Cabot Corporation — FY2019 Form 10-K
Business context and reporting period. Cabot is a global specialty chemicals and performance materials company. This annual report covers the fiscal year ended September 30, 2019; fiscal Q4 ended on that date. The business reported four segments through June 28, 2019, when it sold Specialty Fluids, and has since operated through Reinforcement Materials, Performance Chemicals and Purification Solutions. Amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $3.337 billion | $3.242 billion |
| Gross profit | $685 million | $772 million |
| Gross margin | 20.5% | 23.8% |
| Operating income | $306 million | $144 million |
| Net income (loss) attributable to Cabot | $157 million | $(113) million |
| Diluted EPS | $2.63 | $(1.85) |
| Cash from operating activities | $363 million | $298 million |
| Capital expenditures | $224 million | $229 million |
Revenue rose 2.9%, while gross profit fell 11.3% and gross margin contracted approximately 3.3 percentage points. Management attributed the margin pressure principally to weaker unit margins in Reinforcement Materials and Performance Chemicals, continued competitive pricing in Asia, lower automotive production and lower Performance Chemicals volumes. Revenue growth included $125 million from more favorable pricing and mix as raw-material costs were passed through, and $76 million of by-product sales newly presented as revenue; unfavorable currency translation reduced revenue by $87 million.
Operating income and the return to positive GAAP earnings benefited from the absence of the $254 million Purification Solutions goodwill and long-lived-asset impairment recorded in FY2018. FY2019 included a $29 million Specialty Fluids sale and impairment charge, an $11 million impairment of the Venezuelan equity investment, and $87 million of total pre-tax “certain items.” Total segment EBIT, a non-GAAP measure, was $444 million versus $480 million.
- Segment EBIT, FY2019: Reinforcement Materials $266 million (down from $279 million); Performance Chemicals $152 million (down from $200 million); Purification Solutions $2 million (versus a $7 million loss); Specialty Fluids $24 million for the period before sale.
- Liquidity and debt: Cash was $169 million; total debt was $1.031 billion, including $33 million of commercial paper. Net debt to capitalization was 44%, up from 39%. Available borrowing under revolving credit agreements was $1.297 billion, and Cabot reported compliance with its covenants.
- Cash deployment: Investing activities used $94 million, including $224 million of capital spending partly offset by $135 million of proceeds reported from the Specialty Fluids sale. Financing activities used $236 million, including $173 million of share repurchases and $80 million of common dividends.
- Q4 FY2019: Revenue was $827 million; net income attributable to Cabot was $33 million; diluted EPS was $0.55. The quarter included a $20 million pre-tax charge related to respirator liabilities.
Material changes, outlook and risks
Cabot sold Specialty Fluids to Sinomine in June 2019 for $133 million net of $2 million of cash transferred, subject to customary adjustments. The divestiture was not treated as a discontinued operation. Cabot may also receive up to $5 million in lithium-product royalties over ten years. The company issued $300 million of 4.0% unsecured notes due 2029 and entered a €300 million revolving credit facility during FY2019.
Management expected challenging macroeconomic conditions to continue into FY2020, including U.S.-China trade-tariff disputes, volatile commodity prices and soft global automotive production. It nevertheless expected EBIT growth across all three continuing segments: Reinforcement Materials was expected to benefit from calendar-2020 customer agreements; Performance Chemicals from a full year of output at the new China fumed-silica plant; and Purification Solutions from transformation measures and specialty applications. No Specialty Fluids EBIT was expected in FY2020. Planned FY2020 capital spending was approximately $250 million.
- Contingencies: The respirator-liability reserve increased to $35 million from $25 million, after a $20 million FY2019 charge; payments were $10 million. The estimate depends on future claims, defense and settlement costs, insurance and other parties’ ability to pay.
- Environmental matters: The environmental reserve was $13 million. U.S. carbon-black air-pollution controls under a consent decree were expected to cost $175–$200 million through 2022; approximately $74 million had been spent. Environmental-related capital expenditures were $26 million in FY2019 and approximately $58 million were anticipated for FY2020.
- Pension: Cabot began terminating its U.S. pension plan and expected to settle it in FY2020. The filing anticipated a $13 million loss upon settlement and a $158 million U.S. pension-benefit payment associated with termination.
- Other exposures: Key risks include feedstock and energy price volatility, competition and customer concentration, foreign-exchange and country risk, trade tensions, environmental regulation, operating interruptions, litigation, and the ability to realize growth and capacity-expansion benefits. Management stated that Purification Solutions strategic options remained under review and that further impairment was possible.
Important facts for investors to verify
- Whether the projected FY2020 EBIT growth materialized, particularly amid automotive weakness, trade uncertainty and the loss of Specialty Fluids’ contribution.
- Whether segment margins and volumes recovered, and whether pricing adjustments continued to offset feedstock and energy costs.
- Progress, spending and schedule for U.S. emissions controls and planned capacity projects; compare actual FY2020 capital spending with the approximately $250 million forecast.
- Changes in the $35 million respirator reserve, actual claims payments and the assumptions used to estimate future liabilities.
- Debt, borrowing availability, covenant compliance, and the cash and earnings effects of the U.S. pension-plan termination.
- Any strategic decision, impairment or operating change involving Purification Solutions.
The filing reports unqualified independent-auditor opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.