Celanese Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Celanese is a global technology and specialty materials company, with businesses in engineered polymers, acetate products, emulsions and acetyl intermediates. Unless noted, amounts are in millions of dollars. Comparatives for 2012 were retrospectively adjusted for a pension-accounting policy change.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,653 | $1,675 | $3,258 | $3,308 |
| Gross profit | $319 | $335 | $652 | $609 |
| Operating profit | $169 | $178 | $353 | $289 |
| Net earnings | $133 | $221 | $275 | $414 |
| Diluted EPS | $0.83 | $1.38 | $1.72 | $2.60 |
| Operating margin | 10.2% | 10.6% | 10.8% | 8.7% |
- Q2 sales fell 1.3% year over year and operating profit fell 5.1%; net earnings declined 39.8%. Lower prices and weaker demand weighed on Acetyl Intermediates and Industrial Specialties. The lower Q2 earnings also reflected $61 million less dividend income from cost investments, principally due to the timing of China Acetate venture payments.
- For the first half, sales declined 1.5%, while operating profit rose 22.1%. Lower raw-material costs and improved pricing and costs in Advanced Engineered Materials and Consumer Specialties more than offset weakness in Industrial Specialties and Acetyl Intermediates. Net earnings declined 33.6%, reflecting a much higher tax provision and lower dividend income versus 2012.
- Effective tax rates were 36% in both 2013 periods, versus 21% in Q2 2012 and a 4% benefit rate for first-half 2012. The 2012 six-month rate benefited from a $142 million foreign tax credit recognition, partly offset by a $38 million deferred tax charge.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $376, down from $402 in 2012. Capital expenditures were $149, plus $6 related to the Kelsterbach relocation; investing cash outflow was $177. Operating cash flow less reported capital expenditures was $227.
- Cash increased to $1,107 at June 30, 2013, from $959 at year-end 2012; $706 was held by foreign subsidiaries. Management said repatriating some foreign cash for US use could incur taxes and that it intended to reinvest those funds abroad.
- Total debt was $3,084, compared with $3,098 at year-end; cash exceeded short-term and long-term debt by approximately $1,977. Current assets were $3,180 and current liabilities $1,544. The company reported $600 of available capacity on its revolving facility and $19 on its credit-linked facility; it was in compliance with debt covenants.
- Stockholders’ equity was $1,985, up from $1,730. The quarterly dividend was raised 20%, from $0.075 to $0.09 per share. First-half dividends paid were $26.
Segment and period developments
- Advanced Engineered Materials’ Q2 sales increased 9% and operating profit rose to $39 from $23, benefiting from automotive demand and growth programs. Consumer Specialties’ operating profit increased to $83 from $77, despite lower Q2 sales, aided by pricing and lower energy and plant costs.
- Industrial Specialties’ Q2 sales fell 10% and operating profit fell to $18 from $35, reflecting soft demand and lower prices. Acetyl Intermediates’ sales fell 1.5% and operating profit declined to $55 from $78, mainly from weaker pricing.
- Effective January 1, 2013, Celanese changed its pension accounting to recognize actuarial gains and losses and changes in plan-asset fair value annually in Q4 and upon qualifying remeasurement events. Comparative periods were adjusted; the change did not affect plan funding or benefits paid.
Outlook, investments and risks
- Management expected 2013 capital expenditures of $375–$400. Major planned investments included its estimated $300 share of an $800 methanol joint venture with Mitsui at Clear Lake, Texas; the 1.3-million-ton-per-year unit was expected to start in mid-2015. Replacement natural-gas boilers at Narrows, Virginia, were estimated to cost more than $150 and were expected to be completed in mid-2015.
- The 275,000-ton-per-year TCX ethanol unit at Nanjing was mechanically complete, with operations expected later in 2013. The company was also planning a project-planning phase with Pertamina for an Indonesian fuel-ethanol project; a separate investment commitment was not stated.
- Management said it believed resources would meet liquidity needs, including debt service, for the next 12 months, while cautioning that operating cash flows could not be assured. Risks cited include economic and industry cycles, raw-material and energy prices, ability to pass costs through, utilization and execution of expansions, competition, foreign exchange and interest rates, environmental requirements, litigation and leverage. No material risk-factor changes were reported.
- Environmental remediation reserves totaled $93. The company could not reliably estimate its ultimate share of Lower Passaic River cleanup costs, though it estimated its share might be less than approximately 1%–2% of the costs. An EPA air-violations matter at Meredosia was being resolved; a penalty below $100,000 could not be assured.
- A supplier, Linde Gas, sought $38 plus unspecified damages in arbitration concerning a carbon-monoxide contract. Celanese disputed the claim and said it did not believe the possible loss was material; a liability ruling was expected in Q3 2013. Unconditional purchase obligations totaled $3.9 billion through 2034.
- Celanese had deferred $907 of Kelsterbach proceeds; recognition was expected when the land and buildings transfer to Fraport, anticipated by December 31, 2013, subject to required activities and related asset transfers.
Investor verification priorities
- Track demand, pricing and margins in Industrial Specialties and Acetyl Intermediates, and whether lower input costs continue to offset price pressure.
- Assess how much reported earnings and operating cash flow depend on timing and size of affiliate dividends, and distinguish the 2012 tax-credit benefit from recurring performance.
- Monitor delivery, total cost and funding for the Clear Lake methanol venture, Narrows boiler replacement and other planned capital expenditures.
- Review debt-facility availability and refinancing plans for the credit-linked facility due in 2014, alongside foreign cash availability and repatriation tax considerations.
- Follow developments in the Passaic River matter, Linde arbitration, Meredosia proceeding and Kelsterbach transfer and proceeds recognition.