Cabot Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; comparative period is the three months ended December 31, 2014. The financial statements are unaudited. Cabot operates in Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales and other operating revenues | $603 million | $812 million |
| Gross profit | $99 million | $157 million |
| Income from operations | $12 million | $64 million |
| Income (loss) from continuing operations | $(8) million | $51 million |
| Net income (loss) attributable to Cabot | $(7) million; $(0.11) per diluted share | $45 million; $0.69 per diluted share |
| Cash provided by operating activities | $83 million | $56 million |
| Capital expenditures | $24 million | $41 million |
Gross margin was approximately 16.4%, versus 19.3% a year earlier. Revenue fell about 26%, reflecting $151 million of less favorable price and product mix, $39 million of unfavorable currency translation and $20 million of lower volumes. Management attributed lower selling prices mainly to customer price adjustments following raw-material cost declines.
At December 31, 2015, cash and cash equivalents were $84 million. Debt totaled approximately $971 million: $301 million current and $670 million long term. Cabot reported $1 billion of availability under its revolving credit agreement, no commercial paper outstanding, and compliance with its debt-to-EBITDA covenant. The company said it intended to refinance $300 million of 5% notes maturing October 1, 2016. Cash dividends were $0.22 per share, or $14 million in total.
Other balance-sheet metrics: total assets were $2.955 billion, down from $3.075 billion at September 30, 2015; inventories were $369 million, down from $397 million. Total equity was $1.255 billion, compared with $1.338 billion. Operating cash flow benefited from lower receivables and inventories; financing activities used $41 million, including share repurchases, dividends and debt repayment. Cash was also reduced by $17 million from exchange-rate effects.
Material changes and segment performance
- Reinforcement Materials: Sales were $288 million versus $460 million; segment EBIT was $26 million versus $53 million. Lower prices, contract pricing, currency and weaker volumes weighed on results; unit margins were pressured by competition, feedstock effects and lower energy-efficiency benefits.
- Performance Chemicals: Sales were $207 million versus $229 million; EBIT improved to $50 million from $39 million, mainly on stronger unit margins and lower fixed costs.
- Purification Solutions: Sales were $66 million versus $76 million; EBIT was a loss of $5 million versus a loss of $1 million. Lower activated-carbon demand and inventory reductions were factors.
- Specialty Fluids: Sales were $7 million versus $16 million; EBIT was approximately break-even versus $6 million. Management cited reduced oil-and-gas project activity.
Total segment EBIT declined to $71 million from $97 million. Reported results included $48 million of restructuring charges, an $8 million foreign-currency loss associated mainly with Argentina’s peso devaluation, and $2 million for legal and environmental matters and reserves. Other expense was $8 million, compared with $1 million a year earlier. The quarter also included a $5 million income-tax benefit; the filing reports a 74% effective tax rate and a 26% operating tax rate. Management expected the fiscal 2016 operating tax rate to be 26%–28%.
Other comprehensive loss attributable to Cabot was $52 million, primarily reflecting foreign-currency translation losses. In the prior-year quarter it was $35 million.
Outlook, risks and contingencies
- Management expected operating results to improve beginning in Q2 FY2016, citing restructuring savings, improved Reinforcement Materials product mix in calendar-year 2016 contracts, continued Performance Chemicals strength, potential Purification Solutions volume growth tied to U.S. mercury rules, and greater Specialty Fluids activity in the second half.
- Implemented restructuring actions were expected to reduce fiscal 2016 costs by $55 million versus fiscal 2015. The company recorded $48 million of restructuring charges in the quarter. Its announced global workforce actions affected approximately 300 positions; the Merak, Indonesia carbon-black plant closure affected approximately 50 employees. Management anticipated further site-related costs and cash outlays.
- Fiscal 2016 capital expenditures were forecast at approximately $125 million, primarily for sustaining and compliance projects.
- Cabot identified Purification Solutions’ dependence on mercury-removal demand and regulation as a risk. The D.C. Circuit kept the Mercury and Air Toxics Standards in place while EPA addressed the Supreme Court’s cost-analysis ruling; EPA indicated it would complete that work by April 2016. The Purification Solutions reporting unit had previously been impaired and had limited headroom over carrying value at the latest assessment.
- Environmental reserves were $15 million; respirator-claim reserves were $10 million, with approximately 37,000 claimants in pending cases against American Optical. Management said reasonably possible additional environmental costs were expected to be immaterial, while noting estimates could change. Other lawsuits were not expected in aggregate to have a material adverse effect.
- Raw-material purchase commitments totaled $2.710 billion, including $1.857 billion due thereafter; amounts under certain agreements vary with market prices. Cabot also noted currency and recoverability risks related to its Venezuelan affiliate investment, carried at $13 million.
Key investor verification points
- Track whether projected $55 million of fiscal 2016 restructuring savings materializes and how much additional closure cash is required.
- Verify refinancing of the $300 million notes due October 1, 2016 and monitor covenant compliance and liquidity.
- Assess the recovery of Reinforcement Materials margins and demand in Purification Solutions and Specialty Fluids against management’s outlook.
- Monitor MATS implementation, Purification Solutions goodwill impairment headroom, and related activated-carbon volumes and margins.
- Review changes in environmental and respirator reserves, Venezuelan exposure, and the company’s ability to manage its substantial raw-material commitments.