Cabot Corporation (NYSE: CBT) — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2020. All financial amounts are in U.S. dollars. The filing was signed May 11, 2020.
Business context and reporting period
Cabot operates in Reinforcement Materials, Performance Chemicals and Purification Solutions. The Specialty Fluids business was divested in June 2019, so prior-period comparisons include its results. The quarter was materially affected by COVID-19-related customer shutdowns, particularly in automotive and tires.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales and other operating revenues | $710 million | $844 million | $1,437 million | $1,665 million |
| Gross profit | $153 million | $178 million | $294 million | $344 million |
| Income (loss) from operations | $24 million | $73 million | $87 million | $150 million |
| Net income (loss) attributable to Cabot | $(1) million | $23 million | $40 million | $92 million |
| Diluted EPS | $(0.01) | $0.39 | $0.70 | $1.53 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $129 million | $51 million |
Q2 gross margin was approximately 21.5%, versus 21.1% a year earlier; operating margin was approximately 3.4%, versus 8.7%. For the six-month periods, gross margin was approximately 20.5% versus 20.7%, and operating margin approximately 6.1% versus 9.0%.
Q2 sales fell 16% year over year; excluding $24 million of prior-year Specialty Fluids sales, the decline was $110 million, driven mainly by lower volume, less favorable price/product mix and foreign exchange. Q2 gross profit declined $25 million. Selling and administrative expenses rose $44 million to $114 million, primarily due to the $50 million respirator-claims settlement charge. The six-month period’s lower earnings also reflected weaker segment results and the settlement charge.
Q2 Total segment EBIT, a non-GAAP measure, was $95 million versus $112 million; excluding $12 million of prior-year Specialty Fluids EBIT, it declined $5 million. Segment EBIT for Q2: Reinforcement Materials $61 million (flat), Performance Chemicals $31 million (down from $38 million), and Purification Solutions $3 million (up from $1 million).
Cash, debt and liquidity
At March 31, 2020, cash and cash equivalents were $142 million and restricted cash was $35 million. Cabot reported $1.2 billion of borrowing availability under revolving credit agreements. The balance sheet showed $1,190 million of long-term debt, $7 million of current long-term debt and no short-term borrowings; separately, management reported $100 million outstanding on the U.S. revolver and $144 million under non-U.S. revolving facilities. Cabot said it was in compliance with credit-facility covenants.
Six-month investing cash outflow was $126 million, including $119 million of capital expenditures. Financing activities provided $10 million, including $197 million of long-term debt proceeds, offset in part by debt repayments, $44 million of share repurchases and $40 million of common dividends. Management said overall liquidity, measured as cash plus borrowing availability, declined $136 million during the half.
Outlook, risks and notable items
- COVID-19: Management expected continued adverse effects on revenue, profitability and cash flow, with the duration and recovery path uncertain. Automotive and tire customer closures reduced demand and led to lower production at Cabot facilities; some operations were suspended or idled to comply with government measures.
- Mitigation and outlook: Cabot reduced discretionary spending, managed production and inventory, and temporarily halted share repurchases. Fiscal 2020 capital expenditure expectations were reduced to approximately $200 million. The company anticipated sufficient liquidity for the foreseeable future, while cautioning that mitigation might not offset demand declines.
- Oil prices: The sharp April 2020 decline in oil prices was expected to pressure near-term Reinforcement Materials margins and reduce energy-center revenue.
- Respirator claims: A February settlement created a $65 million payable; Cabot recorded a $50 million Q2 charge and expected to pay the liability in two equal installments in fiscal Q3 2020 and Q1 2021. A separate $23 million reserve covered expected existing and future claims. Actual costs could differ from estimates.
- Acquisition after quarter-end: In April 2020, Cabot completed its acquisition of Shenzhen Sanshun Nano New Materials for approximately $105 million, including $90 million cash consideration (with $5 million contingent on milestones) and $15 million of assumed debt. The acquired business is expected to be included in Performance Chemicals.
- Other items: Fiscal 2020 operating tax rate guidance was 29%–30%. Cabot expected approximately $4 million of additional restructuring charges in the remainder of fiscal 2020 and thereafter. The U.S. pension-plan settlement process was expected to conclude by the end of calendar 2020; management anticipated a roughly $13 million loss upon settlement.
- Contingencies and controls: Environmental reserves were $9 million. Management said reasonably possible additional environmental remediation costs above recorded reserves were expected to be immaterial. Disclosure controls were deemed effective, and no material internal-control changes were reported.
Important facts for investors to verify
- How quickly automotive and tire demand, plant utilization and Cabot’s margins recover from COVID-19 disruptions.
- Whether cash generation and the $1.2 billion of reported revolver availability remain sufficient, including after the April acquisition and respirator settlement payments.
- The ultimate cost and timing of respirator claims, and whether future claims or settlements require additional charges or reserves.
- Whether the $200 million capital-spending outlook, 29%–30% operating tax-rate outlook and restructuring expectations change.
- The acquisition’s final purchase accounting, integration costs and contribution to Performance Chemicals.