Cabot Corporation — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021. Comparisons are with the three months ended December 31, 2020 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
- Revenue: $968 million, up 30% from $746 million. Management attributed the increase mainly to favorable pricing and product mix, including price increases to recover higher input costs; volumes were lower overall.
- Profitability: Gross profit was $198 million versus $193 million. Gross margin was approximately 20.5%, compared with 25.9% a year earlier. Operating loss was $83 million versus operating income of $118 million, primarily reflecting a $197 million impairment charge on Purification Solutions assets held for sale.
- Net income attributable to Cabot: Loss of $89 million, or $1.57 per diluted share, versus income of $60 million, or $1.06 per diluted share. The impairment charge was $160 million after tax.
- Segment EBIT: $137 million versus $140 million. Reinforcement Materials EBIT was $85 million ($88 million prior year); Performance Chemicals was $52 million ($54 million); Purification Solutions was approximately break-even versus a $2 million loss.
- Cash flow: Operating activities used $49 million versus generating $21 million. Capital expenditures were $30 million, making operating cash flow less capital expenditures approximately negative $79 million. Working capital increased $143 million, principally due to higher receivables and inventory costs.
- Liquidity and debt: Cash and cash equivalents were $179 million at quarter-end. Borrowing availability under revolving credit agreements was $983 million. Short-term borrowings were $226 million, current long-term debt $373 million, and long-term debt $714 million. The company reported compliance with credit covenants.
- Other: The company paid $21 million in common dividends and repurchased $19 million of stock during the quarter. Total assets were $3.315 billion and total stockholders’ equity was $948 million at December 31, 2021.
Material changes and business developments
- Revenue increased $222 million, driven by $207 million of favorable price and product mix and $11 million of higher energy-center by-product revenue, partly offset by $6 million of lower volumes. Gross profit rose only $5 million as higher revenue largely reflected input-cost pass-through.
- Reinforcement Materials revenue rose to $541 million from $375 million, primarily from higher prices and stronger Asia volumes; higher utility and maintenance costs weighed on EBIT.
- Performance Chemicals revenue increased to $302 million from $267 million. Pricing and mix gains were partly offset by lower volumes, including plant downtime and the Belgium site outage.
- Purification Solutions was classified as held for sale following a November 2021 agreement to sell the business to an affiliate of One Equity Partners. The announced transaction value is approximately $111 million, subject to adjustments, with expected net cash proceeds of approximately $80 million. Closing was expected in Q2 FY2022. The sale was not classified as a discontinued operation.
- Assets held for sale were reported at $111 million after the impairment; associated liabilities were $71 million. The impairment was based on estimated fair value less costs to sell.
Outlook, risks, and contingencies
- Management expected Q2 Reinforcement Materials EBIT to improve, with solid volumes and sequential improvement in EMEA and the Americas; China demand was expected to follow its usual Lunar New Year seasonality.
- Management expected sequential volume improvement in Performance Chemicals as plants returned online and continued price increases to offset rising input and operating costs.
- FY2022 operating tax rate guidance was 27%–28%. FY2022 capital expenditures were expected to be $250 million–$275 million. Management planned to refinance $350 million of notes maturing in July 2022.
- The Pepinster, Belgium facility remained temporarily out of production after flooding; production was expected to resume in Q2 FY2022. Q1 flood-related costs of $5 million were matched by an equal expected insurance recovery.
- Key risks include COVID-19 uncertainty, supply-chain and logistics disruption, raw-material, energy, labor and construction cost pressures, customer and market demand, foreign exchange and interest-rate exposure, and execution of the planned divestiture and capital projects.
- A $44 million reserve covered pending and future respirator claims. The company said developments in claims, litigation, insurance recoveries, indemnities, or allocation of costs could change its estimate, potentially materially. Other litigation and tax examinations also remain, with outcomes and impacts not fully quantifiable.
Important facts for investors to verify
- Whether the Purification Solutions sale closed on the expected timeline and at what final proceeds after closing adjustments.
- Whether pricing actions translated into sustained unit margins, rather than primarily offsetting higher input costs.
- Progress in restoring Pepinster production and in returning the affected Performance Chemicals plants to normal volumes.
- Working-capital trends, operating cash generation, and the company’s ability to fund its $250 million–$275 million capital-spending plan while managing debt and refinancing maturities.
- Any material change in the $44 million respirator-liability reserve, insurance recoveries, or other contingencies.