Cabot Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019; filed May 9, 2019. Cabot reports four segments: Reinforcement Materials, Performance Chemicals, Purification Solutions, and Specialty Fluids. Amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $844 | $818 | $1,665 | $1,538 |
| Gross profit | $178 | $188 | $344 | $364 |
| Operating income (loss) | $73 | $(161) | $150 | $(70) |
| Net income (loss) attributable to Cabot | $23 | $(173) | $92 | $(295) |
| Diluted EPS | $0.39 | $(2.80) | $1.53 | $(4.78) |
| Operating cash flow | Not stated separately | Not stated separately | $51 | $81 |
- Second-quarter gross margin was approximately 21.1%, versus 23.0% a year earlier. The six-month margin was approximately 20.7%, versus 23.7%.
- Revenue rose $26 million in the quarter, but $20 million resulted from presenting by-product sales as revenue rather than as a reduction of cost of sales under the newly adopted accounting standard. For the six months, the comparable classification effect was $40 million. Management said segment revenue was consistent in the quarter.
- Management cited weaker China pricing, softer automotive production, less favorable mix, higher raw-material costs, and timing-related pricing/cost mismatch as pressures on margins. Total segment EBIT declined to $112 million from $127 million for the quarter and to $217 million from $240 million for six months.
- Cash and cash equivalents were $176 million at March 31, 2019. Revolver borrowing availability was $454 million; the company reported compliance with credit-facility covenants. Liquidity, measured as cash plus borrowing availability, had declined $296 million during the six months.
- Short-term borrowings were $576 million, including $546 million of commercial paper; current long-term debt was $5 million and long-term debt was $672 million. Total reported debt was approximately $1.25 billion, versus approximately $1.00 billion at September 30, 2018. The increase in commercial paper and working-capital needs were notable liquidity factors.
- Six-month capital spending was $97 million. Fiscal 2019 capital expenditures were expected to be $250–$275 million. The company paid $40 million of common dividends and repurchased $112 million of shares during the six months; quarterly dividend was $0.33 per share.
Material changes and unusual items
- Cabot recorded a $20 million impairment on Specialty Fluids assets held for sale, and an $11 million impairment that fully wrote down its Venezuelan equity-affiliate investment. Specialty Fluids remains a continuing operation pending sale.
- Second-quarter 2018 results included $254 million of Purification Solutions goodwill and long-lived-asset impairments and a $13 million inventory reserve adjustment. These prior-year charges largely explain the reported year-over-year improvement in operating and net income; they did not recur in 2019.
- Cabot agreed to sell Specialty Fluids to Sinomine in a cash-free, debt-free transaction valued at $135 million: $130 million payable at closing, subject to customary adjustments, plus up to $5 million of lithium-product royalties over ten years. Closing was expected in fiscal Q3 2019 and remained subject to regulatory approvals and other customary conditions.
- Performance Chemicals EBIT fell to $38 million from $57 million for the quarter, reflecting lower volumes and margins, including weaker automotive demand and high-cost specialty-carbons inventory. Reinforcement Materials EBIT declined to $61 million from $79 million, principally from lower unit margins and China pricing. Specialty Fluids EBIT improved to $12 million from a $3 million loss on higher project activity. Purification Solutions reported EBIT of $1 million versus a $6 million loss.
- The company recorded $11 million of restructuring charges for the six months, primarily associated with the Purification Solutions transformation plan. It expected approximately $7 million of related payments in the remainder of fiscal 2019 and thereafter.
- The tax provision was $20 million for the quarter and $13 million for six months. Reported effective tax rates were 41% and 11%, respectively, affected by discrete items. Fiscal 2019 guidance was an effective tax rate of 19%–21% and an operating tax rate of 23%–25%.
Outlook, risks, and contingencies
- Management said recovery in China and automotive markets was taking longer than expected but characterized current challenges as temporary. It expected improving sequential results in Reinforcement Materials and Performance Chemicals and described its fiscal fourth-quarter outlook as strong; it cited early signs of recovery and expected the adverse raw-material flow-through timing effect not to repeat.
- Cabot expected to complete the Specialty Fluids divestiture in fiscal Q3 and begin operations at its new China fumed-metal-oxides facility near the start of fiscal Q4. These are expectations, not completed events.
- Key risks include raw-material costs and availability, demand and customer concentration, automotive-market softness, pricing and competitive pressure, foreign exchange, project execution, trade-policy changes, and operating disruptions.
- Environmental reserves were $14 million; the respirator-claim reserve was $22 million, with approximately 36,000 claimants in pending cases against American Optical. The company cautioned actual respirator liabilities could exceed the reserve. It said reasonably possible environmental costs beyond recorded reserves were estimated to be immaterial. Other litigation outcomes remain inherently unpredictable.
- Cabot had $3.139 billion of long-term purchase commitments, primarily for raw materials. It reported no material off-balance-sheet arrangements. Purification Solutions could face further impairment depending on strategic actions and business conditions.
Most important facts for investors to verify
- Whether the Specialty Fluids sale closed on expected terms and timing, including regulatory approvals, closing adjustments, and contingent royalties.
- Whether margins and volumes recovered in China, automotive-related businesses, and the Reinforcement Materials and Performance Chemicals segments as management anticipated.
- Commercial-paper levels, working-capital trends, cash generation, revolver availability, and compliance with debt covenants.
- Actual fiscal 2019 capital expenditures and tax rates compared with management’s stated ranges.
- Progress and costs of the Purification Solutions transformation, and whether further impairment or restructuring charges arise.
- Changes in environmental and respirator-claim exposures, including any developments that could make recorded reserves inadequate.