Cabot Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2012. Financial statements are unaudited; dollar amounts are in millions except per-share data. The Supermetals Business sale is presented as discontinued operations.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $846 | $836 | $2,452 | $2,269 |
| Gross profit | $175 | $152 | $491 | $417 |
| Operating income | $90 | $75 | $238 | $182 |
| Income from continuing operations | $66 | $54 | $162 | $158 |
| Net income attributable to Cabot | $66 | $60 | $352 | $186 |
| Diluted EPS | $1.02 | $0.92 | $5.43 | $2.81 |
| Cash from operating activities | Nine months: $184 vs. $117 | 2012 vs. 2011 |
Gross margin improved to approximately 20.7% from 18.2% in the quarter and 20.0% from 18.4% for the nine-month period. The increase in nine-month net income was primarily attributable to the $190 after-tax gain on the Supermetals sale; continuing-operations income rose only modestly. Quarterly diluted EPS from continuing operations was $0.96, versus $0.73; nine-month continuing-operations diluted EPS was $2.29, versus $2.13.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $407, total assets $3,369, current assets $1,617 and current liabilities $630. The resulting current ratio was approximately 2.6.
- Debt consisted of $102 of bank notes payable, $38 current long-term debt and $559 long-term debt. These balances total $699 of borrowings, or approximately $394 net of cash; this excludes other obligations such as capital leases.
- Operating cash flow of $184 was supported by net income and depreciation, but included working-capital investment; receivables and inventories increased by $75 and $55, respectively. Capital expenditures were $176, versus $129 in the comparable period.
- Cash increased by $121 to $407 during the nine months. Investing cash flow was positive $27, including $203 of cash received from the Supermetals sale and related notes; financing used $74, including $36 of share repurchases and $36 of dividends to common shareholders.
- At June 30, revolving-credit availability was approximately $538, and Cabot reported compliance with applicable covenants. After quarter-end, commitments were expanded to $750.
Changes versus prior periods and segment results
- Quarterly revenue rose $10, while nine-month revenue rose $183. Management attributed growth mainly to higher prices and favorable product mix, partly offset by lower volumes and, in the quarter, unfavorable currency translation.
- Quarterly segment EBIT increased to $109 from $106; nine-month segment EBIT increased to $313 from $275. Improved unit margins were partly offset by lower volumes and higher fixed costs, including costs from capacity start-ups and growth spending.
- Core Segment EBIT was $59 for the quarter versus $57 and $186 for nine months versus $145. Performance Segment EBIT declined to $38 from $43 for the quarter and to $94 from $113 for nine months, principally reflecting higher fixed costs from new capacity and segment-management costs.
- New Business Segment EBIT fell to $1 from $3 for the quarter and to $1 from $7 for nine months, amid weaker Aerogel and Inkjet Colorants volumes and higher capacity costs. Specialty Fluids EBIT increased to $11 from $3 for the quarter and $32 from $10 for nine months, reflecting larger, more complex jobs and favorable sales mix.
Outlook, material events and risks
- Cabot completed its $1.1 billion acquisition of Norit on July 31, 2012, after the reporting date. It issued $600 million of senior notes—$250 million due 2018 at 2.55% and $350 million due 2022 at 3.70%—and used expanded revolving-credit capacity and cash on hand to fund the remainder. Purchase accounting was not finalized in the filing.
- Management expected sufficient liquidity for foreseeable operating, investment and financial needs. It forecast a fiscal 2012 operating tax rate of 25%–26% and capital expenditures of $75–$100 for the remainder of fiscal 2012.
- The Supermetals sale generated minimum consideration of approximately $450, including $175 cash at closing and notes. The GAM notes had a carrying value of $253 at June 30 and are exposed to uncertainty in forecast cash flows, Adjusted EBITDA and discount-rate assumptions.
- Unusual and other charges included $14 of restructuring costs and $5 of Norit acquisition costs in the first nine months. The Hong Kong facility closure was expected to result in approximately $9 of total pretax charges; approximately $5 had been recorded through June 30.
- Key disclosed exposures include EPA discussions concerning Clean Air Act permitting at the Pampa, Texas facility; environmental remediation reserves of $5 discounted ($6 undiscounted); and approximately 41,000 pending respirator claims, with a $9 discounted reserve ($14 undiscounted). Management cautioned that actual costs may differ from estimates.
- Cabot cited raw-material costs, product demand and volumes, capacity execution, Norit integration, currency movements, environmental regulation, litigation and respirator-claim assumptions as risks. It also monitored the convertibility and recoverability of its Venezuelan affiliate investment.
Investor verification priorities
- Separate continuing-operations performance from the Supermetals gain when assessing earnings and EPS growth.
- Review the Norit acquisition financing, post-close debt and liquidity, and the eventual purchase-price allocation and integration results.
- Track segment margins and whether higher prices and mix continue to offset raw-material inflation, lower volumes and added capacity costs.
- Assess collections and working-capital needs, capital spending, and the timing and value of payments due under the GAM notes.
- Monitor developments in the EPA Pampa matter, environmental and respirator liabilities, and Venezuelan currency-conversion constraints.