Celanese Corporation — Q1 2019 Form 10-Q
Business context and reporting period
Celanese is a global chemical and specialty materials company, with businesses in engineered materials, acetate tow and the acetyl chain. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Amounts below are in millions of U.S. dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,687 | $1,851 | Down $164 (9%) |
| Gross profit / margin | $453 / 26.9% | $515 / 27.8% | Profit down $62 |
| Operating profit / margin | $320 / 19.0% | $343 / 18.5% | Profit down $23 |
| Continuing-operations earnings | $339 | $367 | Down $28 |
| Net earnings attributable to Celanese | $337 | $363 | Down $26 |
| Diluted EPS | $2.63 | $2.66 | Down $0.03 |
| Operating cash flow | $307 | $143 | Up $164 |
| Capital expenditures | $79 | $86 | Down $7 |
- Cash and cash equivalents were $441 at March 31, 2019, versus $439 at year-end 2018. Q1 operating cash flow benefited from $182 of favorable trade working capital, primarily the timing of receivable collections.
- Total debt was $3,676, compared with $3,531 at December 31, 2018; this includes $743 of short-term borrowings and current installments and $2,933 of long-term debt. The filing reports $1,003 available under the revolving credit facility and $3 available under the receivables securitization facility.
- Current assets were $2,884 and current liabilities $1,822 at quarter-end. Management said it expects resources to meet liquidity needs, including debt service, for the next 12 months.
- Q1 segment sales and operating profit: Engineered Materials $663 and $144; Acetate Tow $166 and $40; Acetyl Chain $889 and $202. The Acetyl Chain had the largest year-over-year decline in sales and profit.
Material changes versus the prior comparable period
- Sales fell 9%, reflecting lower Acetyl Chain prices and volumes, weaker global demand and unfavorable currency effects. Engineered Materials pricing increased, partly offsetting those declines.
- Operating profit declined 7%, despite a higher reported operating margin. Lower sales and higher polymer raw-material costs weighed on results; lower methanol and ethylene costs, reduced project spending and incentive compensation partly offset the pressure.
- Acetyl Chain sales decreased 15.4% and operating profit decreased 20.2%, primarily due to lower prices amid reduced Asian demand and raw-material deflation, lower volume and unfavorable currency. Acetate Tow operating profit fell 13.0%, principally on lower sales and higher acetic-acid costs. Engineered Materials operating profit increased 13.4%, helped by pricing and a commercial-dispute gain.
- Operating cash flow increased to $307, primarily due to favorable working-capital timing. Investing cash outflow was $177, including $91 for acquisitions, principally Next Polymers; the prior-year period included $144 for the Omni Plastics acquisition.
- Financing cash outflow was $130, including $212 of treasury-stock purchases and $70 of dividends, partly offset by higher short-term borrowings. The company repurchased 1.97 million shares for approximately $200 (excluding related fees) during the quarter.
Outlook, management commentary, risks and unusual items
- Management forecast 2019 capital expenditures of $350–$400, mainly for growth opportunities in Engineered Materials and the Acetyl Chain. The filing provides no clear full-year earnings or revenue guidance.
- On April 18, 2019, the board authorized an additional $1.5 billion of share repurchases and declared a $0.62-per-share quarterly dividend, payable May 9, 2019. These are post-quarter announcements.
- Q1 other gains, net, were $4: a $15 gain from settlement of a dispute related to a previous acquisition, offset in part by an $11 loss from a captive-insurer settlement with a former customer. The lower effective tax rate, 12% versus 15%, primarily reflected a partial release of a U.S. foreign-tax-credit valuation allowance.
- The company adopted the new lease standard on January 1, 2019, recognizing $223 of operating lease right-of-use assets and $240 of operating lease liabilities at adoption. Prior periods were not adjusted.
- Key exposures include chemical-sector and end-market cycles, raw-material and energy prices, foreign exchange, ability to pass through costs, leverage, and environmental, legal and regulatory matters. The company reports $65 of environmental remediation liabilities. It says its estimated share of Lower Passaic River cleanup costs is less than 1% and not expected to be material, but outcomes remain uncertain.
- A European Commission competition investigation concerning certain ethylene purchases is ongoing; the company cannot determine its outcome or any potential fine. The filing also describes $1.3 billion of unconditional purchase obligations extending through 2036 and states that debt covenants were met at quarter-end.
Important facts for investors to verify
- Whether lower demand, pricing and volumes—especially in the Acetyl Chain—persist, and whether cost reductions and pricing can protect margins.
- Whether the Q1 working-capital-driven cash flow improvement is sustainable, alongside the planned $350–$400 of 2019 capital expenditures and continued shareholder distributions.
- Debt maturities and refinancing needs, particularly the $337 of senior notes due in 2019 and the receivables securitization facility that expires in July 2019.
- Developments in the European Commission investigation, environmental remediation matters and tax-credit valuation allowances.
- How much future performance depends on acquisition integration and on the non-recurring commercial-dispute gain reported in Q1.