Cabot Corporation (10-Q): Fiscal Q2 2016
Reporting period: Three and six months ended March 31, 2016; unaudited. Cabot is a global specialty chemicals and materials company reporting four segments: Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales and operating revenues | $568 million | $694 million | $1,171 million | $1,506 million |
| Gross profit | $150 million | $139 million | $249 million | $296 million |
| Income from operations | $77 million | $54 million | $89 million | $118 million |
| Net income attributable to Cabot | $48 million | $26 million | $41 million | $71 million |
| Diluted EPS attributable to Cabot | $0.76 | $0.41 | $0.65 | $1.10 |
| Cash provided by operating activities | Not separately presented for the quarter | $188 million | $205 million |
- Revenue fell 18% in Q2 and 22% for the six-month period. Management attributed the declines mainly to lower selling prices and product mix following raw-material cost decreases, foreign-exchange effects, and lower volumes.
- Gross margin was approximately 26.4% in Q2 versus 20.0% a year earlier; for six months it was approximately 21.3% versus 19.7%. Q2 operating results benefited from lower fixed costs after restructuring, improved unit margins and a $7 million gain on sale of land.
- Q2 total segment EBIT was $88 million, up from $69 million; six-month segment EBIT was $159 million, down from $166 million. Six-month GAAP income from continuing operations before taxes and equity earnings was $54 million versus $90 million.
- Segment performance was mixed: Q2 Performance Chemicals EBIT rose to $58 million from $42 million, while Purification Solutions reported a $2 million loss versus $1 million income and Specialty Fluids a $2 million loss versus a $1 million loss. Reinforcement Materials EBIT increased to $34 million from $27 million in Q2, but declined for the six-month period.
- Six-month operating cash flow was $188 million, compared with $205 million. Capital expenditures were $52 million; management expected approximately $125 million for FY2016. Cash and cash equivalents were $178 million at March 31, up from $77 million at September 30, 2015.
- Total borrowings, including notes payable, were approximately $977 million at March 31, 2016, compared with approximately $993 million at September 30, 2015. Current debt included $301 million, principally reflecting $300 million of 5% notes due October 1, 2016. The company intended to refinance these notes during FY2016.
- Current assets were $1.03 billion and current liabilities $655 million. Cabot reported $1 billion of available revolving-credit capacity, no commercial paper outstanding, and compliance with its debt-to-EBITDA covenant. Management said available liquidity should meet operating, investment and financial needs for the foreseeable future.
Material changes, outlook and risks
- Six-month results included $43 million of net restructuring-related charges and $23 million of long-lived-asset impairment charges. The actions included a global workforce reduction of about 300 positions and closure of the Merak, Indonesia carbon-black plant; Merak operations stopped in January 2016. Management expected additional restructuring and site-closure costs and cash outlays.
- Management anticipated a stronger second half of FY2016 than the first half, citing expected volume improvement across segments and continuing restructuring savings. It expected stronger Reinforcement Materials volumes in North America and Europe, improvement in selected Performance Chemicals applications, MATS-related and seasonal demand in Purification Solutions, and increased project activity in Specialty Fluids.
- Management expected an FY2016 operating tax rate of 25%–26%. The reported effective tax rate was 20% for Q2 and 12% for the first six months, affected by discrete tax items.
- Risks include demand and volume weakness, raw-material and selling-price changes, foreign exchange, and oil-and-gas project activity. Purification Solutions’ future performance and goodwill valuation depend significantly on activated-carbon demand, expected volumes and margins, including continued effect and enforcement of U.S. Mercury and Air Toxics Standards (MATS). Its fair value had been only insignificantly above carrying value following a prior-year impairment.
- Environmental reserves were $14 million; the respirator-claims reserve was $9 million, with about 37,000 claimants in pending cases against American Optical. Management considered reasonably possible environmental costs beyond reserves immaterial and did not expect other claims, in aggregate, to have a material adverse effect; outcomes remain uncertain.
- Other notable exposures include $2.33 billion of long-term purchase commitments, primarily for raw materials, with some prices varying with market prices; foreign-exchange and Venezuelan risks; and potential tax-audit adjustments. Cabot reported no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether the anticipated second-half volume recovery materialized, particularly in Reinforcement Materials, Purification Solutions and Specialty Fluids.
- Progress and realized savings from restructuring, remaining Merak closure costs, and the effect of the $23 million impairment.
- Refinancing of the $300 million notes due October 1, 2016, and continued compliance with credit-facility covenants.
- Purification Solutions’ sales, margins and goodwill valuation as MATS requirements and utility demand evolve.
- Cash conversion, working-capital trends, planned capital spending, purchase commitments and exposure to foreign exchange, tax audits and litigation.