Cabot Corporation (NYSE: CBT) — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022; filed February 9, 2023. Figures are unaudited and in U.S. dollars. Comparisons are with the three months ended December 31, 2021 unless stated otherwise.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales and other operating revenues | $965 million | $968 million |
| Gross profit | $181 million | $198 million |
| Gross margin | 18.8% | 20.5% |
| Income (loss) from operations | $105 million | $(83) million |
| Net income (loss) attributable to Cabot | $54 million | $(89) million |
| Diluted EPS | $0.93 | $(1.57) |
| Cash provided (used) by operating activities | $52 million | $(49) million |
| Capital expenditures | $35 million | $30 million |
Consolidated net income was $66 million, including $12 million attributable to noncontrolling interests. Gross margin is calculated from reported revenue and gross profit. Operating cash flow less capital expenditures was approximately $17 million.
Segments and changes versus prior period
- Reinforcement Materials: Sales were $643 million versus $563 million; segment EBIT was $94 million versus $85 million. Favorable pricing and mix outweighed lower volumes and foreign-exchange effects.
- Performance Chemicals: Sales were $286 million versus $306 million; segment EBIT was $29 million versus $52 million. Lower volumes, higher fixed costs and unfavorable currency effects weighed on results.
- Total segment EBIT: $123 million, down from $137 million. Management cited lower volumes in both segments, reflecting customer destocking and COVID-19 outbreaks in China.
- Revenue was nearly unchanged: favorable price and product mix contributed $177 million, largely offset by unfavorable currency translation ($73 million), the Purification Solutions divestiture ($61 million) and lower volumes ($42 million).
- Gross profit declined $17 million, primarily from lower volumes and higher fixed costs, partly offset by higher unit margins. Selling and administrative expense fell $11 million, largely because Purification Solutions-related costs did not recur.
- GAAP income before tax and equity earnings improved to $84 million from a $93 million loss, mainly because the prior-year period included a $197 million Purification Solutions impairment charge. Q1 FY2023 also included a further $3 million divestiture-related loss.
Cash, debt and liquidity
- At December 31, 2022, cash and cash equivalents were $190 million, down from $206 million at September 30, 2022. Operating activities provided $52 million; investing activities used $17 million; financing activities used $92 million. Exchange-rate changes added $41 million to cash.
- Balance-sheet debt comprised $312 million of short-term borrowings, $7 million current portion of long-term debt and $1.091 billion of long-term debt. Total liabilities were $2.376 billion and stockholders’ equity was $1.159 billion.
- Current assets were $1.800 billion and current liabilities were $984 million. The company reported $930 million of availability under revolving credit agreements, alongside $190 million cash. It disclosed $274 million of commercial paper and $116 million drawn under the Euro Credit Agreement; the filing text does not clearly reconcile these amounts to the balance-sheet short-term borrowings figure.
- Cabot reported compliance with credit-agreement covenants, including a maximum consolidated net debt-to-EBITDA ratio of 3.50 to 1.00. Management expects available cash, operating cash flow, credit facilities and commercial paper access to meet foreseeable needs.
- Quarterly common dividends were $21 million ($0.37 per share); share repurchases were $17 million. Fiscal 2023 capital expenditures are expected to be approximately $300 million.
Outlook, commentary and risks
- For Q2, management expected Reinforcement Materials margins to improve on 2023 calendar-year customer pricing and mix, with higher fixed costs from inflation and scheduled maintenance turnarounds.
- For Performance Chemicals, management expected volumes to begin recovering across product lines, while fixed costs and utility costs were expected to remain higher.
- Management projected a fiscal 2023 operating tax rate of 24%–26%. Substantially all U.S. deferred tax assets, net of deferred tax liabilities, remained subject to valuation allowances; a possible release could generate a material non-cash tax benefit.
- Cabot recorded $6 million of insurance proceeds related to the 2021 Pepinster, Belgium flood; the filing reports a $5 million gain and $1 million loss recovery related to these proceeds.
- A $39 million reserve covered Cabot’s estimated share of pending and future respirator claims. The company warned that developments—including the Aearo bankruptcy, insurance recovery, claim trends and allocation among responsible parties—could change the estimate, potentially materially.
- Other stated risks include demand and economic weakness, customer destocking, COVID-19 and supply-chain disruption, energy and raw-material volatility, inflation, foreign exchange and interest rates, regulatory and climate-related matters, litigation, and execution of capacity expansions. Management said the duration and scope of COVID-19 impacts could not be estimated.
Important facts for investors to verify
- Whether segment volume recovery and the expected Q2 margin improvement materialized, and how pricing, mix and fixed costs affected subsequent results.
- How the $312 million balance-sheet short-term borrowing amount relates to the separately disclosed commercial paper and Euro Credit Agreement balances.
- Whether the $300 million fiscal-year capital spending plan and expected liquidity were maintained.
- Any change in the $39 million respirator-liability reserve, related insurance or indemnity recoveries, and the effect of the Aearo proceedings.
- Whether valuation allowances on U.S. deferred tax assets were released and whether the operating tax rate remained within the projected range.