CABOT CORPORATION Critical Accounting Policies
Our critical accounting policies have not substantially changed from those described in the 2021 10-K.
Recently Issued Accounting Pronouncements
Refer to the discussion under the headings "Recently Adopted Accounting Standards" and "Recent Accounting Pronouncements" in Note B of our Notes to the Consolidated Financial Statements.
Results of Operations
The Company has two reportable segments consisting of Reinforcement Materials and Performance Chemicals. The Company's former Purification Solutions segment was a separate reporting segment prior to divestiture in the second quarter of fiscal 2022. Cabot is also organized for operational purposes into three geographic regions: theAmericas ;Europe ,Middle East andAfrica ("EMEA"); andAsia Pacific . The discussion of our results of operations for the periods presented reflects these structures.
Our analysis of our financial condition and operating results should be read with our consolidated financial statements and accompanying notes.
Definition of Terms and Non-GAAP Financial Measures
When discussing our results of operations, we use several terms as described below.
The term "product mix" refers to the mix of types and grades of products sold or
the mix of geographic regions where products are sold, and the positive or
negative impact this has on the revenue or profitability of the business and/or
segment.
Our discussion under the heading "(Provision) Benefit for Income Taxes and
Reconciliation of Effective Tax Rate to Operating Tax Rate" includes a
discussion and reconciliation of our "effective tax rate" and our "operating tax
rate" for the periods presented, as well as management's projection of our
operating tax rate range for the full fiscal year. Our operating tax rate is a
non-GAAP financial measure and should not be considered as an alternative to our
effective tax rate, the most comparable GAAP financial measure. The operating
tax rate is calculated based upon management's forecast of the annual operating
tax rate for the fiscal year applied to adjusted pre-tax earnings. The operating
tax rate excludes income tax (expense) benefit on certain items, discrete tax
items and, on a quarterly basis the timing of losses in certain jurisdictions.
The income tax (expense) benefit on certain items is determined using the
applicable rates in the taxing jurisdictions in which the certain items occurred
and includes both current and deferred income tax (expense) benefit based on the
nature of the certain items. Discrete tax items include, but are not limited to,
changes in valuation allowance, uncertain tax positions, and other tax items,
such as the tax impact of legislative changes. 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 "Second Quarter of Fiscal 2022 versus Second
Quarter of Fiscal 2021-By Business Segment" includes a discussion of Total
segment EBIT, which is a non-GAAP financial measure defined as Income (loss)
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. Our
definition of Total segment EBIT may not be comparable to the definition used by
other companies and it should not be considered an alternative for Income (loss)
before income taxes and equity in earnings of affiliated companies, which is the
most directly comparable GAAP financial measure. A reconciliation of Total
segment EBIT to Income (loss) before income taxes and equity in earnings of
affiliated companies is provided under the heading "Second quarter of Fiscal
2022 versus Second quarter of Fiscal 2021-By Business Segment". Investors should
consider the limitations associated with this non-GAAP measure, including the
potential lack of comparability of this measure from one company to another.
22
--------------------------------------------------------------------------------
In calculating Total segment EBIT, we exclude from our Income (loss) 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
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 exclude from Total segment EBIT but that are included in our GAAP Income
(loss) before income taxes and equity in earnings of affiliated companies, as
applicable in a particular reporting period, include, but are not limited to,
the following:
• Asset impairment charges, which primarily include charges associated with an
impairment of goodwill, other long-lived assets or assets held for sale.
• Charges related to the divestiture of our Purification Solutions business,
which include accelerated costs associated with the change in control and
employee incentive compensation.
• Legal and environmental reserves and matters, which consist of costs or
benefits for matters typically related to former businesses or that are
otherwise incurred outside of the ordinary course of business.
• Global restructuring activities, which include costs or benefits associated
with cost reduction initiatives or plant closures and are primarily related
to (i) employee termination costs, (ii) asset impairment charges associated
with restructuring actions, (iii) costs to close facilities, including
environmental costs and contract termination penalties, and (iv) gains
realized on the sale of land or equipment associated with restructured
plants or locations.
• Acquisition and integration-related charges, which include transaction
costs, redundant costs incurred during the period of integration, and costs
associated with transitioning certain management and business processes to
Cabot's processes.
• Indirect tax settlement credits, which includes favorable settlements
resulting in the recoveries of indirect taxes.
• Gains (losses) on sale of a business.
• Employee benefit plan settlements, which consist of either charges or
benefits associated with the termination of a pension plan or the transfer
of a pension plan to a multi-employer plan.
• Gain associated with the bargain purchase of a business.
Overview
During the second quarter of fiscal 2022, Income (loss) before income taxes and equity in earnings of affiliated companies increased compared to the second quarter of fiscal 2021. The increase was driven by increased earnings across our Reinforcement Materials and Performance Chemicals segments and a gain on the Tokai Carbon acquisition.
Second quarter of Fiscal 2022 versus Second quarter of Fiscal 2021-Consolidated
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Net sales and other operating revenues $ 1,092$ 842 $ 2,060 $ 1,588 Gross profit $ 232$ 214 $ 430 $ 407 The$250 million increase in net sales and other operating revenues in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 was driven by favorable price and product mix (combined$269 million ) across our Reinforcement Materials and Performance Chemicals segments, increased energy center by-product revenue ($15 million ) and higher volumes primarily in Reinforcement Materials ($12 million ). These increases were partially offset by the divestiture of our Purification Solutions segment ($27 million ) in the second quarter of fiscal 2022 and unfavorable impact from foreign currency translation ($21 million ). The$472 million increase in net sales and other operating revenues in the first six months of fiscal 2022 compared to the first six months of fiscal 2021 was primarily driven by favorable price and product mix (combined$471 million ) in Reinforcement Materials and Performance Chemicals and increased energy center by-product revenue ($26 million ). These increases were partially 23 -------------------------------------------------------------------------------- offset by the divestiture of our Purification Solutions segment ($25 million ) in the second quarter and the unfavorable impact from foreign currency translation ($19 million ). In both the second quarter and the first six months of fiscal 2022, the favorable price and product mix was driven by favorable 2022 calendar year tire customer agreements and higher prices from higher feedstock and energy costs that are generally passed through to our customers in the Reinforcement Materials segment and favorable price and product mix in the Performance Chemicals segment driven by targeted growth initiatives and price increases to recover rising input costs, including raw material and energy, and other costs including packaging and transportation. The increased energy center by-product revenue was due to higher energy prices. Gross profit increased by$18 million in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021. Gross profit increased by$23 million in the first six months of fiscal 2022 compared to the first six months of fiscal 2021. The gross profit increase in both comparative periods was primarily due to higher unit margins partially offset by higher fixed costs in the Reinforcement Materials and Performance Chemicals segments.
Selling and Administrative Expenses
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Selling and administrative expenses $ 74 $ 71$ 145 $ 132 Selling and administrative expenses increased by$3 million in the second quarter of fiscal 2022 compared to the same period of fiscal 2021, primarily due to a charge related to our legal reserve for respirator matters. Selling and administrative expenses increased by$13 million in the first six months of fiscal 2022 compared to the same period of fiscal 2021, primarily due to increased incentive compensation, divestiture-related charges and a charge related to our legal reserve for respirator matters.
Research and Technical Expenses
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Research and technical expenses $ 14 $ 15 $ 27 $ 29 Research and technical expenses decreased by$1 million and$2 million in the second quarter and the first six months of fiscal 2022, respectively, compared to the same periods of fiscal 2021, primarily due to restructuring activities that occurred in fiscal 2021.
Interest and Dividend Income, Interest Expense and Other Income (Expense)
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Interest and dividend income $ 4 $ 2 $ 7 $ 4 Interest expense $ (11 ) $ (13 )$ (23 ) $ (25 ) Other income (expense) $ (7 ) $ 1 $ (8 ) $ (8 )
Interest and dividend income increased by
Interest expense decreased by$2 million in each of the second quarter of fiscal 2022 and for the six months endedMarch 31, 2022 , compared to the same periods of fiscal 2021, primarily due to higher capitalized interest. Other income (expense) changed by$8 million in the second quarter of fiscal 2022 compared to the same period of fiscal 2021, primarily due to the unfavorable impact from foreign currency translation. For the six months endedMarch 31, 2022 , Other income (expense) remained flat compared to the same period of fiscal 2021. 24
--------------------------------------------------------------------------------
(Provision) Benefit for Income Taxes and Reconciliation of Effective Tax Rate to
Operating Tax Rate
Three Months Ended March 31
2022 2021
(Provision) / (Provision) /
Benefit for Benefit for
Income Taxes Rate Income Taxes Rate
Dollars in millions
Effective tax rate $ (36 ) 24 % $ (34 ) 29 %
Less: Non-GAAP tax adjustments(1) 2 (3 )
Operating tax rate $ (38 ) 27 % $ (31 ) 28 %
Six Months Ended March 31
2022 2021
(Provision) / (Provision) /
Benefit for Benefit for
Income Taxes Rate Income Taxes Rate
Dollars in millions
Effective tax rate $ (24 ) 44 % $ (63 ) 29 %
Less: Non-GAAP tax adjustments(1) 44 1
Operating tax rate $ (68 ) 27 % $ (64 ) 28 %
(1) Non-GAAP tax adjustments made to arrive at the operating tax provision
include the income tax (expense) benefit on certain items, discrete tax
items, and, on a quarterly basis, the timing of losses in certain
jurisdictions, as further described above under the heading "Definition of
Terms and Non-GAAP Financial Measures".
For the three months endedMarch 31, 2022 , the (Provision) benefit for income taxes was a provision of$36 million compared to$34 million for the same period in 2021. For the six months endedMarch 31, 2022 , the (Provision) benefit for income taxes was a provision of$24 million compared to$63 million for the same period in 2021. Included in the (Provision) benefit for income taxes in the six months endedMarch 31, 2022 is a discrete tax benefit of$36 million primarily related to the divestiture of the Purification Solutions business. Our income taxes are affected by the mix of earnings in the tax jurisdictions in which we operate, and are impacted by the presence of valuation allowances in certain tax jurisdictions. For fiscal 2022, the Operating tax rate is expected to be in the range of 26% to 27%. 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.
Net Income (Loss) Attributable to Noncontrolling Interests
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Equity in earnings of affiliated companies, net of tax $ 3 $ 1 $ 4 $ 1
Net income (loss) attributable to
noncontrolling interests, net of tax $ 7 $ 10 $ 16 $ 20 Equity in earnings of affiliated companies, net of tax, increased by$2 million and$3 million in the second quarter and for the first six months of fiscal 2022, respectively, compared to the same periods of fiscal 2021 primarily due to higher profitability at our equity affiliates inIndia andVenezuela . Net income (loss) attributable to noncontrolling interests, net of tax, decreased by$3 million and$4 million in the second quarter of fiscal 2022 and for the six months endedMarch 31, 2022 , respectively, as compared to the same periods in fiscal 2021 primarily due to lower profitability of our joint venture in theCzech Republic . 25
--------------------------------------------------------------------------------
Net Income Attributable to
In the second quarter and first six months of fiscal 2022, we reported Net income (loss) attributable toCabot Corporation of$107 million and$18 million , or$1.84 per diluted common share and$0.30 per diluted common share, respectively. This compares to Net income (loss) attributable toCabot Corporation of$75 million and$135 million , or$1.30 per diluted common share and$2.36 per diluted common share, respectively, in the second quarter and first six months of fiscal 2021. The higher net income in the second quarter of fiscal 2022 compared with the same period in fiscal 2021 is primarily due to improved Total segment EBIT. The lower net income in the six months endedMarch 31, 2022 , compared with the same period in fiscal 2022 is primarily due to the Purification Solutions loss on sale and asset impairment charge, partially offset by increased Total segment EBIT.
Second quarter of Fiscal 2022 versus Second quarter of Fiscal 2021-By Business Segment
Income (loss) before income taxes and equity in earnings of affiliated companies, certain items, other unallocated items, and Total segment EBIT for the three and six months endedMarch 31, 2022 and 2021 are set forth in the table below. The details of certain items and other unallocated items are shown below and in Note L of our Notes to the Consolidated Financial Statements. Three Months Ended March 31 Six Months Ended March 31 2022 2021 2022 2021 (In
millions)
Income (loss) before income taxes and equity in earnings of affiliated companies $ 147 $ 118 $ 54$ 217 Less: Certain items 7 (1 ) (197 ) (12 ) Less: Other unallocated items (31 ) (30 ) (57 ) (60 ) Total segment EBIT $ 171 $ 149 $ 308$ 289
In the second quarter of fiscal 2022, Income (loss) before income taxes and
equity in earnings of affiliated companies increased by
In the first six months of fiscal 2022, Income (loss) before income taxes and equity in earnings of affiliated companies decreased by$163 million primarily due to the Purification Solutions loss on sale and asset impairment charge of$204 million , partially offset by increased Total segment EBIT of$19 million and gain on the Tokai Carbon acquisition of$24 million .
Certain Items
Details of the certain items for the three and six months ended
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(Inmillions)
Gain on bargain purchase of a business (Note C) 24 - 24 - Loss on sale of business and asset impairment charge (Note D) (7 ) - (204 ) - Legal and environmental matters and reserves (7 ) - (8 ) - Divestiture related charges (1 ) - (5 ) - Acquisition and integration-related charges (2 ) (1 ) (3 ) (2 ) Global restructuring activities - (1 ) (2 ) (4 ) Employee benefit plan settlement and other charges - 1 - (5 ) Other - - 1 (1 ) Total certain items, pre-tax 7 (1 ) (197 ) (12 ) Non-GAAP tax adjustments 2 (3 ) 44 1 Total certain items, after tax $ 9 $ (4 ) $ (153 )$ (11 ) 26
--------------------------------------------------------------------------------
Other Unallocated Items
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(In millions)
Interest expense $ (11 ) $ (13 ) $ (23 ) $ (25 )
Unallocated corporate costs (16 ) (16 ) (30 ) (29 )
General unallocated income (expense) (1 ) - - (5 )
Less: Equity in earnings of affiliated
companies, net of tax 3 1 4 1 Total other unallocated items $ (31 ) $ (30 )$ (57 ) $ (60 ) 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, 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.
Reinforcement Materials
Sales and EBIT for Reinforcement Materials for the second quarter and first six months of fiscal 2022 and 2021 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(In millions)
Reinforcement Materials Sales $ 627 $ 434 $ 1,168 $ 809
Reinforcement Materials EBIT $ 101 $ 89 $ 186 $ 177
Sales in Reinforcement Materials increased by $193 million in the second quarter
of fiscal 2022 compared to the same period of fiscal 2021, primarily due to a
favorable price and product mix (combined $194 million ) and higher volumes ($13
million ), partially offset by unfavorable impact from foreign currency
translation ($13 million ). The favorable price and product mix was primarily due
to favorable 2022 calendar year tire customer agreements and higher feedstock
and energy costs that are generally passed through to our customers. The higher
volumes in fiscal 2022 were driven by stronger demand across all regions.
In the first six months of fiscal 2022, sales in Reinforcement Materials
increased by $359 million compared to the first six months of fiscal 2021. The
increase was primarily due to a favorable price and product mix (combined $344
million ) and higher volumes ($28 million ), partially offset by unfavorable
impact from foreign currency translation ($13 million ). The favorable price and
product mix was primarily due to favorable 2022 calendar year customer
agreements and higher feedstock and energy costs that are generally passed
through to our customers. The higher volumes in fiscal 2022 were driven by
stronger demand in Asia Pacific and the Americas .
EBIT in Reinforcement Materials in the second quarter of fiscal 2022 increased
by $12 million compared to the same period of fiscal 2021. During the second
quarter of fiscal 2022, the segment had higher unit margins ($20 million ) and 3%
higher volumes ($6 million ) partially offset by higher fixed cost ($10 million )
and unfavorable impact from foreign currency exchange ($4 million ). The higher
unit margins were primarily driven by favorable 2022 calendar year tire customer
agreements. The higher volume was due to increased demand across all regions,
largely due to volume gains in our customer agreements in Europe and the
Americas . The higher fixed costs were primarily due to increased costs
associated with utilities and maintenance.
EBIT in Reinforcement Materials increased by $9 million in the first six months
of fiscal 2022 compared to the same period of fiscal 2021. The increase was
driven by higher unit margins ($24 million ) and higher volumes ($13 million )
partially offset by higher fixed cost ($25 million ) and unfavorable impact from
foreign currency exchange ($4 million ). The higher unit margins were primarily
driven by favorable 2022 calendar year customer agreements and benefit of higher
energy prices on our energy center and yield benefits. The higher volume was due
to increased demand in Asia Pacific and the Americas . The higher fixed costs
were primarily due to increased costs associated with utilities and maintenance.
27
--------------------------------------------------------------------------------
As we look to the third quarter of the fiscal year, we expect EBIT in
Reinforcement Materials to improve sequentially due to our expectation that the
strong volume levels will continue with seasonally stronger growth. We also
anticipate margins to be maintained at healthy levels and prices adjusting for
changing input cost.
Performance Chemicals
Sales and EBIT for Performance Chemicals for the second quarter and first six months of fiscal 2022 and 2021 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(In millions)
Performance Additives Sales $ 266 $ 203 $ 493 $ 387
Formulated Solutions Sales 94 91 169 174
Performance Chemicals Sales $ 360 $ 294 $ 662 $ 561
Performance Chemicals EBIT $ 70 $ 58 $ 122 $ 112
Sales in Performance Chemicals increased by $66 million in the second quarter of
fiscal 2022 compared to the same period of fiscal 2021, primarily due to
favorable price and product mix (combined $75 million ), partially offset by
unfavorable impact from foreign currency translation ($8 million ) and lower
volumes ($1 million ). The favorable price and product mix was due to increased
pricing to recover rising input costs across the segment. The lower volumes were
primarily due to a plant outage at our Belgium specialty compounds site,
partially offset by continued momentum in our growth vectors in battery
materials and inkjet applications.
In the first six months of fiscal 2022, sales in Performance Chemicals increased
by $101 million compared to the same period of fiscal 2021, primarily due to
favorable price and product mix (combined $127 million ), partially offset by
lower volumes ($20 million ) and by unfavorable impact from foreign currency
translation ($6 million ). The favorable price and product mix was due to
increased pricing to recover rising input costs across the segment. The lower
volumes were primarily due to plant downtime of a fence-line partner in our
fumed metal oxides product line and a plant outage at our Belgium specialty
compounds site, partially offset by continued momentum in our growth vectors in
battery materials and inkjet applications.
EBIT in Performance Chemicals increased by $12 million in the second quarter of
fiscal 2022 compared to the second quarter of fiscal 2021 primarily due to
higher unit margins ($20 million ), partially offset by higher fixed cost ($8
million ). Higher unit margins were driven by strong pricing in our specialty
carbons and fumed metal oxides product lines and favorable product mix in our
specialty carbons product line. Fixed costs increased in support of our growth
vectors and higher utilities cost.
EBIT in Performance Chemicals increased by $10 million in the first six months
of fiscal 2022 compared to the same period of fiscal 2021 primarily due to
higher unit margins ($29 million ), partially offset by lower volumes ($8
million ) and higher fixed cost ($9 million ). Higher unit margins were driven by
strong pricing and favorable product mix in our specialty carbons and fumed
metal oxides product lines. The lower volumes were primarily due to plant
downtime of a fence-line partner in our fumed metal oxides product line and a
plant outage at our Belgium specialty compounds site, partially offset by
continued momentum in battery materials applications driven by higher demand for
electric vehicles and continued product penetration with top battery producers.
Fixed costs increased in support of our growth vectors and higher utilities
cost.
As we look ahead to the third quarter of the fiscal year, we expect a sequential
volume increase led by growth in battery materials applications and the benefit
from our specialty compounds plant being fully back on-line. We anticipate that
unit margins will remain strong, but we do not expect to see the same benefit
from price increases ahead of raw material costs in our fumed metal oxides
product line. In addition, we expect fixed cost to increase due to plant
start-ups and higher utilities.
Purification Solutions
Sales and EBIT for Purification Solutions for the second quarter and first six months of fiscal 2022 and 2021 were as follows:
Three Months Ended March 31 Six Months Ended March 31
2022 2021 2022 2021
(In millions)
Purification Solutions Sales $ 36 $ 63 $ 97 $ 122
Purification Solutions EBIT $ - $ 2 $ - $ -
We divested the Purification Solutions business in
28
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
Our liquidity position, as measured by cash and cash equivalents plus borrowing availability, decreased by$130 million during the first six months of fiscal 2022, which was due to a higher outstanding commercial paper balance at the end of the period. The higher commercial paper balance was used to fund an increase in net working capital resulting from the impact of rising raw material costs on our inventory balance and higher prices on our accounts receivables balance. As ofMarch 31, 2022 , we had cash and cash equivalents of$215 million and borrowing availability under our revolving credit agreements of$968 million .
As of
•
Agreement") with
which matures in August 2026 , subject to two one-year options to extend
the maturity, exercisable on or prior to August 6, 2022 and 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.
• €300 unsecured revolving credit agreement (the "Euro Credit Agreement",
and together with the
with
the other lenders party thereto, which matures in
the
Euro Credit Agreement may be used for the repatriation of earnings of our
foreign subsidiaries to
of our foreign subsidiaries owing to us or any of our subsidiaries and for
working capital and general corporate purposes.
As ofMarch 31, 2022 , we were in compliance with the debt covenants under the Credit Agreements, which, with limited exceptions, require us to comply on a quarterly basis with a leverage test requiring the ratio of consolidated net debt to consolidated EBITDA not to exceed 3.50 to 1.00. Consolidated net debt is defined as consolidated debt offset by the lessor of (i) unrestricted cash and cash equivalents and (ii)$150 million . A significant portion of our business occurs outside theU.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 theU.S. We generally use a combination ofU.S. earnings, commercial paper issuances and borrowings under ourU.S. Credit Agreement to meet ourU.S. cash needs, and cash held by foreign subsidiaries is generally used to finance the subsidiaries' operational activities and future investments. We usually reduce our commercial paper balance and, if applicable, borrowings under our Credit Agreements, at quarter-end using cash derived from customer collections, settlement of intercompany balances and short-term intercompany loans. We also have cash pooling structures that support our operations in theU.S. , EMEA andChina and provide access to cash for our non-U.S. subsidiaries through the global pool. We face limited restrictions on the flow of cash.Argentina has currency controls in place that prevent the distribution of cash, but otherwise we are able to move funds between our non-U.S. subsidiaries through our cash pools, intercompany accounts and/or distributions, as needed. If additional funds are needed in theU.S. , we expect to be able to repatriate cash, including cash fromChina , while paying any withholding or other taxes. However, we consider most cash we generate in geographies outside theU.S. indefinitely reinvested. Changes in tax laws in theU.S. or foreign countries could restrict our ability to transfer funds or impose material costs on such transfers.
As of
We anticipate sufficient liquidity from (i) cash on hand; (ii) cash flows from operating activities; and (iii) cash available from the Credit Agreements and our commercial paper program to meet our operational and capital investment needs and financial obligations for the foreseeable future. The liquidity we derive from cash flows from operations is, to a large degree, predicated on our ability to collect our receivables in a timely manner, the cost of our raw materials, and our ability to manage inventory levels.
The following discussion of the changes in our cash balance refers to the various sections of our Consolidated Statements of Cash Flows.
Cash Flows from Operating Activities
Cash used 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
29
--------------------------------------------------------------------------------
Cash used by operating activities in the first six months of fiscal 2022 was
driven by an increase in net working capital of $254 million . The increase in
net working capital was driven by an increase in accounts receivable due to
higher sales and an increase in inventory driven by a higher cost of raw
materials, partially offset by an increase in accounts payable.
Cash provided by operating activities in the first six months of fiscal 2021 was
driven by business earnings excluding the non-cash impact of depreciation and
amortization of $77 million , which was partially offset by an increase in net
working capital of $179 million . The increase in net working capital was driven
by an increase in accounts receivable due to higher sales, an increase in
inventory driven by a higher cost of raw materials, and a $32.6 million cash
payment made in the first quarter of fiscal 2021 related to a respirator
litigation settlement in fiscal 2020.
Cash Flows from Investing Activities
Investing activities provided$15 million of cash in the first six months of fiscal 2022 compared to$66 million of cash consumed in the first six months of fiscal 2021. In both periods, investing activities included capital expenditures for sustaining and compliance capital projects at our operating facilities as well as capacity expansion capital expenditures primarily in Performance Chemicals. Capital expenditures totaled$71 million and$69 million in the first six months of fiscal 2022 and 2021, respectively. In addition, the first six months of fiscal 2022 includes$79 million of net cash proceeds from the sale of our Purification Solutions business inMarch 2022 , as well as$5 million of cash assumed from the acquisition of Tokai Carbon inFebruary 2022 . Capital expenditures for fiscal 2022 are expected to be approximately$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 Flows from Financing Activities
Financing activities provided$85 million of cash in the first six months of fiscal 2022 compared to$27 million of cash used during the same period of fiscal 2021. In the first six months of fiscal 2022, financing activities primarily consisted of the issuance of commercial paper of$167 million and proceeds from short-term borrowings of$13 million , partially offset by dividend payments to stockholders of$42 million , share repurchases of$34 million , dividend payments to noncontrolling interests of$15 million , and repayments of long-term debt of$7 million . We plan to refinance our$350 million in registered notes with a coupon of 3.7% that mature in July of 2022 ahead of the notes' maturity. In the first six months of fiscal 2021, financing activities primarily consisted of dividend payments to stockholders of$40 million and net repayments from borrowings under our revolvers of$17 million , which consisted of proceeds of$100 million less repayments of$117 million .
Other Information About Our Businesses
Each of our segments operates globally, and a significant portion of our revenues and operating profits is derived from operations outside theU.S. In particular,China continues to be an important producer of tires and products for automotive applications and since we made our initial investment inChina in 1988, we have increased our operations inChina to support increased demand for our products inChina . In addition, a significant portion of battery manufacturers are located inChina , and we anticipate a material portion of the future growth of our Battery Materials growth vector to be derived from our business and operations inChina . We employ local management teams for our operations inChina , and our business model inChina is predominantly to make and sell product in-country to established local and multi-national customers with operations inChina . In fiscal 2021, sales inChina across our segments constituted approximately 25% of our revenues, and our property, plant and equipment located inChina constituted approximately 25% of our total property, plant and equipment as ofSeptember 30, 2021 . (See Note U to our Consolidated Financial Statements in our 2021 10-K). There are legal and operational risks associated with having substantial operations inChina , which are more fully described under the heading "Risk Factors" in our 2021 10-K. Given the size of our current operations inChina and the future growth we anticipate from those operations, if our ability to operate inChina were to be constrained by legal and operational risks, it could have a material negative impact on our overall operations and the value of our securities. 30 --------------------------------------------------------------------------------
Forward-Looking Information
This report on Form 10-Q contains "forward-looking statements" under the Federal securities laws. These forward-looking statements address expectations or projections about the future, including our expectations regarding our future business performance and overall prospects; segment growth and the assumptions underlying our growth expectations; demand for our products; when we expect to pay the cash consideration for the Tokai acquisition; when we expect to receive the balance of the cash purchase price for our sale of our Purification Solutions business; the sufficiency of our cash on hand, cash provided from operations and cash available under our credit and commercial paper facilities to fund our cash requirements; our plans to refinance the 3.7% Notes that mature inJuly 2022 ; anticipated capital spending; regulatory developments; expected insurance proceeds related to flooding at our Pepinster,Belgium facility; cash requirements and uses of available cash, including future cash outlays associated with respirator liabilities and the timing of such outlays; exposure to interest rate and foreign exchange risk; amortization expenses; our operating tax rate; and the possible outcome of legal and environmental proceedings. From time to time, we also provide forward-looking statements in other materials we release to the public and in oral statements made by authorized officers. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control or difficult to predict. If known or unknown risks materialize, our actual results could differ materially from those expressed in the forward-looking statements. Importantly, as we cannot predict the duration or scope of the COVID19 pandemic, the negative impact to our results cannot be estimated. Factors that will influence the impact on our business and operations include the duration and extent of the pandemic, the virulence and spread of different strains of the virus and the level and timing of vaccine distribution around the world and its impact on the stability of economic recovery and growth, the degree of disruption in supply chains from global logistics matters resulting from the COVID19 pandemic, impacts to manufacturing operations resulting from government-imposed lockdowns, and other general economic consequences of the pandemic. 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. In addition to factors described elsewhere in this report, the following are some of the factors that could cause our actual results to differ materially from those expressed in our forward-looking statements: industry capacity utilization and competition from other specialty chemical companies; safety, health and environmental requirements and related constraints imposed on our business; regulatory and financial risks related to climate change developments; volatility in the price and availability of energy and raw materials, including with respect to the Russian invasion ofUkraine ; a significant adverse change in a customer relationship or the failure of a customer to perform its obligations under agreements with us; failure to achieve growth expectations from new products, applications and technology developments; failure to realize benefits from acquisitions, alliances, or joint ventures or achieve our portfolio management objectives; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations, global health matters or geo-political conflicts; litigation or legal proceedings; tax rates and fluctuations in foreign currency exchange and interest rates; our inability to complete capacity expansions or other development projects; and the accuracy of the assumptions we used in establishing reserves for our share of liability for respirator claims. These other factors and risks are discussed more fully in our 2021 10-K and in our subsequentSEC filings. Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information about market risks for the period ended
As ofMarch 31, 2022 , we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of that date. There were no changes in our internal controls over financial reporting that occurred during our fiscal quarter endedMarch 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As permitted by the rules and regulations of theSecurities and Exchange Commission we excluded from our assessment the internal controls over financial reporting atTokai Carbon (Tianjin) Co. , which was acquired onFebruary 28, 2022 , for the period endedMarch 31, 2022 .
© Edgar Online, source
