Celanese Corporation — Q3 2016 Form 10-Q
Business context and period: Celanese is a global technology and specialty materials company operating through Advanced Engineered Materials, Consumer Specialties, Industrial Specialties, and Acetyl Intermediates. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,323 | $1,413 | $4,078 | $4,340 |
| Gross profit | $355 | $303 | $1,083 | $1,059 |
| Operating profit | $246 | $186 | $776 | $631 |
| Operating margin | 18.6% | 13.2% | 19.0% | 14.5% |
| Net earnings attributable to Celanese | $262 | $161 | $740 | $602 |
| Diluted EPS | $1.81 | $1.07 | $5.05 | $3.92 |
| Effective tax rate | 5% | 33% | 15% | 22% |
- Sales fell 6% in both the quarter and nine-month period, primarily from lower selling prices; Q3 sales also reflected lower volumes in certain businesses. Lower raw-material and energy costs, productivity savings, and lower SG&A more than offset reduced sales, lifting operating profit.
- Q3 segment sales/profit: Advanced Engineered Materials $365/$93; Consumer Specialties $225/$68; Industrial Specialties $245/$25; Acetyl Intermediates $589/$83. Advanced Engineered Materials benefited from higher POM volume; Acetyl Intermediates had lower prices and VAM volume but higher profit from lower input costs and savings.
- Cash from operations was $940 for the first nine months, versus $726 in 2015. Investing cash outflow was $192 (versus $461), including lower Fairway project spending; capital expenditures were $186. Financing cash outflow was $467.
- Cash and equivalents were $1,252 at September 30, 2016, including $561 held by foreign subsidiaries. Total debt was $3,015, versus $2,981 at year-end 2015; current debt and borrowings were $92 and long-term debt was $2,923. Total equity was $3,151.
Material changes and notable items
- On July 15, Celanese entered a new senior credit agreement with a $500 term loan and $1.0 billion unsecured revolving facility, both maturing in 2021, refinancing prior secured term loans. At quarter-end the revolver was undrawn and fully available. The amended receivables facility matures in 2019; $53 was available for borrowing at quarter-end, with $52 of letters of credit issued. The company reported compliance with debt covenants.
- On September 26, Celanese issued €750 million of 1.125% notes due 2023; proceeds repaid $411 of revolver borrowings and were also available for general corporate purposes. Refinancing expenses were $4 in Q3 and $6 year to date.
- The effective tax rate was reduced by a $52 benefit from remeasurement of prior-year tax positions following audit closures and technical clarifications. This is a discrete item, not an indication of the underlying recurring tax rate.
- A new full-yield-curve method for pension and postretirement service and interest costs is expected to reduce 2016 costs by approximately $29 versus the prior method; the filing says total benefit obligations are unaffected.
- Celanese repurchased $300 of shares and paid $150 in dividends during the first nine months. The quarterly dividend rate increased to $0.36 per share in May 2016.
Outlook, risks, and contingencies
- Management expected 2016 capital expenditures of $250–$300, primarily for growth opportunities in Advanced Engineered Materials and Acetyl Intermediates. It stated that available resources should meet liquidity needs, including debt service, for the next 12 months. The filing provides no specific earnings or revenue guidance.
- On October 13, 2016, the company signed an agreement to acquire SO.F.TER. Group, an engineering thermoplastics and elastomers business, with closing expected in Q4 subject to customary conditions. It expected no material effect on 2016 financial position or results. Funding was expected from cash or the revolving facility.
- Key business sensitivities include economic and industry cycles, raw-material and energy prices, ability to pass costs through, plant utilization, competition, currency and interest rates, and the company’s indebtedness. Management cautioned that forward-looking statements are subject to uncertainty.
- Environmental remediation reserves were $69. The EPA’s estimated $1.4 billion cleanup plan for the Lower Passaic River is under way; Celanese estimates its allocable share at less than 1% and believes it will not be material. The company notes that environmental costs could materially affect results or cash flows in a particular period.
- The IRS proposed $192 of pretax adjustments concerning intercompany charges for 2009–2010 tax years. Celanese disputes the adjustments; if wholly unsuccessful, the company says up to $67 of prior foreign tax credit carryforwards could be consumed. The filing does not state a clear expected cash assessment.
- Unconditional purchase obligations totaled $2.6 billion through 2036. Other disclosed uncertainties include environmental and divestiture indemnities, litigation, and the outcome of tax audits. The company said it could not estimate possible losses for certain indemnification obligations beyond amounts accrued.
Investor verification points
- Assess whether margin gains from lower input costs and productivity can persist amid continued pricing pressure and lower sales.
- Separate the $52 tax benefit from recurring earnings and verify the eventual resolution of IRS and other tax matters.
- Review the refinancing’s effect on total debt, interest costs, maturities, and the availability of committed liquidity.
- Track cash generation, planned capital spending, dividends, repurchases, and funding and closing terms for the SO.F.TER. acquisition.
- Monitor exposure to environmental remediation, purchase commitments, and other contingencies whose ultimate cost may differ from recorded estimates.