CABOT CORP annual report, FY2015

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Cabot Corporation — FY2015 Form 10-K

Business context and reporting period. Cabot is a global specialty chemicals and performance materials company. Its four reportable segments are Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids. This annual report covers the fiscal year ended September 30, 2015; the filing also presents unaudited fourth-quarter results.

Key financial results

  • Revenue: $2.871 billion, down 21% from $3.647 billion in FY2014. The decline reflected lower prices and product mix (down $433 million), foreign currency translation (down $203 million) and lower volume (down $116 million).
  • Profitability: Gross profit was $585 million versus $721 million; gross margin was approximately 20.4% versus 19.8%. Operating loss was $317 million, compared with operating income of $335 million, principally due to $562 million of Purification Solutions goodwill and long-lived asset impairments. Net loss attributable to Cabot was $334 million, or $5.27 per diluted share, versus net income of $199 million, or $3.03 per diluted share.
  • Segment performance: Segment EBIT was $332 million, down from $447 million. Reinforcement Materials EBIT fell to $143 million from $259 million; Performance Chemicals rose to $178 million from $168 million; Purification Solutions improved to $5 million from a $19 million loss; and Specialty Fluids declined to $6 million from $39 million.
  • Cash flow and investment: Cash provided by operating activities was $499 million, versus $315 million. Capital expenditures were $141 million, versus $171 million. Cash and cash equivalents were $77 million at year-end.
  • Debt and liquidity: Total debt was approximately $993 million, down from $1.072 billion; the reported net debt-to-capitalization ratio was 41%, versus 33%. Cabot reported $738 million available under its revolving credit agreement at year-end. In October 2015, it amended and extended the facility, increasing capacity from $750 million to $1 billion. The company said available cash, operating cash flow and credit facilities should meet foreseeable requirements.
  • Other metrics: Current assets were $1.048 billion and current liabilities $441 million. Dividends were $0.88 per share for the year. Total assets were $3.075 billion, down from $4.084 billion.

Material changes and unusual items

  • The $562 million pre-tax Purification Solutions impairment included $352 million of goodwill and $210 million of long-lived assets; the after-tax charge was $482 million. The impairment followed reduced assumptions for mercury-removal demand, pricing and margins amid uncertainty around U.S. Mercury and Air Toxics Standards (MATS) implementation.
  • Revenue fell sharply in Reinforcement Materials, primarily on lower selling prices tied to lower raw-material costs, unfavorable currency translation and weaker volumes. Specialty Fluids was hurt by lower oil-and-gas project activity. Performance Chemicals EBIT improved on better margins and cost management.
  • Other FY2015 charges included $21 million for restructuring and employee-benefit-plan settlement and other charges, and a $6 million inventory reserve adjustment. The restructuring charge included an $18 million pre-tax charge related to transferring a foreign pension plan to a multi-employer plan.
  • After its November 2, 2015 earnings release, Cabot adjusted tax and value-added-tax-credit amounts in year-end procedures. The adjustments reduced reported Q4 diluted EPS from $0.68 to $0.63 and FY diluted EPS from a loss of $5.23 to a loss of $5.27; adjusted EPS for both periods was reduced by $0.04. The filing says the adjustments primarily affected Reinforcement Materials.
  • Foreign currency translation reduced FY2015 segment EBIT by $20 million; the company also recorded an $8 million unfavorable currency impact in other expense, largely related to the Brazilian real.

Outlook, management commentary and risks

  • Management expected modest FY2016 volume growth in Reinforcement Materials and Performance Chemicals, while citing continued economic uncertainty in Asia and South America and margin pressure in Reinforcement Materials from feedstock effects and competition in Asia.
  • Cabot expected Purification Solutions to operate at roughly breakeven EBIT in the near term pending greater clarity on MATS proceedings. Management assumed an approximately two-year delay in compliance; a longer delay or a vacated rule could further weaken results and lead to additional impairment. Specialty Fluids’ near-term outlook remained difficult amid weak oil-and-gas activity.
  • In October 2015, Cabot announced restructuring actions expected to produce approximately $50 million of company-wide cost savings in FY2016, beginning in the second quarter. The company also planned to close its Merak, Indonesia carbon black plant by the end of January 2016, with expected annual savings of approximately $8 million. Combined actions were expected to reduce about 370 positions and require approximately $38 million of net cash outlays, mostly in FY2016.
  • FY2016 capital expenditures were projected at approximately $150 million. Cabot anticipated approximately $34 million of environmental-related capital expenditures in FY2016. Separately, controls required under a U.S. carbon-black settlement were expected to cost approximately $100 million through calendar 2020.
  • Other risks include raw-material and energy volatility, foreign-exchange exposure, customer concentration in certain businesses, operational and environmental hazards, litigation and respirator claims, and uncertainty in Venezuela. Reserves included $16 million for environmental remediation and $11 million for respirator liabilities; actual costs could differ.

Most important facts for investors to verify

  • Whether MATS implementation and enforcement support the demand and margin assumptions underlying Purification Solutions’ valuation, and whether further impairments are required.
  • Whether the announced restructuring savings and Merak closure proceed as planned, including timing, cash costs and realized savings.
  • Whether Reinforcement Materials margins stabilize as raw-material prices, pricing formulas, regional mix and Asian competition evolve.
  • Whether Specialty Fluids project activity recovers, given its exposure to oil-and-gas spending and a concentrated customer base.
  • Whether cash generation, debt refinancing and the expanded credit facility adequately support capital spending, restructuring costs, dividends and the $300 million 5% notes due October 2016.
  • Whether environmental, pension, respirator-liability, tax and foreign-exchange exposures remain within recorded estimates. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.