Cabot Corporation — Form 10-Q Summary
Business context and reporting period
Cabot Corporation’s unaudited third quarter and first nine months of fiscal 2018 ended June 30, 2018. The company operates in Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and liquidity
- Third-quarter revenue: $854 million, up 21% from $705 million. Gross profit was $200 million versus $161 million; gross margin increased to approximately 23.4% from 22.8%.
- Third-quarter earnings: Operating income was $109 million versus $84 million. Net income attributable to Cabot was $88 million, or $1.40 diluted EPS, compared with $47 million, or $0.73.
- Nine-month results: Revenue was $2.392 billion, up 20%; gross profit was $568 million versus $489 million. Cabot recorded a net loss attributable to the company of $207 million, or $3.36 per diluted share, compared with net income of $176 million, or $2.78 per diluted share.
- Major nine-month charges: Purification Solutions impairment charges were $254 million pre-tax, including $92 million of goodwill and $162 million of long-lived assets; a separate $13 million inventory reserve adjustment was also recorded. The company reported a $194 million income tax provision, including substantial tax-reform-related items. Management attributed the nine-month loss primarily to the tax charge and Purification Solutions impairment.
- Cash flow: Operating activities provided $143 million in the first nine months, down from $191 million. Investing activities used $211 million, including $167 million of capital expenditures and $64 million for the Tech Blend acquisition. Financing activities used $69 million. Cash declined by $149 million to $131 million.
- Debt and liquidity: At June 30, short-term borrowings were $312 million, current long-term debt $36 million and long-term debt $630 million. Cash plus reported revolving-credit availability was $828 million ($131 million cash and $697 million availability). Cabot said it was in compliance with its credit-facility covenants.
- Other metrics: Nine-month common dividends were $0.96 per share. Fiscal 2018 capital expenditures were expected to be approximately $250 million. Long-term raw-material purchase commitments totaled $3.476 billion, with amounts under certain agreements subject to market prices.
Material changes versus comparable periods
- Third-quarter growth and improved earnings reflected higher pricing and product mix, volumes and favorable foreign-currency translation. For the first nine months, revenue increased by $398 million, with price and mix the largest contributor.
- Reinforcement Materials third-quarter sales rose to $466 million from $367 million and segment EBIT to $74 million from $51 million. Performance Chemicals sales rose to $274 million from $229 million and EBIT to $56 million from $46 million.
- Purification Solutions remained pressured: third-quarter sales were $70 million versus $71 million and segment EBIT was a $6 million loss versus a $2 million loss. Specialty Fluids’ nine-month sales fell to $24 million from $30 million, and EBIT declined to a $2 million loss from $6 million of income.
- Effective October 1, 2017, Cabot retrospectively changed U.S. carbon-black inventory accounting from LIFO to FIFO. Management said the change improved consistency with inventory practices, physical flows and peer comparability.
Outlook, management commentary and risks
- For the fourth quarter, management expected continued strong Reinforcement Materials performance; sustained margins and strong Specialty Carbons and Formulations volumes; lower Metal Oxides volumes and higher costs due to scheduled maintenance; improved seasonal Purification Solutions results; and better Specialty Fluids results as drilling activity ramps up. No specific full-year earnings guidance was provided.
- Management continued to review strategic options for Purification Solutions, citing share losses, lower demand and pricing, competition and overcapacity in certain markets. The business’s revised forecasts drove the impairment charges.
- Management expected fiscal 2018 capital expenditures of approximately $250 million and said available cash, operating cash flow, commercial paper and revolving-credit capacity should meet foreseeable needs. Receivables, inventory and raw-material costs affect operating liquidity.
- U.S.-China tariffs had begun in July 2018. Cabot did not expect a material impact based on the tariffs then in effect, but said it would monitor further actions and potential disruption or cost and revenue effects.
- Tax reform produced significant provisional tax accounting, including a nine-month deemed-repatriation tax expense; related accounting remained incomplete. Cabot expected the lower U.S. corporate tax rate to benefit future U.S. after-tax earnings.
- Recorded reserves included $15 million for environmental matters and $17 million for respirator claims. The company noted possible additional environmental costs and uncertainty in the ultimate respirator liability. It said other litigation was not expected to materially affect financial position, while acknowledging litigation’s unpredictability.
- Cabot reported no material off-balance-sheet arrangements and said disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether Purification Solutions demand, pricing and competitive conditions stabilize, and whether strategic actions or further impairments follow.
- How final tax-reform accounting, tax audits and the unusually high reported effective tax rate affect future earnings and cash taxes.
- Whether working-capital needs, capital spending and scheduled debt maturities can be funded while maintaining liquidity and covenant compliance.
- Whether fourth-quarter segment expectations are achieved, including the effects of maintenance, project activity, raw-material prices, foreign exchange and trade policy.
- Whether environmental and respirator claims remain within recorded reserves, and how the large long-term purchase commitments respond to market-price changes.