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Cabot Announces Fourth Quarter and Fiscal Year Operating Results

Published on 2006-11-03. Author : SpecialChem

BOSTON -- Cabot Corporation (NYSE: CBT) announced net income of $27 million ($0.39 per diluted common share) for the fourth quarter of 2006 and net income of $88 million ($1.28 per diluted common share) for the full fiscal year 2006. This is compared to a net loss of $59 million (a loss of $1.02 per common share) for the fourth quarter of fiscal 2005 and a net loss of $48 million (a loss of $0.84 per common share) for the full fiscal year 2005. These results are discussed in further detail below.

In commenting on the results, Kennett F. Burnes, Cabot's Chairman and CEO, said, "On the whole, we are pleased with our fourth quarter financial results and we were able to manage the significant challenges we faced during the year, specifically the volatility in feedstock and energy prices. Demand for products in all of our businesses remained strong during the quarter and we continued the trend of improving cash generation. During the quarter we also faced the difficult task of reducing costs by eliminating jobs within the Company. These actions are never easy and not something we take lightly, but we felt it was a necessary step in reducing the overall costs in the Company, particularly in the carbon black product lines."

During the fourth quarter, rubber blacks and performance products returned to more normal levels of operations and profitability. Volume growth in rubber blacks remained strong with continued growth in our developing regions and a less than typical seasonal slowdown. Unit margins in performance products continued to improve due to price increases throughout the year and both rubber blacks and performance products benefited from lower feedstock prices, which positively impacted the business, principally in North America. Additionally, over the course of the past 12 to 18 months rubber blacks and performance products operated with significantly fewer days of inventory. During the fourth quarter of fiscal 2005 these efforts, along with other inventory charges, resulted in a $16 million unfavorable impact on profitability. As the inventory reduction was essentially completed by the fourth quarter of fiscal 2006, there was not a similar expense during the quarter. Cabot Japan had a positive impact on the Company's operating profits during both the fourth quarter and full fiscal year.

Once complete, cost reduction actions taken during the fourth quarter of 2006 are anticipated to yield savings of approximately $20 million annually. These efforts include a formal staffing reduction initiative, savings from open positions that will not be refilled, and savings achieved through other cost elimination activities. These initiatives resulted in a pre-tax charge of $10 million during the fourth quarter.

The inkjet colorants product line had somewhat weaker profitability during the fourth quarter but a solid full fiscal year 2006. During the fourth quarter, volumes increased 21% compared to the same period in 2005 driven primarily by growth in the OEM market segment. For the full year, volumes increased 36% with growth in both the OEM and aftermarket segments. An OEM inventory drawdown in the fourth quarter, along with softening demand in the aftermarket segment, unfavorably impacted the product line's results in the quarter. We were successful during the quarter at qualifying our new manufacturing line for the high-speed inkjet market in anticipation of commercial product launches in the spring of 2007. However, unfavorable price mix and costs related to this new production capacity, which is not yet being fully commercially utilized, impacted the profitability of the product line during the quarter.

Fumed silica volumes grew by 20% in the fourth quarter when compared to the same period in fiscal 2005 driven by the niche and electronics segments. For the full fiscal year, volume growth of 9% and high plant utilization more than offset higher hydrogen and natural gas costs and startup costs associated with our new fumed silica plant in China, which is operating at nearly 90% of its designed capacity.

As anticipated, for the full fiscal year, the ongoing transition from fixed price, fixed volume contracts to market based arrangements unfavorably impacted the profitability of the Supermetals Business compared to fiscal year 2005. We were successful during the year in replacing our lost contracted volumes with open market volumes, albeit at significantly lower prices. The Business experienced significant benefits from its previous cost reduction efforts leading to lower costs of nearly $40 million during 2006. Additionally, we made significant progress toward reducing inventory levels, which decreased by $55 million during the fiscal year against our multi-year target of $100 million.

The reduction in profitability in the Specialty Fluids Business during the fourth quarter and fiscal year 2006 was driven by reduced activity in the North Sea, specifically one larger than average job in 2005 that was not replicated during 2006. We were encouraged, however, that our first well in Argentina was successfully completed during the quarter.

Outlook

With respect to the future, Burnes said, "While we continue to remain concerned about the volatility of energy prices because of the impact that they inevitably have on our business, we are confident that we have positioned the Company well to withstand these types of disruptions on a long-term basis. We remain cautious given our current understanding of North American carbon black demand and announced plant closures in the tire industry, and we will continue to follow demand in this important region closely. We face another step down in profitability in the Supermetals Business in the second quarter of fiscal 2007 as the last of our significant long-term supply contracts expires in December 2006. We are confident this business will remain profitable and we must continue to work hard to improve its performance going forward."

Burnes continued, "We anticipate continued healthy growth in demand overall and remain pleased with our strong position in emerging markets which are proving to be our most profitable regions. If market conditions remain stable and energy prices remain at their current levels, we are optimistic that we will see continued benefits in the carbon black product lines. We are pleased with the strong demand we are seeing in the fumed silica product line and anticipate that the high utilization of our plants will continue through at least the first half of fiscal 2007. We are excited about the prospects for our inkjet colorants product line, particularly as high speed inkjet printing is commercialized. With the success of the well in Argentina, we are also increasingly optimistic that we will see significant business for our cesium formate drilling fluids outside of the North Sea in the relatively near future. We remain as convinced as ever that our strategy of optimizing our core businesses and nurturing new business opportunities with patience and persistence is the best way to increase shareholder value."

Cabot Corporation is a global specialty chemicals and materials company headquartered in Boston, MA. Cabot's major products are carbon black, fumed silica, inkjet colorants, capacitor materials, and cesium formate drilling fluids.

Included above are forward-looking statements relating to management's expectations regarding demand for our products; the savings we expect to achieve from cost reduction initiatives; our overall business performance and prospects; our ability to replace lost contract volumes with open market volumes in the Supermetals Business and maintain that Business's profitability; utilization of new capacity for fumed metal oxides and inkjet colorants; carbon black feedstock and natural gas prices; and acceptance of our cesium formate drilling fluids outside of the North Sea. The following are some of the factors that could cause Cabot's actual results to differ materially from those expressed in the forward-looking statements: a continuing rise in feedstock costs and a higher than expected increase in natural gas prices; lower than expected demand for our products; our inability to maintain cost savings from restructuring activities; our inability to maintain and grow our position in the small office, home office printing market and to participate in the growth in emerging inkjet applications; unexpected delays in drilling operations at wells recently awarded to the Specialty Fluids Business and the success of this Business in gaining wider acceptance by the energy industry of cesium formate as a drilling fluid and to penetrate new markets (including development of the required logistics to reach remote markets); and the timely customer acceptance of products from recent capacity expansion projects. Other factors and risks are discussed in the Company's 2005 Annual Report on Form 10-K with the Securities and Exchange Commission.

Source: Cabot Corporation


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