Cabot Corporation (NYSE: CBT) — FY2016 Form 10-K
Business and period. Global specialty chemicals and performance materials producer reporting for the fiscal year ended September 30, 2016. Its four segments are Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. The filing also reports the September 2016 quarter.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales and other operating revenues | $2.411 billion | $2.871 billion |
| Gross profit | $578 million | $585 million |
| Income (loss) from operations | $250 million | $(317) million |
| Net income (loss) attributable to Cabot | $149 million; diluted EPS $2.36 | $(334) million; diluted EPS $(5.27) |
| Cash provided by operating activities | $392 million | $499 million |
| Capital expenditures | $112 million | $141 million |
| Cash and cash equivalents | $200 million | $77 million |
| Total debt | $926 million | $993 million |
| Current assets / current liabilities | $1.089 billion / $398 million | $1.048 billion / $441 million |
Gross margin was approximately 24.0%, compared with 20.4% in FY2015. Operating cash flow less capital expenditures was approximately $280 million, versus $358 million in FY2015; this simple calculation is not a company-reported non-GAAP measure. Reported net debt to capitalization was 35%, down from 41%.
At September 30, Cabot had $1 billion available under its revolving credit facility and no commercial paper outstanding. Cash plus revolving-credit availability was approximately $1.2 billion. Cabot reported compliance with its credit covenants. It redeemed $300 million of 5% notes and issued $250 million of 3.4% notes due 2026 during the year.
In the September quarter, revenue was $619 million, gross profit was $169 million, net income attributable to Cabot was $52 million, and diluted EPS was $0.83.
Material changes and segment results
- Revenue fell $460 million, or approximately 16%, year over year. The company attributed the decrease principally to lower selling prices following raw-material cost declines and unfavorable foreign-currency translation; volumes were down 2% in Reinforcement Materials.
- Segment EBIT, a company-defined non-GAAP measure, rose to $370 million from $332 million. Lower fixed costs and stronger Performance Chemicals results more than offset weaker Reinforcement Materials and Purification Solutions performance and an unfavorable inventory-reduction impact.
- Performance Chemicals sales were $865 million and EBIT was $225 million, up from $927 million and $178 million. Lower raw-material costs, improved unit margins and restructuring savings supported EBIT.
- Reinforcement Materials sales were $1.108 billion and EBIT was $137 million, versus $1.507 billion and $143 million. Lower prices, weaker volumes and currency translation reduced sales; lower margins and volumes weighed on EBIT.
- Purification Solutions sales were $290 million and EBIT was a loss of $5 million, versus sales of $296 million and EBIT of $5 million. Increased MATS-related volumes were offset by inventory-reduction effects, lower margins and currency translation.
- Specialty Fluids sales were $47 million and EBIT was $13 million, compared with $42 million and $6 million. Higher drilling-project activity lifted results from a weak FY2015 base.
- The prior-year loss included $562 million of pre-tax goodwill and long-lived-asset impairment charges in Purification Solutions. No comparable impairment charge was recorded in FY2016; therefore, the swing to reported profit substantially reflects the absence of that FY2015 charge.
Outlook, risks and contingencies
- Management expected FY2017 effective and operating tax rates of approximately 24%, capital expenditures of $150–$175 million, and environmental-related capital spending of approximately $48 million.
- Management described Reinforcement Materials’ outlook as mixed; expected Performance Chemicals’ earnings growth to moderate after a record year; anticipated continued MATS-related growth and relief from inventory-reduction effects in Purification Solutions; and expected solid Specialty Fluids performance, with opportunities beyond the North Sea.
- Planned growth projects included an 80%-owned fumed-silica joint venture facility in Wuhai, China, with initial annual capacity of about 8,000 metric tons, expected to start construction in early 2017 and complete in 2019. A Shanghai Asia Technology Center was expected to open in late 2017.
- Purification Solutions goodwill fair value exceeded carrying value by only 9% at the May 2016 impairment test. Its valuation depends on assumptions including MATS-driven mercury-removal demand, other activated-carbon growth and margins; adverse changes could trigger impairment.
- Raw-material and energy-price volatility, customer concentration, global economic conditions, currency movements, competition and operational or supply-chain disruptions may affect results. The company also faces extensive environmental and safety regulation.
- Environmental remediation reserves were $14 million. Separately, the company expects $100–$150 million of capital spending through 2020 for sulfur-dioxide and nitrogen-oxide controls at certain North American carbon-black plants.
- The respirator-liability reserve increased to $21 million from $11 million after an estimate update reflecting higher defense and indemnity costs. Approximately 38,000 claimants had pending cases against American Optical; Cabot’s actual share of existing and future costs could differ from the reserve.
- Restructuring charges were $47 million in FY2016. Actions included a global reduction of about 300 positions and closure of the Merak, Indonesia carbon-black plant.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether FY2017 segment earnings and demand trends support management’s outlook, particularly in Reinforcement Materials and Purification Solutions.
- How much of the FY2016 improvement in reported earnings reflects sustainable operations versus the absence of FY2015 impairment charges, restructuring and inventory effects.
- Whether Purification Solutions meets the growth and margin assumptions supporting its limited goodwill valuation cushion.
- Progress and actual costs for environmental controls, restructuring, the China joint venture and the Shanghai technology center.
- Changes in the $21 million respirator reserve and $14 million environmental reserve, including any new claims, remediation requirements or cost estimates.
- Cash conversion, working-capital needs, capital spending and debt maturities, including the $250 million notes due in 2018.