Celanese Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Celanese is a global technology and specialty materials company serving chemical, automotive, consumer, industrial and other markets. Financial statements are unaudited and prepared under U.S. GAAP; 2012 comparatives were retrospectively adjusted for a pension accounting policy change.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $1.636 billion | $1.609 billion | $4.894 billion | $4.917 billion |
| Gross profit | $346 million | $328 million | $998 million | $937 million |
| Operating profit | $211 million | $176 million | $564 million | $465 million |
| Operating margin | 12.9% | 10.9% | 11.5% | 9.5% |
| Net earnings attributable to Celanese | $172 million | $127 million | $447 million | $541 million |
| Diluted EPS | $1.08 | $0.79 | $2.80 | $3.39 |
| Operating cash flow | Not presented by quarter | $608 million | $661 million |
Gross margin was approximately 21.1% in Q3 2013 versus 20.4% a year earlier. At September 30, cash and equivalents were $1.100 billion, total debt was $3.094 billion ($224 million current and $2.870 billion long-term), and shareholders’ equity was $2.084 billion. Cash less total debt was approximately negative $1.994 billion. Current assets were $3.228 billion and current liabilities $1.597 billion.
Cash from operations less capital expenditures was approximately $349 million for the first nine months, before other investing items. Investing cash outflow was $290 million and financing cash outflow $183 million; cash increased $141 million from year-end 2012. Capital expenditures were $259 million, excluding $6 million related to the Kelsterbach relocation.
Material changes versus prior comparable periods
- Q3 sales rose 1.7% and operating profit increased $35 million (19.9%). Management attributed profit improvement principally to higher acetate tow pricing and a $12 million benefit from ending production at the Spondon facility.
- For the first nine months, sales declined 0.5%, while operating profit rose $99 million (21.3%). Stronger Advanced Engineered Materials and Consumer Specialties results more than offset weakness in Industrial Specialties and Acetyl Intermediates.
- Consumer Specialties operating profit increased $57 million year to date, including a $53 million benefit from the Spondon production cessation and improved acetate tow pricing. Advanced Engineered Materials operating profit increased $32 million on higher volume, favorable product mix and lower raw material costs.
- Industrial Specialties operating profit fell $23 million year to date, reflecting weaker volume and pricing, particularly in EVA polymers. Acetyl Intermediates operating profit declined $6 million, mainly from lower downstream product pricing.
- Year-to-date net earnings fell $94 million despite higher operating profit, in part because 2012 included a $142 million tax benefit from foreign tax credit carryforwards, partially offset by a $38 million deferred tax charge. The reported effective tax rate was 32% in 2013 versus 7% in 2012; excluding those 2012 items, the filing says the 2012 rate would have been 25%.
- Operating cash flow declined $53 million, principally due to the absence of a $75 million Polyplastics dividend, timing of affiliate dividends and working-capital changes; lower pension contributions partly offset the decline.
Outlook, management commentary, risks and unusual items
- Management stated it expected sufficient resources to meet liquidity requirements, including debt service, over the next 12 months, while warning that operating cash flow could be insufficient and other funding actions might then be needed.
- Expected capital expenditures were $375–$400 million for 2013 and $400–$500 million for 2014. Major planned projects include the Clear Lake methanol joint venture and conversion of coal-fired boilers at Narrows, Virginia to natural gas.
- The Clear Lake methanol project with Mitsui was estimated at $800 million total investment, with Celanese’s share estimated at $300 million plus previously invested assets. Planned capacity is 1.3 million tons annually, with operations expected to begin mid-2015.
- Celanese increased its quarterly dividend twice in 2013, to $0.18 per share (annualized $0.72) beginning in August. It repurchased about 2.10 million shares for $102 million during the first nine months.
- Debt refinancing in September lowered interest margins on certain borrowings; the company recorded $1 million of refinancing expense. A new $135 million receivables securitization facility had $100 million outstanding and $31 million available at quarter-end; it was used to repay $100 million of credit-linked facility borrowings. The revolver had $600 million available, while only $1 million remained available under the credit-linked facility. The company reported compliance with debt covenants.
- Environmental remediation reserves were $91 million. The Lower Passaic River matter remains under investigation; the company estimated its share could be less than approximately 1%–2% of costs but could not reliably estimate the final amount. The filing also describes a Clean Air Act notice concerning the Meredosia site and multiple legal matters, including a Singapore supplier arbitration seeking $38 million; management did not consider that claim’s possible loss material.
- Unconditional purchase obligations totaled $3.7 billion through 2034. The company also disclosed variable-interest-entity maximum exposure of $315 million, largely associated with early termination fees.
- Other notable items include a $1 million trademark impairment and expected recognition of deferred Kelsterbach sale proceeds when title transfers, anticipated by December 31, 2013. The pension accounting policy change was applied retrospectively and moves actuarial gains and losses into earnings annually in Q4 or upon plan remeasurement; it does not change plan funding or benefit payments.
- Principal stated risks include economic and industry cycles, raw-material and energy prices, ability to pass costs through, competition, plant utilization and project execution, environmental obligations, litigation, foreign exchange and interest rates, and leverage. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher acetate tow pricing and the Spondon-related cost benefit can persist, and how much of the operating profit improvement is recurring.
- Current demand, pricing and competitive conditions in Industrial Specialties and Acetyl Intermediates, which weakened year to date.
- Cash conversion and working-capital trends, as operating cash flow declined despite higher operating profit.
- Funding, spending schedule and returns for the Clear Lake methanol project and Narrows boiler conversion, including the stated 2014 capital expenditure range.
- Debt maturities, facility availability and covenant headroom; the credit-linked facility had only $1 million available at quarter-end.
- Developments in environmental and legal contingencies, particularly the Lower Passaic River and Singapore arbitration, where ultimate exposure remains uncertain.
- The impact of pension remeasurement and actuarial gains or losses, typically recognized in the fourth quarter, and the sustainability of the higher dividend and share repurchases.