CBT

Cabot Corporation 10-Q Summary: Quarter Ended December 31, 2006

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Cabot Corporation, a Delaware corporation, for the three-month period ended December 31, 2006 (First Quarter of Fiscal Year 2007). The Company operates four reportable segments: Carbon Black Business, Metal Oxides Business, Supermetals Business, and Specialty Fluids Business. As of February 5, 2007, the Company had 64,336,766 shares of Common Stock outstanding.

Key Financial Metrics

Note: Total Debt calculated as Current portion of long-term debt ($48M) + Long-term debt ($437M) + Notes payable to banks ($69M).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by $68 million (12%) driven by higher pricing ($34M), favorable foreign currency translation ($16M), and higher volumes ($18M).
• Profitability: Net income more than doubled to $54 million. Gross margin expanded from 18% to 23% due to higher prices in the Carbon Black segment and declining energy costs.
• Segment Performance:
  • Carbon Black: Sales up $66M; Profit Before Tax (PBT) up $33M. Growth driven by rubber blacks pricing and volumes, partially offset by a Goodyear strike in North America and lower performance product volumes.
  • Metal Oxides: Sales up $8M; PBT up $7M. Driven by strong fumed silica volumes and lower variable costs from new China capacity.
  • Supermetals: Sales down $16M due to transition from fixed-price contracts to market-based pricing; however, PBT increased $5M due to cost reductions.
  • Specialty Fluids: Sales up $6M; PBT up $4M due to increased fluid utilization in the North Sea.
• Restructuring: The Company recorded $3 million in restructuring charges ($2M in Cost of Sales, $1M in Selling/Admin) related to global cost reduction initiatives and the Altona facility closure.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate for fiscal 2007 to be between 25% and 29%, excluding audit settlements. Capital expenditures for fiscal 2007 are projected at approximately $160 million.
• Operational Updates:
  • New rubber black capacity in China is fully utilized; a new unit in Brazil began operations in November 2006.
  • Aerogel production in Germany was temporarily ceased to reduce costs; restart is anticipated within 6-9 months.
  • Supermetals Business transitioned to market-based pricing effective January 2007.
• Risks and Contingencies:
  • Respirator Litigation: Approximately 58,000 pending claims related to American Optical respirators. Reserve is $18 million (book value) or $28 million (undiscounted).
  • Antitrust Litigation: Defendants in federal and state carbon black price-fixing lawsuits. Plaintiffs estimated total damages at ~$100 million (subject to trebling). Company asserts valid defenses.
  • Environmental: $12 million reserved for environmental remediation, primarily related to divested businesses.
  • Beryllium Claims: Pending actions regarding discontinued beryllium operations; Company has indemnification from NGK Metals for many matters.

Investor Verification Checklist

• Carbon Black Pricing Power: Verify the sustainability of the pricing increases in the rubber blacks segment, particularly as contract pricing lags feedstock costs.
• Restructuring Execution: Monitor the $7 million in expected cash payments for restructuring in the remainder of fiscal 2007 and the realization of cost savings.
• Supermetals Transition: Assess the impact of the full transition to market-based pricing on Supermetals revenue and margins in subsequent quarters.
• Litigation Exposure: Review updates on the Carbon Black antitrust settlement discussions and the volume of new respirator claims to evaluate the adequacy of the $18 million reserve.
• China Operations: Confirm the continued utilization of new capacity in China and the stability of the tax holiday policy through 2014.