Cabot Corporation 10-Q Summary
Business context and period: Cabot Corporation manufactures specialty chemicals, including reinforcement materials and performance chemicals. This fiscal third-quarter report covers the three and nine months ended June 30, 2022; the comparable periods ended June 30, 2021. Results are unaudited.
Financial performance
| Metric | Three months ended June 30, 2022 | Prior-year quarter | Nine months ended June 30, 2022 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1.149 billion | $917 million | $3.209 billion | $2.505 billion |
| Gross profit | $235 million | $214 million | $665 million | $621 million |
| Income from operations | $168 million | $134 million | $246 million | $380 million |
| Net income attributable to Cabot | $97 million | $86 million | $115 million | $221 million |
| Diluted EPS | $1.69 | $1.48 | $1.99 | $3.84 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(5) million | $157 million |
Quarterly gross margin was approximately 20.5%, compared with 23.3% a year earlier; nine-month gross margin was approximately 20.7%, versus 24.8%. Revenue growth reflected higher pricing and product mix, plus higher quarterly volumes, partly offset by foreign-exchange headwinds and the Purification Solutions divestiture. Management attributed stronger quarterly earnings primarily to improved segment EBIT. Nine-month net income fell largely because of the divestiture-related loss and impairment charge.
- Segments: Third-quarter Reinforcement Materials revenue was $707 million and EBIT $113 million, versus $479 million and $85 million. Performance Chemicals revenue was $372 million and EBIT $63 million, versus $303 million and $54 million. Increased pricing and margins supported both businesses.
- Cash flow and investment: Nine-month operating cash use of $5 million reflected a $390 million increase in net working capital, mainly higher receivables and inventory, partly offset by payables. Capital expenditures were $121 million.
- Liquidity: June 30 cash and cash equivalents were $208 million; available borrowing capacity under revolving credit agreements was $930 million. The current ratio was approximately 1.7, based on current assets of $1.871 billion and current liabilities of $1.100 billion.
- Debt: Total short- and long-term debt was approximately $1.410 billion, versus $1.162 billion at September 30, 2021. Cabot issued $400 million of 5% unsecured notes due 2032 and used part of the proceeds to repay $350 million of 3.7% notes. The company reported compliance with its credit-agreement covenants.
Material changes and unusual items
- Cabot sold Purification Solutions on March 1, 2022, for expected proceeds of approximately $90 million, net of cash transferred. It received $79 million and recorded an $11 million receivable subject to customary adjustments. The nine-month results include a $197 million impairment charge and a $9 million sale loss; the total after-tax charge was $169 million.
- Cabot acquired Tokai Carbon (Tianjin) on February 28, 2022, for $14 million cash consideration, net of $5 million cash acquired. A $24 million bargain-purchase gain was recorded.
- A $17 million gain on sale of land contributed to quarterly results. The nine-month period also included the $24 million acquisition gain and the Purification Solutions charge.
- Foreign currency translation reduced quarterly comprehensive income; the quarter included a $102 million translation loss, net of tax.
Outlook, risks and contingencies
- Management expected strong Reinforcement Materials demand in the fourth quarter, with seasonally lower European volumes and higher scheduled turnaround maintenance costs.
- For Performance Chemicals, management expected strong unit margins and sequential volume growth in battery materials and inkjet applications, offset by higher fixed costs, maintenance timing and elevated utility costs.
- Fiscal 2022 capital expenditures were expected to be $200 million to $225 million. The company projected an operating tax rate of approximately 26% for fiscal 2022; this is a non-GAAP measure.
- Cabot said available cash, operating cash flow, credit facilities and commercial paper capacity should be sufficient for foreseeable operating, investment and financial needs. Working-capital needs, receivables collection and raw-material costs remain important to liquidity.
- Respirator claims: The reserve declined from $44 million at September 30, 2021 to $40 million at June 30, 2022. Aearo Technologies, a member of the group sharing these claim costs, filed for Chapter 11 on July 26, 2022. Cabot was assessing the potential effect; the filing says claim liabilities could change materially in the near term.
- Other cited risks include energy and raw-material price and availability, inflation, foreign exchange and interest rates, geopolitical and COVID-19-related disruption, litigation, tax matters, and execution of growth and capital projects. The Pepinster, Belgium facility had resumed full production; Cabot expected insurance recoveries to exceed incurred flood-related costs and deductibles.
Key facts for investors to verify
- How much of reported revenue and margin growth reflects sustainable volume and mix versus price pass-through for higher input costs.
- Whether working capital converts back into operating cash flow, given the $390 million nine-month increase and negative operating cash flow.
- Final Purification Solutions sale adjustments and collection of the $11 million receivable expected by fiscal year-end.
- The potential effect of Aearo’s bankruptcy on Cabot’s respirator-claim exposure, reserve adequacy and cash payments.
- Debt and liquidity needs, including covenant headroom, refinancing costs and the effect of elevated rates.
- Delivery against the fiscal-year capital-spending, tax-rate and segment outlook assumptions.