Celanese Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
Celanese is a global technology and specialty materials company, principally producing engineered polymers and acetyl products. Its three reportable segments are Engineered Materials, Acetate Tow and Acetyl Chain. The company reorganized its segment reporting during 2018, so prior-period segment comparisons reflect adjusted presentation.
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $7.155 billion | $6.140 billion |
| Gross profit / gross margin | $1.972 billion / 27.6% | $1.511 billion / 24.6% |
| Operating profit / operating margin | $1.334 billion / 18.6% | $857 million / 14.0% |
| Continuing-operations earnings attributable to Celanese | $1.212 billion | $856 million |
| Net earnings attributable to Celanese | $1.207 billion | $843 million |
| Diluted EPS from continuing operations | $8.95 | $6.19 |
| Cash provided by operating activities | $1.558 billion | $803 million |
| Capital expenditures (cash-flow statement) | $337 million | $267 million |
FY 2018 net sales rose 16.5%, reflecting higher Acetyl Chain and Engineered Materials pricing, Engineered Materials volume growth and acquisitions. Operating profit increased 55.7%. Segment sales were $2.593 billion for Engineered Materials, $649 million for Acetate Tow and $4.042 billion for Acetyl Chain. Acetyl Chain operating profit more than doubled to $1.024 billion, while Engineered Materials operating profit rose to $460 million. Acetate Tow operating profit fell 31% to $130 million as pricing weakened.
Fourth-quarter results
Q4 2018 net sales were $1.689 billion, versus $1.593 billion in Q4 2017. Gross profit was $420 million and operating profit was $259 million, compared with $413 million and $240 million, respectively, in Q4 2017. Continuing-operations earnings attributable to Celanese were $96 million, down from $204 million; diluted continuing-operations EPS was $0.73 versus $1.50. Sales and operating profit declined from Q3 2018 levels of $1.771 billion and $374 million, respectively.
Liquidity, debt and capital allocation
At year-end, cash and cash equivalents were $439 million, total debt was $3.531 billion, and stockholders’ equity attributable to Celanese was $2.984 billion. Current assets were $2.874 billion and current liabilities were $1.779 billion. The company reported $960 million available under its revolving credit facility and $14 million available under its receivables securitization facility, and said it expected to meet liquidity needs, including debt service, for the next 12 months. Debt covenants were reported in compliance.
Operating cash flow increased by $755 million year over year, mainly due to higher earnings and $316 million lower pension and postretirement contributions, partly offset by working-capital timing. Cash used in investing activities was $507 million; cash used in financing activities was $1.165 billion. Celanese repurchased $817 million of shares and paid $280 million in common-stock dividends during the year. The quarterly dividend was increased from $0.46 to $0.54 per share in 2018. The 2019 capital-expenditure outlook was $350 million to $400 million.
Material changes, outlook and notable items
- Acetyl Chain sales increased 19.9%, with higher industry utilization supporting pricing; management also cited higher raw-material and distribution costs.
- Engineered Materials sales increased 17.2%, supported by project launches, pipeline growth, acquisitions and pricing. Segment operating margin declined to 17.7% from 18.6%, with higher acquired-business spending, distribution costs, raw-material costs and depreciation contributing.
- Acetate Tow sales decreased 2.8% and operating margin declined to 20.0% from 28.3%, primarily due to lower industry utilization and pricing. Celanese closed its acetate-tow manufacturing unit in Ocotlán, Mexico; the acetate-flake unit remained operational.
- The company recorded a $119 million increase in recognized pension actuarial losses, primarily reflecting lower asset returns. Non-operating pension and postretirement expense was $62 million, compared with $44 million of income in 2017.
- The FY 2018 effective tax rate was 19%, versus 20% in 2017. Celanese completed its accounting for the U.S. Tax Cuts and Jobs Act; the filing describes adjustments to prior provisional tax estimates.
- Celanese acquired Omni Plastics in February 2018 for net assets acquired of $146 million. It completed the Next Polymers acquisition in January 2019; the purchase-price allocation was incomplete when the statements were issued. A proposed Acetate Tow joint venture with Blackstone was abandoned in March 2018 after the parties could not agree with the European Commission on conditions.
- Management announced capacity projects, including Engineered Materials expansions and Acetyl Chain debottlenecking. In January 2019 it announced plans to expand Clear Lake acetic-acid capacity to approximately 2 million tons by late 2021, with offsetting productivity options elsewhere; it also signed an agreement to acquire a synthesis-gas unit at Clear Lake.
- Key risks include cyclicality and weaker end-market demand, volatile or constrained raw-material and energy supplies, inability to pass through cost increases, plant disruptions, currency and interest-rate exposure, environmental obligations, legal and regulatory proceedings, pension volatility, cyber threats and debt-service requirements. A European Commission investigation concerning certain ethylene purchases remained ongoing; the company said it could not estimate the outcome or any potential fine.
Important facts for investors to verify
- Whether unusually strong 2018 Acetyl Chain pricing and utilization can be sustained, and how lower demand or pricing would affect margins.
- The effect of acquisition integration and planned capacity projects on Engineered Materials growth, costs and returns.
- The size and timing of future pension contributions, given the funded-status deficit and sensitivity to investment returns and actuarial assumptions.
- Near-term refinancing and liquidity needs, including the 2019 maturity of $343 million of notes and the receivables facility maturity in July 2019; review the subsequent credit-agreement renewal disclosed in the filing.
- Potential outcomes of the ethylene-purchasing investigation, environmental matters and tax audits, including the filing’s stated limits on estimating exposure.
- Whether reported cash generation remains strong after capital spending, dividends and share repurchases; distinguish cash-flow capital expenditures from the filing’s accrued-capex measure.