Business context and reporting period
Celanese Corporation is a global technology and specialty materials company, with businesses in engineered materials, consumer specialties, industrial specialties and acetyl intermediates. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1.351 billion | $1.477 billion | $2.755 billion | $2.927 billion |
| Gross profit | $338 million | $375 million | $728 million | $756 million |
| Operating profit | $243 million | $188 million | $530 million | $445 million |
| Net earnings attributable to Celanese | $221 million | $205 million | $478 million | $441 million |
| Diluted EPS | $1.50 | $1.33 | $3.24 | $2.86 |
| Operating margin | 18.0% | 12.7% | 19.2% | 15.2% |
For the six months, operating cash flow was $636 million, versus $553 million. Investing cash outflow was $138 million versus $354 million, reflecting the prior-year Fairway Methanol construction spend. Capital expenditures were $128 million versus $327 million, including $210 million of Fairway-related spending in 2015. Financing cash outflow was $732 million versus an inflow of $35 million. Cash declined $232 million from year-end to $735 million.
At June 30, total debt was $2.583 billion, down from $2.981 billion at December 31, 2015; cash was $735 million. Current assets were $2.456 billion and current liabilities $1.087 billion. The company had $900 million available under its revolving credit facility and $56 million under its receivables securitization facility at June 30. It reported compliance with debt covenants.
Material changes and drivers
- Quarterly sales fell 8.5%; six-month sales fell 5.9%. Management attributed the declines mainly to lower prices across acetyl intermediates, industrial specialties and consumer specialties, with lower Q2 VAM volume also contributing. Lower feedstock costs were a factor in reduced selling prices.
- Operating profit rose $55 million in Q2 and $85 million for the six months. Lower raw-material and energy costs, productivity savings and reduced SG&A helped offset lower sales. Comparisons also benefited from $39 million of accelerated depreciation recorded in Q2 2015 for the Clear Lake ethanol technology unit, which did not recur.
- Segment operating profit improved year over year in all four segments for the six months. Advanced Engineered Materials benefited from stronger POM volumes and lower input costs; Consumer Specialties and Industrial Specialties cited productivity and lower input costs. Acetyl Intermediates profit rose modestly despite lower sales, helped by lower costs and the nonrecurrence of prior-year accelerated depreciation.
- Equity earnings from affiliates declined $15 million for the six months, primarily due to lower methanol and MTBE pricing and higher input costs at Ibn Sina.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of $250 million to $300 million, mainly for growth opportunities in Advanced Engineered Materials and Acetyl Intermediates. It stated that resources were expected to be sufficient for liquidity requirements, including debt service, for the next 12 months; this is not earnings guidance.
- After quarter-end, the receivables securitization facility was extended to July 2019, with availability reduced to $120 million. On July 15, the company entered a new credit agreement with a $500 million unsecured term loan and a $1.0 billion unsecured revolving facility, both maturing in 2021; proceeds and euro-denominated revolver borrowings repaid the prior secured term facilities.
- The company changed its pension and postretirement cost estimate method prospectively in 2016. It expects the full-yield-curve method to reduce 2016 service and interest costs by approximately $29 million versus the prior method; total benefit obligations are unaffected.
- Environmental remediation reserves were $67 million. For the Lower Passaic River site, the EPA estimated remediation of the lower 8.3 miles at approximately $1.4 billion; Celanese said its estimated allocable share was less than 1% and it was vigorously defending the matter. The company cautioned that environmental costs could materially affect results or cash flows in a given period.
- Outstanding divestiture indemnifications and guarantees totaled $202 million; the company could not estimate possible losses beyond accrued amounts for certain remaining obligations. Unconditional purchase obligations were $2.8 billion through 2036.
- The IRS proposed $192 million of pre-tax adjustments related to intercompany charges for 2009–2010. Celanese said it considered the adjustments without merit and was defending its position; if wholly unsuccessful, up to $67 million of prior foreign tax credit carryforwards could be consumed. The company also noted possible adverse tax consequences if proposed U.S. inversion and earnings-stripping regulations were finalized in their then-current form.
- Other risks include raw-material availability and pricing, industry cycles, competition, currency and interest-rate changes, plant operations, environmental regulation and litigation. The filing reported no material change to the previously disclosed risk factors. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether lower pricing and weaker acetyl-chain demand continue, and whether input-cost savings and productivity can sustain operating margins.
- How the post-quarter refinancing changes borrowing costs, covenant terms, available liquidity and debt maturities.
- Actual 2016 capital expenditures, cash conversion and the effect of the $2.8 billion purchase commitments on future cash needs.
- Developments in the IRS audit, environmental matters, indemnifications and other contingencies, including any changes to reserves or potential exposure.
- The sustainability of earnings comparisons that benefited from the nonrecurrence of the $39 million prior-year accelerated depreciation charge, alongside the pension-cost estimate change.