CBT

Cabot Corporation 10-Q Summary: Quarter Ended June 30, 2007

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Cabot Corporation for the three and nine months ended June 30, 2007. Cabot is a global manufacturer of specialty chemicals, organized into four reportable segments: Carbon Black, Metal Oxides, Supermetals, and Specialty Fluids. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales decreased 2.6% in the quarter ($649M vs $666M) due to lower pricing in the Carbon Black segment (feedstock cost lag) and a non-recurring $11M revenue item from 2006. For the nine months, sales increased 3.2% ($1,941M vs $1,880M), driven by foreign currency translation ($57M) and volume growth ($33M).
• Profitability: Operating income decreased 21% in the quarter ($33M vs $42M) but increased 82% for the nine months ($162M vs $89M). The nine-month improvement was driven by lower raw material costs and higher volumes, offset by pricing pressures in Supermetals and Carbon Black.
• Segment Performance:
  • Carbon Black: Sales down 1.6% QoQ due to pricing; PBT up 8.7% ($25M vs $23M) due to volume and inventory charges.
  • Supermetals: Sales down 27% QoQ ($48M vs $66M) and PBT dropped to break-even from $9M, driven by the transition from fixed-price contracts to market-based sales and electronics market weakness.
  • Metal Oxides: Sales and PBT increased modestly due to volume growth and lower raw material costs.
  • Specialty Fluids: Strong performance with sales up 33% QoQ ($16M vs $12M) driven by rental revenues.
• Restructuring: The company announced the closure of its Waverly, WV facility, expecting total charges of ~$22M. $3M was recorded in Q3, with $5M expected in the remainder of fiscal 2007.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects the effective tax rate for fiscal 2007 to be between 26% and 28% before discrete items. Capital expenditures for fiscal 2007 are expected to be approximately $140M.
• Unusual Items:
  • Antitrust Settlement: A $10M reserve was recorded for a carbon black antitrust class action lawsuit. A settlement payment of $10M was made in July 2007 and held in escrow.
  • Accounting Changes: Adoption of FAS 158 (Pension Accounting) is expected to result in a balance sheet charge of up to $50M in Q4 2007, recorded in accumulated other comprehensive income.
  • Preferred Stock Conversion: On July 20, 2007, all Series B ESOP Convertible Preferred Stock was converted into common stock, which will decrease basic EPS in future periods.
• Risks:
  • Feedstock Volatility: Lag between rising feedstock costs and contract price adjustments negatively impacted Q3 margins.
  • Litigation: Significant reserves exist for respirator liabilities ($18M) and environmental matters ($12M). Pending beryllium claims and AVX supply agreement disputes remain.
  • Foreign Currency: Concerns regarding the repatriation of $11M in cash held in Venezuela at the official exchange rate.

Investor Verification Checklist

• Feedstock Pricing Lag: Verify the duration and magnitude of the mismatch between raw material costs and contract pricing in the Carbon Black segment.
• Antitrust Settlement Finalization: Confirm the final court approval of the $10M carbon black antitrust settlement scheduled for September 2007.
• Supermetals Recovery: Monitor the transition from fixed-price to market-based sales and the impact of the electronics market slowdown on future profitability.
• Waverly Closure Costs: Track the execution of the $22M restructuring plan for the Waverly, WV facility closure.
• Venezuelan Cash Repatriation: Assess the risk of devaluation or inability to repatriate the $11M cash balance in Venezuela.
• FAS 158 Impact: Review the Q4 2007 financial statements for the specific impact of the pension accounting change on equity.