Cabot Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports the fourth quarter ended September 30, 2020. Amounts are in U.S. dollars unless noted.
Business context
Cabot is a global specialty chemicals and performance materials company. Its three reportable segments are Reinforcement Materials, Performance Chemicals, and Purification Solutions. Fiscal 2020 was materially affected by COVID-19-related disruption, especially in automotive and tire markets. Specialty Fluids was divested in June 2019.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales and operating revenues | $2,614 million | $3,337 million |
| Gross profit | $500 million | $685 million |
| Gross margin | 19.1% | 20.5% |
| Income from operations | $21 million | $306 million |
| Net income (loss) attributable to Cabot | $(238) million | $157 million |
| Diluted EPS | $(4.21) | $2.63 |
| Cash provided by operating activities | $377 million | $363 million |
| Capital expenditures | $200 million | $224 million |
| Cash and cash equivalents at year-end | $151 million | $169 million |
| Total debt | $1,101 million | $1,031 million |
| Net debt to capitalization | 54% | 44% |
Operating cash flow benefited from lower working capital, including decreases of $126 million in receivables and $114 million in inventories. Cash used in investing activities was $288 million, including the SUSN acquisition; cash used in financing activities was $132 million. Cash less capital expenditures was approximately $177 million, calculated from reported figures.
At September 30, 2020, Cabot reported $1.3 billion of borrowing availability under its credit agreements, $14 million of commercial paper outstanding, and $148 million borrowed under its Euro revolver. The company was in covenant compliance; the leverage covenant was temporarily amended to 4.50-to-1.00 through the quarter ending June 30, 2021, from the usual 3.50-to-1.00.
Segment results: Reinforcement Materials sales were $1,256 million and EBIT was $162 million, versus $1,815 million and $266 million. Performance Chemicals sales were $933 million and EBIT was $118 million, versus $995 million and $152 million. Purification Solutions sales were $253 million and EBIT was $3 million, versus $278 million and $2 million. Segment EBIT is a company-defined non-GAAP measure.
Material changes versus the prior comparable period
- Revenue fell $723 million, or about 22%. The filing attributes $56 million of the decline to the prior-year Specialty Fluids divestiture; the remaining decrease principally reflected lower volumes, less favorable price and product mix, and foreign exchange.
- Gross profit declined $185 million. Lower Reinforcement Materials and Purification Solutions volumes and lower Performance Chemicals unit margins were key factors.
- Total segment EBIT fell to $283 million from $444 million; excluding Specialty Fluids’ prior-year contribution, the decrease was $137 million. COVID-19-related volume weakness and lower margins were partly offset by lower fixed costs.
- Net loss attributable to Cabot was driven in part by the $129 million Marshall mine sale and asset impairment charge, a $50 million respirator-litigation settlement charge, and substantial deferred-tax valuation allowances. The effective tax rate was negative 587%, reflecting these tax items and the pretax loss.
- Debt increased by $70 million, while net debt to capitalization rose 10 percentage points. The annual common dividend increased to $1.40 per share from $1.36; share repurchases were suspended during the second quarter, though $44 million of common stock purchases were reported for the year.
Outlook, management commentary, risks, and unusual items
- Management said customer operations and demand improved in the fourth quarter after severe disruption in the third quarter. Reinforcement Materials volumes were 11% below the prior-year quarter in Q4, versus 42% below in Q3.
- For FY2021, management expected first-quarter Reinforcement Materials volumes to be consistent with Q4 levels, with potential benefit from strong Asian spot pricing. It anticipated a first-quarter step-up in Performance Chemicals from higher volumes, improved mix, and pricing actions. These expectations depend on the durability of the demand recovery, cost recovery, pricing, and customer negotiations.
- Management expected Marshall-related restructuring to benefit Purification Solutions EBIT by approximately $15 million in FY2021 and said it would continue evaluating strategic options for the segment. The Cilegon, Indonesia expansion was temporarily paused; work on the project was expected to resume later. Specialty carbon production at the Pizhou, China facility was expected to begin in FY2022.
- FY2021 capital expenditures were forecast at $175–$200 million. Environmental-related capital spending was expected to be approximately $52 million in FY2021; U.S. emissions-control installations under the consent decree were expected to cost approximately $200 million through calendar 2022, with $82 million spent by September 30, 2020.
- COVID-19 remains a material uncertainty, with potential effects on customer demand, operations, supply chains, cash flow, asset values, credit availability, and deferred-tax-asset recoverability. Other disclosed risks include raw-material and energy cost volatility, customer concentration, competition, foreign exchange, environmental regulation, and operating interruptions.
- The company recorded a $253 million valuation allowance against U.S. deferred tax assets, citing three-year cumulative U.S. losses; management said it expected the allowance to remain until sufficient positive evidence supports reversal. The fourth quarter included a reported $228 million valuation-allowance charge.
- Cabot settled a large group of respirator claims for $65.2 million; $32.6 million remained payable at year-end and was paid in Q1 FY2021. A separate $24 million reserve covered estimated pending and future respirator claims. A disputed VAT matter could result in a charge from nil to $30 million, including possible interest and penalties, partly dependent on any recovery from customers.
- The mine sale ended Cabot’s lignite-based activated-carbon manufacturing at Marshall; Cabot entered a long-term exclusive supply arrangement with the buyer and retained certain washing, packaging, and warehousing activities at the site. The filing also reports a $7 million environmental remediation reserve.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified U.S. deferred-tax-asset realizability and respirator liabilities as critical audit matters.
Important facts for investors to verify
- Whether automotive and tire demand recovery persisted, and how customer pricing negotiations and production costs affected Reinforcement Materials margins.
- Whether Performance Chemicals’ expected volume, mix, and pricing improvements materialized.
- The basis and recoverability of the U.S. deferred tax assets, and the potential for further valuation-allowance changes.
- Actual cash requirements for respirator claims, the Marshall mine closure, environmental controls, and the disputed VAT assessments.
- Debt covenant headroom, borrowing availability, and capital spending relative to management’s FY2021 outlook.