Cabot Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2013. Unaudited. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context
Cabot reports four segments: Reinforcement Materials, Performance Materials, Advanced Technologies and Purification Solutions. Purification Solutions reflects Norit, acquired July 31, 2012, so it has no comparable prior-year segment results. The Supermetals business, sold in January 2012, is reported as discontinued operations.
Financial performance
- Third quarter: Sales were $903, up 7% from $846. Gross profit was $177 versus $175; gross margin was approximately 19.6%, compared with 20.7%. Operating income was $86 versus $90. Continuing-operations income attributable to Cabot was $55 million, or $0.86 diluted EPS, versus $61 million, or $0.96. Total net income attributable to Cabot was $59 million, or $0.90 diluted EPS, compared with $66 million, or $1.02.
- First nine months: Sales were $2,565, up 5% from $2,452. Gross profit declined to $468 from $491; gross margin was approximately 18.2%, versus 20.0%. Operating income fell to $190 from $238. Continuing-operations income attributable to Cabot was $104 million, or $1.61 diluted EPS, versus $148 million, or $2.29. Total net income attributable to Cabot was $106 million, or $1.63 diluted EPS, versus $352 million, or $5.43; the prior period included a substantial after-tax gain on the Supermetals sale.
- Cash flow: Operating cash flow for nine months was $142, down from $184. Capital expenditures were $195, versus $176, resulting in operating cash flow less capex of negative $53, compared with positive $8. Cash ended at $76, down from $120 at September 30, 2012.
- Debt and liquidity: Notes payable, current long-term debt and long-term debt totaled approximately $1,452 at June 30, versus $1,419 at September 30, 2012. Cash less these borrowings was approximately $1,376. Current assets were $1,604 and current liabilities $988. Cabot reported $547 of available capacity under its revolving credit agreement and compliance with its covenants.
- Dividends: Quarterly dividend was $0.20 per share; nine-month dividends were $0.60 per share, versus $0.56 a year earlier.
Material changes and segment performance
- Management attributed the nine-month decline in pre-tax continuing results primarily to lower volumes and unit margins in a challenging macroeconomic environment. Sales growth reflected Norit, partly offset by lower volumes, prices and product mix, and unfavorable currency translation.
- Third-quarter total segment EBIT was $111 versus $109; nine-month segment EBIT was $290 versus $313. Reinforcement Materials EBIT fell to $48 from $59 for the quarter and to $139 from $186 for nine months, mainly due to lower unit margins and volumes.
- Performance Materials quarterly EBIT was $35 versus $38; nine-month EBIT improved to $98 from $94. Advanced Technologies EBIT increased to $27 from $12 for the quarter and to $42 from $33 for nine months, including restructuring savings and an aerogel license prepayment.
- Purification Solutions reported sales of $86 and EBIT of $1 for the quarter; nine-month sales were $258 and EBIT $11. Segment EBIT excludes certain functional and indirect costs. Cabot expected to allocate costs of up to $12 for fiscal 2013 and said including them likely would have made third-quarter Purification Solutions EBIT a loss.
- Interest expense increased to $15 from $11 for the quarter and to $47 from $30 for nine months, principally due to debt used to finance Norit. Restructuring charges were $30 for nine months versus $14 a year earlier.
Outlook, unusual items and risks
- Management expected a fiscal 2013 operating tax rate of approximately 27%, capital expenditures of $55–$80 for the rest of the fiscal year, and sufficient liquidity to meet foreseeable operational, investment and financial needs.
- Cabot expected to refinance $175 of debt maturing in the fourth quarter of fiscal 2013, reducing liquidity by approximately $200, and anticipated closing the NHUMO transaction during calendar 2013. The deal provides for $80 cash and $25 of redeemable preferred stock, subject to regulatory approvals.
- A change in estimated useful lives for certain machinery increased third-quarter continuing income by $2 ($0.03 per diluted share); Cabot estimated a $9 ($0.14 per diluted share) benefit over the next 12 months.
- Cabot recorded $16 of impairment and accelerated depreciation among restructuring costs. The Port Dickson, Malaysia facility ceased production; expected total pre-tax closure charges were approximately $27, with approximately $11 of cumulative net cash outlays.
- Purification Solutions had $462 of goodwill. Its growth depends in part on mercury-removal demand and adoption and enforcement of U.S. environmental standards effective in April 2015; the annual May 2013 impairment assessment found no impairment.
- Other notable exposures include EPA discussions regarding Clean Air Act compliance at the Pampa, Texas facility, potentially requiring significant capital investment and a civil penalty; approximately 42,000 pending respirator claimants and an $11 discounted reserve; and $5 reserved for environmental matters. The filing also reports $4,075 of long-term raw-material purchase commitments.
- Cabot disclosed a March 2013 fall of ground at its Manitoba mine, potential further deterioration or flooding, and a multi-year dike and lake-dewatering project under planning and permitting. A disruption could affect Specialty Fluids raw-material supply.
- Venezuela’s bolivar devaluation led to a $2 loss on remeasurement of Cabot-held monetary accounts; management reported no impairment of its $26 equity investment but noted currency convertibility and recoverability risks.
Important facts for investors to verify
- Whether operating cash generation and working-capital management can support elevated capital spending, debt obligations and planned NHUMO cash consideration.
- Actual Purification Solutions profitability after functional-cost allocations, and progress integrating Norit and realizing expected synergies.
- Whether demand, margins and volumes recover in Reinforcement Materials and other businesses, and how raw-material costs and LIFO accounting affect results.
- Final costs and cash timing for the Malaysia closure, EPA-related actions, and the mine safety and remediation project.
- Collection and timing of the remaining Supermetals sale notes, including the assumptions used to value the $214 receivable.
- Whether environmental regulations support Purification Solutions growth and its substantial goodwill carrying value.