Cabot Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the fiscal second quarter and six months ended March 31, 2014; the balance sheet is compared with September 30, 2013. Cabot reports four continuing segments: Reinforcement Materials, Performance Materials, Advanced Technologies, and Purification Solutions. Results include NHUMO from its November 2013 acquisition. The Security Materials business is presented as discontinued operations following an agreement to sell it.
Financial performance
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $898m | $840m | $1,796m | $1,659m |
| Gross profit | $176m | $143m | $355m | $290m |
| Income from operations | $68m | $50m | $155m | $107m |
| Income from continuing operations attributable to Cabot | $36m | $28m | $117m | $50m |
| Net income attributable to Cabot | $36m | $27m | $116m | $47m |
| Diluted EPS attributable to Cabot | $0.54 | $0.42 | $1.77 | $0.73 |
Gross margin was approximately 19.6% for the quarter versus 17.0% a year earlier, and 19.8% for the six-month period versus 17.5%. Revenue rose 7% for the quarter and 8% for six months, mainly from higher volumes, partly offset by less favorable price and product mix and currency effects. Quarterly and six-month reported results include unusual items, including a $29m noncash gain on the previously held NHUMO interest in the six-month period.
- Segment EBIT, a non-GAAP measure: Quarterly totals were $116m versus $87m; six-month totals were $230m versus $177m. Reinforcement Materials EBIT increased to $61m from $42m for the quarter and to $125m from $92m for six months. Performance Materials rose to $47m from $37m and to $81m from $64m. Advanced Technologies rose to $12m from $8m and to $37m from $16m. Purification Solutions reported losses of $4m for the quarter and $13m for six months, versus break-even and $5m income, respectively.
- Cash flow: Operating activities provided $69m in the first six months, versus $4m a year earlier. Investing used $148m, including $70m of capital expenditures and $73m net cash paid for NHUMO. Financing provided $89m, principally reflecting $111m net proceeds from commercial paper. Cash declined $6m to $89m.
- Liquidity and debt: At March 31, Cabot had $89m cash and approximately $398m of current revolving-credit availability. Commercial paper outstanding was $352m; the revolving facility and commercial-paper program share a $750m limit. Notes payable were $377m, current long-term debt $19m, and long-term debt $1,023m. Cabot reported covenant compliance. Total liabilities increased to $2,338m from $2,150m at September 30.
- Other metrics: The quarterly tax provision was $7m (14% effective tax rate); the six-month provision was $31m (20%). Management’s operating tax rate was 28% for both periods. Dividends were $0.20 per share for the quarter and $0.40 for six months.
Material changes versus prior comparable periods
- Higher volumes were the main driver of growth, supported by improving demand in key end markets and additional carbon black capacity in China and Mexico. Companywide quarterly revenue increased $58m, with volume contributing $80m; six-month revenue increased $137m, with volume contributing $185m.
- Reinforcement Materials improved on higher volumes and unit margins, while fixed costs rose with new capacity. Performance Materials benefited from demand and, in the quarter, improved Fumed Metal Oxides pricing and mix. Advanced Technologies growth was led by Specialty Fluids rental and sales activity and higher Elastomer Composites royalties.
- Purification Solutions weakened: six-month sales fell $11m and EBIT fell $18m, reflecting lower air-and-gas-sector volumes, maintenance costs, and higher allocated costs.
- Selling and administrative expense increased $15m in the quarter and $19m for six months, driven by EMEA shared-service restructuring, NHUMO, and corporate projects. Interest expense declined as maturing debt was refinanced with lower-rate commercial paper.
- Working capital absorbed cash: receivables and inventory increased, while accounts payable and accrued liabilities declined. Cash and cash equivalents were $89m versus $95m at September 30; inventory was $541m versus $455m.
Outlook, commentary, risks, contingencies, and unusual items
- Management expected fiscal 2014 operating tax rate of approximately 28% and capital expenditures of $130m–$180m for the remainder of the fiscal year. It said available cash, operating cash flow, and credit facilities should meet foreseeable operational, investment, and financial needs.
- Cabot expected $22m–$26m of total pre-tax cash charges for the EMEA shared-service transition; $14m had been recorded through March 31. The Port Dickson, Malaysia closure was expected to result in approximately $23m total pre-tax charges for the joint venture.
- Cabot received the final $215m payment on the Supermetals sale notes in the first week of April 2014, after the balance-sheet date. The proposed Security Materials sale was for approximately $20m, subject to regulatory approval and expected by fiscal year-end.
- Purification Solutions had $469m of goodwill. Its growth depends substantially on mercury-removal demand and implementation/enforcement of U.S. Mercury and Air Toxics Standards effective April 2015; weaker expected volumes or margins could heighten impairment risk. The latest annual goodwill test found no impairment.
- Venezuela’s SICAD 2 exchange rate was 50.8 bolivars per U.S. dollar versus the previously used 6.3 rate. The remeasurement contributed a $1m net adverse impact to Cabot’s second-quarter results. Cabot was monitoring currency convertibility and the recoverability of its $20m equity-affiliate investment; future exchange-rate changes could cause further gains or losses.
- Environmental reserves rose to $17m from $5m, including a $13m charge after new information made remediation costs probable and estimable. Management said reasonably possible environmental costs beyond reserves were estimated to be immaterial, but acknowledged estimates may change.
- Respirator claims numbered approximately 41,000; the reserve was $9m discounted ($13m undiscounted), with expected cash flows extending through 2065. The filing notes that outcomes, claim trends, legal costs, and other parties’ ability to contribute could change actual liability.
- Long-term raw-material purchase commitments totaled $4.453bn, substantially concentrated in Reinforcement Materials. The filing also identifies risks from raw-material costs, demand, currency movements, regulation, project execution, litigation, and restructuring integration.
Important facts for investors to verify
- Whether volume growth and improved margins persist, particularly in Reinforcement Materials, and whether new capacity costs remain elevated.
- Whether Purification Solutions volumes and profitability recover, and how mercury-removal regulation affects sales and the $469m goodwill balance.
- How much reported earnings growth reflects recurring operations versus the NHUMO remeasurement gain, restructuring, legal/environmental charges, currency effects, and tax items.
- Working-capital requirements, commercial-paper reliance, covenant headroom, and the impact of the post-quarter $215m GAM note collection on liquidity.
- Progress and final costs of the NHUMO integration, EMEA shared-service transition, Malaysia closure, and proposed Security Materials divestiture.
- Developments in Venezuelan currency convertibility and the environmental and respirator liabilities, including any changes to reserves or expected cash payments.