Cabot (CBT) - 2023 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements of Cabot Corporation for the period ended December 31, 2022, including statements of operations, comprehensive income (loss), balance sheets, cash flows, changes in stockholders' equity, and detailed notes to the financial statements Consolidated Statements of Operations Cabot Corporation reported a significant turnaround in net income for Q1 fiscal 2023, moving from a net loss of ($80) million in Q1 fiscal 2022 to a net income of $66 million. This was primarily driven by the absence of a large asset impairment charge related to the Purification Solutions divestiture that occurred in the prior year. Net sales remained relatively stable at $965 million compared to $968 million in the prior year, while gross profit decreased slightly | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net sales and other operating revenues | $965 | $968 | | Cost of sales | $784 | $770 | | Gross profit | $181 | $198 | | Income (loss) from operations | $105 | ($83) | | Net income (loss) attributable to Cabot | $54 | ($89) | | Basic EPS | $0.94 | ($1.57) | | Diluted EPS | $0.93 | ($1.57) | Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive income of $153 million for Q1 fiscal 2023, a significant improvement from a comprehensive loss of ($108) million in Q1 fiscal 2022. This was largely influenced by a positive foreign currency translation adjustment of $88 million in the current period, contrasting with a ($28) million adjustment in the prior year | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) | $66 | ($80) | | Foreign currency translation adjustment, net of tax | $88 | ($28) | | Other comprehensive income (loss), net of tax | $87 | ($28) | | Comprehensive income (loss) | $153 | ($108) | | Comprehensive income (loss) attributable to Cabot Corporation | $135 | ($119) | Consolidated Balance Sheets As of December 31, 2022, Cabot Corporation's total assets stood at $3,535 million, a slight increase from $3,525 million at September 30, 2022. Total current assets decreased slightly, primarily due to lower accounts and notes receivable and cash, while total inventories increased. Total liabilities remained stable, and total stockholders' equity increased to $1,159 million from $1,032 million | Metric | December 31, 2022 (in millions) | September 30, 2022 (in millions) | | :-------------------------------------- | :------------------------------ | :------------------------------- | | Cash and cash equivalents | $190 | $206 | | Accounts and notes receivable, net | $779 | $836 | | Total inventories | $704 | $664 | | Total current assets | $1,800 | $1,820 | | Property, plant and equipment, net | $1,304 | $1,270 | | Total assets | $3,535 | $3,525 | | Total current liabilities | $984 | $1,105 | | Long-term debt | $1,091 | $1,089 | | Total stockholders' equity | $1,159 | $1,032 | Consolidated Statements of Cash Flows Cash provided by operating activities significantly improved to $52 million in Q1 fiscal 2023, compared to $49 million cash used in the same period of fiscal 2022. Investing activities consumed less cash, while financing activities shifted from providing cash to consuming cash, primarily due to commercial paper repayments and share repurchases | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cash provided (used) by operating activities | $52 | ($49) | | Cash provided (used) by investing activities | ($17) | ($29) | | Cash provided (used) by financing activities | ($92) | $103 | | Increase (decrease) in cash, cash equivalents | ($16) | $10 | | Cash, cash equivalents at end of period | $190 | $180 | Consolidated Statements of Changes in Stockholders' Equity Total Cabot Corporation stockholders' equity increased from $898 million at September 30, 2022, to $1,009 million at December 31, 2022. This increase was primarily driven by net income of $54 million and total other comprehensive income of $81 million, partially offset by cash dividends paid and share repurchases | Metric | Balance at Sep 30, 2022 (in millions) | Net Income (Loss) (in millions) | Total Other Comprehensive Income (Loss) (in millions) | Cash Dividends Paid (in millions) | Purchase and Retirement of Common Stock (in millions) | Balance at Dec 31, 2022 (in millions) | | :------------------------------------------ | :------------------------------------ | :------------------------------ | :---------------------------------------------------- | :-------------------------------- | :---------------------------------------------------- | :------------------------------------ | | Total Cabot Corporation Stockholders' Equity | $898 | $54 | $81 | ($21) | ($17) | $1,009 | - For the three months ended December 31, 2021, Total Cabot Corporation Stockholders' Equity decreased from $947 million to $794 million, primarily due to a net loss of ($89) million and total other comprehensive loss of ($30) million[79] Notes to the Consolidated Financial Statements The notes provide detailed information on the company's accounting policies, recent acquisitions and divestitures, goodwill and intangible assets, accumulated other comprehensive income, contingencies, insurance recoveries, income tax, earnings per share calculations, financial instruments, fair value measurements, and financial information by segment. Key changes include the finalization of Purification Solutions divestiture adjustments, an increase in goodwill due to foreign currency impact, and detailed segment performance A. Basis of Presentation The consolidated financial statements are prepared in accordance with U.S. GAAP and include Cabot Corporation and its wholly-owned and majority-owned subsidiaries. The unaudited interim statements reflect all necessary normal recurring adjustments and should be read in conjunction with the 2022 10-K - The financial statements are unaudited and reflect all normal recurring adjustments[81] - They are prepared in conformity with U.S. GAAP and include Cabot Corporation and its subsidiaries[81] B. Significant Accounting Policies The company's critical accounting policies have not substantially changed from the 2022 10-K. Recent accounting pronouncements include the FASB's Reference Rate Reform standard (no material impact), the Inflation Reduction Act (IRA) excise tax on stock repurchases (not anticipated to have a material effect), and a new standard on supplier financing programs (currently evaluating impact) - Critical accounting policies have not substantially changed from the 2022 10-K[11] - The Inflation Reduction Act (IRA) 1% excise tax on stock repurchases, effective January 1, 2023, is not anticipated to have a material effect on financial statements or the share repurchase program[82] - The company is evaluating the impact of a new FASB standard on supplier financing programs, effective for fiscal years beginning after December 15, 2022[82] C. Acquisition In February 2022, Cabot Corporation acquired 100% of Tokai Carbon (Tianjin) Co., a carbon black manufacturing facility, for a net purchase price of $9 million - Acquisition of Tokai Carbon (Tianjin) Co. in February 2022 for a net purchase price of $9 million[83] D. Divestitures The sale of the Purification Solutions business, completed in March 2022, resulted in an additional pre-tax loss on sale of $3 million in Q1 fiscal 2023, following a $197 million impairment charge and $10 million loss on sale in fiscal 2022 - Finalized post-closing adjustments for the Purification Solutions business sale resulted in an additional pre-tax loss on sale of $3 million in Q1 fiscal 2023[84] - The divestiture had previously resulted in a $197 million pre-tax impairment charge and a $10 million pre-tax loss on sale in fiscal 2022[84] E. Goodwill and Intangible Assets Goodwill increased by $4 million to $133 million as of December 31, 2022, primarily due to foreign currency impact. Intangible assets are amortized over 10-25 years, with an estimated $6 million annual amortization expense for the next five fiscal years | Segment | Balance at Sep 30, 2022 (in millions) | Foreign Currency Impact (in millions) | Balance at Dec 31, 2022 (in millions) | | :---------------------- | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Reinforcement Materials | $46 | $2 | $48 | | Performance Chemicals | $83 | $2 | $85 | | Total | $129 | $4 | $133 | - Amortization expense for intangible assets was $1 million in Q1 fiscal 2023, down from $2 million in Q1 fiscal 2022[85] - Estimated total amortization expense is approximately $6 million each year for the next five fiscal years[85] F. Accumulated Other Comprehensive Income (Loss) ("AOCI") AOCI attributable to Cabot Corporation improved from ($439) million at September 30, 2022, to ($358) million at December 31, 2022, primarily due to an $88 million positive currency translation adjustment | Metric | Balance at Sep 30, 2022 (in millions) | Other Comprehensive Income (Loss) before Reclassifications (in millions) | Amounts Reclassified from AOCI (in millions) | Less: Other Comprehensive Income (Loss) Attributable to Noncontrolling Interests (in millions) | Balance at Dec 31, 2022 (in millions) | | :------------------------------------------------------------------ | :------------------------------------ | :----------------------------------------------------------------------- | :------------------------------------------- | :----------------------------------------------------------------------------------------------- | :------------------------------------ | | Balance at September 30, 2022, attributable to Cabot Corporation | ($439) | | | | | | Other comprehensive income (loss) before reclassifications | | $88 | | | | | Amounts reclassified from AOCI | | | ($1) | | | | Less: Other comprehensive income (loss) attributable to noncontrolling interests | | | | $6 | | | Balance at December 31, 2022, attributable to Cabot Corporation | | | | | ($358) | - AOCI attributable to Cabot Corporation improved by $81 million, from ($439) million at September 30, 2022, to ($358) million at December 31, 2022, largely driven by an $88 million positive currency translation adjustment[71] G. Contingencies Cabot maintains a $39 million reserve for respirator liability claims, which remained unchanged from September 30, 2022, to December 31, 2022. The company continues to monitor the Aearo Technologies bankruptcy proceedings, a member of the Payor Group, for potential impacts on its liability. Litigation outcomes are inherently unpredictable, and changes in estimates could be material - Cabot has a reserve of $39 million for respirator liability claims as of December 31, 2022, unchanged from September 30, 2022[72] - The company is monitoring the Chapter 11 bankruptcy of Aearo Technologies, a member of the Payor Group, for potential impacts on its respirator liability[72] - It is reasonably possible that liabilities for existing and future claims could change materially in the near term due to various factors[73] H. Insurance Recoveries In Q1 fiscal 2023, Cabot received $6 million in insurance proceeds related to the July 2021 Pepinster, Belgium flood, recognizing a $5 million gain and $1 million loss recovery. This contrasts with Q1 fiscal 2022, where $5 million in flood-related expenses were fully offset by expected insurance recoveries - Received $6 million in insurance proceeds in Q1 fiscal 2023 related to the Pepinster, Belgium flood, recognizing a $5 million gain and $1 million loss recovery[105] - In Q1 fiscal 2022, $5 million in flood-related expenses were recorded and fully offset by expected insurance recoveries[105] I. Income Tax The provision for income taxes was $20 million in Q1 fiscal 2023, compared to a $12 million benefit in Q1 fiscal 2022. This change was primarily due to higher earnings in the current period and the non-recurring nature of a $37 million discrete tax benefit in the prior year related to the Purification Solutions divestiture. The company released $1 million in uncertain tax positions in both periods due to statute of limitations expirations | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | (Provision) benefit for income taxes | ($20) | $12 | - Q1 fiscal 2023 included a net discrete tax expense of $3 million, while Q1 fiscal 2022 included a net discrete tax benefit of $37 million after valuation allowance, related to the Purification Solutions business divestiture and asset impairment charge[91] - Cabot released $1 million in uncertain tax positions in both Q1 fiscal 2023 and Q1 fiscal 2022 due to the expiration of statutes of limitations[93] J. Earnings Per Share Basic EPS was $0.94 and diluted EPS was $0.93 for Q1 fiscal 2023, a significant improvement from ($1.57) for both basic and diluted EPS in Q1 fiscal 2022. This increase was primarily due to higher net income attributable to Cabot Corporation | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | | :------------------------------------------------------------------ | :------------------------------ | :------------------------------ | | Net income (loss) attributable to Cabot Corporation (in millions) | $54 | ($89) | | Earnings (loss) per common share - basic | $0.94 | ($1.57) | | Earnings (loss) per common share - diluted | $0.93 | ($1.57) | | Weighted average common shares outstanding - basic (in millions) | 56.3 | 56.8 | | Weighted average common shares outstanding - diluted (in millions) | 56.7 | 56.8 | - Incremental shares of common stock from assumed exercise of stock options were excluded from diluted EPS calculation if antidilutive (86,782 shares in Q1 FY23, 2,356,941 shares in Q1 FY22)[94] K. Financial Instruments and Fair Value Measurements The company classifies financial assets and liabilities into a fair value hierarchy. Cash and cash equivalents, accounts receivable/payable, and short-term borrowings are Level 1. Derivatives (foreign currency risks) and guaranteed investment contracts are Level 2, with fair values of $15 million and $9 million respectively as of December 31, 2022. Long-term fixed rate debt fair value was $1.06 billion, approximating its carrying value of $1.08 billion - Fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, and short-term borrowings approximate their carrying values and are classified as Level 1[95] - Derivatives relating to foreign currency risks (net asset of $15 million) and guaranteed investment contracts (asset of $9 million) are classified as Level 2 instruments as of December 31, 2022[109] - The fair value of long-term fixed rate debt was $1.06 billion, approximating its carrying value of $1.08 billion, classified as Level 2[109] L. Financial Information by Segment Cabot Corporation operates with two reportable segments: Reinforcement Materials and Performance Chemicals, following the divestiture of Purification Solutions in fiscal 2022. Segment EBIT is used by the CODM to evaluate performance and allocate resources, excluding certain items and unallocated corporate costs Segment Definition Operating segments are identified based on business activities, CODM review, and discrete financial information. They are aggregated into reportable segments if they have similar economic characteristics, products, production processes, customer types, and distribution methods. Cabot's two reportable segments are Reinforcement Materials and Performance Chemicals - Operating segments are aggregated into reportable segments if they have similar economic characteristics, nature of products and services, production processes, customer class, and product distribution methods[6] - The Reinforcement Materials segment combines reinforcing carbons and engineered elastomer composites product lines[6] - The Performance Chemicals segment aggregates specialty carbons, specialty compounds, fumed metal oxides, battery materials, inkjet colorants, and aerogel product lines[6] Segment Results In Q1 fiscal 2023, Reinforcement Materials sales increased to $643 million (from $563 million in Q1 FY22) and EBIT increased to $94 million (from $85 million). Performance Chemicals sales decreased to $286 million (from $306 million) and EBIT decreased to $29 million (from $52 million). Unallocated and Other income (loss) before income taxes improved significantly from ($230) million to ($39) million, largely due to the absence of prior year's divestiture-related charges | Segment | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Reinforcement Materials Sales | $643 | $563 | | Reinforcement Materials EBIT | $94 | $85 | | Performance Chemicals Sales | $286 | $306 | | Performance Chemicals EBIT | $29 | $52 | | Purification Solutions Sales | $0 | $61 | | Purification Solutions EBIT | $0 | $0 | | Unallocated and Other Income (loss) before income taxes | ($39) | ($230) | - Unallocated and Other income (loss) before income taxes improved significantly due to the absence of a $197 million loss on sale of business and asset impairment charge in the prior year[9] Geographic Revenues For Q1 fiscal 2023, Americas contributed $330 million to consolidated total revenues, Asia Pacific $399 million, and Europe, Middle East and Africa $200 million. This shows a shift in regional contribution compared to Q1 fiscal 2022, where Asia Pacific was the largest contributor at $395 million, followed by Americas at $326 million | Region | Reinforcement Materials (in millions) | Performance Chemicals (in millions) | Consolidated Total (in millions) | | :------------------------- | :------------------------------------ | :---------------------------------- | :------------------------------- | | Americas | $241 | $89 | $330 | | Asia Pacific | $273 | $126 | $399 | | Europe, Middle East and Africa | $129 | $71 | $200 | | Segment revenues from external customers | $643 | $286 | $929 | | Region | Reinforcement Materials (in millions) | Performance Chemicals (in millions) | Purification Solutions (in millions) | Consolidated Total (in millions) | | :------------------------- | :------------------------------------ | :---------------------------------- | :----------------------------------- | :------------------------------- | | Americas | $209 | $90 | $27 | $326 | | Asia Pacific | $250 | $137 | $8 | $395 | | Europe, Middle East and Africa | $104 | $79 | $26 | $209 | | Segment revenues from external customers | $563 | $306 | $61 | $930 | - Cabot has two reportable segments: Reinforcement Materials and Performance Chemicals. The Purification Solutions business was a separate reporting segment prior to divestiture in Q2 fiscal 2022[6] - Segment EBIT for Reinforcement Materials increased to $94 million in Q1 FY23 from $85 million in Q1 FY22[97] - Segment EBIT for Performance Chemicals decreased to $29 million in Q1 FY23 from $52 million in Q1 FY22[97] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources for the first quarter of fiscal 2023 compared to the prior year. It details the drivers behind changes in consolidated and segment-level results, including the impact of divestitures, foreign currency, pricing, volumes, and operational costs. It also discusses critical accounting policies, recent accounting pronouncements, and forward-looking information Critical Accounting Policies The company states that its critical accounting policies have not substantially changed from those described in the 2022 10-K - Critical accounting policies have not substantially changed from the 2022 10-K[11] Recently Issued Accounting Pronouncements This section refers to Note B of the Consolidated Financial Statements for details on recently issued accounting pronouncements, which include the FASB's Reference Rate Reform, the Inflation Reduction Act, and a new standard on supplier financing programs - Refer to the discussion under the heading "Recent Accounting Pronouncements" in Note B of the Notes to the Consolidated Financial Statements[112] Overview Income (loss) before income taxes and equity in earnings of affiliated companies increased in Q1 fiscal 2023 compared to Q1 fiscal 2022. This increase was primarily due to the non-recurrence of a $197 million impairment charge related to the Purification Solutions divestiture in fiscal 2022, partially offset by decreased earnings in the Performance Chemicals segment in fiscal 2023 - Income (loss) before income taxes and equity in earnings of affiliated companies increased in Q1 fiscal 2023 compared to Q1 fiscal 2022[12] - The increase was driven by an impairment charge related to the divestiture of Purification Solutions of $197 million in fiscal 2022 that did not repeat in fiscal 2023[12] - This was partially offset by decreased earnings in the fiscal 2023 period in our Performance Chemicals segment[12] First quarter of Fiscal 2023 versus First quarter of Fiscal 2022—Consolidated Consolidated results for Q1 fiscal 2023 showed a slight decrease in net sales and gross profit compared to Q1 fiscal 2022. However, net income attributable to Cabot Corporation significantly improved due to the absence of a prior-year impairment charge. Interest expense increased, while selling and administrative expenses decreased Net Sales and Other Operating Revenues and Gross Profit Net sales and other operating revenues decreased by $3 million in Q1 fiscal 2023 compared to Q1 fiscal 2022, primarily due to unfavorable foreign currency translation ($73 million), the divestiture of Purification Solutions ($61 million), and lower volumes ($42 million). These declines were largely offset by favorable price and product mix ($177 million). Gross profit decreased by $17 million due to lower volumes and higher fixed costs, partially offset by higher unit margins | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net sales and other operating revenues | $965 | $968 | | Gross profit | $181 | $198 | - The $3 million decrease in net sales and other operating revenues was driven by unfavorable foreign currency translation ($73 million), the divestiture of Purification Solutions ($61 million), and lower volumes ($42 million)[26] - These decreases were largely offset by favorable price and product mix (combined $177 million)[26] Selling and Administrative Expenses Selling and administrative expenses decreased by $11 million in Q1 fiscal 2023 compared to Q1 fiscal 2022, primarily due to the non-recurrence of costs associated with the Purification Solutions business from the prior year | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Selling and administrative expenses | $60 | $71 | - Selling and administrative expenses decreased by $11 million primarily due to costs associated with the Purification Solutions business in fiscal 2022 that did not reoccur in fiscal 2023[131] Research and Technical Expenses Research and technical expenses remained flat at $13 million in Q1 fiscal 2023 compared to the same period in fiscal 2022 | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Research and technical expenses | $13 | $13 | Interest and Dividend Income, Interest Expense and Other Income (Expense) Interest and dividend income increased by $3 million in Q1 fiscal 2023 due to higher interest rates. Interest expense increased by $10 million, also due to higher interest rates on borrowings. Other expense increased by $4 million, primarily due to foreign currency losses in Argentina | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Interest and dividend income | $6 | $3 | | Interest expense | ($22) | ($12) | | Other income (expense) | ($5) | ($1) | - Interest and dividend income increased by $3 million primarily due to higher interest rates[14] - Interest expense increased by $10 million primarily due to higher interest rates on borrowings under commercial paper program and unsecured notes issued in June 2022[14] - Other expense increased by $4 million primarily due to foreign currency losses on revaluation of balance sheet exposures, primarily in Argentina[14] (Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate The provision for income taxes was $20 million in Q1 fiscal 2023, compared to a $12 million benefit in Q1 fiscal 2022, primarily due to higher earnings and the non-recurring nature of a prior-year impairment charge. The effective tax rate was 24% in Q1 FY23, compared to 13% in Q1 FY22. The operating tax rate for fiscal 2023 is expected to be in the range of 24% to 26% | Metric | Three Months Ended Dec 31, 2022 (in millions) | Rate | Three Months Ended Dec 31, 2021 (in millions) | Rate | | :-------------------------------------- | :-------------------------------------------- | :------ | :-------------------------------------------- | :------ | | Effective tax rate | ($20) | 24 % | $12 | 13 % | | Less: Non-GAAP tax adjustments | $1 | | $42 | | | Operating tax rate | ($21) | 25 % | ($30) | 27 % | - The (Provision) benefit for income taxes was a provision of $20 million in Q1 FY23, compared to a $12 million benefit in Q1 FY22, primarily due to higher earnings and the non-recurring nature of an impairment charge related to the divestiture of the Purification Solutions business[115] - For fiscal 2023, the Operating tax rate is expected to be in the range of 24% to 26%[115] Equity in earnings of affiliated companies, net of tax Equity in earnings of affiliated companies, net of tax, increased by $1 million in Q1 fiscal 2023, primarily due to higher profitability at equity affiliates in India and Venezuela | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Equity in earnings of affiliated companies, net of tax | $2 | $1 | - Equity in earnings of affiliated companies, net of tax, increased by $1 million primarily due to higher profitability at our equity affiliates in India and Venezuela[104] Net Income (Loss) Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests, net of tax, increased by $3 million in Q1 fiscal 2023, primarily due to higher profitability of the joint venture in the Czech Republic | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net income (loss) attributable to noncontrolling interests, net of tax | $12 | $9 | - Net income (loss) attributable to noncontrolling interests, net of tax, increased by $3 million primarily due to higher profitability of our joint venture in the Czech Republic[104] Net Income Attributable to Cabot Corporation Net income attributable to Cabot Corporation was $54 million ($0.93 diluted EPS) in Q1 fiscal 2023, a significant improvement from a net loss of ($89) million (($1.57) diluted EPS) in Q1 fiscal 2022. This was primarily due to the non-recurrence of an impairment charge related to the Purification Solutions divestiture in the prior year - Net income (loss) attributable to Cabot Corporation was $54 million, or $0.93 per diluted common share, in Q1 fiscal 2023, compared to ($89) million, or ($1.57) per diluted common share, in Q1 fiscal 2022[116] - The higher net income in Q1 fiscal 2023 was primarily due to an impairment charge associated with the divestiture of Purification Solutions in fiscal 2022 that did not reoccur in fiscal 2023[116] First quarter of Fiscal 2023 versus First quarter of Fiscal 2022—By Business Segment Total segment EBIT decreased by $14 million in Q1 fiscal 2023, primarily due to lower volumes in both Reinforcement Materials and Performance Chemicals segments, driven by year-end customer destocking and COVID-19 impacts in China. Income (loss) before income taxes and equity in earnings of affiliated companies increased significantly due to the non-recurrence of a large impairment charge from the prior year Total Segment EBIT Reconciliation Total segment EBIT decreased by $14 million to $123 million in Q1 fiscal 2023 from $137 million in Q1 fiscal 2022. This was primarily due to lower volumes across segments. Income (loss) before income taxes and equity in earnings of affiliated companies increased by $177 million, largely due to the non-recurrence of a $197 million impairment charge related to the Purification Solutions divestiture in fiscal 2022 | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Income (loss) before income taxes and equity in earnings of affiliated companies | $84 | ($93) | | Less: Certain items | ($4) | ($204) | | Less: Other unallocated items | ($35) | ($26) | | Total segment EBIT | $123 | $137 | - Income (loss) before income taxes and equity in earnings of affiliated companies increased by $177 million, largely driven by an impairment charge of $197 million related to the sale of the Purification Solutions business in fiscal 2022 that did not reoccur in fiscal 2023[135] - The decrease in Total segment EBIT was driven by lower volumes in both the Reinforcement Materials and Performance Chemicals segments (combined $21 million), due to year-end customer destocking and the impact of COVID-19 outbreaks in China[135] Certain Items Certain items, which management does not consider representative of ongoing operating segment results, totaled ($4) million pre-tax in Q1 fiscal 2023, a significant improvement from ($204) million pre-tax in Q1 fiscal 2022. This improvement was primarily due to the absence of the large loss on sale of business and asset impairment charge from the prior year | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Loss on sale of business and asset impairment charge | ($3) | ($197) | | Total certain items, pre-tax | ($4) | ($204) | | Total certain items, after tax | ($3) | ($162) | - The significant reduction in certain items was due to the non-recurrence of the $197 million loss on sale of business and asset impairment charge from Q1 FY22[17] Other Unallocated Items Other unallocated items, which are not controlled by business segments and primarily benefit corporate objectives, increased to ($35) million in Q1 fiscal 2023 from ($26) million in Q1 fiscal 2022. This increase was mainly driven by higher interest expense | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Interest expense | ($22) | ($12) | | Unallocated corporate costs | ($15) | ($14) | | General unallocated income (expense) | $4 | $1 | | Less: Equity in earnings of affiliated companies, net of tax | $2 | $1 | | Total other unallocated items | ($35) | ($26) | - The increase in total other unallocated items was primarily due to higher interest expense[17] Reinforcement Materials Reinforcement Materials sales increased by $80 million to $643 million in Q1 fiscal 2023, driven by a favorable price and product mix ($161 million), partially offset by unfavorable foreign currency translation ($51 million) and lower volumes ($28 million). EBIT increased by $9 million to $94 million, primarily due to higher unit margins ($36 million), despite lower volumes, higher fixed costs, and unfavorable foreign currency exchange | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Reinforcement Materials Sales | $643 | $563 | | Reinforcement Materials EBIT | $94 | $85 | - Sales increase driven by a favorable price and product mix (combined $161 million), partially offset by unfavorable foreign currency translation ($51 million) and lower volumes ($28 million)[136] - EBIT increase driven by higher unit margins ($36 million), partially offset by 5% lower volumes ($10 million), higher fixed costs ($11 million), and unfavorable foreign currency exchange ($5 million)[136] Performance Chemicals Performance Chemicals sales decreased by $20 million to $286 million in Q1 fiscal 2023, primarily due to unfavorable foreign currency translation ($22 million) and lower volumes ($13 million), partially offset by favorable price and product mix ($16 million). EBIT decreased by $23 million to $29 million, mainly due to lower volumes ($11 million), higher fixed costs ($8 million), and unfavorable foreign currency exchange ($4 million) | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Performance Chemicals Sales | $286 | $306 | | Performance Chemicals EBIT | $29 | $52 | - Sales decreased primarily due to unfavorable foreign currency translation ($22 million) and lower volumes ($13 million), partially offset by favorable price and product mix (combined $16 million)[18] - EBIT decreased primarily due to lower volumes ($11 million), higher fixed costs ($8 million), and the unfavorable impact from foreign currency exchange ($4 million)[18] Purification Solutions The Purification Solutions business was divested in March 2022, and therefore reported no sales or EBIT in Q1 fiscal 2023, compared to $61 million in sales and no EBIT in Q1 fiscal 2022 - The Purification Solutions business was divested in March 2022[120] | Metric | Three Months Ended Dec 31, 2022 (in millions) | Three Months Ended Dec 31, 2021 (in millions) | | :-------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Purification Solutions Sales | $0 | $61 | | Purification Solutions EBIT | $0 | $0 | Liquidity and Capital Resources Cabot's liquidity position increased by $57 million in Q1 fiscal 2023, with $190 million in cash and cash equivalents and $930 million in borrowing availability. The company anticipates sufficient liquidity from cash on hand, operating activities, and credit agreements to meet future needs Overview Cabot's liquidity position increased by $57 million in Q1 fiscal 2023, reaching $190 million in cash and cash equivalents and $930 million in borrowing availability under its credit agreements as of December 31, 2022. The company expects sufficient liquidity from these sources and operating cash flows to meet future operational and capital needs - Liquidity position, as measured by cash and cash equivalents plus borrowing availability, increased by $57 million during the first three months of fiscal 2023[120] - As of December 31, 2022, cash and cash equivalents were $190 million and borrowing availability under revolving credit agreements was $930 million[120] - The company anticipates sufficient liquidity from cash on hand, cash flows from operating activities, and cash available from Credit Agreements and commercial paper program to meet operational and capital investment needs and financial obligations for the foreseeable future[20] Cash Flows from Operating Activities Cash provided by operating activities was $52 million in Q1 fiscal 2023, a significant improvement from $49 million cash used in Q1 fiscal 2022. This was driven by business earnings (excluding non-cash items) partially offset by an increase in net working capital due to a decrease in accounts payable and accrued expenses - Cash provided by operating activities totaled $52 million in the first three months of fiscal 2023 compared to $49 million of cash used by operating activities during the same period of fiscal 2022[20] - Cash provided by operating activities in Q1 FY23 was driven by business earnings (excluding non-cash impacts of depreciation and amortization of $35 million), partially offset by an increase in net working capital of $34 million[34] - 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[34] Cash Flows from Investing Activities Investing activities consumed $17 million of cash in Q1 fiscal 2023, down from $29 million in Q1 fiscal 2022. This included $35 million in capital expenditures, partially offset by $7 million from land sales, $6 million from the Purification Solutions business sale, and $6 million from insurance settlements. Capital expenditures for fiscal 2023 are projected to be approximately $300 million - Investing activities consumed $17 million of cash in the first three months of fiscal 2023 compared to $29 million in the first three months of fiscal 2022[122] - Q1 FY23 investing activities included $35 million of capital expenditures, partially offset by proceeds from the sale of land of $7 million, proceeds from the sale of Purification Solutions business of $6 million, and proceeds from insurance settlements of $6 million[122] - Capital expenditures for fiscal 2023 are expected to be approximately $300 million, primarily for sustaining, compliance, improvement capital projects, and capacity expansion in the Performance Chemicals segment[122] Cash Flows from Financing Activities Financing activities consumed $92 million of cash in Q1 fiscal 2023, a shift from providing $103 million in Q1 fiscal 2022. This was primarily due to $48 million in commercial paper repayments, $21 million in common stock dividends, $17 million in share repurchases, and $14 million in noncontrolling interest dividends - Financing activities consumed $92 million of cash in the first three months of fiscal 2023 compared to $103 million of cash provided during the same period of fiscal 2022[122] - Q1 FY23 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[122] - These payments were partially offset by proceeds from short-term borrowings of $11 million and proceeds from sales of common stock of $3 million[122] Forward-Looking Information This section highlights that the report contains forward-looking statements regarding future business performance, demand, liquidity, capital spending, regulatory developments, and litigation outcomes. It cautions that actual results could differ materially due to various risks and uncertainties, including industry competition, raw material volatility, economic conditions, and the ongoing impacts of the COVID-19 pandemic - This report contains "forward-looking statements" addressing expectations or projections about future business performance, demand for products, liquidity, capital spending, regulatory developments, cash requirements, and legal proceedings[140] - Actual results could differ materially due to risks such as industry capacity utilization, safety/health/environmental requirements, volatility in energy/raw material prices, adverse customer relationships, failure to achieve growth expectations, negative economic conditions, litigation, tax rates, and fluctuations in foreign currency/interest rates[123] - The duration or scope of the COVID-19 pandemic's negative impact cannot be estimated, and it has contributed to increased costs and decreased availability of labor and materials for construction projects[140] Item 3. Quantitative and Qualitative Disclosures About Market Risk Information about market risks for the period ended December 31, 2022, does not materially differ from that discussed in Item 7A of the 2022 10-K - Information about market risks for the period ended December 31, 2022, does not differ materially from that discussed under Item 7A of our 2022 10-K[123] Item 4. Controls and Procedures As of December 31, 2022, management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective. There were no material changes in internal controls over financial reporting during the quarter, with the internal controls of Tokai Carbon (Tianjin) Co. (acquired Feb 2022) excluded from the assessment - Our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2022[22] - There were no changes in our internal controls over financial reporting that occurred during our fiscal quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting[22] - Internal controls over financial reporting at Tokai Carbon (Tianjin) Co., which was acquired on February 28, 2022, were excluded from the assessment for the period ended December 31, 2022[22] Part II. Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's equity security transactions, specifically focusing on issuer purchases of its common stock during the quarter ended December 31, 2022 Issuer Purchases of Equity Securities During the quarter ended December 31, 2022, Cabot Corporation repurchased a total of 152,968 shares of common stock at an average price of $71.89 per share. As of December 31, 2022, 4,100,166 shares remained available for repurchase under the existing authorization | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | | :-------------------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------------------------------------------------------- | | October 1, 2022 - October 31, 2022 | — | $— | — | 4,253,134 | | November 1, 2022 - November 30, 2022 | 70,861 | $72.64 | 70,861 | 4,182,273 | | December 1, 2022 - December 31, 2022 | 82,107 | $71.19 | 82,107 | 4,100,166 | | Total (for quarter ended Dec 31, 2022) | 152,968 | | 152,968 | | - On July 13, 2018, Cabot publicly announced that the Board of Directors authorized the Company to repurchase up to an additional ten million shares of its common stock, increasing the balance of shares available for repurchase at that time to approximately eleven million shares. The current authorization does not have a set expiration date[125] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Restated Certificate of Incorporation, By-laws, certifications of principal executive and financial officers, and Inline XBRL documents - Includes certifications of Principal Executive Officer (Exhibit 31.1), Principal Financial Officer (Exhibit 31.2), and both pursuant to 18 U.S.C. Section 1350 (Exhibit 32)[126] - Includes Inline XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[126] SIGNATURES The report is signed on behalf of Cabot Corporation by Lisa M. Dumont, Vice President and Controller (Chief Accounting Officer), and Erica McLaughlin, Executive Vice President and Chief Financial Officer, on February 9, 2023 - Signed by Lisa M. Dumont, Vice President and Controller (Chief Accounting Officer)[25] - Signed by Erica McLaughlin, Executive Vice President and Chief Financial Officer[143] - Date of signing: February 9, 2023[25][143]