Cabot Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 7, 2020. Financial statements are unaudited. Amounts are in millions of U.S. dollars except per-share data.
Business context and results
Cabot operates Reinforcement Materials, Performance Chemicals and Purification Solutions. The Specialty Fluids business was sold in June 2019, reducing comparability with the prior-year period. The quarter was materially affected by COVID-19-related weakness in automotive and tire demand.
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales and other operating revenues | $518 | $845 | $1,955 | $2,510 |
| Gross profit | $69 | $170 | $363 | $514 |
| Income (loss) from operations | $4 | $81 | $91 | $231 |
| Net income (loss) attributable to Cabot | $(6) | $32 | $34 | $124 |
| Diluted EPS | $(0.12) | $0.55 | $0.59 | $2.08 |
| Operating cash flow | Not presented by quarter | $278 | $166 |
Q3 gross margin was approximately 13.3%, versus 20.1% a year earlier; operating margin was approximately 0.8%, versus 9.6%. Nine-month gross margin was approximately 18.6%, versus 20.5%. These are calculated from reported figures.
- Q3 revenue fell 39% year over year. Excluding $13 of prior-year Specialty Fluids revenue, the decline was mainly lower volume ($221), less favorable price and product mix ($65), and foreign currency ($18).
- Q3 total segment EBIT, a company-defined non-GAAP measure, was $18 versus $112. Excluding the prior-year Specialty Fluids contribution, it declined $92, primarily from lower volumes and margins, partly offset by lower fixed costs.
- Q3 segment sales and EBIT: Reinforcement Materials $197 and $(5), Performance Chemicals $220 and $21, and Purification Solutions $63 and $2. Reinforcement Materials EBIT was hit by 42% lower volume and weaker unit margins.
- Nine-month results also reflect a $50 charge related to a respirator-claims settlement. Fiscal 2019 comparatives included Specialty Fluids revenue of $56 and EBIT of $24, plus related impairment and sale charges.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $278, up from $166, supported by collections and working-capital reductions: receivables provided $172 and inventory provided $74. Investing used $252, including $162 of capital expenditures and $84 net cash for the SUSN acquisition. Financing used $37; cash declined $7 to $162.
- At June 30, cash was $162; current assets were $983 and current liabilities $494. Total debt, including short-term borrowings and current maturities, was approximately $1,184, compared with approximately $1,064 at September 30, 2019. Long-term debt was $1,164. The filing reported $1.2 billion of revolving-credit availability.
- Cabot reported compliance with debt covenants. Amendments effective June 8 temporarily raised the maximum leverage ratio to 4.50:1 for quarters ending September 2020 through June 2021, from the general 3.50:1 limit, and included other lien restrictions and lender fees.
- Common dividends paid were $60 in the first nine months; the quarterly dividend was $0.35 per share. Share repurchases totaled $44 during the period and were suspended in Q2; Cabot did not expect to repurchase shares for the rest of FY2020.
Outlook, risks and unusual items
- Management expected improved Reinforcement Materials results and production/utilization in Q4 compared with Q3, but not a return to normal levels; it expected a modest Q4 volume improvement in Performance Chemicals. Recovery timing and demand remained uncertain.
- FY2020 capital expenditures were expected to be approximately $200, focused on sustaining, compliance and selected Performance Chemicals growth projects. The expected FY2020 operating tax rate was 29%–30% (non-GAAP); no forward reconciliation to an effective tax rate was provided.
- COVID-19 reduced customer demand and plant utilization, especially in automotive and tires. Management warned that prolonged disruption could affect supply capability, revenue, profitability, cash flow and asset values, potentially requiring inventory, receivable, deferred-tax-asset or long-lived-asset impairments.
- Cabot acquired Shenzhen Sanshun Nano New Materials (SUSN), a carbon nanotube producer, on April 1 for an estimated $100 total purchase price, including cash, contingent consideration and assumed debt. SUSN contributed approximately $6 of Q3 revenue; assumed debt was repaid in June.
- A February 2020 respirator-claims settlement created a $65.2 liability. Cabot paid $32.6 in Q3 and expected to pay the remainder in Q1 FY2021. The reserve for other existing and future claims was $21 at June 30; actual costs may differ from estimates.
- Cabot continued restructuring and reorganization activity, recording $16 of restructuring charges in the first nine months. It also disclosed possible impairment risk for Purification Solutions depending on strategic actions.
Most important facts for investors to verify
- Whether Q4 demand, especially in automotive and tires, recovered as management expected, and whether segment margins and plant utilization improved.
- Cash generation and working-capital sustainability, given the large receivables and inventory cash contributions, planned capital spending and acquisition outlays.
- Debt, covenant headroom and access to commercial paper and revolving facilities under continuing business stress.
- Ultimate cost and payment timing for respirator claims, including whether reserves remain adequate.
- SUSN integration, purchase-price allocation and contingent consideration, as well as potential goodwill or other asset impairment risks.