CABOT CORP quarterly report, Q2 FY2011

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Cabot Corporation — Q2 FY2011 Form 10-Q

Reporting period: Three and six months ended March 31, 2011; fiscal year ends September 30. Amounts are in U.S. dollars unless noted.

Business context and financial performance

Cabot makes specialty chemicals and materials. Its largest businesses are Rubber Blacks and Supermetals, alongside Performance, New Business and Specialty Fluids operations. Management attributed stronger results primarily to higher prices, improved product mix and higher unit margins, which more than offset higher raw-material costs.

  • Q2 revenue: $791 million, up 11% from $712 million. Higher prices and favorable mix contributed $71 million; foreign currency translation added $12 million.
  • Q2 gross profit: $161 million versus $140 million; gross margin was approximately 20%, compared with 20% a year earlier. Operating income was $78 million versus $60 million; operating margin was approximately 9.9% versus 8.4%.
  • Q2 earnings: Net income attributable to Cabot was $51 million, or $0.76 diluted EPS, versus $43 million, or $0.65. Income from continuing operations was $56 million versus $47 million.
  • First six months: Revenue was $1.544 billion, up 11%; gross profit was $319 million versus $276 million. Operating income was $155 million versus $111 million. Cabot-attributable net income was $126 million, or $1.89 diluted EPS, versus $72 million, or $1.09.
  • Segment EBIT, Q2: Rubber Blacks $50 million versus $38 million; Supermetals $20 million versus $3 million; Performance $37 million versus $32 million; New Business approximately breakeven versus $1 million; Specialty Fluids $1 million versus $5 million. Total segment EBIT increased to $108 million from $79 million.
  • Cash flow, first six months: Operating cash flow was $58 million versus $12 million. Capital expenditures were $72 million, compared with $31 million; cash used in investing was $73 million. Cash dividends paid to common shareholders were $24 million.
  • Liquidity and debt, March 31: Cash was $366 million, down from $387 million at September 30, 2010. Revolver availability was approximately $424 million. Bank notes payable were $57 million, current long-term debt $17 million and long-term debt $588 million. The company reported compliance with debt covenants.
  • Balance sheet: Current assets were $1.530 billion and current liabilities $520 million; total assets were $3.014 billion and stockholders’ equity $1.567 billion.

Material changes versus prior comparable periods

  • Revenue and earnings rose in both the quarter and half-year, principally on stronger pricing and mix. Q2 Rubber Blacks volumes fell 2% overall, partly reflecting the India capacity closure and Japanese power and logistics disruptions after the earthquake and tsunami.
  • Supermetals EBIT improved substantially, reflecting higher prices and mix, lower fixed costs and, for the half-year, lower average raw-material costs. Performance Segment Q2 EBIT improved, but first-half EBIT was nearly flat as higher input and other costs offset gains.
  • Specialty Fluids Q2 EBIT fell to $1 million from $5 million, mainly because of less favorable mix and smaller, shorter jobs, particularly in the North Sea.
  • Working capital absorbed cash: receivables increased $32 million and inventories $46 million, while accounts payable and accrued liabilities declined $46 million. Management linked this primarily to higher carbon-black feedstock costs and related price increases.
  • Property, plant and equipment additions were higher than the prior-year period; the company expected approximately $180 million of capital expenditures during the remainder of FY2011.

Outlook, risks and unusual items

  • Management expected an FY2011 operating tax rate of 25%–27%, excluding discrete tax items and certain other items, and stated it expected liquidity to be sufficient for operating needs, investment and obligations for the foreseeable future. No full-year earnings or revenue guidance was provided in the supplied filing text.
  • The first-half tax provision included substantial discrete benefits, principally a $23 million benefit from repatriation of high-tax dividends following U.S. tax-law changes, plus research-credit and audit-settlement benefits. The filing also describes a $26 million net discrete tax benefit for the six months.
  • Q2 and first-half results included a benefit related to a prior-period feedstock-pipeline legal judgment; the notes describe an approximately $9 million benefit, while the MD&A attributes portions to different income-statement and segment lines. Verify the presentation and amounts. U.S. Supermetals LIFO inventory liquidations reduced cost of sales by $8 million in Q2 and $14 million in the half-year, increasing diluted EPS by $0.08 and $0.14, respectively.
  • Restructuring charges were $11 million for the first six months. The Grigno, Italy closure was expected to cost $8 million in total; $5 million had been recorded by March 31. The Thane, India closure was expected to cost $20 million, with $17 million recorded. The 2009 global restructuring was expected to total approximately $124 million, of which $122 million had been recorded.
  • Contingencies include environmental reserves of $6 million discounted ($7 million undiscounted) and respirator claims reserves of $13 million discounted ($18 million undiscounted). Approximately 43,000 claimants were pending in respirator cases; estimated payments extend through 2062. The company cautioned that actual liability may differ from estimates.
  • Venezuela currency-conversion restrictions could affect repatriation and the value of bolivar holdings; management reported $21 million bolivars in cash and dividends receivable and an approximately $5 million U.S.-dollar carrying value for those assets. Other risks include raw-material prices, demand, currency movements, capacity expansion, restructuring execution, litigation and tax audits.

Important facts for investors to verify

  • Reconcile the filing’s tax disclosures: the tax note’s opening text says unrecognized tax benefits were $46 million, while its reconciliation gives an ending balance of $72 million; penalties and interest are separately stated as $5 million and $14 million.
  • Confirm the amount and income-statement classification of the pipeline-judgment benefit, described as approximately $9 million in the notes and in smaller components in the MD&A.
  • Assess whether operating cash generation can keep pace with planned capital spending, elevated working-capital needs and the remaining restructuring cash payments.
  • Monitor pricing, product mix and raw-material cost pass-through, as well as Japan-related disruption and the lower Specialty Fluids results.
  • Review developments in respirator litigation, environmental matters, tax audits and Venezuelan currency restrictions, including potential changes to reserves or cash repatriation.