Celanese Corporation — Q3 2020 Form 10-Q
Business context and period: Global chemical and specialty materials company with Engineered Materials, Acetate Tow and Acetyl Chain segments. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Management attributes substantial demand and operating impacts to the COVID-19 pandemic.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1.411 billion | $1.586 billion | $4.064 billion | $4.865 billion |
| Gross profit | $327 million | $414 million | $917 million | $1.290 billion |
| Operating profit | $184 million | $260 million | $461 million | $766 million |
| Operating margin | 13.0% | 16.4% | 11.3% | 15.7% |
| Net earnings attributable to Celanese | $207 million | $263 million | $532 million | $809 million |
| Diluted EPS | $1.75 | $2.13 | $4.47 | $6.43 |
| Operating cash flow | Not separately presented for quarter | $1.069 billion | $1.128 billion |
Gross margin was approximately 23.2% in Q3 and 22.6% for the nine-month period, versus approximately 26.1% and 26.5%, respectively, in 2019. Nine-month capital expenditures were $279 million, compared with $226 million; operating cash flow less capital expenditures was approximately $790 million, versus $902 million.
At September 30, cash and cash equivalents were $615 million, versus $463 million at year-end 2019. Total debt was $4.098 billion, versus $3.905 billion; cash less total debt implies net debt of approximately $3.483 billion. Current borrowings and current installments of long-term debt totaled $958 million, including $429 million of current long-term debt. The company had $791 million available under its $1.25 billion revolving credit facility and reported compliance with debt covenants. Total assets were $9.769 billion and total equity was $2.884 billion.
Changes and segment performance
- Q3 sales fell 11% year over year; nine-month sales fell 16%. Lower volumes across segments and lower pricing—especially in Acetyl Chain—were the main drivers. Q3 operating profit declined 29%; the nine-month decline was 40%.
- Engineered Materials: Q3 sales declined 11% and operating profit 24%; nine-month sales declined 18% and operating profit 52%. Weaker demand and pricing, plus a $26 million impairment in 2020, weighed on results. Lower spending and raw-material costs partly offset declines.
- Acetate Tow: Q3 sales declined 18%; nine-month sales declined 21%. Nine-month operating profit rose to $88 million from $30 million, mainly because the prior-year period included an $83 million impairment related to the Ocotlán closure. Lower volumes included the effect of an expired acetate flake contract.
- Acetyl Chain: Q3 sales declined 11% and operating profit 33%; nine-month sales declined 15% and operating profit 34%. Lower pricing and demand were partly offset by lower raw-material and energy costs.
- Nine-month earnings also reflected lower equity earnings from affiliates. Q3 affiliate earnings were $25 million versus $45 million.
Outlook, commentary, risks and unusual items
- Management reported improving demand in Q3, particularly in China and the US, and said Chinese activity had returned to pre-pandemic levels. Automotive and medical demand remained reduced, though automotive showed signs of recovery. Management anticipated demand and results would begin to normalize in 2021, absent a renewed COVID-19 resurgence; this is not a quantified earnings forecast.
- 2020 capital expenditure guidance was reduced from $500 million to $325–$350 million. The company said it remained committed to its dividend and expected to repurchase approximately $400 million of additional shares in Q4, including using Polyplastics sale proceeds.
- On October 9, 2020, after quarter-end, Celanese completed the sale of its 45% Polyplastics interest for approximately $1.6 billion cash. It expected a fourth-quarter gain of approximately $1.4 billion and net income tax expense of approximately $295 million.
- Q3 and nine-month performance remains exposed to pandemic duration and effects on customers, suppliers, operations, demand and liquidity. Other risks include raw-material and energy price changes, ability to pass costs through, industry cycles, currency and interest rates, debt and covenant headroom, and environmental and legal liabilities.
- Unusual items included $31 million of asset impairments in the first nine months, primarily the $26 million European compounding-operations impairment and $4 million related to the Lebanon, Tennessee closure. A $92 million European Commission settlement concerning past ethylene purchases was reached in July and remained accrued at quarter-end. Environmental remediation liabilities were $69 million. Unconditional purchase obligations were $2.5 billion through 2042.
- Operating cash flow was supported by favorable working-capital changes, including lower receivables and inventory. Cash and cash equivalents included $540 million held by foreign subsidiaries. Management stated available liquidity was expected to meet needs and obligations for the foreseeable future, while noting uncertainty from the pandemic.
Investor verification points
- Track whether the expected 2021 normalization materializes and whether COVID-19 or renewed restrictions reverse Q3 demand improvement.
- Verify the Polyplastics transaction’s final gain, tax expense and use of proceeds, including planned share repurchases.
- Monitor debt maturities, revolving-facility availability, covenant compliance and liquidity, particularly against continued downturn or weaker EBITDA.
- Assess whether segment pricing, volumes and margins recover, and whether raw-material cost changes can be passed through.
- Review the assumptions, timing and potential cash effects behind environmental remediation, legal contingencies and long-dated purchase obligations.