Cabot Corporation — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended March 31, 2021; unaudited. Cabot operates in Reinforcement Materials, Performance Chemicals and Purification Solutions. Comparisons are with the periods ended March 31, 2020.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales and other operating revenues | $842m | $710m | $1,588m | $1,437m |
| Gross profit | $214m | $153m | $407m | $294m |
| Income from operations | $128m | $24m | $246m | $87m |
| Net income attributable to Cabot | $75m | $(1)m | $135m | $40m |
| Diluted EPS | $1.30 | $(0.01) | $2.36 | $0.70 |
| Cash from operating activities | Not stated by quarter | Not stated by quarter | $86m | $129m |
Q2 gross margin was approximately 25.4%, compared with 21.5% a year earlier; six-month gross margin was approximately 25.6%, versus 20.5%. These percentages are calculated from reported sales and gross profit. Q2 sales rose about 19%; six-month sales rose about 10%. Management attributed the improvement principally to volume recovery and higher unit margins, especially in Reinforcement Materials and Performance Chemicals.
For Q2, segment sales / EBIT were: Reinforcement Materials $434m / $89m (prior-year $355m / $61m); Performance Chemicals $294m / $58m ($245m / $31m); Purification Solutions $63m / $2m ($64m / $3m). Six-month segment sales / EBIT were: Reinforcement Materials $809m / $177m ($734m / $108m); Performance Chemicals $561m / $112m ($487m / $72m); Purification Solutions $122m / approximately $0m ($123m / $1m). Segment EBIT is a non-GAAP measure as defined by the company.
Cash, debt and liquidity
- Six-month operating cash flow was $86m, down from $129m. Working capital increased by $179m, principally from higher receivables and inventory; the period also included a $32.6m payment on the previously settled respirator claims.
- Investing activities used $66m, including $69m of capital expenditures. Financing activities used $27m. Cash and cash equivalents were $146m at March 31, 2021; cash including restricted cash was $150m.
- Capital expenditures for FY2021 were expected to be approximately $200m. Operating cash flow less capital expenditures was $17m for the six months, a simple calculation rather than a company-defined free-cash-flow measure.
- At March 31, short-term borrowings were $44m, current long-term debt $8m and long-term debt $1,087m. Total debt on these balance-sheet lines was approximately $1.14bn. The company reported $1.2bn of borrowing availability under its revolving credit agreements and was in covenant compliance.
- Current assets were $1,224m and current liabilities $647m. Cash plus borrowing availability and operating cash flows were expected by management to be sufficient for foreseeable operating, investment and financial needs.
Material changes and management commentary
- Improved demand across regions and customer inventory replenishment supported volume growth following COVID-related weakness in fiscal 2020. Q2 sales growth also reflected $24m of favorable foreign-currency translation and $15m from price and product mix.
- Q2 income before taxes and equity earnings increased to $118m from $12m. The comparison benefited from stronger segment results and the absence of the prior-year $50m respirator-settlement charge.
- Management expected strong demand in Reinforcement Materials and Performance Chemicals during the second half of FY2021. It anticipated higher feedstock pass-through and planned maintenance costs in Reinforcement Materials, and moderation in automotive demand and higher fixed costs in Performance Chemicals, partly due to semiconductor shortages. Purification Solutions was expected to benefit from higher seasonal volumes.
- Management projected a FY2021 operating tax rate of 27%–29%. No consolidated revenue or earnings guidance is provided in the supplied filing text.
- COVID-19 duration, vaccine distribution, global transportation constraints and semiconductor availability remained uncertain. The filing warns these factors could adversely affect demand, costs, profitability, asset values and borrowing availability.
Contingencies and unusual items
- Respirator-claim reserves were $22m at March 31, 2021, down from $24m at September 30, 2020. Cabot cautioned that actual pending and future claim costs could differ from reserves due to litigation outcomes, claim trends, insurance recoveries, indemnities and other factors.
- A $6m U.S. pension-plan settlement charge was recognized in the first quarter of FY2021. The company also recorded $4m of restructuring charges in the first six months and expected further restructuring charges and cash outlays.
- Foreign-currency derivatives had a net liability fair value of $21m at March 31, 2021, compared with $1m at September 30, 2020. The filing reports a $17m cumulative loss on the cross-currency swaps in accumulated other comprehensive income at March 31.
Most important facts for investors to verify
- Whether demand and customer restocking persist, and how the semiconductor shortage affects automotive-related Performance Chemicals sales.
- Whether working-capital investment reverses as sales and inventory levels evolve, given lower year-over-year operating cash flow.
- Debt, borrowing availability and compliance with leverage covenants as the temporary amended covenant terms approach their scheduled end.
- Adequacy of the respirator-claim reserve and potential variability in future legal costs and payments.
- Delivery of the expected FY2021 capital-spending plan and management’s segment outlook, including maintenance and higher fixed costs.