Celanese Corporation — Q2 2011 Form 10-Q
Business context and reporting period. Celanese is a global technology and specialty materials company producing acetyl products, engineered polymers and other chemical-based products. This unaudited report covers the three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,753 | $1,517 | $3,342 | $2,905 |
| Gross profit | $410 | $303 | $761 | $521 |
| Operating profit | $209 | $156 | $397 | $142 |
| Continuing-operations earnings | $205 | $163 | $343 | $176 |
| Net earnings attributable to Celanese | $203 | $160 | $345 | $174 |
| Diluted EPS | $1.28 | $1.01 | $2.17 | $1.10 |
- Q2 gross margin was approximately 23.4% versus 20.0%; operating margin was 11.9% versus 10.3%. For the first half, gross margin was approximately 22.8% versus 17.9%, and operating margin 11.9% versus 4.9%.
- Q2 revenue increased 16%, mainly from higher selling prices and favorable currency effects. First-half revenue rose 15%. Management said pricing largely reflected recovery of higher raw-material and freight costs; first-half company volume was down 1%.
- Acetyl Intermediates led Q2 segment operating-profit improvement, reporting $152 versus $68; Industrial Specialties reported $28 versus $16. Advanced Engineered Materials declined to $27 from $40, and Consumer Specialties to $48 from $64.
- Q2 earnings included $46 of equity earnings from affiliates and $79 of dividend income from cost investments. Interest expense was $57, up from $49. First-half effective tax rate was 25%, compared with 19%.
Cash flow, balance sheet and capital
- First-half operating cash flow was $316, versus $219 in 2010. Investing cash outflow was $133, versus $275; financing cash outflow was $198, versus $78. Cash ended at $741, essentially unchanged from year-end 2010.
- Working capital absorbed cash: receivables increased $195 and inventories increased $145 in the first half. Capital expenditures were $151, compared with $78 in 2010.
- At June 30, cash was $741; total debt was $3,048, down from $3,218 at December 31, 2010. Net debt was approximately $2,307. Current assets of $3,014 exceeded current liabilities of $1,641; the current ratio was approximately 1.84.
- Celanese issued $400 of 5.875% senior notes due 2021 and used the proceeds plus cash to prepay $516 of Term B debt due 2014. Long-term debt was $2,893; short-term borrowings and current debt were $155. The company reported compliance with debt covenants and $600 available under its revolving facility plus $147 under its credit-linked facility.
- Shareholders’ equity increased to $1,373 from $926, including first-half earnings and $104 of other comprehensive income. The quarterly dividend was raised 20%, to $0.06 per share; $13 was spent on share repurchases in the first half.
Material changes, outlook and risks
- Drivers and segment trends: Management attributed improved consolidated profitability to selling-price increases exceeding raw-material, energy and freight cost increases. Acetyl Intermediates benefited from stronger pricing and industry utilization, but its volumes fell with production turnarounds. Industrial Specialties gained from demand and higher-value applications. Advanced Engineered Materials faced higher raw-material costs, growth investment and Kelsterbach relocation charges.
- Investment plans: Management expected 2011 capital expenditures of $300–$350, excluding the Kelsterbach relocation and European capacity expansion. Relocation capital outflows were expected to be €175 in 2011; the expanded project was expected to cost more than total Fraport proceeds. China plans included approximately 200,000 tons per year of ethanol capacity at Nanjing by mid-2013, alongside plans for one or possibly two larger greenfield facilities. A Clear Lake ethanol technology unit was expected to be operational by mid-2012.
- Restructuring: Spondon, UK acetate operations were expected to close during 2012. The company anticipated total expenses of $35–$45, with most exit costs involving future cash outflows. Kelsterbach operations were scheduled to cease by July 31, 2011; the final Fraport payment of €110 was received in Q2.
- Unusual items: First-half other charges were net expenses of $15, versus $83 in 2010, which included a $72 Spondon impairment. 2011 included $29 of Kelsterbach relocation expenses, partly offset by $17 recovered from a bankrupt-supplier claim, $4 from commercial dispute settlements, and $4 of plumbing-related recoveries and reserve reductions. A $3 loss on de-designated interest-rate swaps was reclassified to interest expense.
- Risks and contingencies: Risks include economic and end-market cycles, raw-material and energy prices, ability to pass costs through, foreign-exchange and interest-rate movements, leverage, environmental regulation and litigation. Environmental remediation reserves totaled $103. The company disclosed $2.0 billion of take-or-pay purchase commitments and $615 of other commitments. It could not estimate possible losses for certain legal matters, including a methanol supply-contract dispute set for trial in October 2011 and German shareholder award proceedings. EPA boiler-emissions rules could require significant capital spending; the rule was stayed pending reconsideration.
- Management stated that it believed available resources would meet 2011 liquidity needs, including debt service, but cautioned that operating cash flows are not assured. The company gave no specific earnings or revenue guidance; interim results were not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether higher prices continue to offset raw-material, energy and freight inflation, and how much reported growth reflects pricing versus volume and currency.
- Whether first-half cash conversion improves as receivables and inventories unwind, given the higher capital-spending outlook.
- Actual spending and completion costs for the Kelsterbach relocation, and progress and funding for ethanol and other expansion projects.
- Debt repayment, interest costs, covenant headroom and the availability of cash held by foreign subsidiaries; $559 of cash was held outside the U.S., and repatriation could trigger U.S. taxes.
- Developments in environmental requirements, remediation obligations and legal proceedings where potential losses remain unquantified.