Celanese Corporation — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Celanese is a global integrated chemicals and advanced materials company, operating across Advanced Engineered Materials, Consumer Specialties, Industrial Specialties and Acetyl Intermediates. Results reflected the continuing global economic slowdown, weaker demand—especially in automotive and industrial markets—and lower acetyl product prices. Management said demand improved slightly in Asia for many major acetyl intermediates products, while volume declines were concentrated in Europe and the Americas.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $1,304 | $1,823 | $3,694 | $5,537 |
| Gross profit | $266 | $333 | $714 | $1,147 |
| Gross margin | 20.4% | 18.3% | 19.3% | 20.7% |
| Operating profit | $65 | $151 | $181 | $592 |
| Operating margin | 5.0% | 8.3% | 4.9% | 10.7% |
| Net earnings attributable to Celanese | $399 | $158 | $483 | $437 |
| Diluted EPS | $2.53 | $0.97 | $3.08 | $2.63 |
Q3 net income included a $382 million discrete deferred tax benefit from releasing most of the U.S. deferred-tax valuation allowance. Excluding that release, the reported effective tax rate would have been 65% for Q3 and 35% for the first nine months. Q3 also included $19 million of equity earnings from a one-time deferred-tax-liability reversal at the Polyplastics equity-method investee. Accordingly, reported net income and EPS are not a straightforward measure of underlying operating performance.
For the nine months, operating cash flow was $408 million, versus $345 million in 2008. Capital expenditures were $130 million; investing activities provided $191 million, including $412 million of accelerated Fraport relocation payments and $168 million of net proceeds from the PVOH sale. Financing activities used $52 million. Cash and cash equivalents rose to $1,293 million from $676 million at year-end 2008.
Total debt was $3,577 million at September 30, 2009, versus $3,533 million at December 31, 2008. Current debt was $265 million and long-term debt was $3,312 million. Celanese reported covenant compliance and estimated a 4.37:1 first-lien secured leverage ratio, against a 5.75:1 limit for the quarter. Available borrowing included $600 million under the revolving facility and $136 million under the credit-linked facility.
Material changes versus the prior comparable period
- Sales fell 28% in Q3 and 33% for the first nine months. Company-wide nine-month sales declines reflected lower volume (16%), lower price (17%) and unfavorable currency (3%).
- Operating profit fell $86 million in Q3 and $411 million year to date. Lower raw-material and energy costs and reduced spending partly offset weaker sales; Q3 also bore $96 million of net other charges, compared with $1 million in the prior-year quarter.
- Acetyl Intermediates was especially weak: Q3 sales were $666 million versus $1,056 million, and the segment recorded a $30 million operating loss versus $100 million of profit. The Pardies closure charges contributed materially.
- Q3 sales declined across all segments. Consumer Specialties operating profit rose to $52 million from $42 million; Industrial Specialties rose to $44 million from $18 million, including the $34 million PVOH disposal gain. Advanced Engineered Materials profit increased to $21 million from $13 million.
- Cash increased substantially, mainly due to Fraport relocation proceeds, the PVOH sale and exchange-rate effects. Debt increased modestly; the company did not repurchase shares in the first nine months of 2009, compared with $378 million of buybacks in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management described the downturn as continuing and said it was aligning capacity and staffing with expectations of prolonged lower demand. The filing provides no specific earnings or revenue guidance.
- Celanese expected 2009 capital expenditures of approximately $185 million, excluding the Kelsterbach relocation; relocation-related cash capital expenditures were expected to be $350–$370 million. The Kelsterbach move is scheduled to transition operations by mid-2011.
- The Pardies, France facility was scheduled to cease manufacturing and related activities by December 2009. The company recorded $85 million of Q3 exit costs and said 2009 exit costs totaled $97 million; up to a further $17 million of contingent employee termination benefits could arise. It also recorded accelerated depreciation and environmental remediation reserves.
- The company completed the PVOH sale for $168 million net cash proceeds, recognizing a $34 million gain. Long-term supply agreements mean the sale was not presented as discontinued operations.
- Environmental remediation reserves were $103 million. The company disclosed exposure at approximately 50 U.S. Superfund sites, legal proceedings, and indemnification obligations; it said reserves were adequate but noted individual matters could materially affect results or cash flows in a period.
- Outstanding future commitments under take-or-pay contracts were $1.854 billion. The company did not expect material losses on these arrangements unrelated to the Pardies closure.
- Other risks include weak end-market demand, raw-material and energy price changes, the ability to pass costs through to customers, currency and interest-rate movements, leverage and covenant requirements, and potential environmental or litigation costs. Management stated liquidity should cover requirements through the remainder of 2009, while acknowledging operating cash flow or borrowing availability could weaken.
Key facts for investors to verify
- Review the $382 million tax valuation-allowance release and the earnings effect of the separate $19 million Polyplastics tax reversal.
- Assess recurring operating performance apart from the PVOH gain, restructuring and closure charges, and other unusual items.
- Track demand, pricing and margins by segment, particularly the Acetyl Intermediates recovery and the effects of plant closures and capacity reductions.
- Monitor cash generation, capital spending and the timing and use of Fraport relocation proceeds, which are recorded as deferred proceeds.
- Check leverage, future covenant thresholds, revolving-credit availability, take-or-pay commitments, and potential environmental and legal cash requirements.
- Confirm whether the Pardies shutdown, its remaining potential costs, and the planned capacity expansions in China proceed on schedule.