Cabot Corporation — Q2 FY2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2023. Comparative periods ended March 31, 2022. Amounts are in millions except per-share data. Filing dated May 9, 2023.
Business context and results
Cabot operates through Reinforcement Materials and Performance Chemicals. Its Purification Solutions business was divested in March 2022, affecting year-over-year comparisons.
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $1,033 | $1,092 | $1,998 | $2,060 |
| Gross profit | $210 | $232 | $391 | $430 |
| Gross margin | 20.3% | 21.2% | 19.6% | 20.9% |
| Income attributable to Cabot | $75 | $107 | $129 | $18 |
| Diluted EPS | $1.29 | $1.84 | $2.23 | $0.30 |
| Operating cash flow | Not separately provided | Not separately provided | $214 | $(39) |
Q2 operating income was $129, down from $161; pretax income before equity earnings was $110, down from $147. For the six-month period, operating income was $234 versus $78 and pretax income was $194 versus $54. The prior-year six-month results included a $197 impairment charge and other divestiture-related loss, partly offset by a $24 bargain-purchase gain; those items materially affect comparability.
Segments and material changes
- Reinforcement Materials: Q2 revenue increased to $672 from $654 and segment EBIT rose to $122 from $101. Improved pricing and product mix, especially under annual tire customer agreements, offset lower volume, foreign exchange impacts and lower by-product revenue.
- Performance Chemicals: Q2 revenue fell to $326 from $363 and segment EBIT declined to $28 from $70. Lower volumes and margins reflected weak end-market demand, customer destocking, COVID-related disruption in China, foreign exchange, and the prior-year timing of price increases.
- Total segment EBIT: $150 in Q2 versus $171; $273 for six months versus $308. Management attributed the Q2 decline to weaker volumes, higher fixed costs and unfavorable currency movements, partly offset by Reinforcement Materials margins.
- Consolidated Q2 revenue declined $59, with lower volumes ($64), unfavorable currency ($38), the divestiture ($36) and lower by-product revenue ($11) partly offset by favorable price and mix ($93). Gross profit fell mainly due to lower volumes and higher fixed costs.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $205, versus $206 at September 30, 2022. Current assets were $1,742 and current liabilities $904.
- Total debt was approximately $1,360: $258 short-term borrowings, including $217 commercial paper and $118 borrowed under the Euro credit agreement, plus $8 current and $1,094 long-term debt. No U.S. credit agreement borrowings were outstanding.
- Available borrowing capacity under credit agreements was $992. Cabot reported compliance with covenants, including a maximum consolidated net debt-to-EBITDA ratio of 3.50 to 1.00.
- Six-month operating cash flow was $214, compared with cash used of $39 a year earlier, largely reflecting working-capital movements. Investing activities used $64, including $86 of capital expenditures; financing activities used $210. Cash ended the period at $205.
- Fiscal 2023 capital expenditures were expected to be $250–$300. The company said cash, operating cash flow and available facilities should cover foreseeable operating, investment and financial needs.
- Interest expense rose to $23 in Q2 from $11, primarily due to higher rates on commercial paper and notes issued in June 2022. Six-month interest expense was $45 versus $23.
Outlook, risks and unusual items
- For Q3, management expected Reinforcement Materials EBIT to improve sequentially as volumes recover, particularly in Asia. Performance Chemicals volumes were expected to increase across product lines, with contribution unit margins relatively stable.
- FY2023 operating tax rate guidance was 24%–26%. Management did not provide a forward reconciliation to the GAAP effective tax rate because certain future items cannot be predicted reliably. Substantially all U.S. deferred tax assets, net of deferred tax liabilities, were subject to valuation allowances; a possible release within 12 months could produce a material non-cash tax benefit.
- Cabot recorded $14 of insurance proceeds for the 2021 Pepinster flood during the six months, including $8 representing final settlement, received in April 2023. The receivable was $8 at quarter-end.
- A $38 reserve covered Cabot’s expected share of respirator claims, compared with $39 at September 30, 2022. The filing says the liability could change materially in the near term, including because of developments in Aearo Technologies’ bankruptcy, insurance recoveries, claim trends, legal outcomes and allocation among responsible parties.
- Other stated risks include demand and economic conditions, raw-material and energy costs, currency and interest rates, customer performance, project execution, litigation, regulation and geopolitical events. Management cautioned that COVID-19 and related effects remained difficult to estimate.
- During Q2, Cabot repurchased 196,433 shares under its existing authorization. Disclosure controls were concluded to be effective as of March 31, 2023.
Important facts for investors to verify
- Whether demand, volumes and segment margins improved as expected in Q3, especially in Asia and Performance Chemicals end markets.
- How much of the cash-flow improvement came from working-capital changes and whether those benefits persist.
- Execution and funding of the $250–$300 capital expenditure plan, and continued covenant compliance and liquidity availability.
- Changes in the $38 respirator-liability reserve, including the effects of the Aearo proceedings and recoveries from insurers or other parties.
- Whether any valuation allowance release occurs and its effect on reported earnings, as distinct from operating performance.