Cabot Corporation — Form 10-Q summary
Business context and reporting period
Quarter ended June 30, 2015, the third quarter of Cabot’s fiscal 2015; financial statements are unaudited. The filing also reports the first nine months of fiscal 2015. Cabot reports four segments: Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. Comparisons are with the corresponding 2014 periods.
Key financial metrics
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Sales and other operating revenues | $694 million, versus $940 million | $2.200 billion, versus $2.736 billion |
| Gross profit | $150 million, versus $184 million | $446 million, versus $539 million |
| Income from operations | $68 million, versus $93 million | $186 million, versus $248 million |
| Net income (loss) attributable to Cabot | $(445) million, versus $52 million | $(374) million, versus $168 million |
| Diluted earnings (loss) per share attributable to Cabot | $(7.04), versus $0.78 | $(5.88), versus $2.55 |
| Cash provided by operating activities | Not presented for the quarter | $278 million, versus $185 million |
Gross margin was approximately 21.6% for the quarter versus 19.6% a year earlier, and 20.3% for the nine months versus 19.7%. These calculated ratios reflect gross profit divided by reported sales.
The quarter and nine-month losses include $563 million of pre-tax Purification Solutions impairments: $353 million of goodwill and $209 million of long-lived assets. The after-tax charge was $482 million, including an $80 million tax benefit on the long-lived asset impairment; the goodwill charge was nondeductible. Income from operations is reported before these separately presented impairment charges.
At June 30, cash was $84 million; current assets were $1.178 billion and current liabilities $568 million. Cabot reported $609 million of available capacity under its revolving credit agreement and $141 million of commercial paper outstanding. Notes payable were $152 million, current long-term debt $1 million and long-term debt $971 million. Total debt on those balance-sheet lines was approximately $1.124 billion. Nine-month capital expenditures were $103 million.
Material changes and segment performance
- Quarterly sales fell $246 million. Management attributed the decline mainly to less favorable price and product mix ($161 million), currency translation ($63 million) and lower volume ($7 million). For the nine months, sales fell $536 million, primarily from price and mix, currency, lower volumes and reduced elastomer-composites royalties and technology payments.
- Total segment EBIT, a non-GAAP measure, was $86 million for the quarter versus $109 million, and $252 million for the nine months versus $339 million. Lower margins and volumes were key pressures.
- Reinforcement Materials EBIT was $32 million for the quarter versus $62 million; nine-month EBIT was $112 million versus $200 million. Lower contract pricing, feedstock-related effects and weaker regional mix weighed on results.
- Performance Chemicals EBIT improved to $48 million from $44 million for the quarter and to $129 million from $127 million for the nine months, supported by margins and cost reductions.
- Purification Solutions EBIT improved to $3 million from a $7 million loss for the quarter and to $3 million from a $20 million loss for the nine months, reflecting price increases, lower variable costs and cost control. Its impaired assets and uncertain mercury-removal outlook remain significant concerns.
- Specialty Fluids EBIT declined to $3 million from $10 million for the quarter and to $8 million from $32 million for the nine months, as oil-and-gas project activity and rental and sales volumes weakened.
Cash from operations increased despite the net loss, substantially because impairment charges were noncash, with working-capital reductions also contributing. Cash used in investing was $111 million; financing used $86 million, including $85 million of share repurchases and $42 million of common dividends. Cash increased by $17 million during the nine months, while foreign-exchange effects reduced cash by $64 million.
Outlook, risks and contingencies
- Management expected higher Reinforcement Materials and Performance Chemicals volumes in fiscal Q4 and early fiscal 2016 than in the first nine months, but anticipated continuing Reinforcement Materials margin pressure and uncertainty in South America and China.
- Following the U.S. Supreme Court’s June 2015 ruling on EPA consideration of costs in setting the Mercury and Air Toxics Standards (MATS), management assumed a two-year delay in implementation for impairment valuation and lowered assumptions for mercury-removal market size, adoption, usage and pricing. A longer delay could increase impairment charges. The final goodwill impairment step-two analysis was still incomplete; management expected to complete it in fiscal Q4 and said total charges were not expected to change materially, while noting additional impairment remained possible.
- Management expected Purification Solutions to maintain its then-current operating-result level in the near term, but said demand visibility might improve over the next three to six months. Specialty Fluids faced potential further project delays from oil-and-gas industry cost and capital-management measures.
- Fiscal 2015 capital spending was forecast at $40–$60 million for the remainder of the year. Management expected an operating tax rate of 27%–28% for fiscal 2015 and said available cash, operating cash flow, commercial paper and revolving-credit capacity should meet foreseeable needs. Cabot was in compliance with its debt-to-EBITDA covenant at June 30.
- Key exposures include foreign exchange and Venezuela: Cabot held less than $1 million in bolivars and monitored conversion and recoverability of its $15 million Venezuelan affiliate investment. Environmental reserves were $16 million; the respirator-claims reserve was $11 million, with approximately 38,000 pending claimants. Management said additional environmental costs above recorded reserves were reasonably possible but expected to be immaterial; actual respirator liabilities could differ from estimates.
- Long-term raw-material purchase commitments totaled $3.196 billion, based on market prices at June 30, 2015. Management identified risks including raw-material costs, demand, customer concentration, regulation, currency, litigation, environmental matters and project execution.
Important facts for investors to verify
- Review the assumptions underlying Purification Solutions’ impairment valuation, including the MATS implementation timing, market demand, pricing and discount rate, and the final step-two analysis.
- Track Reinforcement Materials margins and Specialty Fluids activity against management’s outlook, and monitor currency and raw-material effects on sales and profitability.
- Reconcile reported operating cash flow with its noncash impairment and working-capital components; monitor commercial paper, total debt, liquidity and covenant compliance.
- Assess the scale and timing of the $3.196 billion purchase commitments, remaining restructuring payments, environmental and respirator exposures, and Venezuela-related currency and investment risks.
- Note that the quarter’s $0.22 dividend per share was unchanged from the prior-year quarter; verify future dividend and repurchase decisions against earnings and cash generation.