Celanese Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Celanese is a global technology and specialty materials company, including engineered polymers and acetyl products. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1.413B | $1.769B | $4.340B | $5.243B |
| Gross profit | $303M | $436M | $1.059B | $1.222B |
| Operating profit | $186M | $310M | $631M | $812M |
| Operating margin | 13.2% | 17.5% | 14.5% | 15.5% |
| Net earnings attributable to Celanese | $161M | $253M | $602M | $708M |
| Diluted earnings per share | $1.07 | $1.63 | $3.92 | $4.53 |
Cash flow and liquidity: Nine-month operating cash flow was $726M, down from $796M. Investing activities used $461M, including $263M for Fairway Methanol; financing activities used $64M. Cash rose to $952M from $780M, of which $923M was held by foreign subsidiaries. Total debt was $3.004B, up from $2.745B at year-end 2014; cash less total debt was approximately $2.052B. Current liabilities were $1.516B and current assets $2.796B. At quarter-end, $555M remained available on the revolving credit facility and $5M on the receivables securitization facility. The company reported compliance with debt covenants.
Capital returns: The company repurchased approximately 6.64M shares for $420M during the first nine months and paid $131M in dividends. A new $1.0B repurchase authorization was approved in September.
Material changes and operating drivers
- Q3 sales fell 20.1% and nine-month sales fell 17.2%. Management cited unfavorable foreign exchange, lower acetyl product pricing and volumes, and weaker acetate tow sales. For Q3, total-company sales changes were attributed to volume (−5%), price (−10%), currency (−6%) and other (+1%).
- Q3 operating profit declined 40.0%; nine-month operating profit declined 22.3%. Lower raw-material costs partly offset weaker sales. Nine-month results also included $39M accelerated depreciation related to the ethanol technology development unit.
- Acetyl Intermediates: Q3 sales declined 27.4% and operating profit 69.0%; lower VAM pricing and volume, reduced Asian acetic acid demand, and currency were key factors. Nine-month operating profit also reflected accelerated depreciation.
- Consumer Specialties: Q3 sales declined 15.1% and operating profit 26.7%, with acetate tow destocking, lower industry utilization and the absence of a prior-year arbitration gain weighing on results; lower wood pulp costs provided an offset.
- Advanced Engineered Materials: Sales declined, but operating profit increased in both the quarter and nine-month period, chiefly due to lower raw-material costs.
- Industrial Specialties: Sales declined, while operating profit increased in both periods as lower VAM input costs more than offset lower sales.
- Equity earnings from affiliates fell $55M for the nine-month period, mainly because a 2014 gain from affiliate debt restructuring did not recur.
Outlook, unusual items and risks
- The filing provides no consolidated earnings or sales guidance. Management expected 2015 cash capital expenditures, including Fairway, of $325M–$350M.
- Fairway, a 50%-owned venture consolidated as a variable interest entity, began methanol production in October 2015. Its annual capacity is 1.3 million tons; the company estimated its share of project investment at $380M–$388M, excluding previously invested site assets.
- Management expected operational savings from its centralized European headquarters, while noting that changes in earnings mix could have favorable or unfavorable tax effects. The nine-month effective tax rate was 22%, versus 27% in 2014; Q3 was 33%, versus 26%.
- Expected fourth-quarter 2015 exit costs of $20M–$25M were associated with the planned Meredosia VAE emulsions unit closure. Closures or contemplated closures in Tarragona also resulted in accelerated depreciation. Consultation continued on a potential 50% capacity reduction at the Lanaken acetate tow plant; no related termination or impairment charges had been recorded through September.
- Environmental remediation reserves were $76M. At the Lower Passaic River site, EPA remedy alternatives ranged from $365M to $3.2B, including a proposed $1.7B remedy for part of the site. Celanese estimated its allocable share at substantially less than 1% and said it believed the exposure would not be material. Unconditional purchase obligations were $2.7B through 2036; the company did not expect material losses under take-or-pay arrangements.
- Other stated risks include economic and industry cycles, raw-material and energy costs, pricing and utilization, currency and interest rates, environmental regulation, litigation, and the company’s indebtedness. Management said it believed resources would be sufficient for liquidity needs over the next 12 months, but noted cash flows could fall short.
Most important facts for investors to verify
- Whether lower acetyl pricing, weaker VAM demand and acetate tow destocking persist, and whether raw-material savings continue to cushion margins.
- Actual Fairway ramp-up, remaining project spending and 2015 capital expenditures compared with the $325M–$350M estimate.
- Cash generation and debt levels after substantial share repurchases, including the use of the newly authorized $1.0B repurchase program.
- Timing and costs of announced or contemplated plant closures and capacity changes, including the expected Meredosia exit costs.
- Developments in Passaic River and other environmental matters, tax audits, and the company’s ability to access foreign-held cash and maintain covenant compliance.