Cabot Corporation — FY2023 Form 10-K
Business context and reporting period. Cabot is a global specialty chemicals and performance materials company with two reportable segments: Reinforcement Materials and Performance Chemicals. This annual report covers the fiscal year ended September 30, 2023; comparisons are primarily with FY2022.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $3.931 billion | $4.321 billion |
| Gross profit | $839 million | $885 million |
| Gross margin | 21.3% | 20.5% |
| Income from operations | $526 million | $389 million |
| Income before tax and equity earnings | $451 million | $335 million |
| Net income attributable to Cabot | $445 million | $209 million |
| Diluted EPS | $7.73 | $3.62 |
| Cash provided by operating activities | $595 million | $100 million |
| Capital expenditures | $244 million | $211 million |
Revenue fell 9%, reflecting lower volumes in both segments, unfavorable foreign currency translation, and the prior-year Purification Solutions divestiture, partly offset by improved pricing and mix. Gross profit declined, but gross margin increased. Operating cash flow benefited from earnings and a $97 million reduction in net working capital.
Net income included a non-cash $152 million benefit from releasing part of the U.S. deferred tax valuation allowance. FY2022 included $207 million of Purification Solutions sale and impairment charges. These items materially affect the year-over-year earnings comparison.
Segments and material changes
- Reinforcement Materials: Revenue was $2.563 billion, down $110 million; segment EBIT rose to $482 million from $408 million. Improved pricing and product mix in 2023 tire customer agreements lifted unit margins, partly offset by lower tire demand, destocking and currency effects.
- Performance Chemicals: Revenue was $1.225 billion, down $163 million; segment EBIT fell to $125 million from $234 million. Destocking, weak end markets and prolonged weakness in China reduced volumes; battery materials and specialty carbons also experienced less favorable pricing and mix.
- Total segment EBIT: $607 million, down from $642 million. This is a non-GAAP measure; reported income before tax and equity earnings was $451 million.
Liquidity, debt and capital allocation
- At September 30, 2023, cash and cash equivalents were $238 million. The company reported $1 billion of borrowing availability under its revolving credit agreements.
- Long-term debt was $1.102 billion including current maturities; commercial paper outstanding was $172 million. The company was in compliance with its credit-agreement leverage covenant, which generally caps consolidated net debt to EBITDA at 3.50 to 1.00.
- Interest expense rose to $90 million from $56 million, primarily due to higher interest rates. Commercial paper carried a 5.44% weighted-average rate at year-end.
- FY2023 common dividends were $88 million, or $1.54 per share. The company repurchased approximately 1.3 million shares for $91 million during the fiscal year.
Outlook, risks and contingencies
- Management expected customer destocking to be largely over, but anticipated challenging macroeconomic conditions to persist into FY2024, with cautious near-term buying, particularly in Performance Chemicals. No specific FY2024 earnings guidance was provided.
- FY2024 capital expenditures were forecast at $250 million to $275 million. Environmental-related capital spending was expected to be approximately $74 million, including continued air-pollution-control work.
- Management projected an FY2024 operating tax rate of 28% to 30%; this non-GAAP rate excludes certain items and discrete tax effects.
- U.S. carbon-black emissions-control projects were expected to cost $225 million to $250 million through 2024; approximately $180 million had been incurred by year-end. The company was seeking an extension of the Ville Platte, Louisiana compliance date to 2024. At Sarnia, Ontario, it reported non-compliance with a new sulfur-dioxide standard and was discussing compliance alternatives with regulators.
- Cabot recorded a $38 million reserve for pending and future respirator claims. The company states the estimate could change materially; the auditor identified these claims as a critical audit matter because of uncertainty around future claims and resolution costs.
- China represented approximately 25% of FY2023 revenue and 25% of property, plant and equipment. Other notable exposures include feedstock and energy volatility, foreign exchange (including Argentina), interest rates, customer concentration, environmental and climate regulation, and operational, cyber and litigation risks.
Important facts for investors to verify
- How much of reported FY2023 earnings growth reflects recurring operating performance versus the $152 million tax benefit and the absence of FY2022 divestiture charges.
- Whether Performance Chemicals volumes and margins recover as destocking eases, and whether Reinforcement Materials pricing and margins remain sustainable.
- Actual FY2024 capital spending and costs, timing and regulatory requirements for the Ville Platte and Sarnia emissions-control projects.
- Developments affecting the $38 million respirator-liability reserve, including claims, other payors’ contributions and insurance recovery.
- Liquidity, refinancing and interest-cost trends, including the use of commercial paper and compliance with the leverage covenant.