Cabot Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2017; unaudited results compared with the quarter ended December 31, 2016. Cabot produces carbon black, specialty chemicals, activated carbon and specialty fluids. Prior-year inventory figures were retrospectively adjusted for the change from LIFO to FIFO for U.S. carbon black inventories.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $720 million | $611 million |
| Gross profit / gross margin | $178 million / 24.7% | $159 million / 26.0% |
| Operating income / operating margin | $94 million / 13.1% | $84 million / 13.7% |
| Income before tax and affiliate earnings | $92 million | $75 million |
| Income tax provision / effective tax rate | $205 million / 224% | $18 million / 24% |
| Net income (loss) attributable to Cabot | $(122) million; $(1.98) per diluted share | $55 million; $0.86 per diluted share |
| Cash from operating activities | $45 million | $107 million |
| Capital expenditures | $52 million | $22 million |
| Cash and cash equivalents at quarter-end | $189 million | $189 million |
| Long-term debt, including current portion | $917 million | $917 million |
Interest expense was $13 million in both periods. The quarterly dividend was $0.315 per share, versus $0.30. The $205 million tax provision included $185 million of net discrete tax expense associated with U.S. tax reform; the company’s stated operating tax rate, which excludes discrete items, was 21%.
Business performance and changes
- Sales increased $109 million, driven mainly by more favorable price and product mix ($80 million), higher volumes ($20 million) and foreign currency translation ($13 million). Gross profit rose $19 million, but gross margin declined, with higher fixed costs and inventory-level effects among the offsets.
- Reinforcement Materials sales rose to $387 million from $295 million and segment EBIT increased to $62 million from $40 million, mainly on improved pricing, product mix and unit margins, including stronger Asian spot pricing.
- Performance Chemicals sales rose to $229 million from $205 million, but segment EBIT declined to $47 million from $49 million, reflecting higher fixed costs and weaker unit margins, partly offset by volume growth.
- Purification Solutions sales were $70 million versus $69 million and segment EBIT was $6 million versus $4 million. The quarter included accelerated receipt of remaining royalties under an arrangement.
- Specialty Fluids sales fell to $6 million from $11 million and segment EBIT declined to a $2 million loss from $2 million of income, primarily due to reduced project activity.
- Cabot acquired Tech Blend, a North American black masterbatch producer, in November for a preliminary $65 million cash purchase price. It contributed approximately $4 million of revenue after acquisition. The preliminary allocation includes $31 million each of goodwill and identifiable intangible assets.
Cash, debt and liquidity
Cash declined $91 million during the quarter. Operating cash flow was $45 million, while investing activities used $101 million, chiefly for the Tech Blend acquisition ($64 million, net of acquired cash) and capital expenditures ($52 million). Financing activities used $36 million, including $20 million of common dividends and $16 million of share repurchases. Working-capital uses included increases in receivables and inventories.
At December 31, Cabot reported $189 million of cash and $1 billion of borrowing availability under its revolving credit facility, extended to October 2022. The company said it was in compliance with facility covenants and expected available cash, operating cash flow and borrowing capacity to meet foreseeable needs. Fiscal 2018 capital expenditures were forecast at approximately $250 million. The $250 million of 2.55% notes maturing January 15, 2018 were subsequently repaid using foreign cash and commercial paper. A further $30 million of notes mature in December 2018.
Outlook, risks and unusual items
- For the second quarter, management expected Reinforcement Materials to benefit from 2018 customer agreements and firm spot markets in Europe and Asia. Performance Chemicals was expected to improve sequentially on seasonality and price increases, with feedstock and growth-investment costs pressuring margins.
- Management expected continued specialty-application momentum in Purification Solutions, offset by competitive pricing in mercury removal. Specialty Fluids project activity was expected to remain similar in the next quarter, with an uptick anticipated in the second half. No numeric earnings or revenue guidance was provided.
- Tax reform reduced the U.S. corporate tax rate to 21% effective January 1, 2018. Cabot recorded provisional charges of $149 million for deemed repatriation, $23 million for deferred taxes on certain unremitted earnings, and $13 million for deferred-tax revaluation. The company stated the deemed-repatriation charge was expected to be noncash, and that the tax accounting remained incomplete and subject to revision.
- Cabot indefinitely idled three of seven activated-carbon production units at Marshall, Texas, to align capacity and costs with demand. Total costs were estimated at approximately $8 million, mostly noncash accelerated depreciation.
- A sale of the Merak, Indonesia site was anticipated in Q2 FY2018 for approximately $14 million, with an expected net gain of approximately $11 million; closing and gain were not yet realized at quarter-end.
- Purification Solutions’ fair value exceeded carrying value by 13% in the May 2017 impairment test. Its valuation depends on growth in environmental and specialty applications and demand for mercury-removal products; EPA review of the MATS regulation could affect demand and create impairment risk.
- Environmental reserves were $12 million and respirator-liability reserves were $17 million. Cabot noted actual future costs could differ from reserves. Long-term raw-material purchase commitments totaled $3.182 billion, with some amounts dependent on market prices.
- Other risks include raw-material costs and availability, demand and pricing, customer concentration, foreign exchange, operational disruptions, project execution, acquisition integration, litigation and environmental matters. The company reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- How final tax-reform accounting changes the provisional tax charge, deferred tax balances and expected ongoing tax rate.
- Whether improved Reinforcement Materials pricing and margins persist, and whether Performance Chemicals can offset cost pressures.
- Cash conversion and working-capital trends, delivery of the $250 million capital-spending program, and financing of debt maturities.
- Tech Blend’s final purchase-price allocation, integration progress and contribution to growth and profitability.
- Demand, regulatory developments and impairment assumptions for Purification Solutions, alongside progress on the Marshall idling and Merak site sale.
- Developments in environmental and respirator claims relative to the recorded reserves and the scale and pricing exposure of purchase commitments.