Cabot Corporation — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Cabot is a global specialty chemicals and performance materials company with four segments: Reinforcement Materials, Performance Chemicals, Purification Solutions and Specialty Fluids.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $3.242 billion | $2.717 billion |
| Gross profit / margin | $781 million / 24.1% | $663 million / 24.4% |
| Operating income | $156 million | $347 million |
| Net income (loss) attributable to Cabot | $(113) million | $248 million |
| Diluted EPS | $(1.85) | $3.91 |
| Cash provided by operating activities | $298 million | $348 million |
| Capital expenditures | $229 million | $147 million |
| Cash and cash equivalents at year-end | $175 million | $280 million |
| Total debt | $754 million | $917 million |
FY2018 operating cash flow less capital expenditures was approximately $69 million. Year-end net debt was approximately $579 million; net debt to capitalization was 39%, up from 28%. Cabot reported $751 million available under its revolving credit agreement and $249 million of commercial paper outstanding. It expected to repay $30 million of notes maturing in December 2018 with cash and/or commercial paper.
Management’s non-GAAP Total segment EBIT rose to $480 million from $409 million. Adjusted return on net assets increased to 14% from 13%. FY2018 dividends were $1.29 per share, versus $1.23.
Material changes versus FY2017
- Revenue increased 19%, driven mainly by improved price and product mix (+$323 million), higher volumes (+$110 million) and favorable currency translation (+$83 million). Gross profit rose $118 million, while gross margin edged down.
- Reinforcement Materials sales increased to $1.774 billion from $1.381 billion, and EBIT to $279 million from $193 million, supported by pricing, margins and volumes.
- Performance Chemicals sales increased to $1.028 billion from $908 million, while EBIT was nearly flat at $200 million versus $201 million. Tech Blend contributed additional volume; growth and construction costs weighed on results.
- Purification Solutions reported a $7 million EBIT loss versus $6 million EBIT income. Sales were nearly flat, amid competitive pressure and lower mercury-removal demand.
- Specialty Fluids sales increased to $45 million from $41 million; EBIT decreased to $8 million from $9 million.
- Cabot recorded $254 million of pre-tax impairment charges in Purification Solutions ($92 million goodwill and $162 million long-lived assets), plus a $13 million inventory reserve adjustment. Deteriorating demand, share losses and pricing in mercury removal and North American powdered activated carbon drove revised forecasts.
- The income tax provision was $193 million, including $120 million of net discrete tax expense; the Tax Cuts and Jobs Act was a major factor. Cabot’s reported effective tax rate was 165%, versus 10% in FY2017. The operating tax rate, a non-GAAP measure, was 21%.
- Operating cash flow declined by $50 million; capital spending increased by $82 million. Working capital absorbed cash, including increases in receivables and inventory.
Outlook, risks and notable items
- Management expected another year of strong growth in FY2019 and EBIT growth across all segments. It projected a 22%–24% tax rate and $250–$300 million of capital expenditures.
- Outlook assumptions included favorable Reinforcement Materials customer agreements; Performance Chemicals benefits from growth investments expected in the second half of FY2019; a Purification Solutions improvement plan and continued exploration of strategic alternatives; and continued strong Specialty Fluids performance.
- Near-term uncertainties cited included U.S.–China tariffs, volatile commodity prices and new European emissions testing standards affecting auto production. Management said cautious customer purchasing was not expected to have a long-term business impact.
- Planned capacity and growth investments included a Cilegon, Indonesia carbon-black expansion (about 160,000 metric tons, expected sales from 2021), fumed silica plants in China and Kentucky, and a Jiangsu, China specialty-carbons facility expected to begin production in 2021.
- Environmental-related capital spending was approximately $45 million in FY2018; about $46 million was anticipated in FY2019. A U.S. Clean Air Act settlement requires emissions-control installations, with estimated capital costs of $100–$150 million through calendar 2022.
- Environmental remediation reserves were $15 million. The respirator-claims reserve increased to $25 million from $18 million; approximately 35,000 claimants had pending cases against American Optical. Actual liabilities may differ from estimates.
- Key business risks include customer concentration in tire-related sales, raw-material and energy price volatility, trade and foreign-exchange exposure, operational and environmental incidents, regulatory changes affecting activated-carbon demand, construction delays, and litigation. Management also cited structural and flooding risks at its cesium mine.
- Cabot changed U.S. carbon-black inventory accounting from LIFO to FIFO retrospectively. The auditor issued an unqualified opinion on the financial statements and internal controls; Tech Blend was excluded from management’s internal-control assessment.
Fourth-quarter context
For the quarter ended September 30, 2018, revenue was $850 million, gross profit was $213 million, net income attributable to Cabot was $94 million and diluted EPS was $1.51. The quarter included a $28 million pre-tax gain on the Thane, India land sale and a $19 million net tax benefit from discrete items, primarily a revision to the estimated tax-reform impact.
Most important facts for investors to verify
- How much of the FY2018 loss reflects non-cash impairment and tax-reform charges, and what underlying profitability and cash generation look like without these items.
- Whether Purification Solutions’ improvement plan can reverse market-share, demand and pricing deterioration, and what strategic alternatives management may pursue.
- Whether projected FY2019 EBIT growth and the $250–$300 million capital-spending plan are achieved, including expected returns and timelines for expansion projects.
- How working-capital needs, commercial-paper use and the December 2018 debt repayment affect liquidity and leverage.
- Whether tax-reform estimates, deferred-tax-asset recoverability and pending tax audits result in further material adjustments.
- Whether environmental-control project costs, remediation spending and respirator liabilities remain within recorded estimates.