Cabot Corporation — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparisons are with the three months ended December 31, 2019 unless noted. Cabot operates in Reinforcement Materials, Performance Chemicals, and Purification Solutions. Results are unaudited.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales and other operating revenues | $746 million | $727 million |
| Gross profit | $193 million | $141 million |
| Gross margin | 25.9% | 19.4% |
| Income from operations | $118 million | $63 million |
| Net income attributable to Cabot | $60 million | $41 million |
| Diluted earnings per share | $1.06 | $0.70 |
| Cash provided by operating activities | $21 million | $105 million |
| Capital expenditures | $29 million | $68 million |
Cash and cash equivalents were $147 million at December 31, 2020, versus $151 million at September 30, 2020. Total debt, calculated from current and long-term debt and short-term borrowings, was approximately $1.106 billion, compared with $1.115 billion at September 30. Revolving-credit borrowing availability was $1.3 billion; Cabot reported compliance with its debt covenants.
Operating cash flow was reduced by a $99 million increase in net working capital, principally higher receivables and inventory, and the $32.6 million payment of the remaining amount due under a respirator-claims settlement. The company paid $20 million in common dividends and reported a $0.35-per-share dividend.
Performance and material changes
- Revenue increased $19 million. Higher volumes contributed $22 million and favorable foreign-currency translation $9 million, partly offset by $10 million from less favorable price and product mix.
- Gross profit rose $52 million, primarily on stronger Reinforcement Materials unit margins and higher Performance Chemicals volumes. Management-reported Total segment EBIT, a non-GAAP measure, increased to $140 million from $86 million.
- Reinforcement Materials: Sales were $375 million versus $379 million; segment EBIT increased to $88 million from $47 million. Higher margins more than offset lower sales, reflecting pricing, including price increases in Asia ahead of rising feedstock costs.
- Performance Chemicals: Sales rose to $267 million from $242 million and segment EBIT to $54 million from $41 million, mainly on stronger volumes and customer inventory replenishment.
- Purification Solutions: Sales were $59 million in both periods; segment EBIT was a $2 million loss in both. Lower demand for mercury-removal and environmental products offset benefits from lower fixed costs and improved margins.
- Selling and administrative expenses declined to $61 million from $64 million, primarily due to cost reductions. Interest expense declined to $12 million from $14 million. Other expense increased to $9 million from $2 million, primarily due to a pension-plan settlement charge and unfavorable currency effects.
Outlook, risks, and unusual items
- Management said customer demand had recovered substantially from COVID-19 lows by October 2020, but pandemic duration, vaccine distribution, economic recovery, and logistics disruption remained uncertain. Logistics constraints could affect Performance Chemicals supply availability and transportation costs.
- For Q2 FY2021, management expected Reinforcement Materials EBIT to face lower unit margins as higher feedstock costs follow the prior-quarter pricing benefit, as well as higher fixed costs and maintenance. Performance Chemicals EBIT was expected to face higher raw-material and fixed costs. Purification Solutions was expected to benefit from lower fixed costs and improved specialty-application price and mix.
- FY2021 capital expenditures were forecast at $175 million to $200 million. The expected FY2021 operating tax rate was 28% to 30%; management did not provide a forward reconciliation to a GAAP effective-tax-rate range.
- A $6 million U.S. pension-plan settlement charge was recorded in Q1. The company also recorded $3 million of restructuring charges; it expected approximately $2 million of additional charges during the remainder of FY2021 and $3 million thereafter.
- Cabot reported a $23 million reserve for pending and future respirator claims. The $65.2 million settlement of a group of claims was partly paid in FY2020; the remaining $32.6 million was paid in Q1. Actual future claims costs could differ from the reserve, depending on claim trends, legal outcomes, insurance recoverability, and other factors.
- Other risks include raw-material and energy price volatility, customer and supplier performance, competition, foreign-exchange and interest-rate movements, tax audits, litigation, and execution of expansions and restructuring. Management said liquidity was expected to meet operating, investment, and financial obligations for the foreseeable future.
Most important facts to verify
- Whether the reported improvement in margins and customer demand persists, particularly as feedstock costs and logistics conditions change.
- Cash conversion and working-capital trends after the large quarterly increase in receivables and inventory.
- Debt, covenant headroom, and availability under credit facilities, including the temporary higher leverage limit through June 30, 2021.
- Whether the $23 million respirator-claims reserve remains adequate as claims, legal outcomes, and recovery sources develop.
- Delivery of the $175 million–$200 million capital-spending plan and the stated segment and tax outlook.