Cabot Corporation — Q1 FY2012 10-Q
Business context and period: The quarter ended December 31, 2011; comparisons are with the three months ended December 31, 2010. The statements present the Supermetals Business as discontinued operations. Its sale closed in January 2012, after quarter-end.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales and operating revenues, continuing operations | $762 million | $694 million |
| Gross profit | $143 million | $131 million |
| Income from operations | $61 million | $53 million |
| Income before taxes and affiliate earnings | $55 million | $46 million |
| Income from continuing operations | $40 million | $64 million |
| Net income attributable to Cabot | $46 million | $75 million |
| Diluted EPS | $0.71 | $1.13 |
| Cash provided by operating activities | $20 million | $40 million |
| Capital expenditures | $61 million | $31 million |
- Sales rose about 10%; gross profit increased about 9%. Gross margin was approximately 18.8%, versus 18.9%.
- Management attributed higher sales primarily to price increases and favorable product mix (+$90 million combined), with favorable currency (+$12 million), partly offset by lower volumes (-$37 million). Segment EBIT increased to $81 million from $74 million.
- Rubber Blacks EBIT increased $18 million to $55 million, while Performance Segment EBIT fell $10 million to $21 million, principally due to new-capacity startup and higher management costs. New Business EBIT was approximately flat; Specialty Fluids EBIT declined $1 million to $5 million.
- Continuing-operations income declined despite higher pretax income: the quarter had a $16 million tax provision versus a $15 million tax benefit a year earlier. Prior-year tax included $23 million of benefits related to repatriation and $2 million from renewal of the U.S. R&E credit. Discontinued-operations income was $11 million versus $16 million.
Cash, debt and liquidity
- Cash and cash equivalents were $188 million at December 31, down $98 million from September 30. Operating cash flow was $20 million; investing used $65 million and financing used $48 million.
- Working capital absorbed $90 million of cash, including a $46 million inventory increase, a $12 million receivables increase and a $32 million reduction in payables and accrued liabilities. Capital spending exceeded operating cash flow by $41 million.
- Balance-sheet debt comprised $83 million of bank notes payable, $52 million current long-term debt and $551 million long-term debt. Cabot reported approximately $532 million of available revolving-credit capacity and said it complied with applicable covenants.
- The company repurchased approximately 0.9 million shares for about $30 million and paid $12 million in common dividends. The quarterly dividend was $0.18 per share.
Outlook, transactions and risks
- Management expected fiscal 2012 operating tax rate of 25%–26%, versus 22% in fiscal 2011. Capital expenditures for the remainder of fiscal 2012 were expected to be $140 million–$190 million. Management anticipated adequate liquidity for operating needs, investments and obligations.
- The Supermetals sale provided $175 million cash at closing, with additional two-year notes and contingent EBITDA-linked payments; the filing states minimum total consideration of approximately $450 million. Cabot also sold excess inventory for approximately $50 million, paid through a two-year note. These receivables and future payments merit attention for collection and credit risk.
- Management cited higher unit margins as the principal operating improvement, offset by lower Core Segment volumes, startup-related fixed costs and growth spending. Rubber Blacks global volumes fell 9% year over year.
- Risks and contingencies include the EPA’s review of the Pampa, Texas carbon-black facility, where additional emissions controls and a civil penalty were anticipated; approximately 42,000 pending respirator claims (reserve $10 million discounted, $16 million undiscounted); $6 million environmental reserves; and $65 million of unrecognized tax benefits. The company also disclosed currency-conversion and investment-recoverability uncertainty in Venezuela.
- Long-term purchase commitments totaled $4.519 billion, largely for raw materials and natural gas, with amounts tied in part to market prices. The filing reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Supermetals sale notes and contingent payments are collected on schedule and whether the transaction produces the stated minimum consideration.
- Whether Core Segment volumes and Performance Segment profitability recover as new capacity ramps and costs are absorbed.
- Actual fiscal 2012 capital spending, operating cash flow and working-capital requirements against management’s outlook.
- Tax audit outcomes and the effect of the higher projected tax rate on earnings and cash taxes.
- Potential financial exposure from the EPA matter, respirator claims, environmental remediation and Venezuela currency restrictions.