Three Months Ended December 31 |
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2023 |
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2022 |
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(In millions) |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income (loss) to cash provided by operating activities: |
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Depreciation and amortization |
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Loss on sale of business |
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— |
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Gain on sale of land |
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— |
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( |
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Deferred tax provision (benefit) |
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— |
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Equity in earnings of affiliated companies |
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Share-based compensation |
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Other non-cash (income) expense |
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Cash dividends received from equity affiliates |
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Changes in assets and liabilities: |
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Accounts and notes receivable |
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( |
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Inventories |
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Prepaid expenses and other assets |
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( |
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( |
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Accounts payable and accrued liabilities |
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( |
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( |
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Income taxes payable |
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Other liabilities |
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Cash provided by (used in) operating activities |
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Cash Flows from Investing Activities: |
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Additions to property, plant and equipment |
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( |
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Proceeds from sale of land |
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— |
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Proceeds from sale of business |
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— |
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Other |
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— |
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Cash provided by (used in) investing activities |
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Cash Flows from Financing Activities: |
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Proceeds from short-term borrowings |
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— |
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Proceeds from issuance (repayments) of commercial paper, net |
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Repayments of long-term debt |
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Purchases of common stock |
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Proceeds from sales of common stock |
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Cash dividends paid to noncontrolling interests |
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Cash dividends paid to common stockholders |
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Cash provided by (used in) financing activities |
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Effects of exchange rate changes on cash |
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Increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
UNAUDITED
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Common Stock, Net of Treasury Stock |
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Additional |
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Retained |
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Accumulated Other Comprehensive |
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Total Cabot Corporation Stockholders’ |
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Noncontrolling |
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Total Stockholders’ |
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Shares |
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Cost |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
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Interests |
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Equity |
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(In millions, except share amounts) |
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Balance at September 30, 2023 |
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$ |
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$ |
— |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) |
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Total other comprehensive income (loss) |
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Cash dividends paid: |
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Common stock, $ |
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Cash dividends declared to noncontrolling interests |
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— |
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Issuance of stock under equity compensation plans |
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— |
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Share-based compensation |
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Purchase and retirement of common stock |
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— |
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Balance at December 31, 2023 |
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$ |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
8
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
UNAUDITED
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Common Stock, Net of Treasury Stock |
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Additional |
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Retained |
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Accumulated Other Comprehensive |
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Total Cabot Corporation Stockholders’ |
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Noncontrolling |
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Total Stockholders’ |
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Shares |
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Cost |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
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Interests |
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Equity |
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(In millions, except share amounts) |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income (loss) |
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Total other comprehensive income (loss) |
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Cash dividends paid: |
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Common stock, $ |
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Cash dividends declared to noncontrolling interests |
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— |
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Issuance of stock under equity compensation plans |
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Share-based compensation |
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Purchase and retirement of common stock |
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( |
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— |
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( |
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( |
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( |
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Balance at December 31, 2022 |
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$ |
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$ |
— |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
9
CABOT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
UNAUDITED
A. Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) (“GAAP”) and include the accounts of Cabot Corporation (“Cabot” or the “Company”) and its wholly-owned subsidiaries and majority-owned and controlled U.S. and non-U.S. subsidiaries. Additionally, Cabot considers consolidation of entities over which control is achieved through means other than voting rights. Intercompany transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all disclosures required by Form 10-K. Additional information may be obtained by referring to Cabot’s Annual Report on Form 10-K for its fiscal year ended September 30, 2023 (the “2023 10-K”).
The financial information submitted herewith is unaudited and reflects all adjustments which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods ended December 31, 2023 and 2022. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year.
B. Significant Accounting Policies
Full detail on the Company’s significant accounting policies may be obtained by referring to Note A in the 2023 10-K.
Argentina Devaluation
The Company’s wholly-owned Argentinian subsidiary operates in a highly inflationary economy and, as a result, the functional currency of the subsidiary is Cabot’s reporting currency, the U.S. dollar. During the three months ended December 31, 2023, the Company recorded foreign exchange losses of $
Recently Adopted Accounting Standards
In November 2022, the FASB issued a new standard on the disclosure of supplier financing programs. The new standard requires qualitative and quantitative disclosures as to the nature and potential magnitude of such programs in addition to program activity and changes for the periods presented. The Company adopted this standard on October 1, 2023. See Note J for disclosures related to the Company's supplier financing programs. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.
Recent Accounting Pronouncements
In November 2023, the FASB issued a new standard, Improvement to Reportable Segment Disclosures. The new guidance enhances the disclosure of significant reportable segment expenses. The new standard is effective for fiscal years beginning after December 15, 2023, and early adoption is permitted. The Company is currently evaluating the timing of adoption and the impact of the adoption of this standard on the Company’s Consolidated Financial Statements.
In December 2023, the FASB issued a new standard, Improvements to Income Tax Disclosures. The new guidance requires additional disclosures primarily related to the income tax rate reconciliation and income taxes paid. The new standard is effective for fiscal years beginning after December 15, 2024, and early adoption is permitted. The Company is currently evaluating the timing of adoption and the impact of the adoption of this standard on the Company’s Consolidated Financial Statements.
10
C. Goodwill and Intangible Assets
The carrying amount of goodwill attributable to each reportable segment and the changes in those balances during the three months ended December 31, 2023 are as follows:
|
|
Reinforcement |
|
|
Performance |
|
|
Total |
|
|||
|
|
(In millions) |
|
|||||||||
Balance at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Foreign currency impact |
|
|
|
|
|
|
|
|
|
|||
Balance at December 31, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The following table provides information regarding the Company’s intangible assets:
|
|
December 31, 2023 |
|
|
September 30, 2023 |
|
||||||||||||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
||||||
|
|
(In millions) |
|
|||||||||||||||||||||
Intangible assets with finite lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Developed technologies |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Trademarks |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Customer relationships |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Total intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Intangible assets are amortized over their estimated useful lives, which range between and
D. Accumulated Other Comprehensive Income (Loss) (“AOCI”)
Comprehensive income combines net income (loss) and other comprehensive income items, which are reported as components of stockholders’ equity in the accompanying Consolidated Balance Sheets.
Changes in each component of AOCI, net of tax, were as follows:
|
|
Currency |
|
|
Pension and Other |
|
|
Total |
|
|||
|
|
(In millions) |
|
|||||||||
Balance at September 30, 2023, attributable to Cabot Corporation |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
— |
|
|
|
|
||
Amounts reclassified from AOCI |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Less: Other comprehensive income (loss) attributable to |
|
|
|
|
|
— |
|
|
|
|
||
Balance at December 31, 2023, attributable to Cabot Corporation |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
11
|
|
Currency |
|
|
Pension and Other |
|
|
Total |
|
|||
|
|
(In millions) |
|
|||||||||
Balance at September 30, 2022, attributable to Cabot Corporation |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) before reclassifications |
|
|
|
|
|
— |
|
|
|
|
||
Amounts reclassified from AOCI |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Less: Other comprehensive income (loss) attributable to |
|
|
|
|
|
— |
|
|
|
|
||
Balance at December 31, 2022, attributable to Cabot Corporation |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
For both the three months ended December 31, 2023 and 2022, the Company reclassified $
E. Contingencies
Respirator Liabilities
Cabot has exposure in connection with a safety respiratory products business that a subsidiary acquired from American Optical Corporation (“AO”) in an April 1990 asset purchase transaction. The subsidiary manufactured respirators under the AO brand and disposed of that business in July 1995. In connection with its acquisition of the business, the subsidiary agreed, in certain circumstances, to assume a portion of AO’s liabilities, including costs of legal fees together with amounts paid in settlements and judgments, allocable to AO respiratory products used prior to the 1990 purchase by the Cabot subsidiary. In exchange for the subsidiary’s assumption of certain of AO’s respirator liabilities, AO agreed to provide to the subsidiary the benefits of: (i) AO’s insurance coverage for the period prior to the 1990 acquisition and (ii) a former owner’s indemnity of AO holding it harmless from any liability allocable to AO respiratory products used prior to May 1982. As more fully described in the 2023 10-K, the respirator liabilities generally involve claims for personal injury, including asbestosis, silicosis and coal worker’s pneumoconiosis, allegedly resulting from the use of respirators that are alleged to have been negligently designed and/or labeled. At no time did this respiratory product line represent a significant portion of the respirator market. In addition to Cabot’s subsidiary, other parties are responsible for significant portions of the costs of these respirator liabilities (as defined in the 2023 10-K, the “Payor Group”).
Cabot has a reserve to cover its expected share of liabilities for pending and future respirator liability claims, which is included in Other liabilities and Accounts payable and accrued liabilities on the Consolidated Balance Sheets. The Company expects these liabilities to be incurred over a number of years. The reserve balance was $
The Company’s current estimate of the cost of its 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 the Company’s 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, (ix) exhaustion or changes in the recoverability of the insurance coverage maintained by certain members of the Payor Group, or a change in the availability of the indemnity provided by a former owner of AO, (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 Cabot’s share of liability are no longer reasonable. The Company cannot determine the impact of these potential developments on its current estimate of its share of liability for 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 Cabot’s share of liability for these existing and future claims, it is reasonably possible that the liabilities for existing and future claims could change in the near term and that change could be material.
12
Other Matters
The Company has various other lawsuits, claims and contingent liabilities arising in the ordinary course of its business and with respect to its divested businesses. The Company does not believe that any of these matters will have a material adverse effect on its financial position; however, litigation is inherently unpredictable. Cabot could incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material impact on its results of operations in the period in which the amounts are accrued or its cash flows in the period in which the amounts are paid.
F. Income Tax
Effective Tax Rate
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(Dollars in millions) |
|
|||||
(Provision) benefit for income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
Effective tax rate |
|
|
% |
|
|
% |
||
For the three months ended December 31, 2023 and 2022, the (Provision) benefit for income taxes included a net discrete tax expense of $
Income tax in Interim Periods
The Company records its tax provision or benefit on an interim basis using an estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. The income tax effects of unusual or infrequent items are excluded from the estimated annual effective tax rate and are recognized in the impacted interim period. Losses from jurisdictions for which no benefit can be recognized are excluded from the overall computations of the estimated annual effective tax rate and a separate estimated annual effective tax rate is computed and applied to ordinary income or loss in the loss jurisdiction.
Valuation allowances are provided against the future tax benefits that arise from the deferred tax assets in jurisdictions for which the Company expects that no benefit can be recognized. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and the Company’s projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised.
Uncertainties
Cabot and certain subsidiaries are under audit in a number of jurisdictions. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a change in the unrecognized tax benefits may also occur within the next twelve months related to the settlement of one or more of these audits or the lapse of applicable statutes of limitations. However, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time.
Cabot files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The
During each of the three months ended December 31, 2023 and 2022, Cabot released uncertain tax positions of $
13
G. Earnings Per Share
The following tables summarize the components of the basic and diluted earnings (loss) per common share (“EPS”) computations:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions, except per share amounts) |
|
|||||
Basic EPS: |
|
|
|
|
|
|
||
Net income (loss) attributable to Cabot |
|
$ |
|
|
$ |
|
||
Less: Dividends and dividend equivalents |
|
|
— |
|
|
|
— |
|
Less: Undistributed earnings allocated to |
|
|
|
|
|
|
||
Earnings (loss) allocated to common |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Weighted average common shares and |
|
|
|
|
|
|
||
Less: Participating securities(1) |
|
|
|
|
|
|
||
Adjusted weighted average common |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Earnings (loss) per common share - basic: |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Diluted EPS: |
|
|
|
|
|
|
||
Earnings (loss) allocated to common |
|
$ |
|
|
$ |
|
||
Plus: Earnings allocated to |
|
|
|
|
|
|
||
Less: Adjusted earnings allocated to |
|
|
|
|
|
|
||
Earnings (loss) allocated to common |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Adjusted weighted average common |
|
|
|
|
|
|
||
Effect of dilutive securities: |
|
|
|
|
|
|
||
Common shares issuable(3) |
|
|
|
|
|
|
||
Adjusted weighted average common |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Earnings (loss) per common share - diluted: |
|
$ |
|
|
$ |
|
||
14
Undistributed earnings are the earnings which remain after dividends declared during the period are assumed to be distributed to the common and participating stockholders. Undistributed earnings are allocated to common and participating stockholders on the same basis as dividend distributions. The calculation of undistributed earnings is as follows:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Calculation of undistributed earnings (loss): |
|
|
|
|
|
|
||
Net income (loss) attributable to Cabot Corporation |
|
$ |
|
|
$ |
|
||
Less: Dividends declared on common stock |
|
|
|
|
|
|
||
Less: Dividends declared on participating |
|
|
— |
|
|
|
— |
|
Undistributed earnings (loss) |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Allocation of undistributed earnings (loss): |
|
|
|
|
|
|
||
Undistributed earnings (loss) allocated to |
|
$ |
|
|
$ |
|
||
Undistributed earnings allocated to |
|
|
|
|
|
|
||
Undistributed earnings (loss) |
|
$ |
|
|
$ |
|
||
H. Restructuring
2024 Reorganizations
During the first quarter of fiscal 2024, the Company initiated restructuring activities in both its Reinforcement Materials segment (“RM Plan”) and its Performance Chemicals segment (“PC Plan”).
Under the RM Plan, the Company will close its reinforcing carbons unit at the facility in Tianjin, China that the Company acquired from Tokai Carbon Group in February 2022. The Company expects to consolidate reinforcing carbons operations and reduce ongoing operational costs. During the three months ended December 31, 2023, the Company recorded charges of $
Under the PC Plan, the Company will temporarily idle its aerogel manufacturing plant in Frankfurt, Germany and reorganize certain positions within the Performance Chemicals segment to reduce operating costs. While the Frankfurt facility is idled, the Company expects to reduce inventory levels at that facility as the Company continues its efforts to commercialize aerogel for use in thermal insulation for electric vehicles. During the three months ended December 31, 2023, the Company recorded charges of $
Cabot’s restructuring activities were recorded in the Consolidated Statements of Operations for the three months ended December 31, 2023 and 2022 as follows:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Cost of sales |
|
$ |
|
|
$ |
— |
|
|
Total |
|
$ |
|
|
$ |
— |
|
|
15
Details of all restructuring activities and the related reserves during the three months ended December 31, 2023 were as follows:
|
|
Severance |
|
|
Accelerated Depreciation on Assets |
|
|
Total |
|
|||
|
|
(In millions) |
|
|||||||||
Reserve at September 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charges |
|
|
|
|
|
|
|
|
|
|||
Cost charged against assets |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Cash paid |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Reserve at December 31, 2023 |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Cabot’s severance and employee benefit reserves are reflected in Accounts payable and accrued liabilities on the Company’s Consolidated Balance Sheets.
I. Financial Instruments and Fair Value Measurements
The FASB authoritative guidance on fair value measurements defines fair value, provides a framework for measuring fair value, and requires certain disclosures about fair value measurements. The required disclosures focus on the inputs used to measure fair value. The guidance establishes the following hierarchy for categorizing these inputs:
Level 1 |
|
— |
|
Quoted market prices in active markets for identical assets or liabilities |
|
|
|
|
|
Level 2 |
|
— |
|
Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs) |
|
|
|
|
|
Level 3 |
|
— |
|
Significant unobservable inputs |
There were
At December 31, 2023 and September 30, 2023, the fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and short-term borrowings and variable rate debt approximated their carrying values due to the short-term nature of these instruments. Cash and cash equivalents are classified as Level 1 within the fair value hierarchy.
At December 31, 2023 and September 30, 2023, Cabot had derivatives relating to foreign currency risks, including a net investment hedge and forward foreign currency contracts, carried at fair value. At December 31, 2023 the fair value of these derivatives was a net asset of $
At December 31, 2023 and September 30, 2023, the fair value of guaranteed investment contracts included in Other assets on the Consolidated Balance Sheets was $
The carrying value and fair value of the long-term fixed rate debt were $
J. Supplier Financing Programs
The Company maintains supply chain finance agreements with third-party financial institutions. These agreements allow the Company’s participating suppliers to sell their receivables to such third-party financial institutions to receive payment earlier than the negotiated commercial terms between the supplier and the Company. Such sales are at the sole discretion of the supplier, and on terms and conditions that are negotiated between the supplier and the respective financial institution. The terms and conditions of the supplier invoice, including payment terms and amounts due, are not impacted by a supplier’s participation in the program. Pursuant to the supply chain finance agreements, the Company has agreed to pay financial institutions on the original due date of the applicable invoice. There are no guarantees associated with these programs. The Company's outstanding payment obligations to
16
financial institutions related to supplier financing programs were $
K. Financial Information by Segment
The Company identifies a product line as an operating segment if: i) it engages in business activities from which it may earn revenues and incur expenses; ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is Cabot’s President and Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and iii) it has available discrete financial information. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments are determined to have similar economic characteristics and if the operating segments are similar in the following areas: i) nature of products and services; ii) nature of production processes; iii) type or class of customer for their products and services; iv) methods used to distribute the products or provide services; and v) if applicable, the nature of the regulatory environment.
The Company has
Income (loss) before income taxes (“Segment EBIT”) is presented for each reportable segment in the table below. Segment EBIT excludes Interest expense, General unallocated income (expense), Unallocated corporate costs and Certain items, meaning items management does not consider representative of on-going operating segment results. In addition, Segment EBIT includes Equity in earnings of affiliated companies, net of tax, royalties, Net income attributable to noncontrolling interests, net of tax, and discounting charges for certain Notes receivable.
Financial information by reportable segment is as follows:
|
|
Reinforcement |
|
|
Performance |
|
|
Segment |
|
|
Unallocated |
|
|
Consolidated |
|
|||||
|
|
(In millions) |
|
|||||||||||||||||
Three Months Ended December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenues from external customers(2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Income (loss) before income taxes(3) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three Months Ended December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenues from external customers(2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Income (loss) before income taxes(3) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Shipping and handling fees |
|
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
17
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Interest expense |
|
$ |
( |
) |
|
$ |
( |
) |
Certain items(a) |
|
|
|
|
|
|
||
Argentina controlled currency devaluation loss (Note B) |
|
|
( |
) |
|
|
— |
|
Global restructuring activities (Note H) |
|
|
( |
) |
|
|
— |
|
Gain on sale of land |
|
|
— |
|
|
|
|
|
Loss on sale of business |
|
|
— |
|
|
|
( |
) |
Legal and environmental matters and reserves |
|
|
— |
|
|
|
( |
) |
Acquisition and integration-related charges |
|
|
— |
|
|
|
( |
) |
Total certain items |
|
|
( |
) |
|
|
( |
) |
Unallocated corporate costs(b) |
|
|
( |
) |
|
|
( |
) |
General unallocated income (expense)(c) |
|
|
|
|
|
|
||
Less: Equity in earnings of affiliated companies, net |
|
|
|
|
|
|
||
Total |
|
$ |
( |
) |
|
$ |
( |
) |
The Company’s segments operate globally. In addition to presenting Revenue from external customers by reportable segment, the following tables further disaggregate Revenues from external customers by geographic region.
|
|
Three Months Ended December 31, 2023 |
|
|||||||||
|
|
Reinforcement |
|
|
Performance |
|
|
Consolidated Total |
|
|||
|
|
(In millions) |
|
|||||||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|||
Segment revenues from external customers |
|
|
|
|
|
|
|
|
|
|||
Unallocated and other |
|
|
|
|
|
|
|
|
|
|||
Net sales and other operating revenues |
|
|
|
|
|
|
|
$ |
|
|||
|
|
Three Months Ended December 31, 2022 |
|
|||||||||
|
|
Reinforcement |
|
|
Performance |
|
|
Consolidated Total |
|
|||
|
|
(In millions) |
|
|||||||||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|||
Segment revenues from external customers |
|
|
|
|
|
|
|
|
|
|||
Unallocated and other |
|
|
|
|
|
|
|
|
|
|||
Net sales and other operating revenues |
|
|
|
|
|
|
|
$ |
|
|||
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recently Issued Accounting Pronouncements
Refer to the discussion under the heading “Recent Accounting Pronouncements” in Note B of our Notes to the Consolidated Financial Statements.
Results of Operations
The Company has two reportable segments: Reinforcement Materials and Performance Chemicals. Cabot is also organized for operational purposes into three geographic regions: the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific. The discussion of our results of operations for the periods presented reflects these structures.
Our analysis of our financial condition and operating results should be read with our consolidated financial statements and accompanying notes.
Definition of Terms and Non-GAAP Financial Measures
When discussing our results of operations, we use several terms as described below.
The term “product mix” refers to the mix of types and grades of products sold or the mix of geographic regions where products are sold, and the positive or negative impact this has on the revenue or profitability of the business and/or segment.
Our discussion under the heading “(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate” includes a discussion and reconciliation of our “effective tax rate” and our “operating tax rate” for the periods presented, as well as management’s projection of our operating tax rate range for the next fiscal year. Our operating tax rate is a non-GAAP financial measure and should not be considered as an alternative to our effective tax rate, the most comparable GAAP financial measure. The operating tax rate is calculated based upon management's forecast of the annual operating tax rate for the fiscal year applied to adjusted pre-tax earnings. The operating tax rate excludes income tax (expense) benefit on certain items, discrete tax items, and, on a quarterly basis, the timing of losses in certain jurisdictions. The income tax (expense) benefit on certain items is determined using the applicable rates in the taxing jurisdictions in which the certain items occurred and includes both current and deferred income tax (expense) benefit based on the nature of the certain items. Discrete tax items include, but are not limited to, changes in valuation allowance, uncertain tax positions, and other tax items, such as the tax impact of legislative changes and tax accruals on historic earnings due to changes in indefinite reinvestment assertions. Our definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that this non-GAAP financial measure is useful supplemental information because it helps our investors compare our tax rate year to year on a consistent basis and to understand what our tax rate on current operations would be without the impact of these items.
Our discussion under the heading “First Quarter of Fiscal 2024 versus First Quarter of Fiscal 2023—By Business Segment” includes a discussion of Total segment EBIT, which is a non-GAAP financial measure defined as Income (loss) from operations before income taxes and equity in earnings from affiliated companies less certain items and other unallocated items. Our Chief Operating Decision Maker, who is our President and Chief Executive Officer, uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT, which reflects the sum of EBIT from our reportable segments, provides useful supplemental information for our investors as it is an important indicator of our operational strength and performance, allows investors to see our results through the eyes of management, and provides context for our discussion of individual business segment performance. Total segment EBIT should not be considered an alternative for Income (loss) from operations before income taxes and equity in earnings of affiliated companies, which is the most directly comparable U.S. GAAP financial measure. A reconciliation of Total segment EBIT to Income (loss) from operations before income taxes and equity in earnings of affiliated companies is provided under the heading “First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—By Business Segment”. Investors should consider the limitations associated with this non-GAAP measure, including the potential lack of comparability of this measure from one company to another.
In calculating Total segment EBIT, we exclude from our Income (loss) from operations before income taxes and equity in earnings of affiliated companies (i) items of expense and income that management does not consider representative of our fundamental on-going segment results, which we refer to as “certain items”, and (ii) items that, because they are not controlled by the business segments and primarily benefit corporate objectives, are not allocated to our business segments, such as interest expense and other corporate costs, which include unallocated corporate overhead expenses such as certain corporate salaries and headquarter expenses, plus costs related to special projects and initiatives, which we refer to as “other unallocated items”. Management believes excluding the items identified as certain items facilitates operating performance comparisons from period to period by eliminating differences that would not otherwise be apparent on a GAAP basis and also facilitates an evaluation of our operating performance without the impact of these costs or benefits. The items of income and expense that we have excluded from
19
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.
Overview
During the first quarter of fiscal 2024, Income (loss) before income taxes and equity in earnings of affiliated companies increased compared to the first quarter of fiscal 2023. The increase was driven by higher earnings in our Reinforcement Materials and Performance Chemicals segments and increased investment income in Argentina partially offset by foreign exchange losses primarily in Argentina.
First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—Consolidated
Net Sales and Other Operating Revenues and Gross Profit
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Net sales and other operating revenues |
|
$ |
958 |
|
|
$ |
965 |
|
Gross profit |
|
$ |
218 |
|
|
$ |
181 |
|
The $7 million decrease in Net sales and other operating revenues in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was driven by unfavorable price and product mix (combined $48 million) across our Reinforcement Materials and Performance Chemicals segments driven by the pass through of lower raw material costs, partially offset by higher volumes ($35 million).
Gross profit increased by $37 million in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023. The increase was primarily due to higher volumes and higher unit margins within the Reinforcement Materials and Performance Chemicals segments.
Selling and Administrative Expenses
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Selling and administrative expenses |
|
$ |
67 |
|
|
$ |
60 |
|
Selling and administrative expenses increased by $7 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to an increase in the incentive compensation expense.
20
Research and Technical Expenses
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Research and technical expenses |
|
$ |
15 |
|
|
$ |
13 |
|
Research and technical expenses increased by $2 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023.
Loss on Sale of Business
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Loss on sale of business |
|
$ |
— |
|
|
$ |
3 |
|
There was no Loss on sale of business in the first quarter of fiscal 2024. Previously reported Loss on sale of business in fiscal 2023 is associated with the fiscal 2022 divesture of the Purification Solutions business.
Interest and Dividend Income, Interest Expense and Other Income (Expense)
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Interest and dividend income |
|
$ |
9 |
|
|
$ |
6 |
|
Interest expense |
|
$ |
(22 |
) |
|
$ |
(22 |
) |
Other income (expense) |
|
$ |
(29 |
) |
|
$ |
(5 |
) |
Interest and dividend income increased by $3 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to higher interest rates.
Interest expense remained flat in the first quarter of fiscal 2024, as compared to the same period of fiscal 2023, primarily due to lower commercial paper balances, offset by higher rates.
Other expense increased by $24 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to foreign currency losses on the revaluation of our Argentine peso monetary assets and liability balances ($40 million), partially offset by investment income ($12 million) on our cash and cash equivalent balances in Argentina.
(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate
|
|
Three Months Ended December 31 |
|
|||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||
|
|
(Provision) / Benefit for Income Taxes |
|
|
Rate |
|
|
(Provision) / Benefit for Income Taxes |
|
|
Rate |
|
||||
Dollars in millions |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effective tax rate |
|
$ |
(34 |
) |
|
|
36 |
% |
|
$ |
(20 |
) |
|
|
24 |
% |
Less: Non-GAAP tax adjustments(1) |
|
|
4 |
|
|
|
|
|
|
1 |
|
|
|
|
||
Operating tax rate |
|
$ |
(38 |
) |
|
|
28 |
% |
|
$ |
(21 |
) |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
For the three months ended December 31, 2023, the (Provision) benefit for income taxes was a provision of $34 million compared to a $20 million provision for the three months ended December 31, 2022, with the change primarily due to higher earnings in the current period. Our income taxes are affected by the mix of earnings in the tax jurisdictions in which we operate, and by the presence of valuation allowances in certain tax jurisdictions.
For fiscal 2024, the Company expects the Operating tax rate to be in the range of 28% to 30%. We are not providing a forward-looking reconciliation of the operating tax rate range with an effective tax rate range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to “certain items,” including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on the effective tax rate in future periods.
21
Net Income (Loss) Attributable to Noncontrolling Interests
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Equity in earnings of affiliated companies, |
|
$ |
1 |
|
|
$ |
2 |
|
Net income (loss) attributable to |
|
$ |
11 |
|
|
$ |
12 |
|
Equity in earnings of affiliated companies, net of tax, decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to lower profitability at our equity affiliate in Venezuela.
Net income (loss) attributable to noncontrolling interests, net of tax, decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023.
Net Income Attributable to Cabot Corporation
In the first quarter fiscal 2024, we reported Net income (loss) attributable to Cabot Corporation of $50 million, or $0.88 per diluted common share. This compares to Net income (loss) attributable to Cabot Corporation of $54 million, or $0.93 per diluted common share, in the first quarter of fiscal 2023. The lower net income in the first quarter of fiscal 2024 compared with the same period in fiscal 2023 is primarily due to higher foreign currency losses of $40 million in Argentina, a higher provision for income taxes of $14 million, partially offset by higher Total segment EBIT of $40 million and higher General unallocated income of $9 million.
First quarter of Fiscal 2024 versus First quarter of Fiscal 2023—By Business Segment
Income (loss) before income taxes and equity in earnings of affiliated companies, certain items, other unallocated items and Total segment EBIT for the three months ended December 31, 2023 and 2022 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note K of our Notes to the Consolidated Financial Statements.
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Income (loss) before income taxes and |
|
$ |
94 |
|
|
$ |
84 |
|
Less: Certain items |
|
|
(42 |
) |
|
|
(4 |
) |
Less: Other unallocated items |
|
|
(27 |
) |
|
|
(35 |
) |
Total segment EBIT |
|
$ |
163 |
|
|
$ |
123 |
|
In the first quarter of fiscal 2024, Income (loss) before income taxes and equity in earnings of affiliated companies increased by $10 million and Total segment EBIT increased by $40 million. The increase in Income (loss) before income taxes and equity in earnings of affiliated companies was largely driven by higher Total segment EBIT partially offset by higher foreign currency losses in Argentina. Total segment EBIT was driven by higher volumes in both the Reinforcement Materials and Performance Chemicals segments (combined $13 million) and higher pricing and improved product mix, net of costs in Reinforcement Materials ($28 million).
Certain Items
Details of the certain items for the three months ended December 31, 2023 and 2022 are as follows:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Argentina controlled currency devaluation loss (Note B) |
|
$ |
(33 |
) |
|
$ |
— |
|
Global restructuring activities (Note H) |
|
|
(9 |
) |
|
|
— |
|
Gain on sale of land |
|
|
— |
|
|
|
1 |
|
Loss on sale of business |
|
|
— |
|
|
|
(3 |
) |
Legal and environmental matters and reserves |
|
|
— |
|
|
|
(1 |
) |
Acquisition and integration-related charges |
|
|
— |
|
|
|
(1 |
) |
Total certain items |
|
$ |
(42 |
) |
|
$ |
(4 |
) |
22
Other Unallocated Items
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Interest expense |
|
$ |
(22 |
) |
|
$ |
(22 |
) |
Unallocated corporate costs |
|
|
(17 |
) |
|
|
(15 |
) |
General unallocated income (expense) |
|
|
13 |
|
|
|
4 |
|
Less: Equity in earnings of affiliated |
|
|
1 |
|
|
|
2 |
|
Total other unallocated items |
|
$ |
(27 |
) |
|
$ |
(35 |
) |
Total Other unallocated items increased by $8 million due to higher General unallocated income (expense) resulting from higher investment income on our cash and cash equivalent balances in Argentina.
A discussion of items that we refer to as “other unallocated items” can be found under the heading “Definition of Terms and Non-GAAP Financial Measures”. The balances of unallocated corporate costs are primarily comprised of expenditures related to managing a public company that are not allocated to the segments and corporate business development costs related to ongoing corporate projects. The balances of General unallocated income (expense) consist of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, interest and dividend income, the profit or loss related to the corporate adjustment for unearned revenue and unrealized holding gains (losses) for investments. General unallocated income (expense) does not include items of income or expense that are separately treated as Certain items.
Reinforcement Materials
Sales and EBIT for Reinforcement Materials for the first quarter of fiscal 2024 and 2023 were as follows:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Reinforcement Materials Sales |
|
$ |
641 |
|
|
$ |
643 |
|
Reinforcement Materials EBIT |
|
$ |
129 |
|
|
$ |
94 |
|
Sales in Reinforcement Materials decreased by $2 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to less favorable price and product mix (combined $27 million), partially offset by higher volumes ($16 million) and the favorable impact from foreign currency translation ($9 million). The less favorable price and product mix was primarily due to lower raw material costs in China that are generally passed through to our customers and were partially offset by favorable price and product mix in the 2023 calendar year customer agreements. The higher volumes in the first quarter of fiscal 2024 were driven by higher volumes in Europe and Asia.
EBIT in Reinforcement Materials in the first quarter of fiscal 2024 increased by $35 million compared to the same period of fiscal 2023. During the first quarter of fiscal 2024, the segment had higher unit margins, net of costs ($28 million) and higher volumes ($5 million). The higher unit margins in the first quarter of fiscal 2024 were primarily driven by favorable pricing and product mix in the 2023 calendar year customer agreements. The higher volumes were driven by higher volumes in Europe and Asia. The higher costs were primarily driven by higher selling and administrative expense.
As we look to the second quarter of the fiscal year, we expect the Reinforcement Materials EBIT to improve sequentially due to higher pricing and product mix related to the outcome of negotiations on our calendar year 2024 customer agreements and modestly higher sequential volumes.
Performance Chemicals
Sales and EBIT for Performance Chemicals for the first quarter of fiscal 2024 and 2023 were as follows:
|
|
Three Months Ended December 31 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
|
|
(In millions) |
|
|||||
Performance Chemicals Sales |
|
$ |
285 |
|
|
$ |
286 |
|
Performance Chemicals EBIT |
|
$ |
34 |
|
|
$ |
29 |
|
Sales in Performance Chemicals decreased by $1 million in the first quarter of fiscal 2024 compared to the same period of fiscal 2023, primarily due to less favorable price and product mix (combined $22 million), partially offset by higher volumes ($19 million) and the favorable impact from foreign currency translation ($3 million). The less favorable price and product mix was primarily due to lower raw material costs that are generally passed through to our customers in our specialty carbons product line.
23
The higher volumes in the first quarter of fiscal 2024 were primarily in our specialty carbons, specialty compounds and fumed metal oxides product lines.
EBIT in Performance Chemicals increased by $5 million in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 primarily due to higher volumes ($7 million). The higher volumes in the first quarter of fiscal 2024 were primarily in our specialty carbons, specialty compounds and fumed metal oxides product lines.
As we look ahead to the second quarter of the fiscal year, we expect seasonally higher volumes will be more than offset by higher fixed costs, including higher costs associated with maintenance activities and the reduction of inventory levels.
Liquidity and Capital Resources
Overview
Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by $14 million during the first three months of fiscal 2024, which was largely due to a higher outstanding commercial paper balance at the end of the period. As of December 31, 2023, we had cash and cash equivalents of $244 million and borrowing availability under our revolving credit agreements of $1.0 billion. We have access to borrowings under the following two credit agreements:
As of December 31, 2023, we were in compliance with the debt covenants under the Credit Agreements, which, with limited exceptions, require us to comply on a quarterly basis with a leverage test requiring the ratio of consolidated net debt to consolidated EBITDA not to exceed 3.50 to 1.00. Consolidated net debt is defined as consolidated debt offset by the lesser of (i) unrestricted cash and cash equivalents and (ii) $150 million.
A significant portion of our business occurs outside the U.S. and our cash generation does not always align geographically with our cash needs. The vast majority of our cash and cash equivalent holdings tend to be held outside the U.S. We generally use a combination of U.S. earnings, repatriation of certain foreign earnings, commercial paper issuances and borrowings under our U.S. Credit Agreement to meet our U.S. cash needs. With the exception of Argentina, which has currency controls that prevent the distribution of cash, we are generally able to move cash throughout the Company through our cash pooling structures, intercompany accounts and/or distributions, as needed. Although we repatriate certain foreign earnings, cash held by foreign subsidiaries is generally considered permanently reinvested and is used to finance the subsidiaries’ operational activities and future investments. We usually reduce our commercial paper balance and, if applicable, borrowings under our Credit Agreements, at quarter-end using cash derived from customer collections, settlement of intercompany balances and short-term intercompany loans. If additional funds are needed in the U.S., we expect to be able to repatriate cash, including cash from China, while paying any withholding or other taxes. Changes in regulations and tax laws in the U.S. or foreign countries could restrict our ability to transfer funds or impose material costs on such transfers.
In addition to the currency controls that prevent the distribution of cash in Argentina, there are also regulations that require that all cash in Argentina be held in Argentine pesos and regulations that place restrictions related to how and when suppliers of imported goods and services into Argentina can be paid. These regulations likely come with increased costs and future regulations could further restrict our operations in Argentina.
As of December 31, 2023, we had $1.0 billion of availability under our Credit Agreements. As of December 31, 2023, we had $124 million of borrowings under the Euro Credit Agreement and no outstanding borrowings under the U.S. Credit Agreement. There was $205 million of commercial paper outstanding as of December 31, 2023.
We anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from the Credit Agreements and our commercial paper program to meet our operational and capital investment needs and financial obligations for the foreseeable future. The liquidity we derive from cash flows from operations is, to a large degree, predicated on our ability to collect our receivables in a timely manner, the cost of our raw materials, and our ability to manage inventory levels.
The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows.
24
Cash Flows from Operating Activities
Cash provided by operating activities, which consists of net income adjusted for the various non-cash items included in income, changes in working capital and changes in certain other balance sheet accounts, totaled $105 million in the first three months of fiscal 2024 compared to $52 million of cash provided by operating activities during the same period of fiscal 2023 primarily due to improved segment EBIT.
Cash provided by operating activities in the first three months of fiscal 2024 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $41 million and foreign exchange losses of $34 million, primarily related to devaluation of the Argentine peso, which was partially offset by an increase in net working capital of $46 million. The increase in net working capital was largely driven by a decrease in Accounts payable and accrued expenses and an increase in Inventories and Accounts and notes receivable.
Cash used by operating activities in the first three months of fiscal 2023 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $35 million, which was partially offset by an increase in net working capital of $34 million. The increase in net working capital was largely driven by a decrease in Accounts payable and accrued expenses, partially offset by a decrease in Accounts receivables.
Cash Flows from Investing Activities
Investing activities consumed $54 million of cash in the first three months of fiscal 2024 compared to $17 million in the first three months of fiscal 2023.
In the first three months of fiscal 2024, investing activities included $54 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including capacity expansion capital projects.
In the first three months of fiscal 2023, investing activities included $35 million of capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including capacity expansion projects, in Performance Chemicals, partially offset by proceeds from the sale of land of $7 million, proceeds from the sale of our Purification Solutions business of $6 million, and proceeds from insurance settlements of $6 million.
Capital expenditures for fiscal 2024 are expected to be between $250 million and $275 million. Our planned capital spending program for fiscal 2024 is for sustaining, compliance and improvement capital projects at our operating facilities as well as capacity expansion capital expenditures.
Cash Flows from Financing Activities
Financing activities consumed $29 million of cash in the first three months of fiscal 2024 compared to $92 million of cash consumed during the same period of fiscal 2023.
In the first three months of fiscal 2024, financing activities primarily consisted of share repurchases of $33 million, dividend payments to stockholders of $22 million, and cash dividends paid to noncontrolling interests of $12 million. These payments were partially offset by net proceeds from commercial paper of $32 million and proceeds from sales of common stock of $7 million from stock option exercises.
In the first three months of fiscal 2023, financing activities primarily consisted of the repayment of commercial paper of $48 million, dividend payments to stockholders of $21 million, share repurchases of $17 million, cash dividends paid to noncontrolling interests of $14 million and repayments of long-term debt of $6 million. These payments were partially offset by proceeds from short-term borrowings of $11 million and proceeds from sales of common stock of $3 million from stock option exercises.
Forward-Looking Information
This report on Form 10-Q contains “forward-looking statements” under the Federal securities laws. These forward-looking statements address expectations or projections about the future, including our expectations regarding our future business performance and overall prospects, including for margins, price and product mix, volumes and operations in our Reinforcement Materials segment, for volumes and inventory levels in our Performance Chemicals segment, inventory levels and commercialization efforts in our Aerogel product line, and for costs in both our Reinforcement Materials and Performance Chemicals segments; the impact and cost of restructuring activities; demand for our products; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit and commercial paper facilities to fund our cash requirements; anticipated capital spending; regulatory developments; cash requirements and uses of available cash, including future cash outlays associated with respirator liabilities and the timing of such outlays; amortization expenses; our operating tax rate; and the possible outcome of legal and environmental proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers.
Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control or difficult to predict. If known or unknown risks materialize, our actual results could differ materially from those expressed in the forward-looking statements.
25
In addition to factors described elsewhere in this report, the following are some of the factors that could cause our actual results to differ materially from those expressed in our forward-looking statements: industry capacity utilization and competition from other specialty chemical companies; safety, health and environmental requirements and related constraints imposed on our business; regulatory and financial risks related to climate change developments; volatility in the price and availability of energy and raw materials, including with respect to the Russian invasion of Ukraine and the U.S.-China trade relationship; a significant adverse change in a customer relationship or the failure of a customer to perform its obligations under agreements with us; failure to achieve growth expectations from new products, applications and technology developments; failure to realize benefits from acquisitions, alliances, or joint ventures or achieve our portfolio management objectives; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations, global health matters or geo-political conflicts; litigation or legal proceedings; interest rates, tax rates, currency exchange controls, and fluctuations in foreign currency, such as the recent currency movements in Argentina; our inability to complete capacity expansions or other development projects; and the accuracy of the assumptions we used in establishing reserves for our share of liability for respirator claims. These other factors and risks are discussed more fully in our 2023 10-K and in our subsequent SEC filings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about market risks for the period ended December 31, 2023 does not differ materially from that discussed under Item 7A of our 2023 10-K.
Item 4. Controls and Procedures
As of December 31, 2023, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of that date.
There were no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information regarding Cabot’s purchases of its equity securities during the quarter ended December 31, 2023:
Period |
|
Total Number of |
|
|
Average Price |
|
|
Total Number of |
|
|
Maximum Number (or |
|
||||
October 1, 2023 - October 31, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
2,984,970 |
|
November 1, 2023 - November 30, 2023 |
|
|
191,954 |
|
|
$ |
76.74 |
|
|
|
191,954 |
|
|
|
2,793,016 |
|
December 1, 2023 - December 31, 2023 |
|
|
68,140 |
|
|
$ |
77.33 |
|
|
|
68,140 |
|
|
|
2,724,876 |
|
Total |
|
|
260,094 |
|
|
|
|
|
|
260,094 |
|
|
|
|
||
Item 6. Exhibits
Exhibit No. |
|
Description |
|
|
|
Exhibit 3.1 |
|
|
|
|
|
Exhibit 3.2 |
|
|
|
|
|
Exhibit 31.1* |
|
|
|
|
|
Exhibit 31.2* |
|
|
|
|
|
Exhibit 32** |
|
|
|
|
|
Exhibit 101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
Exhibit 101.SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Document. |
|
|
|
Exhibit 104* |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, formatted in Inline XBRL (included in Exhibit 101). |
* Filed herewith.
** Furnished herewith.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
CABOT CORPORATION |
|
|
|
|
|
Date: February 8, 2024 |
|
By: |
/s/ Erica McLaughlin |
|
|
|
Erica McLaughlin |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
(Duly Authorized Officer) |
|
|
|
|
|
|
|
|
Date: February 8, 2024 |
|
By: |
/s/ Lisa m. Dumont |
|
|
|
Lisa M. Dumont |
|
|
|
Vice President and Controller (Chief Accounting Officer) |
28
Exhibit 31.1
Principal Executive Officer Certification
I, Sean D. Keohane, certify that:
Date: February 8, 2024 |
|
|
/s/ SEAN KEOHANE |
|
|
|
Sean D. Keohane |
|
|
|
President and Chief Executive Officer |
Exhibit 31.2
Principal Financial Officer Certification
I, Erica McLaughlin, certify that:
Date: February 8, 2024 |
|
|
/s/ Erica McLaughlin |
|
|
|
Erica McLaughlin |
|
|
|
Executive Vice President and Chief Financial Officer |
Exhibit 32
Certifications Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 (the “Report”) by Cabot Corporation (the “Company”), each of the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
Date: February 8, 2024 |
|
/s/ Sean D. Keohane |
|
|
Sean D. Keohane |
|
|
President and Chief Executive Officer |
|
|
|
Date: February 8, 2024 |
|
/s/ Erica McLaughlin |
|
|
Erica McLaughlin |
|
|
Executive Vice President and Chief Financial Officer |