Discussion and analysis by the management of CABOT CORP of the financial situation and operating results (Form 10-K)
Critical accounting policies
Our consolidated financial statements have been prepared in conformity with
U.S.GAAP. This preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the financial statements if (i) the estimate is complex in nature or requires a high degree of judgment and (ii) different estimates and assumptions were used, the results could have a material impact on the consolidated financial statements. On an ongoing basis, we evaluate our estimates and the application of our policies. We base our estimates on historical experience, current conditions and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The policies that we believe are critical to the preparation of the consolidated financial statements are presented below.
We recognize revenue when our customers obtain control of promised goods or services. The revenue recognized is the amount of consideration which we expect to receive in exchange for those goods or services. Our contracts with customers are generally for products only and do not include other performance obligations. Generally, we consider purchase orders, which in some cases are governed by master supply agreements, to be contracts with customers. The transaction price as specified on the purchase order or sales contract is considered the standalone selling price for each distinct product. To determine the transaction price at the time when revenue is recognized, we evaluate whether the price is subject to adjustments, such as for returns, discounts or volume rebates, which are stated in the customer contract, to determine the net consideration to which we expect to be entitled. Revenue from product sales is recognized based on a point in time model when control of the product is transferred to the customer, which typically occurs upon shipment or delivery of the product to the customer and title, risk and rewards of ownership have passed to the customer. We have an immaterial amount of revenue that is recognized over time. Payment terms typically range from zero to ninety days. Shipping and handling activities that occur after the transfer of control to the customer are billed to customers and are recorded as sales revenue, as we consider these to be fulfillment costs. Shipping and handling costs are expensed in the period incurred and included in Cost of sales within the Consolidated Statements of Operations. Taxes collected on sales to customers are excluded from the transaction price. We generally provide a warranty that our products will substantially conform to the identified specifications. Our liability typically is limited to either a credit equal to the purchase price or replacement of the non-conforming product. Returns under warranty have historically been immaterial.
We do not have any material contractual assets or liabilities.
When the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, we do not consider there to be a significant financing component associated with the contract.
Inventories are valued at the lower of cost or net realizable value. The cost of stocks is determined using the FIFO method.
We periodically review inventory for both potential obsolescence and potential declines in anticipated selling prices. In this review, we make assumptions about the future demand for and market value of the inventory, and based on these assumptions estimate the amount of any obsolete, unmarketable, slow moving or overvalued inventory. We write down the value of our inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Historically, such write-downs have not been material. If actual market conditions are less favorable than those projected by management at the time of the assessment, however, additional inventory write-downs may be required, which could reduce our gross profit and our earnings.
Depreciation of goodwill
Goodwillis comprised of the purchase price of business acquisitions in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. Goodwillis not amortized and is subject to impairment testing annually, or when events or changes in the business environment indicate that the carrying value of the reporting unit may exceed its fair value. 26 -------------------------------------------------------------------------------- A reporting unit, for the purpose of the impairment test, is at or below the operating segment level, and constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Reinforcement Materials, and the fumed metal oxides, specialty compounds, and specialty carbons product lines within Performance Chemicals, which are considered separate reporting units, carried our goodwill balances as of September 30, 2021. For the purpose of the goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an initial qualitative assessment identifies that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, an additional quantitative evaluation is performed. Alternatively, we may elect to proceed directly to the quantitative goodwill impairment test. If based on the quantitative evaluation the fair value of the reporting unit is less than its carrying amount, a goodwill impairment loss would result. The goodwill impairment loss would be the amount by which the carrying value of the reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management's best estimates of future growth rates, operating cash flows, capital expenditures and discount rates over an estimate of the remaining operating period at the reporting unit level. The fair value is also benchmarked against the value calculated from a market approach using the guideline public companies method. Based on our most recent annual goodwill impairment test performed as of August 31, 2021, the fair values of the Reinforcement Materials, fumed metal oxides, specialty compounds, and specialty carbons reporting units were substantially in excess of their carrying values.
Impairment of long-lived assets
Our long-term assets mainly include property, plant and equipment, intangible assets and long-term investments. The carrying amounts of long-lived assets are tested for impairment whenever events or changes in business conditions indicate that the carrying amount of an asset may not be recoverable.
To test assets for impairment, we generally use a probability-weighted estimate of undiscounted future net cash flows from assets over their remaining useful lives to determine whether the asset’s value is recoverable. Long-lived assets are grouped with other assets and liabilities at the lowest level for which independent identifiable cash flows can be determined.
An asset impairment is recognized when the carrying value of the asset is not recoverable based on the analysis described above, in which case the asset is written down to its fair value. If the asset does not have a readily determinable fair value, a discounted cash flow model may be used to determine the fair value of the asset. In circumstances when an asset does not have separately identifiable cash flows, an impairment charge is recorded when we no longer intend to use the asset.
We accrue costs related to contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. Contingencies could arise from litigation, environmental remediation or contractual arrangements. When a single liability amount cannot be reasonably estimated, but a range can be reasonably estimated, we accrue the amount that reflects the best estimate within that range or the low end of the range if no estimate within the range would be considered more likely than any other estimate. The amount accrued is determined through the evaluation of various information, which could include claims, settlement offers, demands by government agencies, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute, and our prior experience. We do not reduce the estimated liability for possible recoveries from insurance carriers. Proceeds from insurance carriers are recorded when realized by either the receipt of cash or a contractual agreement. Litigation is highly uncertain and there is always the possibility of an unusual result in any particular case that may reduce our earnings and cash flows. We have recorded a significant reserve for respirator liability claims. Our current estimate of the cost of our share of existing and future respirator liability claims is based on facts and circumstances existing at this time, including the number and nature of the remaining claims. Developments that could affect our estimate include, but are not limited to, (i) significant changes in the number of future claims, (ii) changes in the rate of dismissals without payment of pending claims, (iii) significant changes in the average cost of resolving claims, including potential settlements of groups of claims, (iv) significant changes in the legal costs of defending these claims, (v) changes in the nature of claims received or changes in our assessment of the viability of these claims, (vi) trial and appellate outcomes, (vii) changes in the law and procedure applicable to these claims, (viii) the financial viability of the parties that contribute to the payment of respirator claims, (ix) exhaustion or changes in the recoverability of the insurance coverage maintained by certain of the parties that contribute to the settlement of respirator claims, or a change in the availability of the indemnity provided by a former owner of the business, (x) changes in the allocation of costs among the various parties paying legal and settlement costs, and (xi) a determination that the assumptions that were used to estimate our share of liability are no longer reasonable. We cannot determine the impact of these potential developments on our current estimate of our share of liability for these existing and future claims. Because reserves are limited to amounts that are probable and estimable as of a relevant measurement date, and there is inherent difficulty in projecting the impact of potential developments on our share of liability for these existing and future claims, it is reasonably possible that the liabilities for existing and future claims could change in the near 27
term and this change could be significant. Refer to Note T of our Notes to Consolidated Financial Statements (“Note T”) for further details on respirator liabilities and regulations.
Our business operations are global in nature and we are subject to taxes in many jurisdictions. Tax laws and tax rates vary widely in these jurisdictions and are subject to change depending on the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of the tax laws in each jurisdiction.
Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations which make the ultimate tax determination uncertain. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. We have recorded reserves for taxes and associated interest and penalties when it becomes more likely than not that an amount would be payable to tax authorities in future years. Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, and/or our cash flow. We record benefits for uncertain tax positions based on an assessment of whether the position is more likely than not to be sustained by the taxing authorities. If this threshold is not met, no tax benefit of the uncertain tax position is recognized. If the threshold is met, the tax benefit that is recognized is the largest amount that is greater than 50% likely of being realized upon ultimate settlement. This analysis presumes the taxing authorities' full knowledge of the positions taken and all relevant facts, but does not consider the time value of money. We also accrue for interest and penalties on these uncertain tax positions and include such charges in the income tax provision in the Consolidated Statements of Operations. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits, and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize these deferred tax assets is determined in accordance with
U.S.GAAP. In jurisdictions where we have a three-year cumulative loss, we utilize recent historical results in order to assess the recoverability of deferred tax assets. Where we have a three-year cumulative profit, we review our forecast of future taxable income in relation to actual results and expected future trends. We perform this review on a quarterly basis. Failure to achieve our operating income targets, may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in an increase in the valuation allowance being recorded against some or all of our net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense, while a release of valuation allowances in periods when these tax attributes become realizable would reduce our income tax expense.
Main accounting policies
We have other significant accounting policies that are discussed in Note A in Item 8 below. Certain of these policies include the use of estimates, but do not meet the definition of critical because they generally do not require estimates or judgments that are as difficult or subjective to measure. However, these policies are important to an understanding of the consolidated financial statements.
Recently published accounting position papers
Refer to the discussion in Note B of our Notes to the Consolidated Financial Statements.
Results of Operations Cabot is organized into three reportable business segments: Reinforcement Materials, Performance Chemicals, and Purification Solutions. Cabot is also organized for operational purposes into three geographic regions: the
Americas; Europe, Middle Eastand Africa; and Asia Pacific. The discussions of our results of operations for the periods presented reflect these structures. Our analysis of financial condition and operating results should be read with our consolidated financial statements and accompanying notes. Unless a calendar year is specified, all references to years in this discussion are to our fiscal years ended September 30. This section discusses our fiscal 2021 and fiscal 2020 results of operations and year-to-year comparisons between fiscal 2021 and fiscal 2020. For the discussions of our fiscal 2019 results and year-to-year comparisons between fiscal 2020 and fiscal 2019, refer to our discussions under the headings "Results of Operations" and "Cash Flows and Liquidity" in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020, which was filed with the United States Securities and Exchange Commissionon November 25, 2020. 28
Definition of non-GAAP financial terms and measures
When discussing our results of operations, we use several terms described below.
The term "product mix" refers to the mix of types and grades of products sold or the mix of geographic regions where products are sold, and the positive or negative impact this has on the revenue or profitability of the business and/or segment. Our discussion under the heading "(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate" includes a discussion and reconciliation of our "effective tax rate" and our "operating tax rate" for the periods presented, as well as management's projection of our operating tax rate range for the next fiscal year. Our operating tax rate is a non-GAAP financial measure and should not be considered as an alternative to our effective tax rate, the most comparable GAAP financial measure. The operating tax rate excludes income tax (expense) benefit on certain items and discrete tax items. The income tax (expense) benefit on certain items is determined using the applicable rates in the taxing jurisdictions in which the certain items occurred and includes both current and deferred income tax (expense) benefit based on the nature of the certain items. Discrete tax items include, but are not limited to, changes in valuation allowance, uncertain tax positions, and other tax items, such as the tax impact of legislative changes. Our definition of the operating tax rate may not be comparable to the definition used by other companies. Management believes that this non-GAAP financial measure is useful supplemental information because it helps our investors compare our tax rate year to year on a consistent basis and to understand what our tax rate on current operations would be without the impact of these items. Our discussion under the heading "Fiscal 2021 compared to Fiscal 2020-By Business Segment" includes a discussion of Total segment EBIT, which is a non-GAAP financial measure defined as Income (loss) from continuing operations before income taxes and equity in earnings from affiliated companies less certain items and other unallocated items. Our Chief Operating Decision Maker, who is our President and Chief Executive Officer, uses segment EBIT to evaluate the operating results of each segment and to allocate resources to the segments. We believe Total segment EBIT, which reflects the sum of EBIT from our reportable segments, provides useful supplemental information for our investors as it is an important indicator of our operational strength and performance, allows investors to see our results through the eyes of management, and provides context for our discussion of individual business segment performance. Total segment EBIT should not be considered an alternative for Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, which is the most directly comparable
U.S.GAAP financial measure. A reconciliation of Total segment EBIT to Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies is provided under the heading "Fiscal 2021 compared to Fiscal 2020-By Business Segment". Investors should consider the limitations associated with this non-GAAP measure, including the potential lack of comparability of this measure from one company to another. In calculating Total segment EBIT, we exclude from our Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies (i) items of expense and income that management does not consider representative of our fundamental on-going segment results, which we refer to as "certain items", and (ii) items that, because they are not controlled by the business segments and primarily benefit corporate objectives, are not allocated to our business segments, such as interest expense and other corporate costs, which include unallocated corporate overhead expenses such as certain corporate salaries and headquarter expenses, plus costs related to special projects and initiatives, which we refer to as "other unallocated items". Management believes excluding the items identified as certain items facilitates operating performance comparisons from period to period by eliminating differences caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a U.S.GAAP basis and also facilitates an evaluation of our operating performance without the impact of these costs or benefits. The items of income and expense that we have excluded from Total segment EBIT, as applicable, but that are included in our U.S.GAAP Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, as applicable, are described below.
• Global restructuring activities, which include costs or benefits
associated with cost reduction initiatives or plant closures and are
mainly related to (i) termination costs, (ii) impairment of assets
charges associated with restructuring actions, (iii) costs to close facilities, including environmental costs and contract termination penalties and (iv) gains realized on the sale of land or equipment associated with restructured plants or locations.
• Non-recurring exchange gains (losses), which mainly concern
the impact of controlled currency devaluations on our
assets denominated in this currency.
• Legal and environmental issues and reservations, which consist of costs or
benefits for matters generally related to old companies or which are
otherwise incurred outside the ordinary course of business.
• Management transition costs, which include additional costs, including
stock-based compensation costs associated with retirement or termination of employment
employment of senior executives of the Company.
• Asset impairment charges, which mainly include charges related to
an impairment of goodwill or other long-lived assets. 29
• Costs related to acquisition and integration, which include transaction costs
costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to our processes.
• Gains (losses) on the sale of investments, which relate mainly to the sale of
investments recognized using the cost method.
• Adjustment of the inventory reserve, which results from an assessment carried out as
part of an impairment analysis.
• Indirect tax settlement credits, which include favorable settlements
resulting in the recoveries of indirect taxes. • Gains (losses) on sale of businesses.
• Regulations of employee benefit plans, which consist of either expenses or
benefits associated with the termination of a pension plan or the transfer
from a pension plan to a multi-employer plan.
Demand drivers and key factors affecting profitability
Drivers of demand and key factors affecting our profitability differ by segment. In Reinforcement Materials, longer term demand is driven primarily by: i) the number of vehicle miles driven globally; ii) the number of original equipment and replacement tires produced; and iii) the number of automotive builds. Over the past several years, operating results have been driven by a number of factors, including: i) increases or decreases in our sales volumes driven by changes in production levels for tires or industrial rubber products and the level at which we service that demand; ii) changes in raw material costs and our ability to adjust the sales price for our products commensurate with changes in raw material costs; iii) changes in pricing and product mix, which includes customer pricing as well as the mix of products sold or the region in which they are sold; iv) global and regional capacity utilization for carbon black; v) fixed cost savings achieved through restructuring and other cost saving activities; vi) the growth of our volumes and market position in emerging economies; vii) capacity management and technology investments, including the impact of energy utilization and yield improvement technologies at our manufacturing facilities; and viii) royalties and technology payments related to our patented elastomer composites technology that is used in tire applications. In Performance Chemicals, longer term demand is driven primarily by the construction and infrastructure, automotive, electronics and consumer products industries. In recent years, operating results in Performance Chemicals have been driven by: i) increases or decreases in sales volumes to the industries previously noted; ii) changes in pricing and product mix, which includes customer pricing as well as the mix of products sold or the region in which they are sold; iii) our ability to deliver differentiated products that drive enhanced performance in customers' applications; iv) our ability to obtain value pricing for this differentiation; v) the cost of new capacity; vi) changes in selling prices relative to variations in the cost of raw materials; and vii) the adoption of new products for use in our customers' applications. In Purification Solutions, longer term demand is driven primarily by the demand for activated carbon based solutions for water, gas and air, pharmaceuticals, food and beverages, catalysts and other chemical applications. Operating results in Purification Solutions have been influenced by: i) changes in our sales volumes in the various applications previously noted; ii) management of our operations, including inventory levels, and the commensurate costs; iii) changes in price and product mix; iv) industry capacity utilization; and v) implementation of cost savings initiatives as part of a transformation plan.
Overview of results for fiscal year 2021
Our business saw a strong rebound in results of operations in fiscal 2021 compared to fiscal 2020 which was adversely affected by the COVID-19 pandemic and its impact on our customers and our operations. In fiscal 2021, we saw a recovery in demand from the COVID-19 pandemic driven declines we experienced in fiscal 2020, as volumes in our Performance Chemicals segment returned to pre-COVID-19 levels, and volumes in our Reinforcement Materials segment returned to just slightly below pre-COVID-19 levels. Despite this improvement in demand for our products, the duration and scope of the COVID-19 pandemic continues to be uncertain as infection rates remain high in many parts of the world. In addition, the COVID-19 pandemic and other factors are having a negative impact on the cost and availability of global transportation and the availability of semi-conductor chips for the automotive industry. While we expect these global supply chain disruptions and the semi-conductor chip shortage to impact our Performance Chemicals segment in the short-term, if they persist or intensify, they could further negatively impact our results. Further, the COVID-19 pandemic has also contributed to increased costs and decreased availability of labor and materials for construction projects, and these factors have increased the costs of our capital improvement projects and may delay our completion of such projects. If there is a resurgence in the COVID-19 pandemic impacting our business, it could cause us to recognize write-downs or impairments for certain assets or result in a reduction in our borrowing availability under our credit agreements. These factors could also result in an adverse impact on our revenue as well as our overall profitability. 30
Fiscal year 2021 compared to fiscal year 2020-Consolidated
September 30 20212020 (In millions)
Net sales and other operating income
$ 799 $ 500Net sales increased by $795 millionin fiscal 2021 when compared to fiscal 2020. The increase in net sales was primarily driven by favorable price and product mix (combined $333 million), higher volumes ( $324 million), and the favorable impact from foreign currency translation ( $86 million). The favorable price and product mix in the Reinforcement Materials segment was due to improved product mix in all regions and higher prices from higher feedstock costs that are generally passed through to our customers. The favorable price and product mix in the Performance Chemicals segment was driven by higher sales into automotive applications and targeted growth applications and price increases to recover rising raw material and other costs. The higher volumes in fiscal 2021 were driven by stronger demand across all regions due to the recovery from demand declines in fiscal 2020 related to the COVID-19 pandemic. Gross profit increased by $299 millionin fiscal 2021 when compared to fiscal 2020. The gross profit increase was primarily due to higher volumes across all regions, higher unit margins in the Reinforcement Materials segment due to stronger pricing in Asiaand higher unit margins in the Performance Chemicals segment due to higher demand in automotive applications and in targeted growth applications.
Selling and administration costs
September 30 20212020 (In millions)
Selling and administration costs
Selling and administrative expenses decreased by
Research and technical costs
September 30 20212020 (In millions)
Research and technical costs
Research and technical costs have decreased by
Depreciation charges and loss on sale
Years Ended September 30 2021 2020 (In millions) Specialty Fluids loss on sale and asset impairment charge $ - $ 1 Marshall Mine loss on sale and asset impairment charge $ - $ 129 The loss on sale and asset impairment charges recorded during fiscal 2020 are described in Note D of our Notes to the Consolidated Financial Statements ("Note D"). Interest and Dividend Income Years Ended September 30 2021 2020 (In millions) Interest and dividend income
$ 8 $ 8
Interest and dividend income for fiscal 2021 remained stable compared to fiscal 2020.
Interest Expense Years Ended September 30 2021 2020 (In millions) Interest expense
$ 49 $ 53Interest expense decreased by $4 millionin fiscal 2021 as compared to fiscal 2020. The decrease was primarily due to lower average interest rates, partially offset by higher average balances.
Other income (expenses)
Years Ended September 30 2021 2020 (In millions) Other income (expense)
$ (7 ) $ (9 )Other expense decreased during fiscal 2021 by $2 millionas compared to fiscal 2020. The change was primarily due to termination of the U.S.pension plan in fiscal 2020. Provision (Benefit) for Income Taxes and Reconciliation of Effective Tax Rate to Operating Tax Rate Years Ended September 30 2021 2020 (Provision) / (Provision) / Benefit for Benefit for Income Income Taxes Rate Taxes Rate (Dollars in millions) Effective tax rate(1) $ (123 )30 % $ (191 ) -587 % Less: Non-GAAP tax adjustments(2) (4 ) (139 ) Operating tax rate $ (119 )27 % $ (52 ) 28 %
(1) Refer to the reconciliation of the tax expense calculated to federal law
provision (benefit) rate for income taxes in note R.
(2) Non-GAAP tax adjustments made to arrive at the provision for operating taxes
include income tax benefit (charge) on certain items and discreet tax
articles, as described in more detail above under the heading “Definition of Terms and
Non-GAAP Financial Measures “.
For the year ended
September 30, 2021, the (Provision) benefit for income taxes was a $123 millionexpense compared to a $191 millionexpense for the fiscal year 2020. Included in the non-GAAP tax adjustment for fiscal 2020 is the tax impact for a valuation allowance charge recorded against U.S.deferred tax assets, as described in Note R to our financial statements. Our income taxes are affected by the mix of earnings in the tax jurisdictions in which we operate, and the presence of valuation allowances in certain tax jurisdictions. For fiscal year 2022, the Operating tax rate is expected to be in the range of 27% to 29%. We are not providing a forward-looking reconciliation of the operating tax rate range with an effective tax rate range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to "certain items," including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on the effective tax rate in future periods.
Equity in earnings of affiliates and net income (loss) attributable to non-controlling interest, net of tax
September 30 20212020 (In millions)
Equity in the results of affiliated companies, net of tax
$ 3 $ 3 Net income (loss) attributable to noncontrolling interests, net of tax $ 36 $ 17
Equity in the results of affiliates, net of tax, remained stable in fiscal 2021 compared to fiscal 2020.
Net income attributable to non-controlling interests, net of tax, increased by
Net income (loss) attributable to
In fiscal 2021, we reported net income attributable to
Cabot Corporationof $250 million( $4.34earnings per diluted common share). In fiscal 2020, we reported a net loss attributable to Cabot Corporationof $238 million( $4.21loss per diluted common share). The increase in fiscal 2021 is primarily due to higher Segment EBIT, a $228 millionexpense related to the tax valuation allowance in fiscal 2020 that did not recur in fiscal 2021 as discussed in Note R, and a $129 millionloss on sale and asset impairment charge in fiscal 2020 related to our manufacturing facility and our former lignite mine in Marshall, TXthat did not recur in fiscal 2021 as discussed in Note D.
Fiscal year 2021 compared to fiscal year 2020 – By business sector
Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies, certain items, pre-tax, other unallocated items and Total segment EBIT for fiscal 2021 and 2020 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note U of our Notes to the Consolidated Financial Statements. Years Ended
September 30 20212020 (In millions)
Profit (loss) from continuing operations before profit
taxes and equity in affiliate profits $ 406
$ (33 ) Less: Certain items, pre-tax (34 ) (218 ) Less: Other unallocated items (110 ) (98 ) Total segment EBIT $ 550 $ 283 In fiscal 2021, Income (loss) from continuing operations before income taxes and equity in earnings of affiliated companies increased by
$439 millionand Total Segment EBIT increased by $267 million. The increase in Income (loss) before income taxes and equity earnings of affiliated companies was driven by increased Total Segment EBIT and a $129 millioncharge for the loss on sale and asset impairment charge during fiscal 2020 related to our manufacturing facility and our former lignite mine in Marshall, TXthat did not recur. The increase in Total segment EBIT was driven by higher volumes and unit margins, partially offset by higher fixed costs in our Reinforcement Materials and Performance Chemicals segments. Higher volumes in the Reinforcement Materials ( $106 million) and Performance Chemicals ( $59 million) segments were driven by stronger demand across all regions and key end markets due to continued market recovery from the declines in demand during fiscal 2020 driven by the COVID-19 pandemic. Higher unit margins in the Reinforcement Materials segment ( $96 million) were primarily driven by improved pricing in Asia. Higher unit margins in the Performance Chemicals segment ( $54 million) were largely due to favorable product mix in our specialty carbons, specialty compounds and fumed metal oxides product lines as a result of higher demand in automotive applications and targeted growth applications.
The details of some items for fiscal years 2021 and 2020 are as follows:
Years Ended September 30 2021 2020 (In millions) Indirect tax settlement credits $ 12 $ 3 Legal and environmental matters and reserves (Note T) (25 ) (54 ) Global restructuring activities (Note O) (11 ) (19 ) Acquisition and integration-related charges (Note C) (5 ) (5 )
Regulations for employee benefit plans and other charges (note M)
(4 ) (10 )
Marshall Mineloss on sale and asset impairment charge (Note D) - (129 ) Inventory reserve adjustment - (2 )
Loss on sale and asset impairment charge for specialty fluids (note D)
- (1 ) Other certain items (1 ) (1 ) Total certain items, pre-tax (34 ) (218 ) Non-GAAP tax adjustments (4 ) (139 ) Total certain items, net of tax $ (38 )
An explanation of these expense and income items is included in our discussion under the heading “Definition of Non-GAAP Financial Terms and Measures”.
Other Unallocated Items: Years Ended September 30 2021 2020 (In millions) Interest expense $ (49 ) $ (53 ) Unallocated corporate costs (58 ) (41 ) General unallocated income (expense) - (1 )
Less: Equity in affiliate profits, net of tax
3 3 Total other unallocated items $ (110 ) $ (98 ) A discussion of items that we refer to as "other unallocated items" can be found under the heading "Definition of Terms and Non-GAAP Financial Measures". The balances of unallocated corporate costs are primarily comprised of expenditures related to managing a public company that are not allocated to the segments and corporate business development costs related to ongoing corporate projects. The balances of General unallocated income (expense) consist of gains (losses) arising from foreign currency transactions, net of other foreign currency risk management activities, interest income, dividend income, the profit or loss related to the corporate adjustment for unearned revenue, and the impact of including the full operating results of a contractual joint venture in Purification Solutions Segment EBIT. In fiscal 2021, Total other unallocated items increased by
$12 millionwhen compared to fiscal 2020 due to the increase in Unallocated corporate costs for corporate projects and higher incentive compensation partially offset by the reduction in Interest income (expense).
Sales and EBIT for Reinforcement Materials for fiscal 2021 and 2020 are as follows: Years Ended September 30 2021 2020 (In millions) Reinforcement Materials Sales
$ 1,781 $ 1,256Reinforcement Materials EBIT $ 329 $ 162In fiscal 2021, sales in Reinforcement Materials increased by $525 millionwhen compared to fiscal 2020. The increase was primarily due to higher volumes ( $242 million), a favorable price and product mix (combined $248 million), and a favorable impact from foreign currency translation ( $35 million). The higher volumes in fiscal 2021 were driven by stronger demand across all regions as compared to fiscal 2020 due to demand declines resulting from the COVID-19 pandemic. The favorable price and product mix was primarily due to higher prices from higher feedstock costs that are generally passed through to our customers. In fiscal 2021, Reinforcement Materials EBIT increased by $167 millionwhen compared to fiscal 2020. The increase was driven by higher volumes ( $106 million), higher unit margins ( $96 million), and a favorable impact from foreign currency translation ( $4 million). These factors were partially offset by higher fixed costs ( $39 million). The higher volumes in fiscal 2021 were driven by stronger demand across all regions as compared to fiscal 2020 due to demand declines resulting from the COVID-19 pandemic. The higher unit margins were driven by stronger pricing in Asia. The higher fixed costs were primarily due to higher maintenance costs after deferrals in the prior year. In fiscal 2022, we expect to benefit from higher pricing in our 2022 calendar year customer agreements as we believe customers are placing a premium on supply security, and higher volumes driven by robust levels of tire production.
Sales and EBIT for Performance Chemicals for fiscal 2021 and 2020 are as follows: Years Ended September 30 2021 2020 (In millions) Performance Additives Sales $ 796
$ 645Formulated Solutions Sales 352 288 Performance Chemicals Sales $ 1,148 $ 933Performance Chemicals EBIT $ 211 $ 118In fiscal 2021, sales in Performance Chemicals increased by $215 millionwhen compared to fiscal 2020. The increase was primarily due to higher volumes ( $98 million), favorable price and product mix (combined $75 million), and the favorable impact 34
the conversion of foreign currencies (
In fiscal 2021, EBIT in Performance Chemicals increased by
$93 millioncompared to fiscal 2020 primarily due to increased volumes ( $59 million), higher unit margins ( $54 million), and a favorable impact from foreign currency translation ( $7 million), partially offset by higher fixed costs ( $29 million). Higher volumes across all product lines resulted from continuing strength in demand and inventory replenishment by our customers. Favorable unit margins were driven by higher demand in automotive applications and in targeted growth applications. Increased fixed costs were driven by increased production activity, higher depreciation from the startup of our new fumed metal oxides plant, and higher maintenance costs after deferrals in the prior year. In fiscal 2022, we anticipate continued demand growth across the segment driven by lessening pandemic impacts and supply chain stabilization as we move through the fiscal year, as well as strong fundamentals in key end use industries, augmented by the high-growth areas of battery materials and inkjet in commercial and packaging printing applications. While external challenges, such as rising input costs, global supply chain disruptions and the semi-conductor chip shortage, are likely to remain in the short-term, we expect the impact to moderate as we move through the fiscal year and expect to recover rising input costs through price increases.
Sales and EBIT for Purification Solutions for fiscal 2021 and 2020 are as follows: Years Ended September 30 2021 2020 (In millions) Purification Solutions Sales
$ 257 $ 253Purification Solutions EBIT $ 10 $ 3 Sales in Purification Solutions increased by $4 millionin fiscal 2021 when compared to fiscal 2020 due to improved pricing and a more favorable product mix (combined $11 million) and the favorable impact from foreign currency translation ( $9 million), partially offset by lower volumes ( $16 million). The favorable price and product mix was driven by a shift towards our specialty applications. The lower volumes were primarily due to lower sales in mercury removal products. EBIT in Purification Solutions increased by $7 millionin fiscal 2021 when compared to fiscal 2020 due to a reduction in fixed costs ( $14 million), partially offset by lower volumes ( $8 million). The reduction in fixed costs was driven by the sale of our mine in Marshall, TXand the related long-term activated carbon supply agreement. The lower volumes were primarily due to a decrease in sales of mercury removal products. On November 25, 2021, we entered into a Share Purchase Agreement with an affiliate of funds advised by One Equity Partners("OEP") for the sale of our Purification Solutions business, subject to the satisfaction or waiver of the conditions set forth in the agreement. We expect to close the transaction in the second quarter of fiscal 2022.
Liquidity and capital resources
Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by
$128 millionduring fiscal 2021, which was largely attributable to the termination of our $100 millionunsecured revolving credit agreement with TD Bank, NA, as Lender which had a maturity date of September 2021(the "Canadian Credit Agreement") in the second quarter of fiscal 2021, higher net working capital, and capital expenditures, partially offset by improved earnings from operations. The Canadian Credit Agreement provided liquidity for working capital and general corporate purposes for certain of our Canadian subsidiaries. We had no borrowings under this agreement during either fiscal 2021 or 2020.
We have access to loans under the following two credit agreements:
$1 billionunsecured revolving credit agreement (the " U.S.Credit Agreement") with JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and the other lenders party thereto, which matures in August 2026, subject to two one-year options to extend the maturity, exercisable on or prior to August 6, 2022and August 6, 2023. The U.S.Credit Agreement supports our issuance of commercial paper, and borrowings under it may be used for working capital, letters of credit and other general corporate purposes. 35
• €300 million unsecured revolving credit agreement (the "
Euro CreditAgreement", and together with the U.S.Credit Agreement, the "Credit Agreements"), with Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, which matures
Borrowings under the Euro Credit Agreement may be used for the repatriation of earnings of our foreign subsidiaries to
the United States, the repayment of indebtedness of our foreign subsidiaries owing to us or any of our subsidiaries and for working capital and general corporate purposes. As of September 30, 2021, we were in compliance with the debt covenants under the Credit Agreements, which, with limited exceptions, generally require us to comply on a quarterly basis with a leverage test. The U.S.Credit Agreement requires a leverage ratio of net debt, with the ability to offset such debt by the lesser of (i) unrestricted cash and cash equivalents and (ii) $150 million, to consolidated EBITDA not to exceed 3.50 to 1.00. The Euro Credit Agreement required a leverage ratio of total debt to consolidated EBITDA not to exceed 3.50 to 1.00. Effective October 19, 2021, we amended the Euro Credit Agreement to include a leverage test using net debt, consistent with the U.S.Credit Agreement. 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.Cash held by foreign subsidiaries is generally used to finance the subsidiaries' operational activities and future investments. We are currently using a combination of commercial paper and borrowings from the U.S.Credit Agreement to meet our U.S.cash needs. We generally 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 funds or to access additional debt under the Credit Agreements. As of September 30, 2021, we had $71 millionof commercial paper outstanding and our borrowings under the Euro Credit Agreement totaled $134 million. We generally manage our cash and debt on a global basis to provide for working capital requirements as needed by region or site. Cash and debt are generally denominated in the local currency of the subsidiary holding the assets or liabilities, except where there are operational cash flow reasons to hold non-functional currency or debt. 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 changes in our cash balance makes reference to the various sections of our consolidated statements of cash flows.
Cash flow 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
$257 millionin fiscal 2021. Operating activities provided $377 millionof cash in fiscal 2020. Cash provided by operating activities in fiscal 2021 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $160 million, which was partially offset by an increase in net working capital of $222 million. The increase in net working capital was driven by an increase in accounts receivable due to higher sales and an increase in inventory driven by a higher cost of raw materials, partially offset by an increase in accounts payable. Additionally, we made a cash payment of $33 millionin the first quarter of fiscal 2021 related to the settlement of a large group of respirator claims in fiscal 2020 as discussed in Note T. Cashprovided by operating activities in fiscal 2020 was driven by business earnings excluding the non-cash impacts of depreciation and amortization of $158 million, the loss on sale and asset impairment of $129 millionrelated to our manufacturing facility and our former lignite mine in Marshall, TX, and a deferred tax provision of $130 millionwhich was primarily driven by a change in our tax valuation allowance. In addition, cash provided by operating activities benefited from lower net working capital balances, including a decrease in Accounts and notes receivable of $126 million, and a decrease in our Inventories of $114 million, partially offset by a decrease in Accounts payable and accrued liabilities of $55 million.
In addition to the factors mentioned above, the following other operating items affect operating cash flow:
Restructuring – From
36 -------------------------------------------------------------------------------- Litigation Matters - As of
September 30, 2021, we had a $44 millionreserve for existing and future respirator claims that we expect to pay over multiple years. During fiscal 2020, we settled a large group of respirator claims for $65 million. We paid half of this settlement during fiscal 2020, and the remainder in the first quarter of fiscal 2021. We also have other lawsuits, claims and contingent liabilities arising in the ordinary course of business.
Cash flow from investing activities
Investing activities consumed
$186 millionof cash in fiscal 2021 compared to $288 millionin fiscal 2020. In fiscal 2021, the use of cash by investing activities primarily consisted of $195 millionof capital expenditures for sustaining and compliance capital projects at our operating facilities as well as growth-related capital, including a capacity expansion project in Performance Chemicals. In fiscal 2020, the use of cash by investing activities primarily consisted of $200 millionof capital expenditures for sustaining and compliance capital projects at our operating facilities as well as capacity expansion capital expenditures in Reinforcement Materials and Performance Chemicals, an $84 millionpayment, net of cash acquired, for the SUSN acquisition in April 2020and an $8 millionpayment for the plant that we acquired from NSCCin September 2018. Capital expenditures for fiscal 2022 are expected to be between $225 millionand $250 million. Our planned capital spending program for fiscal 2022 is primarily for sustaining, compliance and improvement capital projects at our operating facilities as well as capacity expansion capital expenditures in Performance Chemicals.
Cash flow from financing activities
Financing activities consumed
$60 millionof cash in fiscal 2021 compared to $132 millionin fiscal 2020. The use of cash by financing activities in fiscal 2021 primarily consisted of dividend payments to stockholders of $80 million, dividend payments to noncontrolling interests of $19 million, and net repayments of long-term debt of $22 million, which consisted of proceeds of $200 millionless repayments of $222 million, partially offset by net proceeds from the issuance of commercial paper of $58 million. The use of cash by financing activities in fiscal 2020 primarily consisted of dividend payments to stockholders of $80 million, share repurchases of $44 million, dividend payments to noncontrolling interests of $26 million, the repayment of $16 millionof long-term debt and the net repayment of $19 millionof commercial paper, partially offset by the net proceeds from borrowings under our revolvers of $50 million, which includes proceeds of $444 millionless repayments of $394 million. At September 30, 2021, we had $1.1 billionof availability under our Credit Agreements. Although we typically have an outstanding commercial paper balance during the quarter, we generally reduce the balance at quarter-end through cash receipts from collections, settlement of intercompany balances and short-term intercompany loans. There was $71 millionand $14 millionof commercial paper outstanding at September 30, 2021and 2020, respectively. Our long-term total debt, of which $373 millionis current, matures at various times as presented in Note I of our Notes to the Consolidated Financial Statements. Our current plan is to refinance the $350 millionin registered notes with a coupon of 3.7% that mature in July of 2022 during the first half of calendar 2022. The weighted-average interest rate on our fixed rate long-term debt was 3.84% as of September 30, 2021.
In fiscal 2018, our Board of Directors authorized us to repurchase up to 10 million shares of common stock. We did not repurchase any shares during fiscal 2021. We repurchased 0.9 million shares of our common stock on the open market for
$39 millionduring fiscal 2020. Additionally, during both fiscal 2021 and fiscal 2020 we repurchased 0.1 million shares of our common stock associated with employee tax obligations on stock-based compensation awards for $3 millionand $5 million, respectively. As of September 30, 2021, we had approximately 5 million shares available for repurchase under the Board of Directors' share repurchase authorization.
During fiscal years 2021 and 2020, we paid cash dividends on our common shares of
Employee benefit plans
September 30, 2021, we had a consolidated pension obligation, net of the fair value of plan assets, of $51 million, comprised of $7 millionfor pension benefit plan liabilities and $44 millionfor postretirement benefit plan liabilities. 37
$7 millionof unfunded pension benefit plan liabilities is derived as follows: U.S. Foreign Total (In millions) Fair value of plan assets $ - $ 217 $ 217Benefit obligation 3 221 224 Funded (unfunded) status $ (3 ) $ (4 ) $ (7 )
In fiscal 2021, we made cash contributions totaling
$44 millionof unfunded postretirement benefit plan liabilities is comprised of $25 millionfor our U.S.and $19 millionfor our foreign postretirement benefit plans. These postretirement benefit plans provide certain health care and life insurance benefits for retired employees. Typical of such plans, our postretirement plans are unfunded and, therefore, have no plan assets. We fund these plans as claims or insurance premiums come due. In fiscal 2021, we paid postretirement benefits of $3 million. For fiscal 2022, our benefit payments for our postretirement plans are expected to be $3 million. In fiscal 2019, our Board of Directors approved a resolution to terminate the U.S.pension plan. We commenced the U.S.plan termination process during the third quarter of fiscal 2019 and completed the transfer of the U.S.plan's assets to participants during fiscal 2021. The pension liability was settled through a combination of lump-sum payments and purchased annuities, neither of which required an additional cash contribution. In fiscal 2020, we recognized a settlement loss of $3 millionrelated to lump-sum payments made to participants who elected this option, which was recorded in Other income (expense) in the Consolidated Statements of Operations. In fiscal 2021, we recognized an additional $4 millionsettlement loss in Other income (expense) related to the final asset transfers through purchased annuities.
The following table shows our long-term contractual obligations.
Payments Due by Fiscal Year 2022 2023 2024 2025 2026 Thereafter Total (In millions) Purchase commitments
$ 260 $ 186 $ 186 $ 185 $ 187 $ 1,786 $ 2,790Long-term debt 369 - 134 - 250 308 1,061 Fixed interest on long-term debt 36 21 21 21 21 37 157 Variable interest on long-term debt 2 2 1 - - - 5 Finance leases(1) 5 5 5 4 4 18 41 Operating leases(1) 16 14 11 10 9 57 117 Total $ 688 $ 228 $ 358 $ 220 $ 471 $ 2,206 $ 4,171
(1) Rental debts include interest.
We have entered into long-term, volume-based purchase agreements primarily for the purchase of raw materials and natural gas with various key suppliers for all of our business segments. Under certain of these agreements the quantity of material being purchased is fixed, but the price we pay changes as market prices change. For purposes of the table above, current purchase prices have been used to quantify total commitments. We have also entered into long-term purchase agreements primarily for services related to information technology, which are not included in the table above, that total
$7 millionas of September 30, 2021, the majority of which is expected to be paid within the next 5 years.
We have entered into various leases as the lessee, primarily related to certain transportation vehicles, warehouse facilities, office space, and machinery and equipment. These leases have remaining lease terms between one and eighteen years, some of which may include options to extend the leases for up to fifteen years or options to terminate the leases. Our land leases have remaining lease terms up to sixty-nine years.
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