Cabot Corporation — FY2011 Form 10-K
Business context and period. Cabot is a global specialty chemicals and performance materials company. This filing covers the fiscal year ended September 30, 2011; fiscal 2011 fourth-quarter results are also provided. The four reporting segments were Core, Performance, New Business and Specialty Fluids. Supermetals was classified as discontinued operations following an agreement to sell it.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Continuing net sales and operating revenue | $3.102 billion | $2.716 billion |
| Gross profit | $558 million | $510 million |
| Income from operations | $243 million | $204 million |
| Net income attributable to Cabot | $236 million | $154 million |
| Diluted EPS | $3.57 | $2.35 |
| Cash from operating activities | $195 million | $249 million |
| Capital expenditures | $230 million | $108 million |
- Revenue rose 14%, primarily from higher prices and favorable product mix, plus currency translation; volume was slightly lower. Gross profit increased 9%. Gross margin was approximately 18.0%, versus 18.8% in FY2010.
- Net income included $53 million from discontinued operations, compared with $26 million in FY2010. Continuing-operations diluted EPS was $2.77, compared with $1.94.
- Cash and cash equivalents were $286 million at year-end, down from $387 million. Working capital was $899 million. Operating cash flow fell as higher receivables and inventories absorbed cash.
- Reported total debt was $613 million, including the current portion; short-term notes payable to banks were an additional $86 million. Net debt to capitalization was 20%, versus 16%. A new $550 million revolving facility runs through August 2016; approximately $521 million was available, and Cabot reported compliance with its covenants.
- Common dividends remained $0.72 per share for the year. Cabot repurchased approximately 1.6 million shares on the open market for $50 million.
Material changes versus the prior year
- Total segment EBIT increased to $354 million from $314 million. Higher unit margins, pricing, mix and energy/yield investments more than offset higher raw-material costs and fixed manufacturing costs.
- Core/Rubber Blacks sales rose to $1.952 billion from $1.660 billion; EBIT increased to $183 million from $139 million. Performance Segment sales reached $880 million, up from $783 million, and EBIT rose to $140 million from $125 million.
- Specialty Fluids sales declined to $69 million from $81 million and EBIT to $22 million from $35 million, primarily due to smaller, shorter-duration jobs and less favorable mix. New Business EBIT fell to $9 million from $15 million despite higher sales.
- Cash flow from operations decreased by $54 million, while capital spending more than doubled. The company attributed the operating cash use chiefly to increased receivables and inventories amid higher prices and feedstock costs.
Outlook, commentary, risks and unusual items
- Management expected FY2012 capital spending of $200–$250 million and an operating tax rate of 24%–25%. It expected liquidity from cash, operations and committed credit facilities to cover foreseeable needs.
- Capacity projects included rubber-black expansions in South America and Indonesia, a planned 130,000-metric-ton-per-year Hebei, China facility expected to commission in calendar 2013, fumed-silica expansion in China and Wales, and increased inkjet capacity in Massachusetts.
- The proposed Supermetals sale to Global Advanced Metals had minimum stated consideration of approximately $401.5 million, with cash, a secured interest-bearing note and contingent payments. Closing remained subject to regulatory approval and customary conditions; the parties expected completion by year-end 2011.
- Key exposures include volatile petroleum-linked feedstock and energy costs, customer concentration in tire markets, global economic and automotive cycles, foreign exchange and interest-rate movements, and execution and utilization risks for capacity projects. International operations represented a majority of revenue; Venezuela currency controls could constrain repatriation.
- Environmental and legal matters include an EPA inquiry concerning the Pampa, Texas facility’s Clean Air Act permitting, a $6 million environmental reserve, and respirator claims with a $11 million discounted reserve ($16 million undiscounted). The company cautioned actual liabilities could differ from estimates.
- FY2011 included $18 million of restructuring charges and a $38 million net tax benefit from discrete items. A roughly $9 million benefit from a prior-period feedstock-pipeline judgment was also recognized. Results were affected by segment-reporting changes and the Supermetals discontinued-operations reclassification.
Most important facts for investors to verify
- Whether the Supermetals transaction closed on the stated terms, and the timing and collectability of its note and contingent consideration.
- Whether planned FY2012 capital spending and capacity additions were completed on schedule and achieved expected utilization and returns.
- Whether improved prices and margins continued to cover feedstock, energy and fixed-cost increases, particularly in Rubber Blacks.
- Cash conversion and working-capital trends, including receivables and inventory, alongside debt maturities and use of the revolving facility.
- Developments in the EPA matter, environmental remediation, respirator claims and related reserve assumptions.
- Realization of deferred tax assets and the stated FY2012 operating tax-rate outlook, given audits and forecast-dependent tax benefits.