Celanese Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Celanese is a global technology and specialty materials company. Financial amounts are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,510 | $1,351 | $2,981 | $2,755 |
| Gross profit | $367 | $338 | $719 | $728 |
| Operating profit | $240 | $243 | $432 | $530 |
| Net earnings attributable to Celanese | $231 | $221 | $414 | $478 |
| Diluted EPS | $1.66 | $1.50 | $2.96 | $3.24 |
- Q2 sales rose 11.8%, while operating profit declined 1.2%. The reported operating margin was 15.9%, versus 18.0% a year earlier.
- First-half sales rose 8.2%, but operating profit fell 18.5%; operating margin was 14.5%, versus 19.2%. A $50 million Nanjing plant/office closure charge was a significant contributor to the decline.
- Cash from operations was $490 for the first half, down from $636. Capital expenditures were $116, implying operating cash flow less capital expenditures of $374, compared with $508 in the prior-year period. Nilit acquisition spending contributed to investing cash outflow of $389.
- Cash and equivalents were $511 at June 30, down from $638 at year-end 2016. Total debt was $3,315, up from $3,008. The company reported $800 available on its revolving credit facility and $10 available under its receivables securitization facility; it was in compliance with debt covenants.
- Current assets were $2,583 and current liabilities $1,424. The filing states management believes resources are sufficient for liquidity needs, including debt service, over the next 12 months.
- Celanese repurchased $300 of shares and paid $116 in dividends during the first half. The board subsequently authorized an additional $1.5 billion of repurchases and declared a $0.46-per-share quarterly dividend.
Material changes and business developments
- Advanced Engineered Materials: Sales increased 41% in Q2 and 40% for the first half, largely from the SO.F.TER. and Nilit acquisitions and higher POM volumes. First-half operating profit rose 15%, but margins declined as acquired businesses added plant spending and input costs increased.
- Consumer Specialties: Sales fell 18% in Q2 and 14% in the first half, and first-half operating profit declined 26%, reflecting lower acetate-tow pricing and volume amid lower global industry utilization.
- Acetyl Intermediates: Q2 sales rose 10% and operating profit 42%, benefiting from higher prices and cost savings, partly offset by input costs and Clear Lake turnaround costs. First-half operating profit fell 29%, including the Nanjing closure charge and higher raw-material costs.
- Industrial Specialties: First-half sales declined 2% and operating profit 15%, primarily due to higher raw-material costs and unfavorable currency effects.
- Celanese acquired Nilit’s nylon compounding division on May 3 for net cash outflow of $268; the acquisition added $136 of goodwill and $104 of intangible assets in preliminary purchase accounting.
- Celanese agreed to form a cellulose-acetate joint venture with Blackstone affiliates, expected to be owned 70% by Celanese and 30% by Blackstone. Closing remained subject to customary conditions, including regulatory approvals and internal reorganization. Planned joint-venture financing totals $2.4 billion; approximately $1.6 billion of expected proceeds is to be distributed to Celanese. Celanese expects about $40 million of pre-closing carve-out costs and will guarantee specified $465 million of the venture’s facilities.
Outlook, risks, and unusual items
- Management expected 2017 capital expenditures of $250–$300, primarily for growth opportunities in Advanced Engineered Materials and Acetyl Intermediates. The filing provides no specific earnings guidance.
- Management cited raw-material availability and pricing, ability to pass costs through, demand and business cycles, plant utilization, currency and interest rates, indebtedness, regulatory changes, and execution of acquisitions among factors that could affect results.
- The European Commission opened a competition-law investigation in May concerning certain subsidiaries’ raw-material purchases. The company is cooperating but said the early-stage outcome and any potential fines could not be determined.
- The IRS was auditing U.S. tax years 2009–2012. Proposed pre-tax adjustments of $192 were disputed; if the company were wholly unsuccessful, up to $67 of prior foreign tax credit carryforwards could be consumed.
- Environmental remediation reserves totaled $69. For the Lower Passaic River cleanup, the EPA estimated approximately $1.4 billion of costs for the Lower 8.3 Miles; Celanese estimated its allocable share at less than 1% and believed it would not be material. The company cautioned environmental costs could materially affect results or cash flows in a particular period.
- Unconditional purchase obligations were $1.9 billion, extending through 2036. The filing also describes a disputed InfraServ ownership option and other legal matters; management said it could not estimate possible losses beyond recorded amounts for certain indemnification obligations.
Investor verification priorities
- Track whether the Blackstone joint venture closes on the stated terms, including financing, Celanese guarantees, expected dividend proceeds, and carve-out costs.
- Assess whether acquisition-related sales growth converts into operating profit and cash flow as integration and ongoing plant costs develop.
- Monitor acetate-tow market utilization and pricing, Nanjing closure consequences, and the timing and impact of the Clear Lake turnaround.
- Follow the European Commission investigation, IRS audit, environmental exposures, and any changes to reserves or estimated liabilities.
- Reconcile ongoing repurchases and dividends with cash generation, higher debt, and the company’s stated liquidity expectations.