Cabot Corporation — FY2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2021 (not a calendar fourth quarter). Cabot is a global specialty chemicals and performance materials company with three reportable segments: Reinforcement Materials, Performance Chemicals and Purification Solutions. Results improved as demand recovered from the COVID-19-related declines in FY2020. On November 25, 2021, Cabot agreed to sell Purification Solutions; after closing, the company expects to report two segments.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales and other operating revenues | $3,409 | $2,614 |
| Gross profit | $799 | $500 |
| Gross margin | 23.4% | 19.1% |
| Income (loss) from operations | $454 | $21 |
| Net income (loss) attributable to Cabot | $250 | $(238) |
| Diluted EPS | $4.34 | $(4.21) |
| Cash provided by operating activities | $257 | $377 |
| Capital expenditures | $195 | $200 |
- Revenue grew 30% year over year, reflecting higher prices and improved product mix ($333 million), higher volumes ($324 million) and favorable currency translation ($86 million). Gross profit increased $299 million.
- Net income rebounded from a FY2020 loss. FY2020 included a $228 million tax valuation allowance charge and a $129 million loss and impairment related to the Marshall mine and facility; neither charge recurred in FY2021.
- Management’s non-GAAP Total segment EBIT was $550 million, up from $283 million. Segment EBIT: Reinforcement Materials $329 million (FY2020: $162 million); Performance Chemicals $211 million ($118 million); Purification Solutions $10 million ($3 million).
- Operating cash flow fell to $257 million, mainly due to a $222 million increase in net working capital, including higher receivables and inventory. Operating cash flow less capital expenditures was approximately $62 million (calculated).
- At September 30, cash and cash equivalents were $168 million; revolving-credit availability was $1.1 billion. Total debt was $1.09 billion, including $373 million current; commercial paper outstanding was $71 million and Euro revolver borrowings were $134 million. Cabot reported compliance with its debt covenants.
- FY2021 dividends were $1.40 per share ($80 million paid). No open-market share repurchases were made during the year.
Changes, outlook and material items
- Recovery and segment trends: Performance Chemicals volumes returned to pre-pandemic levels; Reinforcement Materials volumes were slightly below them. FY2021 segment EBIT benefited from stronger demand and margins, partly offset by higher fixed costs and maintenance.
- FY2022 outlook: Management expects a 27%–29% operating tax rate and $225–$250 million of capital expenditures. It expects Reinforcement Materials to benefit from robust tire production and higher pricing in 2022 customer agreements. Performance Chemicals is expected to see continued demand growth, particularly in battery materials and inkjet, with supply-chain pressures and input-cost increases expected to moderate over the year. These are management expectations, not guarantees.
- Purification Solutions sale: The agreement values the business at approximately $111 million, with estimated net cash proceeds of approximately $80 million, subject to closing adjustments. Closing was expected in FY2022’s second quarter. Cabot estimated a pre-tax impairment charge of $155–$165 million for FY2022’s first quarter.
- Operational disruption: July 2021 flooding significantly damaged the Pepinster, Belgium specialty compounds facility; production was temporarily halted, with resumption expected in FY2022’s second quarter. Cabot recorded $17 million of flood-related costs and an offsetting expected insurance recovery in FY2021; additional $5–$10 million charges and repairs were estimated to be insurance-offset.
- Environmental spending: Environmental-related capital expenditures were $83 million in FY2021; approximately $80 million was anticipated for FY2022. U.S. emissions-control installation costs were estimated at $225–$250 million through calendar 2023; $125 million had been incurred by September 30, 2021.
- Contingencies: The respirator-liability reserve rose to $44 million from $24 million, including a $25 million FY2021 charge; management says a near-term change could be material. A disputed foreign VAT assessment could result in a charge ranging from nil to $37 million, including potential interest and penalties, although Cabot does not consider a loss probable.
- Other risks: The filing highlights continuing COVID-19 uncertainty, supply-chain and labor constraints, raw-material and energy-cost volatility, customer concentration, currency and geopolitical exposure, stricter emissions and climate regulations, and weather-related disruption. A Canal, Louisiana plant outage also reduced FY2021 volumes and earnings.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Respirator liabilities were identified as a critical audit matter due to uncertainty in estimating future claims and settlement costs.
Important facts for investors to verify
- Whether the Purification Solutions sale closes on schedule, the final cash proceeds and adjustments, and the actual impairment recorded.
- Whether the FY2022 demand, pricing, supply-chain recovery and 27%–29% operating tax-rate expectations are achieved.
- Working-capital conversion and operating cash flow relative to planned $225–$250 million capital expenditures and dividend payments.
- Refinancing and repayment plans for the $350 million 3.7% notes due July 2022, alongside other current debt obligations and covenant headroom.
- Actual insurance recoveries and restoration progress at Pepinster, and the timing and cost of emissions-control projects.
- Developments in respirator claims and the VAT dispute, including possible reserve changes or cash payments.