Cabot Corporation — Form 10-Q
Reporting period: Second quarter and six months ended March 31, 2015; fiscal year ends September 30. Figures are unaudited. The company reports Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. Prior segment results were recast following a December 2014 reporting-structure change; Security Materials is presented as discontinued operations.
Financial results
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $694m | $898m | $1,506m | $1,796m |
| Gross profit | $139m | $176m | $296m | $355m |
| Operating income | $54m | $68m | $118m | $155m |
| Income from continuing operations | $27m | $39m | $76m | $126m |
| Net income attributable to Cabot | $26m | $36m | $71m | $116m |
| Diluted EPS attributable to Cabot | $0.41 | $0.54 | $1.10 | $1.77 |
| Operating cash flow | Not stated for quarter | $205m | $69m |
Q2 gross margin was approximately 20.0% versus 19.6%; six-month gross margin was approximately 19.7% versus 19.8%. Q2 operating margin was approximately 7.8% versus 7.6%; six-month operating margin was approximately 7.8% versus 8.6%. The filing reports an effective tax rate of 36% for Q2 and 18% for the first six months; the operating tax rate, a non-GAAP measure, was 28% in both periods.
At March 31, cash was $94m. Notes payable were $133m, current long-term debt $1m and long-term debt $995m. The filing identifies $124m of commercial paper within notes payable. Cash plus current revolver availability was $720m ($94m cash and $626m availability). Current assets were $1,171m and current liabilities $557m. Operating cash flow of $205m was offset by $77m of investing outflows and $37m of financing outflows; capital expenditures were $70m.
Material changes versus prior period
- Q2 revenue fell $204m (about 23%) and six-month revenue fell $290m (about 16%). Management attributed the declines chiefly to lower prices/product mix and foreign-exchange translation, with lower volumes also contributing.
- Q2 total segment EBIT declined $47m to $69m; six-month segment EBIT declined $64m to $166m. Reinforcement Materials bore the largest pressure: EBIT was $27m versus $65m in Q2 and $80m versus $138m year to date, mainly from lower unit margins and volumes.
- Specialty Fluids revenue fell to $8m from $25m in Q2 and to $24m from $53m year to date, reflecting reduced oil-and-gas project activity; segment EBIT was a $1m loss for Q2 versus $9m income.
- Purification Solutions Q2 EBIT improved to $1m from a $4m loss, while six-month EBIT was break-even versus a $13m loss. Performance Chemicals Q2 EBIT was $42m versus $46m; six-month EBIT was $81m versus $83m.
- Operating cash flow increased to $205m from $69m, principally reflecting lower receivables and inventory and working-capital movements. The prior-year comparison included $73m of net cash paid for the NHUMO acquisition in investing activities.
- Foreign-currency translation contributed to a $234m six-month other comprehensive loss; Cabot-attributable accumulated other comprehensive loss rose to $273m from $64m at September 30, 2014.
Outlook, risks and unusual items
- Management expected higher volumes across segments in the second half of FY2015 versus the first half, but continued Reinforcement Materials margin pressure from feedstock effects and competition. No consolidated revenue or EPS guidance was provided.
- Management expected a FY2015 operating tax rate of 27%–28% and $75m–$85m of capital expenditures for the remainder of the fiscal year.
- Cabot was reassessing Purification Solutions’ goodwill and asset valuations as MATS mercury-emissions requirements and market demand developed. It considered a non-cash impairment charge of up to $350m reasonably possible under the then-current regulatory schedule; a significant delay or change to MATS could increase the charge. The analysis was preliminary, with completion expected in Q3 FY2015. The unit carried $439m goodwill and $270m intangible assets.
- The U.S. Supreme Court was reviewing the MATS rule, with a ruling expected by the end of June 2015. Management reported an increase in mercury-removal demand after implementation began in April 2015, but below prior expectations; further compliance was expected in April 2016.
- Oil-and-gas cost and capital controls could continue delaying Specialty Fluids projects. Other risks include raw-material prices, demand, currency movements, regulatory developments, and litigation and environmental claims.
- Unusual items included an $18m pre-tax employee-benefit plan settlement charge in the first six months and restructuring charges of $12m. The prior-year six-month comparison included a $29m non-cash gain on the NHUMO transaction. Cabot repurchased 925,700 shares in the first six months and paid $28m in common dividends.
- Environmental reserves were $17m; the respirator-claim reserve was $11m, with approximately 40,000 claimants in pending cases. Management said other ordinary-course claims were not expected in aggregate to materially harm financial position.
Important facts for investors to verify
- Whether the Purification Solutions impairment assessment resulted in a charge, and the actual amount and affected assets.
- The Supreme Court’s MATS ruling, subsequent implementation and utility demand for mercury-removal products.
- Whether Reinforcement Materials margins recover, and whether Specialty Fluids project activity rebounds amid oil-and-gas spending constraints.
- Commercial-paper funding, revolver availability, debt-covenant compliance and cash-flow sustainability as working capital changes.
- Developments in respirator litigation, environmental remediation and Venezuela-related currency conversion and investment recoverability.