Cabot Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. The filing also reports the September 2010 quarter. Cabot is a global specialty chemicals and performance materials company; its largest businesses are rubber blacks and specialty products, including fumed metal oxides.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales and other operating revenues | $2.893 billion | $2.243 billion |
| Gross profit | $564 million | $227 million |
| Gross margin | 19.5% | 10.1% |
| Income (loss) from operations | $248 million | ($55) million |
| Net income (loss) attributable to Cabot | $154 million | ($77) million |
| Diluted EPS attributable to Cabot | $2.35 | ($1.25) |
| Cash provided by operating activities | $249 million | $399 million |
| Capital expenditures | $108 million | $106 million |
| Cash and cash equivalents at year-end | $387 million | $304 million |
| Total debt | $623 million | $628 million |
Gross margin and operating margin (8.6% in FY2010 versus (2.5)% in FY2009) are calculated from reported figures. Cash from operations less capital expenditures was approximately $141 million in FY2010, compared with $293 million in FY2009; this is a simple analyst calculation, not a company-reported measure. The cash-flow decline reflected a $76 million working-capital increase, mainly from higher receivables as sales recovered.
Working capital was $899 million. The company reported $424 million of current availability under revolving and other committed facilities; its new $450 million unsecured revolving credit facility matures in June 2014 and had no drawn borrowings at year-end. Cabot reported a 16% net-debt-to-capitalization ratio and compliance with credit-agreement covenants. Annual dividends were $0.72 per share.
For the September 2010 quarter, sales were $749 million, gross profit was $134 million, net income attributable to Cabot was $35 million, and diluted EPS was $0.54.
Changes versus prior periods
- FY2010 sales rose $650 million year over year, primarily from $453 million of higher volume, $116 million of higher prices and favorable product mix, and $57 million of favorable currency translation.
- Management attributed the recovery in profitability to stronger demand across tire, automotive, infrastructure and electronics markets; restructuring and cost reductions; improved pricing and mix; and investment in efficient capacity and technology. Demand volumes nevertheless remained 5%–10% below pre-recession levels.
- Every reported business segment improved its FY2010 sales versus FY2009. Rubber Blacks sales were $1.677 billion and segment PBT was $150 million; Performance Segment sales were $783 million and PBT was $130 million. New Business sales were $88 million with a $2 million PBT loss; Specialty Fluids sales were $81 million and PBT was $35 million. Segment PBT is a company-defined non-GAAP measure.
- FY2010 included $46 million of restructuring charges, including $30 million for the 2009 global restructuring plan and $16 million for the Thane, India closure. FY2009 had $91 million of restructuring charges.
- FY2010 operating cash flow was below FY2009’s unusually strong $399 million, which benefited from a $356 million working-capital release. A $14 million FY2010 earnings benefit from LIFO inventory liquidation should also be considered when assessing earnings quality.
Outlook, risks and contingencies
- Management expected continued profitability improvement as demand recovered, with FY2011 capacity expansion in emerging markets and ongoing new-business development. It planned approximately $250 million of FY2011 capital expenditures, versus $108 million in FY2010, and expected a 25%–27% FY2011 tax rate excluding discrete items and certain-item tax effects.
- Cabot expected sufficient liquidity for operating needs and financial obligations over the following 12 months. Planned FY2011 restructuring cash payments were approximately $21 million. Expected FY2011 pension contributions were approximately $12 million, with separate postretirement benefit payments of approximately $7 million.
- Material risks include cyclicality and uncertain global demand; volatile feedstock, energy and raw-material costs; customer concentration (Goodyear represented approximately 11% of FY2010 consolidated revenue); foreign exchange and country risks; and successful execution and utilization of capacity expansions and restructuring.
- The company had $7 million of environmental remediation reserves and a $15 million discounted reserve for respirator claims ($20 million undiscounted). Respirator liabilities depend on uncertain future claims, legal outcomes, insurance availability and contributions from other parties.
- EPA was reviewing Clean Air Act permitting at Cabot’s Pampa, Texas facility and could require additional emissions controls or seek a civil penalty. Cabot also disclosed Venezuelan currency restrictions; it valued subsidiary-held bolivar assets at approximately $3 million at year-end and reported a post-year-end exchange loss of less than $1 million on a bond transaction.
- Other notable exposure includes $2.197 billion of purchase commitments, largely for raw materials, with amounts subject to market-price changes; $66 million of uncertain tax positions with timing of potential payments not estimable; and greenhouse-gas regulation affecting carbon-black operations. Deloitte issued unqualified audit opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether recovering volumes and improved pricing and mix persisted, and how much earnings depended on one-time or inventory-related benefits, including the LIFO liquidation.
- Whether the planned FY2011 capital spending and emerging-market expansions were completed on budget and generated expected returns.
- How operating cash flow, working capital, debt and revolver availability evolved after year-end.
- Developments in the Pampa EPA review, environmental remediation, respirator claims and the related reserve assumptions.
- Changes in major-customer exposure, Venezuelan cash convertibility, raw-material costs and FY2011 tax-rate assumptions.