Cabot Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless stated otherwise. Cabot is a specialty chemicals company with four reportable segments: Reinforcement Materials, Performance Materials, Advanced Technologies, and Purification Solutions.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales and operating revenues | $899 million | $820 million |
| Gross profit / gross margin | $179 million / 19.9% | $147 million / 17.9% |
| Income from operations / operating margin | $86 million / 9.6% | $55 million / 6.7% |
| Net income attributable to Cabot | $80 million | $20 million |
| Diluted EPS attributable to Cabot | $1.23 | $0.31 |
| Cash used in operating activities | $18 million | $51 million |
| Cash and cash equivalents at period end | $105 million | $91 million |
Revenue rose $79 million, primarily from $107 million of higher volumes, partly offset by $32 million of lower prices and unfavorable product mix. Gross profit increased $32 million, mainly on volume. Earnings included a $29 million noncash gain from remeasuring Cabot’s previously held NHUMO interest upon obtaining control; other income was $35 million versus $1 million. The reported 22% effective tax rate was affected by this nontaxable gain; management’s operating tax rate was 28%.
Segment sales and EBIT: Reinforcement Materials, $517 million and $64 million (prior $475 million and $50 million); Performance Materials, $217 million and $34 million (prior $196 million and $27 million); Advanced Technologies, $65 million and $24 million (prior $38 million and $7 million); Purification Solutions, $77 million and a $9 million loss (prior $93 million and $5 million profit). Total segment EBIT, a non-GAAP measure, was $113 million versus $89 million. Purification Solutions weakened on lower volumes and higher maintenance and allocated costs.
Liquidity, debt and cash flow
Operating cash outflow improved from $51 million to $18 million, but remained negative despite $86 million of net income. Higher receivables and inventory, and lower payables and accrued liabilities, used working capital. Investing cash outflow was $119 million, including $42 million of capital expenditures and $80 million paid for NHUMO. Financing provided $155 million, principally from $149 million net commercial-paper issuance. Cash increased $10 million during the quarter.
At December 31, current assets were $1.615 billion and current liabilities $969 million. Notes payable were $421 million, including $390 million of commercial paper; current and long-term debt were $19 million and $1.026 billion, respectively. Total reported debt across these categories was approximately $1.466 billion, compared with $1.298 billion at September 30. Cabot had $359 million of availability under its revolving credit agreement and reported compliance with its covenants. Management expected available cash, operating cash flow, and credit and commercial-paper capacity to meet foreseeable needs.
The company held $215 million of notes receivable from the Supermetals business sale, due by March 31, 2014; their estimated fair value was $210 million. Capital expenditures for the remainder of FY2014 were expected to be $150–$200 million.
Material changes, outlook and risks
- In November 2013, Cabot bought KUO’s approximately 60% interest in NHUMO for $80 million cash and consolidated the joint venture. The preliminary allocation included $51 million goodwill, $57 million customer-relationship intangibles, and $28 million of redeemable preferred stock; purchase-price allocation remained preliminary. The preferred stock has a $25 million redemption value and a 6% annual dividend, subject to NHUMO meeting a minimum EBITDA level.
- Management expected the FY2014 operating tax rate to be 26%–28%. It cited higher volumes as the main driver of improved segment EBIT, partly offset by higher fixed costs, new carbon-black capacity costs, and Purification Solutions maintenance costs.
- The Port Dickson, Malaysia facility closure was expected to result in approximately $25 million total pretax charges and about $9 million cumulative net cash outlays. Separately, announced plans to close Leuven, Belgium and establish an EMEA service center in Riga, Latvia were expected to involve $19–$22 million of cash charges over the next two years, subject to consultation.
- Risks include raw-material prices and availability, product demand and customer concentration, currency movements, execution and integration of acquisitions, environmental and regulatory requirements, litigation, and the ability to collect receivables and manage inventory. Venezuelan currency-conversion restrictions could affect the value of bolivar-denominated assets.
- Environmental reserves were $5 million. Cabot reported approximately 42,000 pending respirator claimants and a $10 million discounted reserve ($14 million undiscounted); actual costs could differ from estimates. Management considered other outstanding claims not expected, in aggregate, to materially adversely affect financial position.
- Cabot reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Key facts for investors to verify
- How much of earnings growth is repeatable after excluding the $29 million NHUMO remeasurement gain and other unusual items?
- Whether Cabot received the $215 million GAM note payment due March 31, 2014, and whether the receivable was collected in full.
- Whether working capital, commercial-paper borrowing, and projected capital spending affected liquidity or debt levels after quarter-end.
- NHUMO’s subsequent operating performance, final purchase accounting, and terms or payment status of its redeemable preferred stock.
- Whether Purification Solutions recovered from its quarterly loss and whether restructuring and Leuven-to-Riga costs remained within disclosed expectations.
- Changes in respirator claims, environmental exposures, tax audits, or Venezuelan currency-conversion conditions.