Cabot Corporation — Q3 FY2010 Form 10-Q
Reporting period: Three and nine months ended June 30, 2010; fiscal year ends September 30. Unaudited consolidated results. Cabot’s businesses include Rubber Blacks and Supermetals (Core), Performance, New Business, and Specialty Fluids.
Financial results
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Revenue | $753 million | $511 million | $2,144 million | $1,633 million |
| Gross profit | $154 million | $68 million | $430 million | $155 million |
| Income (loss) from operations | $77 million | $2 million | $188 million | $(58) million |
| Net income (loss) attributable to Cabot | $47 million | $(12) million | $119 million | $(66) million |
| Diluted EPS attributable to Cabot | $0.72 | $(0.19) | $1.81 | $(1.06) |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $99 million | $317 million |
Gross margin was approximately 20.5% for Q3 and 20.1% for the nine months, versus approximately 13.3% and 9.5% in the comparable 2009 periods. Revenue rose 47% in Q3 and 31% year to date. Management attributed the improvement chiefly to stronger volumes, higher selling prices and favorable product mix, with lower restructuring-related costs also supporting year-to-date profitability.
- Cash flow and investment: Nine-month operating cash flow fell to $99 million from $317 million. Higher sales and prices increased receivables by $142 million; inventories rose $9 million. Capital expenditures were $57 million, compared with $75 million a year earlier.
- Liquidity and debt: June 30 cash was $295 million, down from $304 million at September 30, 2009. Current assets were $1.331 billion and current liabilities $485 million. Debt comprised $41 million of bank notes, $22 million current long-term debt, and $601 million long-term debt. Cabot reported approximately $501 million of availability under its revolving credit agreement and other committed facilities.
- Dividends: $0.18 per common share for the quarter, unchanged from the prior-year quarter; $0.54 for the nine months, also unchanged.
Changes, outlook, and notable items
- Segment profit before tax increased to $101 million in Q3 from $29 million, and to $265 million for nine months from $37 million. Rubber Blacks, Supermetals, and Performance improved on stronger demand; New Business remained slightly loss-making year to date, while Specialty Fluids benefited from North Sea drilling activity and higher rental revenue.
- Q3 and nine-month results included LIFO inventory liquidation benefits at the U.S. Supermetals site: cost of sales was reduced by $8 million and $15 million, respectively, increasing net income by $5 million and $9 million. These benefits are an important qualification to reported earnings.
- Restructuring charges were $14 million in Q3 and $38 million for nine months. The Thane, India carbon-black facility ceased manufacturing in June; Cabot expected approximately $20 million of total pre-tax charges, with $14 million recorded through June 30. The 2009 Global Restructuring Plan had incurred $113 million of an expected approximately $120 million cumulative pre-tax charge.
- Management expected FY2010 tax rate of 20%–22%; excluding discrete items and restructuring, the expected operating tax rate was 25%–27%. The filing gives no specific revenue or earnings guidance.
- Cabot entered a new unsecured $450 million revolving credit facility expiring June 2014, replacing a facility due to expire in August 2010. The facility has customary covenants, and Cabot reported compliance at June 30. Management expected available cash, operating cash flow, and credit access to meet foreseeable needs.
- Risks and contingencies include raw-material costs and demand, currency movements, execution of restructuring, tax audits, and litigation. Environmental reserves were $7 million undiscounted; the respirator-claims reserve was $12 million discounted ($22 million undiscounted), with approximately 45,000 pending claimants. A new Gainesville, Florida environmental class-action lawsuit sought unspecified damages; Cabot said it had not been served and intended to defend the claims. Cabot also disclosed ongoing beryllium-related claims, while noting favorable dismissals and rulings during the quarter.
- Venezuelan currency restrictions prevented Cabot from converting and remitting its remaining Bolivar cash and dividend receivables through the available secondary market; balances were remeasured at the official non-essential rate. Cabot said the investment was not impaired but continued to monitor developments.
- After quarter-end, on July 28, Cabot acquired Oxonica Materials Inc. for $5 million. The filing also reported no material change in previously disclosed risk factors and effective disclosure controls.
Investor verification priorities
- Assess the sustainability of volume, price, and margin improvements, including the effect of raw-material costs and contract-lag changes.
- Separate recurring earnings from LIFO liquidation gains and restructuring charges; check progress and cash costs against restructuring estimates.
- Monitor operating cash conversion, particularly receivables growth, and confirm ongoing access to committed credit and covenant headroom.
- Track the outcome and potential cost of environmental, respirator, beryllium, and tax matters, as well as the ability to repatriate Venezuelan funds.
- Review subsequent disclosures on the Oxonica acquisition accounting and the realization of management’s FY2010 tax-rate expectations.