Cabot Corporation Reports Third Quarter Fiscal 2016 Results

BOSTON--(BUSINESS WIRE)--Cabot Corporation (NYSE: CBT) today announced results for its third quarter of fiscal year 2016.

Key Highlights

• Stronger volumes drove significant improvement in operating results both year-over-year and sequentially
• Fifth consecutive quarter of record EBIT for the Performance Chemicals segment
• Specialty Fluids segment delivered a higher level of profitability from projects in the North Sea and Asia
• Strong cash flow generation with cash flows from operating activities in excess of $100 million for the quarter

Commenting on the results, Cabot President and CEO Sean Keohane, said, “I am pleased to see the substantial improvement in operating results both on a year-over-year and sequential basis. As we expected, volumes improved sequentially across our segments and we continued to realize the benefit from our cost savings initiatives. Our Performance Chemicals segment continued to deliver exceptional results from strong volumes and margins. The improvement in our Specialty Fluids segment was in part a result of our sustained efforts to expand our business outside the North Sea. The success this quarter validates the value proposition of this unique material, even in a low oil price environment. ” Keohane continued, “In addition, we delivered another strong quarter of cash generation with cash flows from operations in excess of $100 million.”

Financial Detail
For the third quarter of fiscal 2016, net income attributable to Cabot Corporation was $56 million ($0.88 per diluted common share). Net income includes a per share charge of $0.05 from certain items, principally reflecting charges associated with restructuring activities and executive transition costs. Adjusted EPS for the third quarter of fiscal 2016 was $0.93 per share.

Segment Results
Reinforcement Materials -- Third quarter fiscal 2016 EBIT in Reinforcement Materials increased by $3 million compared to the third quarter of fiscal 2015 principally driven by lower fixed costs as a result of cost savings initiatives. Volumes declined by 2% during the third quarter of fiscal 2016 as compared to the third quarter of fiscal 2015 as a result of lower volumes in Asia due to a challenging macro-economic environment and the closure of our Merak, Indonesia manufacturing plant. Sequentially, Reinforcement Materials EBIT increased by $1 million compared to the second quarter of fiscal 2016 driven by higher volumes partially offset by a less favorable price and product mix. Sequentially, volumes increased by 6% due to higher volumes in the Americas from the full impact of calendar year contracts and from seasonally higher volumes in Asia.

Global and regional volume changes for the rubber blacks product line for the third quarter of fiscal 2016 as compared to the same quarter of the prior year and the second quarter of fiscal 2016 are included in the table below:

Performance Chemicals -- Third quarter fiscal 2016 EBIT in Performance Chemicals increased by $11 million compared to the third quarter of fiscal 2015 due to improved margins from a stronger product mix and lower raw material costs, and higher volumes. Volumes increased by 3% in the Specialty Carbons and Formulations business and 9% in the Metal Oxides business. Sequentially, Performance Chemicals EBIT increased by $1 million compared to the second quarter of fiscal 2016, primarily due to higher volumes, with a 7% increase in Specialty Carbons and Formulations and a 10% increase in Metal Oxides. The higher volumes were partially offset by a less favorable product mix.

Purification Solutions -- Third quarter fiscal 2016 EBIT in Purification Solutions decreased by $3 million compared to the third quarter of fiscal 2015 primarily due to an unfavorable impact from reducing inventory levels as compared to the prior year. This was partially offset by higher volumes driven by MATS-related demand and lower fixed costs. Sequentially, Purification Solutions EBIT increased by $2 million compared to the second quarter of fiscal 2016 driven by higher volumes from MATS-related demand. The increase in volumes was partially offset by an unfavorable impact from reducing inventory levels as compared to the prior quarter and a less favorable price and product mix.

Specialty Fluids – Third quarter fiscal 2016 EBIT in Specialty Fluids increased by $7 million compared to the third quarter of fiscal 2015 and increased by $12 million compared to the second quarter of fiscal 2016. The increase in both comparative periods was due to a higher level of project activity in both the North Sea and Asia.

Cash Performance -- The Company ended the third quarter of fiscal 2016 with a cash balance of $222 million. During the third quarter of fiscal 2016, cash flows from operating activities were $107 million, including an increase in net working capital of $21 million. Capital expenditures for the third quarter of fiscal 2016 were $28 million, including $21 million for sustaining and compliance capital expenditures. Additional uses of cash during the third quarter included $19 million for dividends and $8 million for share repurchases.

Taxes -- During the third quarter of fiscal 2016, the Company recorded a tax provision of $15 million for an effective tax rate of 21%. This included a tax benefit from certain items of $2 million. Excluding the impact of certain items on both operating income and the tax provision, the year-to-date operating tax rate on continuing operations for fiscal 2016 was 24%.

Outlook
Commenting on the outlook for the Company, Keohane said, “With the third quarter operating results in line with our expectations, we are on track to deliver results in the low to mid-point of the range we communicated last quarter. Looking sequentially, while the Performance Chemicals and Specialty Fluids segments are expected to moderate, we anticipate a strengthening of results from our Reinforcement Materials and Purification Solutions segments.” Keohane continued, “We are driving our Advancing the Core strategy focused on profit growth and cash generation. In addition, we are maintaining discipline around our capital allocation framework, which includes returning cash to shareholders as demonstrated this quarter with the increase in our dividend and ongoing share repurchases.”

Earnings Call
The Company will host a conference call with industry analysts at 2:00 p.m. Eastern time on Thursday, July 28, 2016. The call can be accessed through Cabot’s investor relations website at http://investor.cabot-corp.com

About Cabot Corporation
Cabot Corporation (NYSE: CBT) is a global specialty chemicals and performance materials company, headquartered in Boston, Massachusetts. The company is a leading provider of rubber and specialty carbons, activated carbon, inkjet colorants, cesium formate drilling fluids, fumed silica, and aerogel. For more information on Cabot, please visit the company’s website at: http://www.cabotcorp.com.

Forward-Looking Statements -- This earnings release contains forward-looking statements based on management’s current expectations, estimates and projections. All statements that address expectations or projections about the future, including our expectations for adjusted earnings per share for fiscal 2016, actions that will drive earnings growth, demand for our products, and expectations for cost reductions and cash generation are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, potentially inaccurate assumptions, and other factors, some of which are beyond our control and difficult to predict. If known or unknown risks materialize, or should underlying assumptions prove inaccurate, our actual results could differ materially from past results and from those expressed in the forward-looking statement. Important factors that could cause our results to differ materially from those expressed in the forward-looking statements include, but are not limited to economic, competitive, legal, governmental, and technological factors. These factors are discussed more fully in the reports we file with the Securities and Exchange Commission, particularly our latest annual report on Form 10-K. We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Use of Non-GAAP Financial Measures
To supplement Cabot’s consolidated financial statements presented on a generally accepted accounting principles (“GAAP”) basis, the preceding discussion of our results and the accompanying financial tables report Adjusted EPS, and our operating tax rate, both of which are non-GAAP financial measures. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. A reconciliation of Adjusted EPS to diluted income (loss) per share (EPS) from continuing operations, the most directly comparable GAAP financial measure, and a reconciliation of operating tax rate to effective tax rate, the most directly comparable GAAP financial measure, are provided in the table titled “Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate”.

Management believes these non-GAAP measures provide investors with greater transparency to the information used by Cabot management in its financial and operational decision-making, allow investors to see Cabot’s results through the eyes of management, and better enable Cabot’s investors to understand Cabot’s operating performance and financial condition.

Adjusted EPS. In calculating Adjusted EPS, we exclude from our net income (loss) per share from continuing operations items of expense and income that management does not consider representative of the Company’s on-going business operations. Accordingly, reporting earnings on an adjusted basis supplements the GAAP measure of performance and provides additional information related to the underlying performance of the business. For example, certain of the items we exclude are items that we are required by GAAP to recognize in one period that relate to activities extending over several periods or relate to single events that management considers to be unusual and infrequent, although not necessarily non-recurring, and not indicative of ongoing operations. We refer to these items as “certain items”. Management believes excluding these items facilitates operating performance comparisons from period to period by eliminating differences caused by the existence and timing of certain expense and income items that would not otherwise be apparent on a GAAP basis and evaluates the Company’s operating performance without the impact of these costs or benefits. Management also uses adjusted EPS as a key measure in evaluating management performance for incentive compensation purposes.

The calculations of Adjusted EPS for the periods presented in this release exclude the impact of the following items that are included in our GAAP diluted net income (loss) per share:

• Global restructuring activities include costs or benefits associated with cost reduction initiatives or plant closures and are primarily related to (i) employee termination costs, (ii) asset impairment charges associated with restructuring actions, (iii) costs to close facilities, including environmental costs and contract termination penalties and (iv) gains realized on the sale of land or equipment associated with restructured plants or locations.
• Foreign currency loss on devaluation represents the impact of controlled currency devaluations on the Company’s net monetary assets denominated in that currency. Most recently this has applied to currency exchange rate changes in Argentina and Venezuela.
• Legal and environmental reserves and matters consist of costs or benefits for matters typically related to former businesses or that are otherwise incurred outside of the ordinary course of business.
• Executive transition costs include incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.
• Asset impairment charges primarily include charges associated with an impairment of goodwill or other long-lived assets.
• Acquisition and integration-related charges include transaction costs, redundant costs incurred during the period of integration, and costs associated with transitioning certain management and business processes to Cabot’s processes.
• Employee benefit plan settlement charges consist of the costs associated with transferring the obligations and assets held by one of the Company’s defined benefit plans to a multi-employer plan.

In the third quarter of fiscal 2016, the Company indicated that it expects to achieve Adjusted EPS for fiscal 2016 in the range of $3.05-$3.25 per share. For the certain items that are currently known, we anticipate charges in the fourth quarter of fiscal 2016 to include $0.04 per share, reflecting charges that will be associated with restructuring activities and executive transition costs. We do not provide guidance for GAAP-Reported EPS on a forward-looking basis or a reconciliation for forward-looking non-GAAP financial measures to the most directly comparable GAAP measure because we are not able to predict with reasonable certainty the ultimate amount or nature of all items that will be included as certain items in the fourth quarter. These items are uncertain, depend on many factors and could have a material impact on our GAAP reported results for the guidance period.

Operating Tax Rate. Our “operating tax rate” represents the tax rate on our recurring operating results. This rate excludes discrete tax items, which are unusual or infrequent items that are excluded from the estimated annual effective tax rate and other tax items, including the impact of the timing of losses in certain jurisdictions, cumulative tax rate adjustments and the impact of the items of expense and income we identify as certain items on both our operating income and the tax provision. Management believes that the operating tax rate is useful supplemental information because it helps our investors compare our tax rate year to year on a consistent basis and to understand what our tax rate on current operations would be without the impact of these items.

Explanation of Terms Used

Product Mix. The term “product mix” refers to the mix of types and grade of products sold or the mix of geographic regions where products are sold, and the positive or negative impact this has on the revenue or profitability of the business or segment.

Net Working Capital. The term “net working capital” includes accounts receivable, inventory and accounts payable and accrued expenses.

^(A) Included within the provision for income taxes is a tax benefit for the three and nine months ended June 30, 2015 in the amount of $80 million associated with the long-lived asset impairment charge that was recorded in the third quarter of fiscal 2015.

^(B) Amounts relate primarily to the divestiture of the Security Materials business.

^(C) The weighted average common shares outstanding for both the three and nine months ended June 30, 2015 excludes approximately 0.5 million shares as those shares would be antidilutive due to the Company’s net loss position.

^(A) Unallocated and other reflects royalties, other operating revenues, external shipping and handling fees, the impact of the corporate adjustment for unearned revenue, the removal of 100% of the sales of an equity method affiliate and discounting charges for certain Notes receivable.

^(B) Segment EBIT is a measure used by Cabot's Chief Operating Decision-Maker to measure consolidated operating results, assess segment performance and allocate resources. Segment EBIT includes equity in earnings of affiliated companies, royalty income, and allocated corporate costs.

^(C) Details of certain items are presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(D) General unallocated income includes foreign currency transaction gains (losses), interest income, dividend income, the profit related to the corporate adjustment for unearned revenue, and the impact of LIFO accounting.

^(E) Amounts relate primarily to the previously divested Security Materials business.

^(F) Adjusted EPS is a non-GAAP measure, and a reconciliation of Adjusted EPS to GAAP EPS is presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(G) The weighted average common shares outstanding for both the three and nine months ended June 30, 2015 excludes approximately 0.5 million shares as those shares would be antidilutive due to the Company’s net loss position.

^(A) Unallocated and other reflects royalties, other operating revenues, external shipping and handling fees, the impact of the corporate adjustment for unearned revenue, the removal of 100% of the sales of an equity method affiliate and discounting charges for certain Notes receivable.

^(B) Segment EBIT is a measure used by Cabot's Chief Operating Decision-Maker to measure consolidated operating results, assess segment performance and allocate resources. Segment EBIT includes equity in earnings of affiliated companies, royalty income, and allocated corporate costs.

^(C) Details of certain items are presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(D) General unallocated income (expense) includes foreign currency transaction gains (losses), interest income, dividend income, the profit related to the corporate adjustment for unearned revenue, and the impact of LIFO accounting.

^(E) Amounts relate primarily to the previously divested Supermetals and Security Materials businesses.

^(F) The weighted average common shares outstanding used to calculate earnings per share for the three months ended June 30, 2015, the twelve months ended September 30, 2015, and the three months ended December 31, 2015 exclude approximately 0.5 million, 1 million, and 1 million shares, respectively, as those shares would be antidilutive due to the Company’s net loss position.

^(G) Adjusted EPS is a non-GAAP measure, and a reconciliation of Adjusted EPS to GAAP EPS is presented in the Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate table.

^(A) Includes Accounts and notes receivable, Inventories, and Accounts payable and accrued liabilities

^(A) The tax effect of certain items is determined by (1) starting with the current and deferred income tax expense or benefit, included in Net income attributable to Cabot Corporation, and (2) subtracting the tax expense or benefit on “adjusted earnings”. Adjusted earnings is defined as the pre-tax income attributable to Cabot Corporation excluding certain items. The tax expense or benefit on adjusted earnings is calculated by applying the operating tax rate, which includes both current and deferred taxes, as defined under the section Use of Non-GAAP Financial Measures of the earnings release.

^(B) The nature of the discrete tax items for the periods ended June 30, 2016 and 2015 were as follows: Three months ended June 30, 2016: (i) Unusual or infrequent items included the tax impact of excludible foreign exchange gains/(losses) in certain jurisdictions. (ii) Items related to uncertain tax positions included tax benefits from items such as uncertain tax positions accrual reversals due to the expiration of statutes of limitations offset by a charge for the accrual of interest on uncertain tax positions. (iii) Other discrete tax items included tax charges for items such as charges for various return to provision true ups related to tax return filings and changes in tax laws. Nine months ended June 30, 2016: (i) Unusual or infrequent items included tax benefits from items such as extraordinary dividends from subsidiaries, the renewal of U.S. Research and Experimental credit, and other non-routine items. (ii) Items related to uncertain tax positions included tax benefits from items such as uncertain tax positions accrual reversals due to the expiration of statutes of limitations and settlement of tax audits, partially offset by a charge for the accrual of interest on uncertain tax positions. (iii) Other discrete tax items included tax charges for items such as charges for various return to provisions true ups related to tax return filings and changes in tax laws. Three months ended June 30, 2015: (i) Unusual or infrequent items included tax expense from the refinement of the tax benefit from the renewal of U.S. Research and Experimental credit. (ii) Items related to uncertain tax positions included tax benefits from items such as uncertain tax positions accrual reversals due to the expiration of statutes of limitations offset by a charge for the accrual of interest on uncertain tax positions. (iii) Other discrete tax items included tax charges for items such as charges for various return to provision true ups related to tax return filings and changes in tax laws. Nine months ended June 30, 2015: (i) Unusual or infrequent items included tax benefit from items such as the renewal of U.S. Research and Experimental credit and net tax benefit from other non-routine items. (ii) Items related to uncertain tax positions included tax benefits from items such as uncertain tax positions accrual reversals due to the expiration of statutes of limitations and settlement of tax audits, partially offset by a charge for the accrual of interest on uncertain tax positions. (iii) Other discrete tax items included tax benefits for items such as charges for various return to provision true ups related to tax return filings and changes in tax laws.

^(C) Amounts relate primarily to the previously divested Supermetals and Security Materials businesses.

^(D) This table indicates the line items where certain items are recorded in the table titled Cabot Corporation Consolidated Statements of Operations.

^(E) Per share amounts are calculated after tax and, where applicable, noncontrolling interest, net of tax.

^(F) Due to the Company’s Net Loss position, GAAP EPS has been calculated using basic weighted average shares for both basic and diluted GAAP EPS. However, in order to provide an Adjusted Non-GAAP EPS with a weighted average share figure that is consistent with all other periods presented, the Company has included this reconciling item to quantify the difference between basic and diluted weighted average shares. The net loss in Q3 2015 and FY15 year-to-date is driven by a Certain Item, so the Company believes this approach provides the most comparable presentation possible.