Celanese Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Unaudited results. Celanese is a global technology and specialty materials company, with businesses spanning engineered polymers, consumer specialties, emulsions and EVA polymers, and acetyl products.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales ($ millions) | 1,807 | 1,506 | 5,149 | 4,411 |
| Gross profit ($ millions) | 401 | 346 | 1,162 | 867 |
| Operating profit ($ millions) | 196 | 221 | 593 | 363 |
| Net earnings ($ millions) | 167 | 145 | 512 | 319 |
| Diluted EPS | $1.05 | $0.92 | $3.22 | $2.01 |
| Operating margin | 10.8% | 14.7% | 11.5% | 8.2% |
| Operating cash flow ($ millions) | Not separately reported for the quarter | 481 | 363 |
- Q3 sales rose 20%; nine-month sales rose 17%. Management attributed growth mainly to pricing and favorable foreign exchange, with stronger demand in several businesses. Nine-month acetyl volumes declined because of production turnarounds.
- Gross profit increased in both comparisons as price increases more than offset higher raw-material, energy and freight costs. SG&A rose in dollars but declined as a share of sales: 7.7% versus 8.3% in Q3 and 7.9% versus 8.5% year to date.
- Q3 operating profit fell despite higher sales, in part because 2010 included insurance recoveries and plumbing-related reserve reductions, while 2011 included Kelsterbach relocation and other charges. Nine-month operating profit improved substantially, including the absence of the 2010 Spondon impairment and stronger acetyl results.
- Q3 and nine-month effective tax rates were 17% and 23%, respectively, versus 23% and 21% in 2010. Nine-month net earnings included $80 million of dividend income from cost investments, compared with $73 million in 2010.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $704 million, down from $740 million at year-end 2010; total debt was $3.054 billion, down from $3.218 billion. Cash less total debt was approximately $2.350 billion.
- Current assets were $2.898 billion and current liabilities $1.613 billion. Cash flow from operations of $481 million was offset by $296 million of net investing outflows and $224 million of net financing outflows; cash declined $36 million over the nine months.
- Operating cash flow increased $118 million year over year, aided by higher earnings and lower cash taxes, partly offset by higher working capital and $85 million of U.S. pension contributions in Q3. Capital expenditures were $241 million, compared with $122 million in the prior-year period; the company also spent $174 million on the Kelsterbach relocation.
- Celanese issued $400 million of 5.875% notes due 2021 and used proceeds plus cash to repay $516 million of Term B loans. The company reported $600 million available under its revolving facility and $148 million under its credit-linked facility, and stated it was in compliance with debt covenants.
- The quarterly common dividend was increased 20%, from $0.05 to $0.06 per share. The company repurchased $28 million of shares in the first nine months and had $175 million remaining under its authorization at September 30.
Business developments and outlook
- Management cited higher selling prices, strong demand and favorable currency as key sales drivers. Acetyl Intermediates benefited from industry outages and high utilization supporting prices; its nine-month operating profit increased to $392 million from $149 million.
- Advanced Engineered Materials sales grew, but operating profit declined to $14 million in Q3 from $63 million, and to $79 million for nine months from $151 million. Higher raw-material costs, growth and innovation spending, and relocation charges outweighed pricing and volume benefits.
- The new 140,000-ton-per-year POM facility in Frankfurt Hoechst opened in September 2011. The company received the final €110 million Fraport payment and said relocation spending would exceed total proceeds received.
- Management expected 2011 capital expenditures of $350 million to $375 million, excluding Kelsterbach relocation and capacity expansion in Europe. It anticipated €160 million of relocation capital outflows in 2011. Plans also included ethanol capacity additions in China and a Clear Lake technology development unit; these are plans, not earnings guidance.
- The Spondon, U.K. acetate facility closure was expected during 2012. Total related expenses were estimated at $35 million to $45 million, with cash outflows expected through 2012.
- Management said it expected to have resources to meet 2011 liquidity requirements, while cautioning that operating cash flow could fall short and that borrowing, reduced or delayed capital spending, or refinancing might then be needed. No specific earnings forecast was provided.
Risks, contingencies and unusual items
- Southern Chemical sought $1.3 billion in compensatory damages, plus interest, fees and punitive damages, in a methanol contract dispute. Celanese disputed the claims and alleged damages, was actively defending the case, and said it could not estimate possible loss beyond immaterial amounts accrued. Trial was set for March 2012.
- Environmental remediation reserves were $99 million. The company said environmental costs were not expected to materially affect its financial position, but could materially affect results or cash flows in a given period; ultimate Superfund liabilities could not be accurately determined.
- Outstanding take-or-pay purchase commitments totaled $1.9 billion; other commitments totaled $889 million. The company did not expect material losses under take-or-pay arrangements.
- Other notable items included $17 million received from settling a claim against a bankrupt supplier, $43 million of nine-month Kelsterbach relocation charges, and $6 million of nine-month plumbing-action recoveries or legal-reserve reductions. The 2010 comparison included a $72 million Spondon impairment and $25 million of insurance recoveries in Industrial Specialties during Q3.
- Management identified exposure to economic and industry cycles, raw-material and energy prices, its ability to pass through cost increases, plant utilization and execution, competition, foreign exchange and interest rates, indebtedness, environmental obligations, and litigation. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated acetyl pricing and favorable input-price pass-through persist, and how raw-material costs affect margins.
- Whether working-capital needs, pension contributions and capital spending continue to pressure operating cash flow.
- Progress, cost and ramp-up of the Frankfurt POM facility and other announced expansion projects.
- Updates to the Southern Chemical dispute, environmental exposures and other legal contingencies, including any changes to accrued or reasonably possible losses.
- Availability of cash held by foreign subsidiaries: $561 million of the $704 million cash balance was held abroad, and taxable repatriation could be required if funds are needed in the United States.