Income Taxes

12 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note R. Income Taxes

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

	Years Ended September 30
	2021			2020			2019
	(In millions)
Domestic	$	(73	)	$	(274	)	$	(66	)
Foreign		479			241			321
Income from continuing operations before income taxes and    equity in earnings of affiliated companies	$	406		$	(33	)	$	255

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

	Years Ended September 30
	2021			2020			2019
	(In millions)
U.S. federal and state:
Current	$	11		$	(1	)	$	2
Deferred		(1	)		139			(30	)
Total		10			138			(28	)
Foreign:
Current		103			62			95
Deferred		10			(9	)		3
Total		113			53			98
Provision (benefit) for income taxes	$	123		$	191		$	70

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
	2021			2020			2019
	(In millions)
Computed tax expense at the federal statutory rate	$	85		$	(7	)	$	53
Foreign impact of taxation at different rates, repatriation,    valuation allowance, and other		8			4			17
Global Intangible Low Taxed Income (GILTI)		18			(4	)		10
Impact of the Coronavirus Aid, Relief, and Economic    Security ("CARES") Act of 2020		10			(10	)		—
Impact of increase (decrease) in valuation allowance on    U.S. deferred taxes		(1	)		228			—
U.S. and state benefits from research and experimentation    activities		(2	)		(2	)		(2	)
Provision (settlement) of unrecognized tax benefits		1			(7	)		(8	)
Permanent differences, net		7			—			1
State taxes, net of federal effect		(3	)		(11	)		(1	)
Provision (benefit) for income taxes	$	123		$	191		$	70

Significant components of deferred income taxes were as follows:

	September 30
	2021			2020
	(In millions)
Deferred tax assets:
Deferred expenses	$	14		$	19
Intangible assets		38			37
Inventory		13			13
Operating lease liability		21			20
Other		42			51
Pension and other benefits		32			35
Net operating loss carryforwards		257			254
Foreign tax credit carryforwards		48			58
R&D credit carryforwards		46			44
Other business credit carryforwards		24			23
Subtotal		535			554
Valuation allowance		(470	)		(481	)
Total deferred tax assets	$	65		$	73

	September 30
	2021			2020
	(In millions)
Deferred tax liabilities:
Property, plant and equipment	$	(47	)	$	(40	)
Right of use asset		(20	)		(20	)
Unremitted earnings of non-U.S. subsidiaries		(18	)		(18	)
Total deferred tax liabilities	$	(85	)	$	(78	)

Subsequent to the filing of the Company’s financial statements as of and for the year ended September 30, 2020, the Company identified a misstatement related to the disclosure of the previously reported net operating loss carryforwards, other deferred tax assets and the offsetting valuation allowance associated with certain non-U.S. subsidiaries for the year ended, September 30, 2020. As a result, the Company included an additional $145 million in net operating loss carryforwards, $19 million of other deferred tax assets, and $164 million of valuation allowance for the year ended September 30, 2020, in the Deferred tax assets table above to reflect the correct presentation. The Company had previously reported net operating loss carryforwards of $109 million, other deferred tax assets of $32 million, and a valuation allowance of $317 million at September 30,2020, prior to this correction. This

adjustment had no effect on the Company’s previously reported consolidated financial statements including the balance sheet, statement of operations, or cash flows as of and for the year ended September 30, 2020.

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.

In determining the recoverability of its U.S. deferred tax assets, the Company considered its cumulative loss incurred over the three-year period ended September 30, 2020. Such objective negative evidence limits the Company’s ability to consider other subjective evidence, such as its projections for future growth. Given the weight of objectively verifiable historical losses from the Company's U.S. operations, the Company recorded a valuation allowance on all of its U.S. deferred tax assets resulting in a charge of $228 million during the fourth quarter of fiscal 2020. The Company has maintained a valuation allowance on all of its US deferred tax assets at September 30, 2021. The Company expects to continue to record a valuation allowance against these assets until sufficient positive evidence exists to support its reversal.

The valuation allowance decreased by $11 million in fiscal 2021 compared to fiscal 2020, primarily due to the expiration of NOLs. The valuation allowance increased in fiscal 2020 compared to fiscal 2019 primarily due to the recording of a valuation allowance charge against all of the Company’s U.S. net deferred tax assets of $228 million as of September 30, 2020.

After the valuation allowance, approximately $26 million of foreign NOLs and less than $1 million of other tax credit carryforwards remained at September 30, 2021. 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 and other tax credit carryforwards before valuation allowances:

Years Ending September 30	NOLs		Credits
	(In millions)
2022 - 2028	$	229	$	28
2029 and thereafter		218		88
Indefinite carryforwards		818		2
Total	$	1,265	$	118

As of September 30, 2021, provisions have not been made for non-U.S. withholding taxes or other applicable taxes on $1,934 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, 2021, the total amount of unrecognized tax benefits was $21 million, of which $6 million was recorded in Other liabilities in the Consolidated Balance Sheet and $15 million was offset against deferred tax assets. In addition, accruals of $4 million have been recorded for penalties and interest, as of September 30, 2021. Total penalties and interest recorded in the tax provision in the Consolidated Statements of Operations was $1 million in both fiscal 2021 and 2020, and $2 million in 2019. If the unrecognized tax benefits were recognized as of September 30, 2021, there would be $21 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 2021, 2020 and 2019 is as follows:

	Years Ended September 30
	2021			2020			2019
	(In millions)
Balance at beginning of the year	$	23		$	27		$	37
Additions based on tax provisions related to the current    year		1			2			—
Additions for tax positions of prior years		—			2			—
Reductions of tax provisions of prior years		(2	)		(1	)		(1	)
Reductions related to settlements		—			(5	)		(5	)
Reductions from lapse of statute of limitations		(1	)		(2	)		(4	)
Balance at end of the year	$	21		$	23		$	27

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 files U.S. federal and state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The 2018 through 2020 tax years generally remain subject to examination by the IRS and various tax years from 2005 through 2020 remain subject to examination by the respective state tax authorities. In significant non-U.S. jurisdictions, various tax years from 2005 through 2020 remain subject to examination by their respective tax authorities. As of September 30, 2021, Cabot’s significant non-U.S. jurisdictions include Canada, China, France, Germany, Italy, Japan, and the Netherlands.