Celanese Corporation — Q2 2010 Form 10-Q
Business context and period: Global technology and specialty materials company, with businesses in engineered polymers, acetate products, emulsions and acetyl chemicals. This unaudited report covers the three and six months ended June 30, 2010; prior-year figures are adjusted for the retrospective equity-method accounting change for Ibn Sina.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $1.517 billion | $1.244 billion | $2.905 billion | $2.390 billion |
| Gross profit / margin | $303 million / 20.0% | $248 million / 19.9% | $521 million / 17.9% | $448 million / 18.7% |
| Operating profit / margin | $156 million / 10.3% | $89 million / 7.2% | $142 million / 4.9% | $116 million / 4.9% |
| Continuing-operations earnings | $163 million | $110 million | $176 million | $94 million |
| Net earnings | $160 million | $109 million | $174 million | $94 million |
| Diluted EPS | $1.01 | $0.69 | $1.10 | $0.60 |
| Operating cash flow | Not presented by quarter | $219 million | $299 million |
- Q2 sales rose 22%, driven by increased volumes during the global recovery and higher selling prices. First-half sales also rose 22%.
- Q2 gross margin was broadly flat year over year; first-half margin declined as higher raw-material and energy costs were only partly offset by pricing. First-half results also included a $22 million accelerated write-off of a raw-material contract prepayment.
- Q2 operating profit increased $67 million. For the first half, a $72 million Spondon asset impairment contributed to $83 million of net other charges; this partly offset higher sales and profit.
- Operating cash flow fell $80 million year over year, principally because of increased trade working capital. Investing cash flow was negative $275 million, versus positive $183 million in 2009, when the company received $412 million related to the Ticona relocation. Financing cash outflow was $78 million.
Financial position and liquidity
- At June 30, cash and equivalents were $1.081 billion, down $173 million from year-end. Current assets were $2.822 billion and current liabilities $1.510 billion.
- Total debt was $3.427 billion, down from $3.501 billion at December 31, 2009; long-term debt was $3.162 billion. The company reported compliance with debt covenants.
- Available borrowing capacity was $600 million under the revolving facility and $137 million under the credit-linked facility. The estimated first-lien leverage ratio was 2.7x against a 4.25x limit at June 30; the limit becomes 3.90x from year-end 2010.
- Management said available resources should meet liquidity requirements, including debt service, for the remainder of 2010, while noting cash generation and continued access to revolvers are not assured.
Material changes, outlook and unusual items
- By segment, Q2 sales increased notably in Acetyl Intermediates ($782 million, up $160 million) and Advanced Engineered Materials ($282 million, up $98 million). Acetyl profit benefited from higher volumes and prices; Advanced Engineered Materials benefited from recovery-driven demand and affiliate earnings. Consumer Specialties first-half operating profit fell to $34 million from $132 million, largely due to the $72 million Spondon impairment and weaker volumes/outage effects.
- In May, Celanese acquired DuPont’s Zenite LCP and Thermx PCT product lines for $46 million. The filing says the acquisition did not materially affect reported financial information. It also committed to purchase $12–$17 million of related inventory.
- The company was considering closure of its Spondon, UK acetate flake and tow operations, potentially in the latter part of 2011; formal employee consultation concluded in July. The $72 million impairment was recorded in the first half. Pardies, France closure costs were $18 million for the first half, with up to $10 million of additional contingent termination benefits possible.
- For 2010, expected capital expenditures were approximately $243 million, excluding the Ticona relocation; relocation capital outflows were expected to be €239 million. Celanese also expected its share of investment in the Saudi POM facility to total about $150 million over three years beginning in late 2010.
- The Ibn Sina joint venture term was extended to 2032 and a 50,000-ton POM facility was announced. If the facility starts successfully, Celanese’s indirect economic interest is expected to rise from 25% to 32.5%. The company increased its quarterly common dividend 25%, from $0.04 to $0.05 per share, beginning with dividends payable in August.
- Other notable items: Celanese recorded a $14 million gain on sale of an office building; redeemed/converted its preferred stock, issuing approximately 12.1 million common shares; and repurchased 678,592 common shares for $20 million in the first half.
Risks and contingencies
- Key business risks include economic and industry cycles, raw-material and energy prices, ability to pass on cost increases, plant utilization and outages, foreign exchange and interest rates, competition, regulation and litigation.
- Environmental remediation reserves were $97 million. The company reported potential Superfund responsibility at approximately 40 sites and noted that ultimate costs cannot be accurately determined for many sites.
- Outstanding take-or-pay purchase commitments were $1.7 billion, with an additional $659 million of other commitments. Management did not expect material losses under take-or-pay arrangements.
- Divestiture-related guarantees totaled approximately $1.9 billion; some indemnities have no monetary or time limits. Plumbing-action accruals were $54 million. A polyester-staple-related contractual claim remains pending, and the company said it could not estimate its potential loss.
- The filing states that litigation outcomes may materially affect results or cash flows in an individual period, although management believed reserves were adequate and did not expect litigation to materially affect financial position overall.
Investor verification checklist
- Verify whether volume recovery and pricing continued, particularly in Acetyl Intermediates and Advanced Engineered Materials, and whether input-cost increases were passed through.
- Track working-capital requirements and operating cash flow against debt service, capital spending and the stated 2010 liquidity outlook.
- Monitor Spondon closure decisions, further impairment or restructuring costs, and any additional Pardies termination benefits.
- Assess the timing, cost and expected returns of the Ticona relocation and Saudi POM project, including the conditions for Celanese’s increased Ibn Sina interest.
- Review developments in environmental liabilities, plumbing claims, the polyester staple litigation, and the company’s significant guarantees and purchase commitments.