Cabot Corporation — Form 10-Q Summary
Business context and period: Cabot reported its third quarter and first nine months of fiscal 2014, ended June 30, 2014. The company operates in Reinforcement Materials, Performance Materials, Advanced Technologies and Purification Solutions. Security Materials is presented as discontinued operations; the sale closed July 31, 2014, after quarter-end.
Financial performance
| Metric | Three months ended June 30, 2014 | Prior year | Nine months ended June 30, 2014 | Prior year |
|---|---|---|---|---|
| Revenue | $940 million | $901 million | $2,736 million | $2,560 million |
| Gross profit | $184 million | $176 million | $539 million | $466 million |
| Income from operations | $93 million | $87 million | $248 million | $194 million |
| Income from continuing operations | $58 million | $61 million | $184 million | $111 million |
| Net income attributable to Cabot | $52 million | $59 million | $168 million | $106 million |
| Diluted EPS attributable to Cabot | $0.78 | $0.90 | $2.55 | $1.63 |
- Gross margin was approximately 19.6% for the quarter and 19.7% year to date, versus approximately 19.5% and 18.2%, respectively, in the comparable periods.
- Quarterly revenue rose 4%, primarily on higher volumes. Nine-month revenue rose 7%, with higher volumes partly offset by less favorable price and product mix.
- Quarterly net income attributable to Cabot fell despite higher operating income; nine-month earnings benefited substantially from the $29 million non-cash gain on the previously held NHUMO investment. That gain is not recurring operating performance.
- Nine-month operating cash flow was $185 million, compared with $142 million. Investing activities provided $22 million, including $215 million collected on notes from the Supermetals business sale, offset by $115 million of capital spending and $73 million paid for NHUMO. Financing activities used $188 million. Cash at June 30 was $101 million.
- At June 30, total debt was approximately $1.16 billion, comprising $119 million of notes payable, $18 million of current long-term debt and $1.03 billion of long-term debt. This compared with approximately $1.30 billion at September 30, 2013. Cabot reported $647 million of revolving-credit availability and said it complied with applicable covenants.
- Current assets were $1.50 billion and current liabilities $715 million. The company’s stated liquidity—cash plus revolving-credit availability—increased by $145 million during the first nine months, largely due to the final Supermetals note payment.
Material changes and segment trends
- Reinforcement Materials: Nine-month sales increased to $1.56 billion from $1.42 billion and EBIT to $186 million from $141 million, led by higher carbon-black volumes, new China capacity, NHUMO consolidation, raw-material savings and energy-efficiency benefits. Higher fixed costs partly offset gains.
- Performance Materials: Nine-month sales rose to $709 million from $672 million and EBIT to $122 million from $99 million, mainly on improved end-market volumes.
- Advanced Technologies: Nine-month sales increased to $159 million from $143 million and EBIT to $51 million from $44 million. In the quarter, sales fell to $47 million from $67 million and EBIT to $14 million from $28 million, primarily because of lower Specialty Fluids volumes and Aerogel royalties.
- Purification Solutions: Nine-month sales declined to $230 million from $244 million and EBIT fell to a $20 million loss from $4 million of income. Lower demand in the air-and-gas sector and higher fixed and maintenance costs were cited. Quarter EBIT was a $7 million loss versus a $1 million loss.
- Quarterly total segment EBIT was $109 million, down from $111 million; nine-month total segment EBIT was $339 million, up from $288 million. The nine-month comparison includes the NHUMO gain among certain items and reflects higher volumes, partly offset by increased fixed costs.
Outlook, risks and unusual items
- Management expected the fiscal 2014 operating tax rate to be approximately 27%. Capital spending for the remainder of fiscal 2014 was expected to be $60 million to $85 million.
- Cabot said it expected liquidity from cash, operating cash flow and available borrowing capacity to cover foreseeable operational, capital and financial requirements. Working-capital needs depend in part on timely receivables collection, raw-material costs and inventory management.
- Management said cesium reserves available to Specialty Fluids would likely be lower than previously disclosed after technical and economic challenges at its mine. It expected annual Specialty Fluids profitability to be approximately 10%–20% below recent years and said this could affect costs, pricing and volumes.
- Purification Solutions goodwill was $468 million; its reporting-unit fair value exceeded carrying value by approximately 9% at the May 2014 impairment test. Results are sensitive to activated-carbon mercury-removal volumes and margins and to adoption and enforcement of environmental rules, including U.S. Mercury and Air Toxics Standards effective April 2015.
- Venezuela’s currency changes caused a $4 million Cabot share of the affiliate’s nine-month loss impact and a separate $2 million loss in Cabot’s own accounts, partly offset by a $2 million tax benefit. The company identified currency-conversion and investment-recoverability risks.
- Environmental reserves were $17 million, up from $5 million at September 2013, including a $13 million charge in fiscal Q2. Respirator-claim reserves were $9 million discounted ($13 million undiscounted), with approximately 41,000 pending claimants; payments are expected to extend through 2065. Management said reasonably possible additional environmental costs beyond reserves were expected to be immaterial, while noting estimates can change.
- Restructuring included the EMEA shared-service transition, with expected total cash charges of $22 million–$26 million, and closure work at the Malaysia facility. Cabot also disclosed $4.16 billion of long-term raw-material purchase commitments, based on market prices at June 30, 2014.
- The Security Materials sale was for approximately $20 million in cash; it closed July 31 and Cabot expected to record a gain in discontinued operations. Other unusual nine-month items included $24 million of restructuring charges, $5 million of acquisition and integration charges, $16 million of legal and environmental matters and reserves, and the $29 million NHUMO remeasurement gain.
Investor verification priorities
- Separate recurring operating results from the NHUMO remeasurement gain and other restructuring, acquisition, legal and environmental items.
- Track Purification Solutions demand, profitability and goodwill impairment headroom, particularly against mercury-control regulation and market-share assumptions.
- Monitor Specialty Fluids’ reserve and supply outlook, and the expected 10%–20% reduction in annual profitability.
- Confirm cash conversion and working-capital trends after the one-time Supermetals note collection, alongside capital spending and debt levels.
- Follow Venezuela’s exchange-rate regime and the recoverability and repatriation of related cash and investment balances.
- Review subsequent results of the Security Materials sale and developments in environmental remediation and respirator litigation.