Cabot Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018. Amounts are in U.S. dollars unless noted. Results are unaudited.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales and other operating revenues | $727 million | $821 million |
| Gross profit / gross margin | $141 million / 19.4% | $166 million / 20.2% |
| Income from operations | $63 million | $77 million |
| Net income attributable to Cabot | $41 million | $69 million |
| Diluted earnings per share | $0.70 | $1.14 |
| Cash provided by (used in) operating activities | $105 million | ($39) million |
| Capital expenditures | $68 million | $54 million |
Sales declined 11% year over year; excluding $19 million of prior-year Specialty Fluids sales, sales fell $75 million. Management attributed the remaining decline mainly to lower pricing and less favorable product mix ($68 million combined) and foreign currency ($9 million), partly offset by higher volume ($5 million). Gross profit fell $25 million; lower volumes and margins in Reinforcement Materials were partly offset by higher Performance Chemicals volumes.
Reported operating margin was approximately 8.7%, versus 9.4%; Cabot-attributable net margin was approximately 5.6%, versus 8.4%. The effective tax rate was 7%, compared with a tax benefit and a negative 10% effective rate a year earlier. The current-quarter tax provision included a $10 million net discrete tax benefit.
At December 31, 2019, cash and equivalents were $173 million, current assets $1.196 billion, and current liabilities $574 million (current ratio approximately 2.1). Total debt, including short-term borrowings and current maturities, was approximately $1.106 billion, compared with approximately $1.064 billion at September 30, 2019. Cash plus available revolving-credit borrowing capacity totaled approximately $1.453 billion; availability was $1.28 billion. Cabot reported compliance with credit-facility covenants.
Operating cash flow improved to $105 million from a $39 million use, supported by net income, depreciation and amortization, and lower receivables. Investing used $77 million; financing used $44 million. Financing included $34 million of share repurchases and $20 million of common dividends. Cash increased $4 million during the quarter.
Segments and material changes
- Reinforcement Materials: Sales were $379 million versus $457 million; segment EBIT was $47 million versus $62 million. Lower volumes, including customer year-end inventory management, and weaker unit margins weighed on results.
- Performance Chemicals: Sales were $242 million versus $231 million; EBIT was $41 million versus $36 million. Higher volumes lifted results, partly offset by weaker product mix and pricing. Volumes rose 13% in Performance Additives and 20% in Formulated Solutions.
- Purification Solutions: Sales were $59 million versus $65 million; EBIT loss narrowed to $2 million from $3 million. Lower volume was partly offset by improved pricing, mix, and cost performance.
- Specialty Fluids: Divested June 28, 2019; it contributed $19 million of sales and $10 million of EBIT in the prior-year quarter. Comparative statements were not recast.
Total segment EBIT was $86 million, down from $105 million. Excluding the prior-year $10 million contribution from Specialty Fluids, segment EBIT decreased $9 million. GAAP pretax income before equity earnings was $50 million, versus $70 million.
Outlook, notable items, and risks
- Management expected earnings to improve through fiscal 2020. It anticipated Reinforcement Materials volumes returning to more normalized levels beginning in Q2, and continued year-over-year EBIT improvement in Purification Solutions. It expected near-term pricing challenges for fumed silica in China and Europe to continue.
- Management had not incorporated coronavirus effects into its outlook, citing uncertainty and the possibility of negative business impacts. Fiscal 2020 capital expenditures were expected to be approximately $225 million.
- Fiscal 2020 effective and operating tax rates were forecast at 24%–25% and 26%–27%, respectively. The filing notes that tax audits and discrete tax items could affect the effective rate.
- Cabot agreed to acquire carbon nanotube producer Shenzhen Sanshun Nano New Materials for approximately $115 million, comprising $100 million cash and $15 million assumed debt. Closing was expected in Q2 FY2020; the deal remained pending at quarter-end.
- A fiscal 2020 reorganization generated $7 million of charges in the quarter; approximately $4 million of additional charges and approximately $10 million of cash payments were expected in the remainder of FY2020 and thereafter. Total restructuring reserves were $12 million at quarter-end.
- Long-term raw-material purchase commitments totaled $2.485 billion, based on market prices at December 31, 2019; actual costs may differ. Environmental reserves were $12 million and respirator-claim reserves were $34 million. The filing says actual respirator liabilities could exceed reserves; outcomes of litigation are inherently uncertain.
- Lease-standard adoption added approximately $106 million of operating lease right-of-use assets and $111 million of lease liabilities at October 1, 2019, with no cumulative retained-earnings adjustment and no material impact on liquidity or covenant compliance.
Important facts for investors to verify
- Whether the expected recovery in Reinforcement Materials volumes and overall earnings materialized, and how price, mix, and input-cost changes affected margins.
- The effects of coronavirus-related disruption and the pending SUSN acquisition, including closing, funding, and integration.
- Cash generation, planned capital spending, debt levels, and covenant headroom as the year progresses.
- Actual restructuring charges and cash costs, and progress in improving Purification Solutions.
- Developments in respirator claims, environmental matters, tax audits, and other contingencies relative to recorded reserves.