Income Taxes

12 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

Note Q. Income Taxes

Income from operations before income taxes and equity in net earnings of affiliated companies was as follows:

	Years Ended September 30
	2023		2022			2021
	(In millions)
Domestic	$	65	$	(20	)	$	(73	)
Foreign		386		355			479
Income from operations before income taxes and    equity in earnings of affiliated companies	$	451	$	335		$	406

Tax provision (benefit) for income taxes consisted of the following:

	Years Ended September 30
	2023			2022			2021
	(In millions)
U.S. federal and state:
Current	$	5		$	7		$	11
Deferred		(156	)		2			(1	)
Total		(151	)		9			10
Foreign:
Current		123			135			103
Deferred		—			(42	)		10
Total		123			93			113
Provision (benefit) for income taxes	$	(28	)	$	102		$	123

The provision (benefit) for income taxes differed from the provision for income taxes as calculated using the U.S. statutory rate as follows:

	Years Ended September 30
	2023			2022			2021
	(In millions)
Computed tax expense at the federal statutory rate	$	95		$	70		$	85
Foreign impact of taxation at different rates, repatriation,    valuation allowance, and other		30			38			8
Global Intangible Low Taxed Income (GILTI)		15			23			18
Purification Solutions business divestiture		—			(179	)		—
Impact of the Coronavirus Aid, Relief, and Economic    Security ("CARES") Act of 2020		—			—			10
Impact of increase (decrease) in valuation allowance on    U.S. deferred taxes		(156	)		160			(1	)
U.S. and state benefits from research and experimentation    activities		(2	)		(2	)		(2	)
Provision (settlement) of unrecognized tax benefits		2			1			1
Permanent differences, net		(4	)		10			7
State taxes, net of federal effect		(8	)		(19	)		(3	)
Provision (benefit) for income taxes	$	(28	)	$	102		$	123

Significant components of deferred income taxes were as follows:

	September 30
	2023			2022
	(In millions)
Deferred tax assets:
Deferred expenses	$	50		$	10
Intangible assets		42			39
Inventory		14			15
Operating lease liability		22			21
Other		6			32
U.S. federal interest expense carryforward		42			33
Pension and other benefits		24			29
Net operating loss carryforwards		244			224
Capital loss carryforwards		132			137
Foreign tax credit carryforwards		68			55
R&D credit carryforwards		49			47
Other business credit carryforwards		19			20
Subtotal		712			662
Valuation allowance		(498	)		(580	)
Total deferred tax assets	$	214		$	82

	September 30
	2023			2022
	(In millions)
Deferred tax liabilities:
Property, plant and equipment	$	(47	)	$	(59	)
Right of use asset		(22	)		(21	)
Unremitted earnings of non-U.S. subsidiaries		(15	)		(22	)
Total deferred tax liabilities	$	(84	)	$	(102	)

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit utilization of the existing deferred tax assets. When performing this assessment, the Company looks to the potential future reversal of existing taxable temporary differences, taxable income in carryback years and the feasibility of tax planning strategies and estimated future taxable income. Failure to achieve operating income targets resulting in a cumulative loss may change the Company’s assessment regarding the realization of Cabot’s deferred tax assets, resulting in valuation allowance

being recorded against some or all of the Company’s deferred tax assets. The need for a valuation allowance can also be affected by changes to tax laws, changes to statutory tax rates and changes to future taxable income estimates. A valuation allowance represents management’s best estimate of the non-realizable portion of the deferred tax assets. Any adjustments in a valuation allowance would result in an adjustment to income tax expense.

Since 2020, the Company has maintained a valuation allowance against its net U.S. deferred tax assets. On a quarterly basis, the Company evaluates all positive and negative evidence to determine if a valuation allowance is required. In analyzing all available evidence as of September 30, 2023, the Company determined that there is sufficient positive evidence outweighing the negative evidence to conclude that it is more likely than not that a portion of the U.S. deferred tax assets are realizable. As a result, the Company reversed a portion of the valuation allowance that was recorded against U.S. net deferred tax assets. This reversal resulted in a non-cash income tax benefit of $152 million. The Company continues to maintain a valuation allowance in the U.S. against capital losses, interest expense limitation carryforwards, certain foreign tax credits, certain R&D tax credits, and certain state deferred tax assets that the Company does not expect to realize.

The valuation allowance decreased by $82 million from $580 million in fiscal 2022 compared to $498 million in fiscal 2023, primarily due to the reversal of a portion of the valuation allowance on the ending U.S. net deferred tax assets, which was partially offset by an increase in valuation allowance on current year activity of U.S. deferred tax assets and an increase in valuation allowance on foreign deferred tax assets on some of the Company's net operating losses. The valuation allowance increased by $110 million from $470 million in fiscal 2021 compared to $580 million in fiscal 2022, primarily due to the tax loss related to the divestiture of the Purification Solutions business.

After the valuation allowance, approximately $24 million of foreign NOLs and less than $1 million of other tax credit carryforwards remained at September 30, 2023. The benefits of these carryforwards are dependent upon taxable income during the carryforward period in the jurisdictions in which they arose.

The following table provides detail surrounding the expiration dates of NOLs, capital loss and other tax credit carryforwards before valuation allowances:

Years Ending September 30	NOLs/Capital Losses		Credits
	(In millions)
2024 - 2030	$	1,051	$	31
2031 and thereafter		268		103
Indefinite carryforwards		793		2
Total	$	2,112	$	136

As of September 30, 2023, provisions have not been made for non-U.S. withholding taxes or other applicable taxes on $1,359 million of undistributed earnings of non-U.S. subsidiaries, as these earnings are considered indefinitely reinvested. It is not practicable to calculate the unrecognized deferred tax liability on undistributed earnings. Cabot continually reviews the financial position and forecasted cash flows of its U.S. consolidated group and foreign subsidiaries in order to reaffirm the Company’s intent and ability to continue to indefinitely reinvest earnings of its foreign subsidiaries or whether such earnings will need to be repatriated in the foreseeable future. Such review encompasses operational needs and future capital investments. From time to time, however, the Company’s intentions relative to specific indefinitely reinvested amounts change because of certain unique circumstances. These earnings could become subject to non-U.S. withholding taxes and other applicable taxes if they were remitted to the U.S.

Cabot has filed its tax returns in accordance with the tax laws in each jurisdiction and recognizes tax benefits for uncertain tax positions when the position would more likely than not be sustained based on its technical merits and recognizes measurement adjustments when needed. As of September 30, 2023, the total amount of unrecognized tax benefits was $20 million, of which $6 million was recorded in Other liabilities in the Consolidated Balance Sheet and, $14 million was offset against deferred tax assets. In 2022, we reported an uncertain tax position of $137 million related to the initially anticipated filing position on the character of a portion of the tax loss from Purification Solutions business divestiture. Upon completion of the U.S. Consolidated tax return in 2023, the Company has reversed the $137 million unrecognized tax benefit which reflects the final position ultimately taken on the filed tax return. In addition, accruals of $5 million have been recorded for penalties and interest, as of September 30, 2023. Total penalties and interest recorded in the tax provision in the Consolidated Statements of Operations was $2 million in fiscal 2023, $2 million in fiscal 2022 and $1 million in fiscal 2021. If the unrecognized tax benefits were recognized as of September 30, 2023, there would be $20 million favorable impact on the Company’s tax provision before consideration of the impact of the potential need for valuation allowances.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2023, 2022 and 2021 is as follows:

	Years Ended September 30
	2023			2022			2021
	(In millions)
Balance at beginning of the year	$	159		$	21		$	23
Additions based on tax positions related to the current    year		1			138			1
Additions for tax positions of prior years		—			2			—
Reductions of tax positions of prior years		(137	)		(1	)		(2	)
Reductions related to settlements		(2	)		—			—
Reductions from lapse of statute of limitations		(1	)		(1	)		(1	)
Balance at end of the year	$	20		$	159		$	21

Cabot and certain subsidiaries are under audit in a number of jurisdictions. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more of these audits or the lapse of applicable statutes of limitations; however, an estimated range of the impact on the unrecognized tax benefits cannot be quantified at this time.

Cabot is subject to taxation in the United States and various states and foreign jurisdictions. The 2020 through 2022 tax years generally remain subject to examination by the IRS and various tax years from 2010 through 2022 remain subject to examination by the respective state tax authorities. In foreign jurisdictions, various tax years from 2006 through 2022 remain subject to examination by their respective tax authorities.