Cabot Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing also presents unaudited fourth-quarter results. Unless noted otherwise, financial amounts are in millions of dollars.
Business context
Cabot is a global specialty chemicals and performance materials company. Its four segments are Reinforcement Materials, Performance Materials, Advanced Technologies, and Purification Solutions. During FY2012, Cabot sold its Supermetals Business and acquired Norit N.V., adding activated carbon to the portfolio. Norit contributed two months of results.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales and operating revenues | $3,300 | $3,102 |
| Gross profit | $648 | $558 |
| Gross margin | 19.6% | 18.0% |
| Income from operations | $290 | $243 |
| Operating margin | 8.8% | 7.8% |
| Income from continuing operations | $201 | $205 |
| Net income attributable to Cabot | $388 | $236 |
| Diluted EPS attributable to Cabot | $5.99 | $3.57 |
| Cash provided by operating activities | $415 | $195 |
| Capital expenditures | $281 | $230 |
FY2012 net income includes $205 million from discontinued operations, including a $191 million after-tax gain on the Supermetals sale. Continuing-operations income was lower than FY2011 despite increased sales. Gross profit improved mainly on higher unit margins from pricing and favorable mix, partly offset by lower volumes and higher fixed costs. Net sales increased $198 million: pricing and mix added about $270 million and two months of Norit sales added about $61 million, while lower volume and foreign exchange reduced sales by about $127 million combined.
Fourth-quarter FY2012 revenue was $848 million, gross profit $157 million, operating income $52 million, and net income attributable to Cabot $36 million; diluted EPS was $0.56.
Segments and material changes
- Reinforcement Materials: Sales of $2,019 million and EBIT of $227 million; EBIT rose $44 million, principally on stronger unit margins, despite a 6% volume decline.
- Performance Materials: Sales of $914 million and EBIT of $128 million; sales increased, but EBIT fell $12 million as added fixed manufacturing and management costs outweighed volume and margin gains.
- Advanced Technologies: Sales of $210 million and EBIT of $49 million; EBIT increased $18 million, supported mainly by Specialty Fluids and other business volumes.
- Purification Solutions: Norit contributed $61 million in sales and $5 million in EBIT for two months.
Total Segment EBIT was $409 million, up from $354 million. Reported operating income also included $51 million of specified charges, including $26 million of Norit acquisition-related costs and $17 million of restructuring charges.
Liquidity, debt and capital allocation
At September 30, 2012, cash was $120 million, working capital $524 million, total debt $1,357 million, and long-term debt $1,172 million. The reported net debt-to-capitalization ratio rose to 40% from 20% in FY2011, principally reflecting Norit financing. Current availability under the revolving credit facility was approximately $560 million; Cabot reported compliance with its covenants. The current ratio was approximately 1.6, compared with 2.4 a year earlier.
Operating cash flow rose to $415 million, helped by earnings, depreciation and amortization, and a $76 million working-capital reduction. Investing activities used $1,180 million, including $1,104 million for Norit and $281 million of capital expenditures, partly offset by Supermetals sale proceeds. Financing activities provided $606 million. Cabot paid $0.76 per share in dividends and repurchased $36 million of shares.
Cabot issued $250 million of 2.55% notes due 2018 and $350 million of 3.70% notes due 2022 to help fund Norit. It expected FY2013 capital expenditures of $250–$300 million and pension contributions of approximately $12 million to foreign plans and less than $1 million to the U.S. plan.
Outlook, risks and contingencies
- Management expected sufficient liquidity from cash, operating cash flow and available credit for foreseeable operational, investment and financial needs; this outlook depends in part on collections, raw-material costs and inventory management.
- Management anticipated an FY2013 operating tax rate of 25%–26%. Tax audits could affect the effective rate.
- Cabot expected commissioning of its Xingtai, China carbon-black facility in calendar 2013 and startup of a lignite mine near its Texas facility in 2014.
- Key risks include economic weakness and customer inventory reductions, pricing and raw-material volatility, lower capacity utilization, foreign-exchange and country risks, customer concentration, and execution of capacity expansions and Norit integration. Activated-carbon demand also depends partly on environmental regulation and continued trade protection against low-priced imports.
- Environmental matters include anticipated significant capital improvements at certain U.S. facilities and a civil penalty in connection with an EPA Clean Air Act review; the amount and timing are not clear in the filing. A separate EPA information request concerns the acquired Marshall, Texas activated-carbon facility.
- Recorded reserves included $7 million for environmental remediation and $13 million discounted ($17 million undiscounted) for respirator claims. Approximately 42,000 claimants had pending claims against American Optical in connection with respirator products; Cabot’s share is uncertain and could differ from its reserve.
- Supermetals sale consideration had a minimum value of approximately $450 million, including deferred notes. The notes’ carrying value was $252 million at year-end; collection depends partly on the buyer’s cash flows and other terms.
Important facts for investors to verify
- How Norit performs after full-year consolidation, including integration progress, synergies, and the final purchase-price allocation.
- Collection and timing of the Supermetals promissory notes and any contingent payments.
- Debt reduction, refinancing needs and covenant headroom, particularly with $185 million of current long-term debt.
- Whether margins and cash generation remain resilient if volumes weaken or feedstock, energy, and other costs rise.
- Developments, expected spending and potential liabilities from EPA proceedings, environmental remediation and respirator claims.