Cabot Corp Reports Second Quarter Fiscal 2021 Results

Strong Diluted EPS of $1.30 and Record Adjusted EPS of $1.38

Cabot Corporation (NYSE: CBT) today announced results for its second quarter of fiscal year 2021.

Key Highlights

• GAAP EPS of $1.30, compared to a loss of $0.01 in the prior fiscal year second quarter. Record Adjusted EPS of $1.38, compared to $0.77 in the prior fiscal year second quarter
• Second quarter EBIT in Reinforcement Materials increased 46% year over year to a record high of $89 million
• Performance Chemicals EBIT increased by $27 million compared to the second quarter of fiscal 2020 to $58 million, driven by 11% higher volumes
• Liquidity remains strong at approximately $1.3 billion; Debt to EBITDA ratio of 2.3 times as of March 31, 2021

Commenting on the results for the second fiscal quarter of 2021, Cabot President and CEO Sean Keohane, said, “Building on the momentum we created in the prior quarter, the Cabot team delivered our second consecutive quarter of record adjusted EPS. Our global footprint and operational agility, combined with continued strong demand in our key end markets, resulted in year-over-year and sequential growth in our core businesses. Reinforcement Materials delivered a second consecutive quarter of record EBIT, driven by higher volumes and strong Asia pricing. Performance Chemicals results improved on a year-over-year basis due to stronger volumes in our key end markets and a favorable product mix driven by demand from automotive applications and our target growth initiatives.”

Keohane continued, “In addition, I am very pleased with the Cabot team’s efforts to support our customers through effective sourcing strategies and supply chain management, while facing a tightening of availability in global transportation. Operating cash flow was a source of $65 million despite higher raw material prices and a step up in growth-related working capital. Our balance sheet remains strong with approximately $1.3 billion of liquidity and a total debt to EBITDA ratio of 2.3x as of March 31, 2021.”

Financial Detail

For the second quarter of fiscal 2021, net income attributable to Cabot Corporation was $75 million ($1.30 per diluted common share). Net income reflects an after-tax per share charge from certain items of $0.08. Adjusted EPS for the second quarter of fiscal 2021 was $1.38 per share.

Segment Results

Reinforcement Materials – Second quarter fiscal 2021 EBIT in Reinforcement Materials increased by $28 million compared to the second quarter of fiscal 2020. The increase in EBIT was driven by significantly higher volumes across all regions and improved pricing in Asia. Higher volumes were driven by demand increases across all regions compared to the same quarter last year, which was impacted by COVID-19 shutdowns.

Global and regional volume changes for Reinforcement Materials for the second quarter of fiscal 2021 as compared to the same quarter of the prior year are set forth in the table below:

Performance Chemicals – Second quarter fiscal 2021 EBIT in Performance Chemicals increased by $27 million compared to the second quarter of fiscal 2020, primarily due to higher volumes and improved product mix driven by higher sales into automotive applications and our target growth initiatives. Year-over-year, volumes increased by 10% in the Performance Additives business and 14% in the Formulated Solutions business driven by increases across all key product lines from higher demand levels and some level of customer inventory replenishment during the quarter.

Purification Solutions – Second quarter fiscal 2021 EBIT in Purification Solutions decreased by $1 million compared to the second quarter of fiscal 2020. The decrease in EBIT was largely due to reduced demand in mercury removal applications, partially offset by lower fixed costs resulting from the sale of our mine in Marshall, TX and the related long-term activated carbon supply agreement.

Cash Performance – The Company ended the second quarter of fiscal 2021 with a cash balance of $146 million. During the second quarter of fiscal 2021, cash flows from operating activities were a source of $65 million. Capital expenditures for the second quarter of fiscal 2021 were $40 million. Additional uses of cash during the second quarter included $20 million for the payment of dividends.

Taxes – During the second quarter of fiscal 2021, the Company recorded a tax provision of $34 million for an effective tax rate of 29%. The provision reflected a $3 million net charge from tax-related certain items. The operating tax rate was 28% for the second quarter of fiscal 2021, which decreased from 30% in the first quarter of fiscal 2021 due to changes in our projected geographic mix of earnings for fiscal 2021. We expect our operating tax rate for fiscal 2021 to be in the range of 27% to 29%.

Outlook

In summarizing the quarter and looking forward to the remainder of the year, Keohane said, “Our ability to deliver a second consecutive quarter of record adjusted EPS reflects the strength of our portfolio, the agility of our supply chain network and the value customers place on Cabot’s product offerings. We continue to execute on our strategy and target growth initiatives, and believe we are well positioned to deliver record adjusted earnings per share for the 2021 fiscal year. I am proud of the way the Cabot team is responding to the needs of our customers and the challenges brought on by the pandemic, and I believe that Cabot is emerging from the COVID crisis a stronger company.”

“Looking ahead to the second half of the fiscal year, we anticipate continued demand strength across our segments. We also expect some impact from the flow-through of higher raw material costs in Asia, moderating volumes into automotive applications due to the semi-conductor chip shortage and increased fixed costs due to the timing of scheduled maintenance activities. With these factors in mind, we expect adjusted earnings per share for the full fiscal year of 2021 to be in the range of $4.70 to $4.95.”

“Cabot has established tremendous momentum through the first half of fiscal 2021, which we intend to build on throughout the remainder of the fiscal year and in the years ahead. We are taking decisive actions to optimize our performance amid the current environment while we continue to invest in our ability to deliver growth in shareholder value over the longer-term,” concluded Keohane.

Earnings Call

The Company will host a conference call with industry analysts at 8:00 a.m. Eastern time on Tuesday, May 4, 2021. 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, masterbatches and conductive compounds, fumed silica, and aerogel. For more information on Cabot, please visit the company’s website at: http://www.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 with respect to our expectations for our performance in fiscal year 2021, including our expectations for adjusted earnings per share and the strength of demand in the second half of fiscal 2021, the factors that we expect will impact our results of operations, our expected operating tax rate for fiscal 2021, and our positioning as we emerge from the COVID-19 pandemic, 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. 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, 2020, 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, 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 to net income (loss) per share attributable to Cabot Corporation, the most directly comparable GAAP financial measure, Total Segment EBIT, Total Segment EBITDA, and Adjusted EBITDA to income (loss) from continuing operations 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, 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 but that are included in our GAAP net income (loss) per share, as applicable in a particular reporting period, include, but are not limited to, the following:

• Global restructuring activities, which 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.
• Non-recurring gains (losses) on foreign currency, which are primarily related to the impact of continued currency devaluations on our net monetary assets denominated in that currency.
• Legal and environmental reserves and matters, which 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, which include incremental charges, including stock compensation charges, associated with the retirement or termination of employment of senior executives of the Company.
• Asset impairment charges, which primarily include charges associated with an impairment of goodwill or other long-lived assets.
• 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.
• Gains (losses) on sale of investments, which primarily relate to the sale of investments accounted for under the cost-method.
• Inventory reserve adjustment, which generally result from an evaluation performed as part of an impairment analysis.
• Indirect tax settlement credits, which includes favorable settlements resulting in the recoveries of indirect taxes.
• Gains (losses) on sale of business.
• Employee benefit plan settlements, 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.

Cabot does not provide an expected GAAP EPS range or reconciliation of the Adjusted EPS range with an expected 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) from continuing operations 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 Additions to property, plant and equipment 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 included in the effective tax rate. Discrete tax items are comprised of (i) unusual or infrequent items, (ii) items related to uncertain tax positions, and (iii) other tax items, such as the impact from the timing of losses in certain jurisdictions and cumulative tax rate adjustments. The operating tax rate also excludes 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.

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 expenses.