Cabot Corporation (NYSE: CBT) — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended March 31, 2022. Comparisons are with the corresponding 2021 periods unless noted. Amounts are in U.S. dollars.
Business context and financial performance
Cabot reported two continuing reportable segments: Reinforcement Materials and Performance Chemicals. It sold its Purification Solutions business on March 1, 2022, and acquired Tokai Carbon (Tianjin) Co. on February 28, 2022.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales and operating revenues | $1.092 billion, up 30% from $842 million | $2.060 billion, up 30% from $1.588 billion |
| Gross profit / gross margin | $232 million / 21.2%; prior year $214 million / 25.4% | $430 million / 20.9%; prior year $407 million / 25.6% |
| Net income attributable to Cabot | $107 million; prior year $75 million | $18 million; prior year $135 million |
| Diluted earnings per share | $1.84; prior year $1.30 | $0.30; prior year $2.36 |
| Cash provided by (used in) operating activities | Not separately presented for the quarter | $(39) million; prior year $86 million |
| Capital expenditures | Not separately presented for the quarter | $71 million; prior year $69 million |
Quarterly revenue growth reflected favorable pricing and product mix, higher energy-center by-product revenue, and increased volumes, partly offset by the Purification Solutions divestiture and foreign-exchange effects. Gross profit rose in dollars, but gross margin declined as cost of sales grew faster than revenue. Management attributed higher gross profit to improved unit margins, partly offset by higher fixed costs.
For the six-month period, reported earnings included a $204 million pre-tax loss and impairment charge related to Purification Solutions, partly offset by a $24 million bargain-purchase gain on Tokai Carbon. The divestiture charge drove the year-over-year decline in six-month net income despite higher segment EBIT. The filing reports a $167 million after-tax loss on the divestiture and impairment for the six months.
Liquidity, debt and capital resources
- At March 31, 2022, cash and cash equivalents were $215 million, versus $168 million at September 30, 2021. Current assets were $1.778 billion and current liabilities $1.407 billion.
- Total debt was approximately $1.337 billion, comprising $253 million of short-term borrowings, $373 million of current long-term debt and $711 million of long-term debt. The filing identifies $238 million of commercial paper and $128 million borrowed under the Euro Credit Agreement.
- Cabot reported $968 million of available borrowing capacity under its revolving credit agreements and said it was in compliance with debt covenants. Management expects available cash, operating cash flow, credit facilities and commercial paper to meet foreseeable operating, investment and financial needs.
- Operating cash use for the six months was attributed primarily to a $254 million increase in net working capital, including higher receivables and inventory from increased sales and raw-material costs, partly offset by higher payables. Financing activities provided $85 million, including $167 million of net commercial-paper proceeds; the company paid $42 million of common dividends and repurchased $34 million of shares.
- Cabot planned approximately $250 million of fiscal 2022 capital expenditures and said it intended to refinance $350 million of 3.7% notes maturing in July 2022.
Segments and material changes
- Reinforcement Materials: Second-quarter sales were $627 million versus $434 million; EBIT was $101 million versus $89 million. Higher prices and product mix, including tire customer agreements and pass-through of higher input costs, and stronger volumes supported results. Management expected third-quarter EBIT to improve sequentially, with strong volumes and healthy margins.
- Performance Chemicals: Second-quarter sales were $360 million versus $294 million; EBIT was $70 million versus $58 million. Higher pricing and product mix lifted margins; plant downtime and higher fixed and utility costs were offsets. Management expected sequential volume growth, including from battery materials and the specialty-compounds plant returning to full operation, while anticipating higher fixed costs and less favorable pricing timing in fumed metal oxides.
- Purification Solutions: The business was sold to an affiliate of funds advised by One Equity Partners for expected proceeds of approximately $90 million, net of $7 million cash transferred. Cabot received $79 million and recorded an $11 million receivable, subject to customary adjustments; management expected settlement by fiscal year-end.
- Tokai Carbon: Cabot acquired the Tianjin carbon-black facility for $14 million cash consideration, net of $5 million cash acquired. A $24 million bargain-purchase gain was recorded; the consideration was expected to be paid in fiscal Q3.
Outlook, risks and contingencies
- Management projected a fiscal 2022 operating tax rate of 26%–27% and fiscal-year capital expenditures of approximately $250 million. The operating tax rate is a non-GAAP measure; the filing does not provide a forward-looking reconciliation to an effective tax rate.
- Risks cited include volatility and availability of energy and raw materials, supply-chain and labor constraints, foreign-exchange and interest-rate exposure, geopolitical developments including the Russian invasion of Ukraine, and COVID-19-related disruptions. Cabot also highlighted political, regulatory, operating and cash-repatriation risks in China; China accounted for approximately 25% of fiscal 2021 revenue and 25% of property, plant and equipment at September 30, 2021.
- The reserve for respirator-related claims was $42 million at March 31, 2022, down from $44 million at September 30, 2021. The company said estimates could change materially in the near term as claims, litigation outcomes, insurance recoverability, and allocation of costs evolve. Other litigation and contingencies were described as arising in the ordinary course; outcomes are inherently unpredictable.
- The Pepinster, Belgium facility, damaged by flooding in July 2021, resumed production in fiscal Q2. Cabot recorded additional costs and offsetting expected insurance recoveries during the six-month period; an $8 million insurance-recovery receivable remained at March 31, 2022.
- Management concluded disclosure controls were effective as of March 31, 2022. Controls at the newly acquired Tokai Carbon business were excluded from the assessment.
Important facts for investors to verify
- Whether working capital converts back into operating cash flow as receivables and inventory levels change.
- Progress on refinancing the $350 million notes due July 2022 and any changes in commercial-paper borrowings or credit availability.
- Final proceeds and post-closing adjustments for Purification Solutions, and payment and integration of the Tokai Carbon acquisition.
- Whether segment volume and margin expectations are achieved, particularly amid input-cost, utility-cost and plant-availability pressures.
- Changes to the respirator-liability reserve, insurance recoveries, or other legal and tax contingencies.