Cabot Corporation — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and six months ended March 31, 2018 (fiscal Q2 and first half), compared with the same 2017 periods. Cabot reports Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The company adopted FIFO accounting retrospectively for U.S. carbon black inventories; prior-period figures shown reflect that change.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales and operating revenues | $818 million, up 21% from $678 million | $1.538 billion, up 19% from $1.289 billion |
| Gross profit | $190 million vs. $169 million; gross margin 23.2% vs. 24.9% | $368 million vs. $328 million; gross margin 23.9% vs. 25.4% |
| Income (loss) from operations | $(158) million vs. $90 million | $(64) million vs. $174 million |
| Net income (loss) attributable to Cabot | $(173) million; $(2.80) per diluted share, vs. $74 million; $1.19 per share | $(295) million; $(4.78) per diluted share, vs. $129 million; $2.05 per share |
| Cash provided by operating activities | $81 million in the first half vs. $58 million | |
| Capital expenditures | $109 million in the first half vs. $45 million | |
| Cash and cash equivalents | $179 million at March 31, down from $280 million at September 30, 2017 |
- First-half operating cash flow less capital expenditures was $(28) million. Investing activities used $157 million, including $64 million for the Tech Blend acquisition; financing activities used $51 million. Cash decreased by $101 million, with exchange-rate effects adding $26 million.
- At March 31, debt comprised $268 million of notes payable, $36 million current long-term debt and $631 million long-term debt. Commercial paper outstanding was $258 million. Cabot reported $742 million of availability under its revolving credit agreement and compliance with its covenants. Management said total liquidity (cash plus borrowing availability) decreased by $359 million during the half.
- Common dividends were $0.315 per share for Q2 and $0.63 for the first half, compared with $0.30 and $0.60, respectively, in 2017.
Changes, segments and unusual items
- Revenue growth reflected higher price and product mix, foreign-currency translation and, for the first half, higher volumes. Q2 revenue gains were concentrated in Reinforcement Materials; favorable pricing and mix contributed $93 million across the company, and currency translation added $42 million.
- Reinforcement Materials Q2 sales were $454 million vs. $352 million and segment EBIT was $79 million vs. $54 million. Management attributed improved results chiefly to 2018 customer-agreement pricing and strong Asian spot pricing.
- Performance Chemicals Q2 sales were $268 million vs. $228 million and EBIT was $57 million vs. $51 million. Purification Solutions sales were $66 million vs. $67 million, with EBIT of $(6) million vs. $2 million. Specialty Fluids sales were $6 million vs. $7 million, with EBIT of $(3) million vs. zero.
- Cabot recorded $254 million of Purification Solutions goodwill and long-lived asset impairment charges ($92 million goodwill; $162 million long-lived assets), a separate $13 million inventory reserve adjustment, and a $30 million tax benefit associated with the impairment charges. The impairment followed weaker demand, share losses and pricing in mercury removal and North American powdered activated carbon, as well as lower forecasts for other applications. Purification Solutions goodwill was reduced to zero.
- First-half tax expense was $198 million, including a $189 million net expense related to the Tax Cuts and Jobs Act, principally the provisional deemed-repatriation tax charge. The first-half effective tax rate was unusually high at negative 248%; management’s operating tax rate, a non-GAAP measure excluding discrete items, was 21%. Cabot said the U.S. statutory-rate reduction should benefit future U.S. after-tax earnings, but its Act-related accounting remained incomplete.
- Cabot acquired Tech Blend in November 2017 for a preliminary $65 million cash purchase price; the purchase-price allocation remained preliminary. Tech Blend contributed approximately $12 million of revenue in the five months through March 31.
Outlook, risks and contingencies
- Management expected Reinforcement Materials to benefit from a favorable market, Performance Chemicals to maintain margins while growing volumes, and Purification Solutions to see higher seasonal volumes and lower variable costs in the second half. Specialty Fluids was expected to improve as drilling activity began on previously awarded projects.
- Cabot said it would continue to assess strategic alternatives for Purification Solutions and focus on recovering mercury-removal volumes, growing specialty applications, reducing costs and controlling capital. The company also noted that further impairment could be possible if circumstances change.
- Fiscal 2018 capital expenditures were expected to be approximately $250 million, including sustaining, compliance and expansion projects. Management expected available cash, operating cash flow, revolving-credit capacity and commercial paper to meet foreseeable needs. A $30 million note was due December 2018.
- Key stated risks include raw-material costs and availability, demand and customer losses, competition, currency movements, project execution and commercialization, plant disruptions, environmental requirements, litigation and the accuracy of environmental and respirator-claim reserves. Environmental reserves were $16 million; respirator-liability reserves were $17 million. Cabot said additional environmental costs above reserves were reasonably possible but estimated to be immaterial based on available information; actual respirator liabilities could differ from the reserve.
- Long-term raw-material purchase commitments totaled $3.610 billion, with prices under certain agreements subject to market changes. Cabot reported no material off-balance-sheet arrangements and said disclosure controls were effective.
Investor verification points
- Review the Purification Solutions impairment assumptions, demand and pricing trends, and progress toward any strategic alternative or recovery plan.
- Track the final accounting and cash-tax implications of the Tax Act, including deemed repatriation, deferred taxes and future tax rates.
- Assess cash conversion, working-capital requirements, capital spending and commercial-paper reliance alongside the reported borrowing availability and covenant compliance.
- Check whether Reinforcement Materials pricing and margins remain supportive, and whether Performance Chemicals volume growth and Specialty Fluids project activity materialize.
- Monitor environmental and respirator claims, purchase commitments, and the preliminary Tech Blend purchase-price allocation for changes in reserves, obligations or reported results.