Cabot Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2012 (fiscal 2012). Financial figures are unaudited and in millions of dollars unless stated otherwise. Prior periods are presented on a continuing-operations basis following the Supermetals divestiture.
Business context and results
Cabot operates in Core, Performance, New Business and Specialty Fluids segments. In January 2012, it completed the sale of substantially all Supermetals Business assets to Global Advanced Metals (GAM); Supermetals results are reported as discontinued operations.
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $844 | $739 | $1,606 | $1,433 |
| Gross profit | $173 | $134 | $316 | $265 |
| Gross margin | 20.5% | 18.1% | 19.7% | 18.5% |
| Income from operations | $87 | $54 | $148 | $107 |
| Income from continuing operations | $56 | $40 | $96 | $104 |
| Net income attributable to Cabot | $240 | $51 | $286 | $126 |
| Diluted EPS | $3.70 | $0.76 | $4.41 | $1.89 |
| Operating cash flow | Not separately stated | Not separately stated | $93 | $58 |
Reported net income includes $186 million after-tax gain on the Supermetals sale. Continuing-operations diluted EPS was $0.78 for Q2 and $1.33 for the six months, versus $0.52 and $1.40, respectively, in the comparable periods.
Liquidity, debt and cash flows
- At March 31, cash was $366, up $80 from September 30, 2011. Current assets were $1,648 and current liabilities $684 (current ratio approximately 2.4).
- Cabot reported approximately $534 of available capacity under its revolving credit agreement and said it was compliant with applicable covenants. Management expects available liquidity to meet operational, investment and financial needs for the foreseeable future.
- Balance-sheet debt included $79 of bank notes payable, $48 of current long-term debt and $560 of long-term debt. These amounts total approximately $687, compared with approximately $699 at September 30, 2011.
- Six-month operating cash flow of $93 was offset by $117 of capital expenditures; investing cash flow was positive $52, including $175 of sale proceeds. Financing used $62, including $30 of share repurchases and $24 of common dividends.
- Working capital absorbed cash, principally through increases in receivables and inventory. Cash flows include discontinued operations.
Changes versus prior periods
- Q2 revenue rose 14% and six-month revenue rose 12%. Management attributed the increases primarily to higher prices and favorable product mix; Q2 also benefited from higher volumes. Six-month volumes were lower overall.
- Gross profit increased $39 in Q2 and $51 for the six months, as pricing and mix more than offset higher raw-material costs. Higher fixed costs, including costs from new capacity and growth spending, partly offset improvement.
- Q2 total segment EBIT rose to $123 from $95; six-month segment EBIT increased to $204 from $169. Core segment EBIT improved, while Performance and New Business EBIT declined; Specialty Fluids EBIT increased substantially, including an approximately $7 benefit from a significant product sale in Q2.
- Six-month continuing income declined to $96 from $104, despite higher operating income, reflecting a $39 tax provision versus a $6 tax benefit in the prior-year period. The prior period included significant discrete tax benefits.
Outlook, risks and unusual items
- Management expected fiscal 2012 operating tax rate of 25%–27%, versus 22% in fiscal 2011, and forecast $80–$130 of capital expenditures for the remainder of fiscal 2012.
- The Supermetals sale provided $175 cash at closing plus notes and other consideration. The notes’ value and collection depend partly on GAM cash flows and Adjusted EBITDA; most note balances mature by March 2014. Certain working-capital, pension and other sale adjustments remained to be finalized.
- Management cited raw-material costs, product demand, customer concentration, capacity execution, currency movements, commercialization of new products and restructuring execution among risks. The company also has large long-term raw-material purchase commitments: $4,486 in total, based on market prices at March 31.
- Cabot reported approximately 42,000 pending claims relating to legacy respirators; the reserve was $10 discounted and $15 undiscounted. Environmental reserves were $6. The EPA was discussing Clean Air Act permitting matters at the Pampa, Texas carbon-black facility; Cabot anticipated possible additional emissions controls and a civil penalty, with no clear amount provided.
- Cabot held a $25 investment and $4 of cash and dividends receivable associated with its Venezuelan affiliate. Currency convertibility and repatriation restrictions could affect recoverability and reported values.
- Goodwill impairment testing as of March 31 found no impairment. The filing also describes restructuring charges, including expected total pre-tax charges of about $10 for the Hong Kong facility closure.
Key facts for investors to verify
- How much of reported earnings growth reflects recurring continuing operations versus the $186 after-tax divestiture gain?
- Whether GAM makes scheduled note payments and what additional proceeds result from contingent EBITDA payments and final sale adjustments.
- Whether pricing and product mix continue to offset raw-material inflation, lower volumes and higher fixed costs, particularly in Performance and New Business.
- Progress on forecast capital spending, working-capital requirements and liquidity, including compliance with credit covenants.
- Developments in EPA discussions, respirator litigation and Venezuelan currency conversion, and any resulting changes to reserves or asset recoverability.