Cabot Corporation — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2013, ended March 31, 2013. Unaudited consolidated results; dollars in millions except per-share amounts. Cabot acquired Norit in July 2012, adding Purification Solutions. Supermetals was sold in January 2012 and is reported as discontinued operations.
Financial results and liquidity
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $842 | $844 | $1,662 | $1,606 |
| Gross profit | $144 | $173 | $291 | $316 |
| Income from operations | $49 | $87 | $104 | $148 |
| Income from continuing operations | $23 | $56 | $48 | $96 |
| Net income attributable to Cabot | $27 | $240 | $47 | $286 |
| Diluted EPS, continuing operations | $0.42 | $0.78 | $0.75 | $1.33 |
- Gross margin was approximately 17.1% for the quarter and 17.5% for the six-month period, down from approximately 20.5% and 19.7%, respectively.
- Quarter revenue was nearly flat as lower volume and foreign exchange effects were largely offset by Norit. Six-month revenue increased 3%, principally from Norit, despite weaker volumes and unfavorable currency translation.
- Operating cash flow was $4, versus $93 in the prior-year six months. Capital expenditures were $127, leaving operating cash flow less capital expenditures of negative $123. Working capital and lower accounts payable/accruals were major cash uses.
- At March 31, cash was $85; current revolver availability was approximately $493. Total debt, including notes payable and current and long-term debt, was approximately $1,513, compared with $1,419 at September 30, 2012. Cabot reported compliance with credit-facility covenants.
- Interest expense rose to $16 for the quarter and $32 for six months, from $9 and $19, respectively, primarily due to debt financing for Norit. Quarterly and six-month dividends per share were $0.20 and $0.40.
Material changes and business performance
- Management attributed lower continuing-operations pretax income to a challenging macroeconomic environment and reduced volumes. Total segment EBIT fell to $89 from $123 in the quarter and to $179 from $204 for six months.
- Reinforcement Materials was weakest: quarterly sales fell to $459 from $534 and EBIT to $41 from $72, driven by lower volumes, weaker unit margins, and an unfavorable Japanese plant disruption.
- Performance Materials EBIT improved to $37 from $35 for the quarter and $63 from $56 for six months. Advanced Technologies EBIT declined to $8 from $16 for the quarter; lower Specialty Fluids rental activity was a key factor.
- Purification Solutions, comprising Norit, contributed sales of $79 and EBIT of $3 in the quarter, and sales of $172 and EBIT of $10 for six months. Prior-year segment comparisons are not available because Norit was acquired after those periods.
- Prior-year net income included the after-tax Supermetals sale gain of $186 in the quarter and six-month period. Accordingly, the much lower reported net income in 2013 is not a like-for-like measure of continuing performance.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2013 operating tax rate of 25%–27%. Planned capital expenditures for the remainder of fiscal 2013 were $125–$175.
- Cabot said available cash, operating cash flows, and revolver capacity were expected to meet operating, investment, and financial obligations for the foreseeable future; liquidity depends in part on receivable collection, raw-material costs, and inventory management.
- Restructuring and other certain items reduced pretax results by $20 in the quarter and $40 for six months, including restructuring charges of $19 and $25, respectively, and Norit-related charges within acquisition costs. The Malaysia joint venture announced cessation of production at its Port Dickson facility; expected total pretax charges were approximately $28, including $16 impairment, with estimated net cash outlays of $12.
- Venezuela’s bolivar devaluation generated a $2 loss at Cabot’s subsidiaries, partly offset by a $2 tax benefit; Cabot’s share of affiliate losses was approximately $1. Cabot reported no impairment of its $25 equity investment, but noted restrictions on currency conversion and continued monitoring of recoverability.
- Environmental reserves were $6. Approximately 42,000 respirator-related claimants remained in pending cases; the discounted reserve was $12 ($16 undiscounted). Cabot also described potential significant capital improvements and a civil penalty to resolve EPA discussions concerning its Pampa, Texas facility, with costs and timing not specified.
- Long-term raw-material purchase commitments totaled $4.147 billion, based on March 31 market prices. Key stated risks include weaker demand, raw-material cost changes, Norit integration, currency movements, environmental regulation, litigation, and execution of capacity expansions.
Important facts for investors to verify
- Whether demand, volumes, and margins—particularly in Reinforcement Materials and Specialty Fluids—recover, and how Norit integration affects profitability.
- Working-capital trends, capital spending, operating cash conversion, debt levels, and continued covenant compliance.
- Actual cash receipts and valuation of the $223 GAM notes receivable, including the remaining scheduled payments and variable consideration.
- Final costs, cash timing, and recoveries related to the Malaysia closure, other restructuring plans, and the Pampa EPA matter.
- Developments in Venezuela’s currency-conversion restrictions and the recoverability of Cabot’s affiliate investment.