Cabot Corporation (NYSE: CBT) — Form 10-Q
Business context and reporting period. This filing covers Cabot’s fiscal third quarter and nine months ended June 30, 2021; the filing was signed August 9, 2021. Cabot reports three segments: Reinforcement Materials, Performance Chemicals, and Purification Solutions. Results improved substantially as demand recovered from COVID-19-related declines in the prior year.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales and operating revenues | $917 million | $518 million | $2,505 million | $1,955 million |
| Gross profit | $214 million | $69 million | $621 million | $363 million |
| Income from operations | $134 million | $4 million | $380 million | $91 million |
| Net income attributable to Cabot | $86 million | $(6) million | $221 million | $34 million |
| Diluted EPS | $1.48 | $(0.12) | $3.84 | $0.59 |
| Cash from operating activities | Not separately stated | Not separately stated | $157 million | $278 million |
| Capital expenditures | Not separately stated | Not separately stated | $115 million | $162 million |
Gross margin was approximately 23.3% in Q3 versus 13.3% a year earlier; for the nine-month periods it was approximately 24.8% versus 18.6%. These percentages are calculated from reported sales and gross profit. Cash and cash equivalents were $173 million at June 30, 2021, compared with $151 million at September 30, 2020. Total debt, including short-term borrowings and current maturities, was approximately $1.156 billion, versus $1.115 billion at September 30, 2020. Current assets were $1.370 billion and current liabilities $704 million.
Operating cash flow declined year over year despite stronger earnings, primarily because working capital increased by $226 million, including higher receivables from increased sales and higher-cost inventories. Cash and borrowing availability totaled $173 million and $1.2 billion, respectively, at June 30, 2021. The company paid $60 million in common dividends during the first nine months.
Material changes and segment results
- Revenue and earnings recovery: Q3 revenue rose $399 million year over year, driven by higher volumes ($185 million), favorable price and product mix ($152 million), and foreign currency translation ($35 million). The filing attributes the comparison largely to recovery from COVID-19-related demand weakness in 2020.
- Reinforcement Materials: Q3 sales were $479 million versus $197 million and segment EBIT was $85 million versus a $5 million loss. Management cited higher volumes, stronger Asian pricing and improved geographic mix; higher fixed costs partly offset gains.
- Performance Chemicals: Q3 sales were $303 million versus $220 million and segment EBIT was $54 million versus $21 million. Higher volume and margins, including demand in automotive applications, drove improvement; increased fixed costs were a partial offset.
- Purification Solutions: Q3 sales were $69 million versus $63 million and segment EBIT was $6 million versus $2 million. Higher specialty-application sales and $2 million of insurance proceeds contributed to the EBIT increase.
- Unusual and comparative items: Q3 FY2021 included a $12 million Brazilian indirect-tax settlement benefit ($9 million in revenue and $3 million in other income). Nine-month FY2020 included a $50 million respirator-litigation settlement charge. Fiscal 2021 also included pension settlement charges, restructuring costs and acquisition-related charges.
Outlook, risks and contingencies
- Management expected strong fourth-quarter demand in Reinforcement Materials, with elevated fixed costs from maintenance, a Franklin, Louisiana outage and higher feedstock differentials. Performance Chemicals demand was expected to remain strong overall, with some seasonal softness and higher costs from maintenance and plant outages. Purification Solutions was expected to see lower mercury-removal volumes; Q3 insurance proceeds were not expected to recur.
- Management forecast a fiscal 2021 operating tax rate of 27%–28%. The filing does not provide full-year revenue or earnings guidance. Fiscal 2021 capital expenditures were expected to be approximately $200 million.
- Subsequent event: July 2021 flooding at the Pepinster, Belgium facility was expected to prevent production there for at least the remainder of fiscal 2021. Cabot estimated a $10 million–$15 million damage charge and anticipated recovering a substantial portion through insurance, but the amount and timing were uncertain.
- Liquidity and debt: On August 6, 2021, Cabot replaced its existing $1 billion revolver with a new $1 billion facility maturing in 2026, with two possible one-year extensions. It includes a net-debt-to-EBITDA limit of 3.50 to 1.00 and sustainability-linked pricing targets.
- Contingencies: The respirator-claims reserve was $20 million at June 30, 2021, expected to be paid over multiple years. Actual costs could differ as claims, legal outcomes, insurance recoveries and allocation among responsible parties change. The company also disclosed ordinary-course litigation and tax audits; it could not quantify the possible effect of changes in unrecognized tax benefits.
- Key business risks include the uncertain course of COVID-19, global logistics and labor constraints, semiconductor shortages affecting automotive demand, raw-material and energy price volatility, construction-project cost and timing pressure, foreign exchange movements, and legal and environmental matters.
Important facts for investors to verify
- Whether the demand recovery and reported margin improvements are sustainable, particularly after the prior-year pandemic-driven comparison.
- The working-capital reversal and cash conversion, including receivables collection and inventory levels, given operating cash flow fell to $157 million from $278 million.
- The operational, financial and insurance impacts of the Pepinster flooding and the Franklin, Louisiana plant outage.
- Actual timing and amount of respirator-claim payments and whether the $20 million reserve remains adequate.
- Compliance with the new credit facility’s leverage covenant and the effect of sustainability targets on borrowing costs.
- Performance against the stated fiscal-year tax-rate and capital-spending expectations; the filing provides no full-year earnings guidance.