Cabot Corporation (NYSE: CBT) — Q3 FY2023 Form 10-Q
Quarter ended June 30, 2023; fiscal year ends September 30. Amounts are in millions of dollars except per-share data. Cabot operates through Reinforcement Materials and Performance Chemicals; its Purification Solutions business was divested in March 2022.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $968 | $1,149 | $2,966 | $3,209 |
| Gross profit | $223 | $235 | $614 | $665 |
| Income from operations | $150 | $168 | $384 | $246 |
| Net income attributable to Cabot | $82 | $97 | $211 | $115 |
| Diluted EPS | $1.43 | $1.69 | $3.65 | $1.99 |
- Q3 gross margin was approximately 23.0%, versus 20.5% a year earlier; nine-month gross margin was approximately 20.7% in both periods.
- Nine-month operating cash flow was $457, versus cash used of $5 in the prior-year period. Capital expenditures were $166; operating cash flow less capital expenditures was $291 (derived).
- At June 30, cash was $220. Balance-sheet debt comprised $136 of short-term borrowings, $7 current long-term debt and $1,093 long-term debt. Revolving-credit availability was $1.1 billion; $134 of commercial paper and $118 borrowed under the Euro Credit Agreement were outstanding.
- Total assets were $3,387 and stockholders’ equity was $1,266. The current ratio was approximately 2.2, based on current assets of $1,602 and current liabilities of $738.
Changes versus comparable periods
- Q3 revenue declined $181 (16%), reflecting lower volumes ($92), unfavorable price and mix ($56), foreign exchange ($19) and lower by-product revenue ($8). Nine-month revenue fell $243 (8%); lower volumes, foreign exchange and the prior-year divestiture were partly offset by favorable pricing and mix.
- Q3 attributable net income declined $15. Management cited lower volumes and higher fixed costs, partly offset by higher Reinforcement Materials unit margins. Higher interest expense, up $9 in Q3 and $31 for nine months, reflected higher rates.
- Nine-month attributable net income rose $96, primarily because the prior year included a $197 impairment charge and $10 loss on sale related to Purification Solutions; the 2022 period also included a $24 bargain-purchase gain.
- Q3 segment EBIT was $132 for Reinforcement Materials, up $19, and $32 for Performance Chemicals, down $31. Nine-month segment EBIT was $348 and $89, respectively, versus $299 and $185 a year earlier.
Outlook, commentary and risks
- For Q4, management expected Reinforcement Materials EBIT to decline sequentially due to seasonally lower European volumes and maintenance-related fixed costs. Performance Chemicals EBIT was expected to improve sequentially on higher battery materials and inkjet volumes.
- Management projected a fiscal 2023 operating tax rate of 27%–29% and capital expenditures of approximately $250 for the year. No consolidated earnings or revenue guidance is provided in the supplied filing text.
- Liquidity was described as sufficient for foreseeable operating, investment and financial needs, using cash, operating cash flows, credit facilities and commercial paper. Cabot reported compliance with credit covenants; its U.S. revolver maturity was extended to August 2027 after quarter-end.
- Ontario regulators notified Cabot that its Sarnia plant was out of compliance with new sulfur-dioxide standards effective July 1, 2023. Cabot submitted an abatement plan and is discussing alternatives; significant future capital spending for emissions controls may be required, with a technical-standard route currently contemplating installation by July 1, 2028.
- The respirator-claims reserve was $38 at June 30. Cabot said claims and related costs could change in the near term and the change could be material. Aearo’s bankruptcy case was dismissed in June 2023; its appeal remained pending and the dismissal ended the automatic stay.
- A June 2023 European Court of Justice judgment was favorable on a VAT dispute; Cabot considered the possibility of loss remote. The company also cited potential foreign-currency losses in Argentina, where currency controls restrict cash distribution and it had approximately $35 of peso-denominated net assets.
- Substantially all U.S. deferred tax assets, net of deferred tax liabilities, remained subject to valuation allowances. A release in the next 12 months was possible and could create a material non-cash tax benefit. Management identified demand softness, customer destocking, raw-material and energy costs, foreign exchange, regulation, litigation and project execution among relevant risks.
Important facts for investors to verify
- Whether weak demand and customer destocking persist, and whether Performance Chemicals’ expected Q4 sequential recovery occurs.
- Progress on Sarnia SO₂ compliance, the regulator-approved approach and the timing and amount of required capital costs.
- Developments in respirator litigation and Aearo’s appeal, including whether Cabot’s $38 reserve remains adequate.
- Cash generation, working-capital trends, capital spending versus the approximately $250 fiscal-year plan, and borrowing levels.
- Any changes in U.S. tax valuation allowances, Argentina currency restrictions or related foreign-exchange exposure.