Celanese Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Celanese is a global chemicals and specialty materials company, with Engineered Materials, Acetate Tow and Acetyl Chain segments. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,193 million | $1,592 million | $2,653 million | $3,279 million |
| Gross profit | $242 million | $423 million | $590 million | $876 million |
| Operating profit | $83 million | $186 million | $277 million | $506 million |
| Net earnings attributable to Celanese | $107 million | $209 million | $325 million | $546 million |
| Diluted EPS | $0.90 | $1.66 | $2.72 | $4.30 |
| Operating margin | 7.0% | 11.7% | 10.4% | 15.4% |
Q2 gross margin was approximately 20.3%, versus 26.6% a year earlier. Q2 continuing-operations earnings attributable to Celanese were $110 million; the reported net earnings figure includes a $3 million loss from discontinued operations. For the first half, operating cash flow was $638 million (down from $731 million); capital expenditures were $207 million, implying cash flow after capital expenditures of approximately $431 million.
At June 30, cash and cash equivalents were $539 million, including $478 million held by foreign subsidiaries. Total debt was $4.034 billion, versus $3.905 billion at year-end 2019; net debt was approximately $3.495 billion. Current borrowings and current installments rose to $1.045 billion from $496 million, while long-term debt net of issuance costs was $2.989 billion. Current assets were $2.709 billion and current liabilities $2.262 billion. Celanese reported $1.096 billion available under its revolving credit facility and $5 million under its receivables securitization facility; it stated it was compliant with debt covenants.
Material changes versus the prior comparable period
- Q2 sales fell 25% and first-half sales fell 19%. Management attributed declines across segments mainly to lower volumes from COVID-19-related demand weakness and lower prices; currency effects were also unfavorable.
- Q2 operating profit fell 55%; first-half operating profit fell 45%. Lower sales were partly offset by lower raw-material costs and fewer impairment charges than in 2019. First-half results also reflected higher turnaround and spending costs.
- Engineered Materials Q2 sales fell 29% to $420 million; the segment reported a $13 million operating loss, including a $25 million impairment related to planned consolidation of European compounding operations. Acetyl Chain Q2 sales fell 24% to $662 million and operating profit fell 36% to $121 million. Acetate Tow sales fell 23% to $127 million; its $31 million operating profit benefited from the absence of the prior-year $83 million impairment charge.
- Cash increased $76 million from year-end, while debt increased $129 million. First-half share repurchases were $150 million, compared with $500 million in the prior-year period; the company paused repurchases during Q2.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 significantly harmed Engineered Materials and Acetyl Chain results, and expected demand declines—particularly in the Western Hemisphere—to continue through the second half of 2020. It expected demand and results to begin normalizing in 2021, absent a renewed pandemic resurgence; this outlook is uncertain.
- Celanese reduced its 2020 capital spending forecast from $500 million to less than $350 million; the filing’s liquidity discussion gives an expected range of $325 million to $350 million. It said it would maintain its current dividend and prioritize liquidity over discretionary share repurchases.
- Management said available cash, operating cash flow, strategic-investment dividends and borrowing capacity should cover obligations and operating needs for the foreseeable future. It cautioned that a prolonged downturn, lower EBITDA or increased borrowing could challenge covenant compliance and liquidity.
- On July 20, 2020, Celanese agreed to sell its 45% Polyplastics joint-venture interest to Daicel for approximately $1.6 billion in cash. Closing was expected in the second half of 2020, subject to customary conditions, including antitrust approvals.
- On July 14, 2020, Celanese reached a $92 million settlement with the European Commission concerning an investigation into past ethylene purchases; the company had recorded an $89 million reserve in 2019.
- Other notable items include $29 million of asset impairments in the first half, $67 million of environmental remediation liabilities, and $2.5 billion of unconditional purchase obligations extending through 2036. The company said environmental costs could materially affect results or cash flows in a particular period, though it did not expect a material adverse effect on its financial position.
- The effective tax rate increased to 24% for Q2 and 23% for the first half, versus 12% in each 2019 period, primarily because of tax-position and foreign-currency effects and lower earnings. The filing identifies pandemic duration, customer demand, raw-material prices, plant utilization, supply-chain disruption, litigation, environmental obligations, foreign exchange and indebtedness as risks.
Important facts for investors to verify
- Whether demand, sales volumes, pricing and margins recover as management anticipated, and whether COVID-19 disruptions recur or persist.
- Completion, timing, proceeds and any related business or earnings effects of the proposed Polyplastics sale.
- Near-term debt maturities and refinancing needs, available borrowing capacity, and covenant headroom as current debt rose materially.
- Cash generation, capital spending, dividend support and the timing or resumption of share repurchases.
- Final costs and timing of the European Commission settlement, and developments in environmental and other legal contingencies.