Cabot Corporation — Q1 FY2011 Form 10-Q
Reporting period: Three months ended December 31, 2010; comparable period ended December 31, 2009. Unaudited results. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Cabot sells specialty chemicals and materials across its Rubber Blacks and Supermetals businesses, Performance, New Business and Specialty Fluids segments. Management attributed the quarter’s improved earnings mainly to higher prices, favorable product mix and more efficient manufacturing utilization; global volumes increased modestly.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales and other operating revenues | $753 | $679 | +$74, about 11% |
| Gross profit | $158 | $136 | +$22 |
| Gross margin | 21% | 20% | +1 percentage point |
| Income from operations | $77 | $51 | +$26 |
| Income from continuing operations | $79 | $34 | +$45 |
| Net income attributable to Cabot | $75 | $29 | +$46 |
| Diluted EPS attributable to Cabot | $1.13 | $0.44 | +$0.69 |
| Dividends per common share | $0.18 | $0.18 | No change |
Cash flow, debt and liquidity
- Operating cash flow was $40, compared with a $32 use of cash a year earlier. The current quarter included $80 net income and $35 depreciation and amortization, partly offset by $46 of payments against year-end payables and accrued liabilities.
- Capital expenditures were $31, versus $13; investing activities used $30, versus $15. Financing activities used $10, including $12 of common dividends.
- Cash and equivalents were $388 at December 31, 2010, nearly unchanged from $387 at September 30; quarter-end cash was $242 a year earlier. Current availability under the revolving agreement and other committed facilities was approximately $424.
- Debt comprised $32 notes payable to banks, $27 current long-term debt and $594 long-term debt, totaling approximately $653. Cabot reported compliance with debt covenants and expected available liquidity to cover operating needs and obligations for the next 12 months.
- Total assets were $2,911 and stockholders’ equity was $1,500 at December 31, 2010.
Material changes and segment performance
- Sales growth reflected $53 from higher prices and favorable mix and $16 from higher volumes. Higher unit margins and volumes lifted gross profit, partly offset by maintenance costs and growth spending.
- Total segment EBIT rose to $94 from $85. Supermetals EBIT increased to $22 from $6, benefiting from pricing, mix, lower costs and shipment timing. Rubber Blacks EBIT declined to $38 from $43, largely because $5 of prior-year milestone revenue did not recur; excluding that comparison, margins and volumes improved.
- Performance EBIT fell to $30 from $34 as maintenance and growth spending and an unfavorable LIFO comparison outweighed improved unit margins. New Business losses narrowed to $2 from $3; Specialty Fluids EBIT increased to $6 from $5.
- Restructuring and other “certain items” were $4, versus $17 a year earlier. The current-period charge related principally to the planned Grigno, Italy facility closure.
Outlook, unusual items and risks
- The reported $6 income tax benefit included $23 of net discrete benefits from repatriating high-tax dividends following U.S. tax legislation changes and $2 from renewal of the U.S. research and experimentation credit. Management gave a 25%–27% expected FY2011 tax rate excluding discrete and specified items. The quarterly operating tax rate was approximately 26%.
- U.S. Supermetals LIFO inventory liquidation reduced cost of sales by $6 and increased net income by $4, or $0.06 per diluted share; the comparable prior-year benefit was $3 to cost of sales and $2 to net income.
- Management expected approximately $220 of capital expenditures for the remainder of FY2011, mainly for energy projects, capacity expansion and maintenance. It expected restructuring cash payments of approximately $18 for the remainder of FY2011.
- Cabot expected the Grigno closure to incur an $8 charge in total; $4 had been recorded by quarter-end. For the Thane, India closure, $17 of an expected approximately $20 charge had been recorded. The 2009 Global Restructuring Plan had recorded $119 of an expected approximately $120 charge.
- Purchase commitments for raw materials and natural gas totaled $2,339, largely attributable to Rubber Blacks. Some commitments have quantities fixed but prices that vary with market prices.
- Key exposures include raw-material prices and customer demand, foreign exchange, and execution of restructuring and capacity plans. In Venezuela, currency restrictions limit conversion and repatriation of funds; Cabot reported approximately $5 of bolivar-denominated assets and warned that exchange-rate or feedstock-cost changes could affect earnings, volumes or margins.
- Environmental reserves were $7. Respirator claims involved approximately 45,000 pending claimants; the reserve was $14 discounted ($19 undiscounted), with payments expected over time through 2062. EPA was discussing Clean Air Act permitting at the Pampa, Texas facility; additional emissions controls and/or a civil penalty were anticipated as possibilities. Management said other claims were not expected, in aggregate, to materially harm financial position.
Important facts for investors to verify
- How much of the earnings increase is sustainable after separating the $23 discrete tax benefit, the LIFO liquidation benefit and restructuring charges.
- Whether margin improvement and volume trends persist, particularly in Rubber Blacks and Performance, and whether planned capital spending delivers expected capacity and energy benefits.
- Progress and cash costs for the Grigno, Thane and global restructuring plans, alongside raw-material purchase commitments.
- Developments in the Venezuela currency and repatriation restrictions, the EPA Pampa matter, and respirator litigation relative to recorded reserves.
- The share-repurchase table reports a December average price paid of $10.37 per share; verify this figure against the underlying filing or source data.