Cabot Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. This is an annual filing, not a standalone fourth-quarter report; the filing also reports unaudited Q4 results. Cabot is a global specialty chemicals and performance materials company with four segments: Reinforcement Materials, Performance Materials, Advanced Technologies and Purification Solutions.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales and operating revenues | $3.463 billion | $3.300 billion |
| Gross profit / gross margin | $636 million / 18.4% | $648 million / 19.6% |
| Operating income / operating margin | $263 million / 7.6% | $290 million / 8.8% |
| Income from continuing operations | $158 million | $201 million |
| Net income attributable to Cabot / diluted EPS | $153 million / $2.36 | $388 million / $5.99 |
| Cash provided by operating activities | $419 million | $415 million |
| Capital expenditures | $264 million | $281 million |
| Total debt at year-end | $1.298 billion | $1.419 billion |
Margins are calculated from reported figures. FY2013 operating cash flow less capital expenditures was approximately $155 million. Cash and cash equivalents were $95 million; available revolving-credit capacity was approximately $508 million. Net debt to capitalization was 36%, versus 40% in FY2012. The company reported compliance with its credit-facility covenants.
Unaudited FY2013 fourth-quarter sales were $898 million and net income attributable to Cabot was $47 million, or $0.73 diluted EPS; comparable FY2012 Q4 figures were $848 million, $36 million and $0.56, respectively.
Material changes versus FY2012
- Revenue increased 4.9%, primarily because FY2013 included a full year of Purification Solutions, acquired in July 2012; the segment contributed $348 million in FY2013 versus $61 million for two months in FY2012. Lower prices and mix, foreign-exchange effects and lower volumes partly offset the increase.
- Gross profit fell $12 million, and total segment EBIT declined $25 million to $384 million. Management cited lower volumes, lower unit margins, less favorable product mix and unfavorable currency translation.
- Cabot-attributable net income fell to $153 million from $388 million, mainly because FY2012 included a $191 million after-tax gain on the Supermetals sale. Continuing-operations diluted EPS was $2.32 versus $2.83.
- Operating cash flow was broadly stable. Debt declined by $123 million, while cash declined by $25 million. FY2013 included $264 million of capital spending and $51 million of dividends to common shareholders.
Segments, outlook and significant items
- Reinforcement Materials: Sales were $1.902 billion and EBIT $188 million, down from $2.019 billion and $227 million. Lower prices/mix, 1% lower volume, currency effects and higher manufacturing costs pressured results.
- Performance Materials: Sales were $904 million versus $914 million; EBIT rose to $132 million from $128 million. Higher fumed-metal-oxide volumes supported EBIT, partly offset by mix and inventory-related costs.
- Advanced Technologies: Sales were $222 million versus $210 million; EBIT increased to $68 million from $49 million, supported by restructuring savings and higher elastomer-composites royalties and technology payments.
- Purification Solutions: Sales were $348 million and EBIT a $4 million loss, compared with $61 million and $5 million of EBIT for its two months in FY2012. Management cited weaker gas and air purification volumes and pricing, plant outages, inventory-reduction costs and allocated functional costs.
- FY2014 outlook: Management expected an operating tax rate of 26%–28% and capital expenditures of $200 million–$250 million. No formal revenue or EPS forecast is stated in the filing text provided.
- Acquisition after year-end: Cabot completed its purchase of the remaining 60% of NHUMO on November 15, 2013. It paid approximately $80 million and received a $14 million special cash dividend; NHUMO also issued $25 million of redeemable preferred stock to the seller.
- Unusual charges and accounting: FY2013 included $37 million of restructuring charges and $21 million of Norit acquisition/integration-related charges. A change in estimated useful lives for certain machinery increased FY2013 continuing-operations income by $4 million; the company estimated a $9 million increase over a 12-month period based on the asset base at the time.
Risks, contingencies and management commentary
- Cesium mine supply: A March 2013 ground fall at the Manitoba pollucite mine raised stability concerns. Monitoring indicated stability in unaffected areas, but further deterioration or flooding remains possible. Mine development alternatives were still under assessment; feasibility and cost were uncertain. Cabot increased ore inventories. The estimated reserve life of approximately 10 years depends on successful development and reserve assumptions.
- Environmental obligations: A November 2013 proposed consent decree covering three U.S. carbon-black facilities includes a $975,000 civil penalty, $450,000 for mitigation projects and emissions controls expected to cost approximately $85 million over about six and one-half years. The decree remained subject to public comment and court approval. Cabot’s FY2013 environmental remediation reserve was $5 million; it expected approximately $23 million of environmental-related capital spending in FY2014.
- Litigation: Cabot recorded an $11 million discounted reserve ($15 million undiscounted) for respirator claims; approximately 42,000 claimants had pending cases against AO. Actual costs may differ from estimates. The company also disclosed unresolved environmental and regulatory matters, including a proposed TCEQ penalty that Cabot disputed.
- Purification Solutions execution and impairment: The business had $466 million of goodwill at year-end. Its growth assumptions depend significantly on demand for mercury-removal products and implementation/enforcement of emissions standards, including U.S. MATS requirements scheduled to take effect in April 2015. Delays could weaken growth and create impairment risk.
- Other material exposures include feedstock and energy-price volatility, foreign-exchange and country risk, customer concentration, chemical-plant safety and environmental compliance, restructuring execution, and activated-carbon competition if antidumping duties are reduced or lapse.
- Management stated that available cash, operating cash flow and borrowing capacity should fund operations, investment needs and obligations for the foreseeable future. The statements are forward-looking and subject to the risks described in the filing.
Most important facts for investors to verify
- Underlying earnings trends excluding the FY2012 Supermetals disposal gain, restructuring and Norit acquisition/integration charges.
- Whether Purification Solutions can restore segment profitability and achieve the growth assumptions supporting its goodwill, especially if emissions-rule timing or enforcement changes.
- Pollucite mine stability, the technical and economic viability and cost of development alternatives, and adequacy of cesium inventory.
- Timing and total cost of the approximately $85 million emissions-control program, including required approvals and any related operational disruption.
- Collection of the $214 million carrying value of Supermetals-sale notes, with $215 million contractually due March 31, 2014, and the cash and financing effects of the NHUMO acquisition.
- Changes in respirator-claim estimates, environmental liabilities, feedstock costs, customer demand and foreign-currency exposures.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of September 30, 2013.