Cabot Corporation — Fiscal 2011 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2011; comparable periods are the three and nine months ended June 30, 2010. Amounts are in U.S. dollars. The filing describes Cabot’s Core, Performance, New Business and Specialty Fluids segments.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Revenue | $883 million | $753 million | $2,427 million | $2,144 million |
| Gross profit | $175 million | $154 million | $494 million | $430 million |
| Income from operations | $96 million | $77 million | $251 million | $188 million |
| Net income attributable to Cabot | $60 million | $47 million | $186 million | $119 million |
| Diluted EPS attributable to Cabot | $0.92 | $0.72 | $2.81 | $1.81 |
| Cash provided by operating activities | Not provided by quarter | Not provided by quarter | $117 million | $99 million |
- Q3 revenue rose 17% and nine-month revenue rose 13%. Management attributed the increases chiefly to higher prices and favorable product mix, with foreign-exchange translation also contributing; nine-month volumes were modestly higher.
- Gross margin was approximately 19.8% in Q3 versus 20.5% a year earlier, and approximately 20.4% for the nine months versus 20.1%. Operating margin was approximately 10.9% in Q3 versus 10.2%, and 10.3% for the nine months versus 8.8%.
- Segment EBIT was $115 million in Q3 versus $101 million and $317 million for the nine months versus $265 million. Higher unit margins were the main driver; higher raw-material costs, lower volumes in some businesses and higher fixed manufacturing costs were offsets.
- Q3 segment results included Rubber Blacks EBIT of $50 million, Supermetals $19 million, Performance $42 million, New Business $1 million and Specialty Fluids $3 million. Specialty Fluids sales and EBIT fell to $12 million and $3 million from $22 million and $11 million, respectively.
- Nine-month operating cash flow increased to $117 million from $99 million. Higher receivables, inventories and lower accounts payable absorbed working capital; management cited rising carbon-black feedstock costs and related higher receivable and inventory values.
- Capital expenditures were $129 million for the nine months, compared with $57 million. Investing activities used $138 million; financing activities used $35 million. Cash decreased by $43 million to $344 million.
Balance sheet and liquidity
- At June 30, 2011, cash and cash equivalents were $344 million; current assets were $1.580 billion and current liabilities $542 million.
- Debt comprised $61 million of bank notes payable, $26 million of current long-term debt and $578 million of long-term debt. Total reported interest-bearing debt was approximately $665 million, versus approximately $652 million at September 30, 2010.
- Cash less reported interest-bearing debt was approximately $321 million. The company reported approximately $424 million of availability under its revolving credit agreement and compliance with debt covenants.
- Total stockholders’ equity was $1.635 billion. Accounts receivable were $697 million and inventories $434 million.
Management outlook, unusual items and risks
- Management expected the fiscal 2011 operating tax rate to be 25%–26%, compared with 27% in fiscal 2010. The nine-month reported tax rate was 13%, including $23 million of discrete tax benefits related principally to repatriation of high-tax dividends following U.S. tax-law changes.
- Management expected approximately $70 million of capital expenditures for the remainder of fiscal 2011, primarily for energy-related projects, capacity expansion and maintenance. It anticipated adequate liquidity for operating, investment and financial needs for the foreseeable future.
- Q3 restructuring charges were $5 million; nine-month charges were $16 million. Plans included closures at Grigno, Italy and Thane, India, and the ongoing 2009 global restructuring. Management estimated approximately $7 million of net restructuring cash payments for the remainder of fiscal 2011 and $5 million thereafter.
- Supermetals inventory liquidation under LIFO reduced nine-month cost of sales by $20 million and increased net income by $13 million, or $0.20 per diluted share. Q3 effects were $6 million and $4 million, or $0.06 per diluted share.
- The company recorded a roughly $9 million benefit related to a prior-period feedstock pipeline legal judgment during the nine months. Q3 other expense included a $3 million charge related to Colombian net-worth tax regulation changes and unfavorable foreign-currency comparisons.
- Environmental reserves were $6 million. Respirator-claim reserves were $12 million discounted ($17 million undiscounted), with approximately 43,000 claimants in pending cases; estimated payments extend through 2062. The filing cautions that actual liability could differ from estimates.
- Unrecognized tax benefits totaled $73 million, including $47 million recorded on the balance sheet; management said potential changes from audits or expiring statutes could not be quantified. Venezuela currency-conversion restrictions, raw-material costs, demand, foreign exchange, execution of capacity expansions and restructuring, and litigation are among the stated risks.
- Management reported no material change in risk factors from the 2010 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2011. The filing provides no specific earnings or revenue guidance.
Investor verification priorities
- Verify whether higher prices and favorable mix continue to offset raw-material inflation, and whether volume trends improve, particularly in Rubber Blacks and Specialty Fluids.
- Assess working-capital conversion, receivables and inventory growth, capital spending, and the resulting effect on cash flow and debt.
- Separate recurring earnings from LIFO liquidation benefits, discrete tax benefits, restructuring charges and the legal-judgment benefit.
- Track the fiscal 2011 tax-rate outlook and potential developments in tax audits and unrecognized tax benefits.
- Review assumptions and reserve adequacy for respirator claims, environmental matters and other litigation, as well as Venezuela’s ability to remit affiliate earnings.
- Confirm progress, remaining cash costs and expected benefits from facility closures, restructuring and announced capacity projects.