Cabot Corporation — Q1 FY2013 Form 10-Q
Business context and period. The unaudited quarter ended December 31, 2012, compared with the quarter ended December 31, 2011. Cabot’s fiscal year ends September 30. Results include Norit, acquired July 31, 2012, in Purification Solutions; Supermetals is presented as discontinued operations after its January 2012 sale.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $820 million | $762 million |
| Gross profit / margin | $147 million / 17.9% | $143 million / 18.8% |
| Operating income / margin | $55 million / 6.7% | $61 million / 8.0% |
| Continuing income before tax and affiliate earnings | $41 million | $55 million |
| Continuing income attributable to Cabot | $21 million | $35 million |
| Net income attributable to Cabot | $20 million | $46 million |
| Diluted EPS, continuing / total | $0.33 / $0.31 | $0.55 / $0.71 |
| Operating cash flow | $(51) million | $20 million |
| Capital expenditures | $62 million | $61 million |
Liquidity and debt. At December 31, cash was $91 million, down from $120 million at September 30. Bank notes, current long-term debt and long-term debt totaled approximately $1.50 billion, versus $1.42 billion at September 30. Cabot reported about $497 million of current availability under its revolving facility, within the facility’s $750 million limit, and said it was compliant with applicable covenants. Net debt, calculated as total debt less cash, was approximately $1.41 billion. The filing states liquidity is expected to be sufficient for foreseeable operational, investment and financial needs.
Other balance-sheet measures. Current assets were $1.42 billion and current liabilities $797 million. Total assets were $4.38 billion. Inventory rose to $587 million from $533 million; receivables declined to $619 million from $687 million. The filing reports $4.19 billion of long-term purchase commitments, primarily for raw materials, priced at market where applicable.
Material changes and management commentary
- Revenue rose $58 million, primarily from approximately $93 million of Norit/Purification Solutions revenue and $16 million from pricing and product mix, partly offset by lower volumes ($31 million) and unfavorable currency translation ($13 million).
- Gross profit increased $4 million, but gross margin narrowed. Higher unit margins and the acquired business were partly offset by higher raw-material costs and lower volumes.
- Total segment EBIT, a non-GAAP measure, increased to $90 million from $81 million. Management attributed the increase to Purification Solutions ($7 million), higher unit margins ($11 million), and Elastomer Composites milestone and royalty revenue ($2 million), partly offset by lower volumes ($11 million).
- Reported pretax income fell despite higher segment EBIT: certain items were $20 million of expense versus $5 million, including $14 million of acquisition-related charges and $6 million of restructuring costs. Other unallocated costs also increased, principally due to $6 million higher interest expense from Norit acquisition financing.
- Net income attributable to Cabot declined to $20 million from $46 million. The prior-year quarter included $11 million of after-tax Supermetals operating income; the current quarter included a $1 million discontinued-operations loss, primarily from settling pension liabilities.
- By segment, Reinforcement Materials EBIT fell to $50 million from $55 million; Performance Materials EBIT rose to $26 million from $21 million; Advanced Technologies EBIT rose to $7 million from $5 million. Purification Solutions, newly reported, recorded $93 million sales and $7 million EBIT.
- Operating cash use of $51 million reflected working-capital needs and lower income-tax payables. Management cited an $84 million working-capital increase and a $33 million decrease in income taxes payable. Investing used $45 million; financing provided $67 million, including a net debt increase.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management estimated remaining FY2013 capital expenditures of $200 million to $250 million and an FY2013 operating tax rate of 25% to 27%. Following extension of the U.S. research and experimentation tax credit, Cabot expected a $3 million discrete tax benefit in Q2 FY2013 related to FY2012.
- The quarter’s overall tax rate was 46%, including a $7 million net discrete tax charge; management reported a 27% operating tax rate. Tax audits could affect future tax expense, and the impact of potential audit resolutions was not quantified.
- Norit’s $1.113 billion purchase-price allocation remained preliminary. Goodwill and acquired intangible valuations rely on estimates; Norit-related integration and acquisition costs remain relevant risks.
- Cabot disclosed an EPA matter concerning the Pampa, Texas, facility and anticipated significant capital investment in controls over multiple years plus a civil penalty; amounts and timing were not stated. Environmental reserves were $6 million discounted ($7 million undiscounted).
- Respirator litigation involved approximately 42,000 pending claimants. The reserve was $13 million discounted ($17 million undiscounted), with payments estimated through 2062; actual exposure may differ.
- Cabot cited risks including raw-material costs, weaker demand, customer loss, Norit integration, capacity-expansion execution, regulation, currency movements, litigation, and product development and commercialization. Venezuela currency-conversion restrictions also pose risk to cash repatriation and investment recoverability.
- Other notable items: $4.188 billion in purchase commitments; $19 million received during the quarter on notes from the Supermetals sale; and $234 million carrying value of those notes at quarter-end. Cabot said it had no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Norit integration delivers expected operating benefits and how acquisition-related expenses and financing costs evolve.
- Whether lower volumes persist, and whether pricing and product mix continue to offset raw-material inflation.
- Working-capital recovery, operating cash flow, capital-spending execution, and debt levels relative to covenant limits and available liquidity.
- Progress and ultimate cost of EPA-related controls and penalty, respirator claims, and other environmental or legal contingencies.
- Realization and timing of Supermetals note payments, and the assumptions underlying the notes’ valuation.
- Actual tax rate and benefit from the tax-credit extension, including developments in pending tax audits.