Cabot Corp Reports Fourth Quarter Diluted Loss Per Share of ($4.81) and Adjusted EPS Of $0.68

Cabot Corporation (NYSE: CBT) today announced results for its fourth quarter and full fiscal year 2020.

Key Highlights

• GAAP EPS was a loss of $4.81, compared to earnings of $0.55 in the prior fiscal year fourth quarter. Adjusted EPS of $0.68 compared to $1.05 in the prior fiscal year fourth quarter
• Fiscal fourth quarter volumes in Reinforcement Materials rebounded strongly from the third quarter, increasing by 56%, and EBIT improved by $64 million
• Continued strong operating cash flow of $99 million in the fourth quarter and $377 million for the full fiscal year
• Liquidity remains strong at approximately $1.4 billion; Debt decreased by $69 million during the quarter; Debt to EBITDA ratio of 2.9 times as of September 30, 2020
• Sold the Purification Solutions’ lignite mine in Marshall, TX to ADES and signed long-term product supply agreement

Commenting on the results, Cabot President and CEO Sean Keohane said, “I am very pleased to see the strong sequential demand momentum in the fourth quarter largely driven by an improving global economy and steady improvement in the tire and automotive sectors. I am also proud of our team’s ability to successfully manage the continued challenges from the COVID-19 global pandemic. As certain segments of the global economy gained momentum during the quarter, we responded quickly to serve increased customer demand. At the segment level, we experienced a significant sequential improvement in demand in Reinforcement Materials this quarter as customers increased their production levels. In Performance Chemicals, we saw a modest sequential improvement in volumes as key end markets begin to recover and in Purification Solutions, we executed the next step in our transformation plan by selling our lignite mine in Marshall, Texas and entering into a long-term supply agreement for activated carbon from ADES.”

Keohane continued, “Our working capital reduction efforts generated a strong source of cash in the fourth quarter which helped drive $99 million of operating cash flow in the quarter and $248 million in the second half of the fiscal year, well in excess of our previously announced expectation of $200 million. Our strong cash flow allowed us to reduce our debt, continue to pay our dividend and fund $38 million of capital expenditures in the quarter. Our balance sheet remains strong with approximately $1.4 billion of liquidity and a total debt to EBITDA ratio of 2.9x as of September 30, 2020. Our aggressive cost reduction efforts generated a savings of $68 million in fiscal 2020. As the global economy continues to recover, we believe we remain well positioned both strategically and financially.”

Financial Detail

For the fourth quarter of fiscal 2020, net loss attributable to Cabot Corporation was $272 million ($4.81 loss per diluted common share). The net loss includes a total after-tax per share charges from certain items of $5.49 predominantly from the loss on the sale and asset impairment related to the Purification Solutions agreements with ADES and tax certain items mainly associated with an increase in the valuation allowance associated with U.S. deferred tax assets. Adjusted EPS for the fourth quarter of fiscal 2020 was $0.68 per share.

Segment Results

Reinforcement Materials -- Fourth quarter fiscal 2020 EBIT in Reinforcement Materials decreased by $12 million compared to the fourth quarter of fiscal 2019. Globally, volumes decreased 11% year-over-year as the COVID-19 pandemic impacted demand levels. The EBIT impact from lower volumes was partially offset by improved pricing from our calendar 2020 customer agreements and improved pricing in Asia.

Global and regional volume changes for Reinforcement Materials for the fourth quarter of fiscal 2020 as compared to the same quarter of the prior year are included in the table below:

Performance Chemicals − Fourth quarter fiscal 2020 EBIT in Performance Chemicals decreased by $16 million compared to the fourth quarter of fiscal 2019 primarily due to a less favorable product mix in the specialty carbons and fumed metal oxides product lines, and by a more competitive pricing environment in our fumed metal oxides product line. Year-over-year, volumes decreased by 9% in the Formulated Solutions business driven by declines in our specialty compounds and inkjet product lines. These impacts were partially offset by 2% higher volumes in Performance Additives driven by increased volumes related to our recent energy materials acquisition.

Purification Solutions − Fourth quarter fiscal 2020 EBIT in Purification Solutions decreased by $3 million compared to the fourth quarter of fiscal 2019 primarily due to the impact from reducing inventory levels to drive strong cash flow.

Cash Performance − The Company ended the fourth quarter of fiscal 2020 with a cash balance of $151 million. During the fourth quarter of fiscal 2020, cash flows from operating activities were $99 million, which included a $7 million decrease in net working capital. Capital expenditures for the fourth quarter of fiscal 2020 were $38 million. Additional uses of cash during the fourth quarter included $20 million for the payment of dividends.

Taxes − During the fourth quarter of fiscal 2020, the Company recorded a tax provision of $182 million for an effective tax rate of (217%).The provision included a $166 million net charge from tax-related certain items. The operating tax rate for fiscal year 2020 was 28% and we anticipate our operating tax rate for fiscal 2021 to be in the range of 28% to 30%.

Outlook

Commenting on the outlook for the Company, Keohane said, “As we enter fiscal 2021, we are encouraged by the pace of recovery we are seeing in the automotive and tire markets. With this momentum, we expect both year-over-year and sequential EBIT improvement as we look ahead to the first quarter of fiscal 2021. Reinforcement Materials is expected to benefit from improved margins, particularly in Asia, and we anticipate that Performance Chemicals will benefit in both volumes and product mix from a strengthening automotive end market. Based on the current market environment, we expect adjusted earnings per share in the first fiscal quarter to be between $0.80 and $0.90. This expectation assumes that the resurgence in COVID-19 infections will not cause a significant disruption to the ongoing business recovery. Due to continued economic uncertainty related to the impacts of the COVID-19 pandemic, we are not providing fiscal 2021 full-year earnings guidance at this time.”

Keohane continued, “Our team remains focused on executing our Advancing the Core strategy and emerging from this crisis an even stronger company. Our long-term growth strategy and capital allocation framework guides our actions and is underpinned by strong cash flow discipline and the strength of our investment grade balance sheet. We plan to continue to invest in attractive growth projects across our core segments while exploring strategic alternatives for our Purification Solutions business. We remain committed to returning cash to our shareholders as part of our balanced capital allocation framework and maintaining our investment grade credit rating. I am confident in the fundamental earnings power of our businesses and our long-term growth prospects.”

Earnings Call

The Company will host a conference call with industry analysts at 8:00 a.m. Eastern time on Tuesday, November 24, 2020. 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 carbon black, specialty carbons, activated carbon, elastomer composites, inkjet colorants, masterbatches and conductive compounds, fumed silica and aerogel. For more information on Cabot, please visit the company’s website at cabotcorp.com. The Company encourages investors and potential investors to consult the Cabot website regularly.

Forward-Looking Statements -- This earnings release contains forward-looking statements. All statements that address expectations or projections about the future, including our expectations for EBIT, margins, volume and product mix improvements in certain of our businesses in the first quarter of fiscal 2021, our expectations for Adjusted EPS for the first quarter of fiscal 2021, the factors we expect to positively impact our results, capital allocation, our earnings potential and growth prospects, and our expected operating tax rate for fiscal 2021, 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 or implied by forward-looking statements. Importantly, as we cannot predict the duration or scope of the COVID-19 pandemic, the negative impact to our results cannot be estimated. Factors that will influence the impact on our business and operations include the duration and extent of the pandemic, the extent of imposed or recommended containment and mitigation measures, and the general economic consequences of the pandemic. Other important factors that could cause our results to differ materially from those expressed or implied in the forward-looking statements include, but are not limited to, competition from other specialty chemical companies; volatility in the price of energy and raw materials; a significant adverse change in a customer relationship; safety, health and environmental requirements; unanticipated delays in site development projects; negative or uncertain worldwide or regional economic conditions and market opportunities, including from trade relations or global health matters; and fluctuations in foreign currency exchange and interest rates. These factors are discussed more fully in the reports we file with the Securities and Exchange Commission (“SEC”), particularly under the heading “Risk Factors” in our annual report on Form 10-K for our fiscal year ended September 30, 2019 and in our quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2020, or subsequent SEC filings, filed with the SEC at www.sec.gov. 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 principle (“GAAP”) basis, the preceding discussion of our results and the accompanying financial tables report Adjusted EPS, Total Segment EBIT, Total Segment EBITDA, Adjusted EBITDA, Adjusted EPS excluding the Specialty Fluids segment, our operating tax rate, Free Cash Flow and Discretionary Free Cash Flow, all of which are non-GAAP financial measures. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, GAAP. Reconciliations of Adjusted EPS and adjusted EPS excluding the Specialty Fluids segment to net income (loss) per share attributable to Cabot Corporation, the most directly comparable GAAP financial measure of both such non-GAAP measures, Total Segment EBIT, Total Segment EBITDA, and Adjusted EBITDA to income (loss) before income taxes and equity in earnings of affiliated companies, the most directly comparable GAAP financial measure of each such non-GAAP measure, operating tax rate to effective tax rate, the most directly comparable GAAP financial measure and Free Cash Flow and Discretionary Free Cash Flow to Cash flow from operating activities, the most directly comparable GAAP financial measure of both such non-GAAP measures, are provided in the tables titled “Cabot Corporation Certain Items and Reconciliation of Adjusted EPS and Operating Tax Rate” and “Cabot Corporation Reconciliation of Non-GAAP Financial Measures.”

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) attributable to Cabot Corporation items of expense and income that management does not consider representative of the Company’s 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. 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 items of income and expense that we exclude from our calculations of Adjusted EPS, as applicable, but that are included in our GAAP net income (loss) per share, as applicable, are described below.

• Asset impairment charges, which primarily include charges associated with an impairment of goodwill or other long-lived assets.
• Inventory reserve adjustment, which result from an evaluation performed as part of an impairment analysis.
• Global restructuring activities, which include costs or benefits associated with cost reduction initiatives or plant closures and primarily relate 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.
• Legal and environmental reserves and matters, which consist of costs or benefits for matters typically related to former businesses or that were otherwise incurred outside of the ordinary course of business.
• Gains (losses) on sale of investments, which primarily relate to the sale of investments accounted for under the cost-method.
• Gains (losses) on sale of businesses
• Executive transition costs, which include incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.
• Acquisition and integration-related charges, which 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.
• Non-recurring gains (losses) on foreign currency, which primarily relate to the impact of continued currency devaluations on our net monetary assets denominated in that currency.
• Employee benefit plan settlements and other charges, which consist of either charges or benefits associated with the termination of a pension plan or the transfer of a pension plan to a multi-employer plan or prior service cost charges associated with a change in assumption on a frozen pension plan
• Indirect tax settlement credits, which includes favorable settlements resulting in the recoveries of indirect taxes.
• Certain valuation allowances on deferred tax assets earned in the current fiscal year.

Cabot does not provide a target GAAP EPS range or reconciliation of the Adjusted EPS range with a GAAP EPS range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to “certain items,” including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on GAAP EPS in future periods.

Total Segment EBIT. Total segment EBIT reflects the sum of EBIT from our three reportable segments. In calculating Total segment EBIT we exclude from our income (loss) before income taxes and equity in earnings of affiliated companies, certain items and items that, because they are not controlled by the business segments and primarily benefit corporate objectives, are not allocated to our business segments, such as interest expense and other corporate costs, which include unallocated corporate overhead expenses such as certain corporate salaries and headquarter expenses, plus costs related to corporate projects and initiatives.

Total Segment EBITDA. Total Segment EBITDA is equal to Total Segment EBIT (as defined above), but further adjusted for depreciation and amortization.

Adjusted EBITDA. Adjusted EBITDA reflects Total Segment EBITDA and is further adjusted for unallocated corporate costs, which include unallocated corporate overhead expenses such as certain corporate salaries and headquarter expenses, plus costs related to corporate projects and initiatives.

Free Cash Flow. To calculate “free cash flow” we deduct capital expenditures from cash flow from operating activities.

Discretionary Free Cash Flow. To calculate “Discretionary Free Cash Flow” we deduct sustaining and compliance capital expenditures and changes in Net Working Capital from cash flow from operating activities.

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. In addition, in fiscal 2020 we have excluded certain valuation allowances on deferred tax assets earned in the current fiscal year. 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.

Cabot does not provide a forward-looking reconciliation of the operating tax rate range with an effective tax rate range because, without unreasonable effort, we are unable to predict with reasonable certainty the matters we would allocate to “certain items,” including unusual gains and losses, costs associated with future restructurings, acquisition-related expenses and litigation outcomes. These items are uncertain, depend on various factors, and could have a material impact on the effective tax rate in future periods.

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 liabilities.