Celanese Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Celanese is a global technology and specialty materials company. Unless noted, financial figures are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1.477B | $1.769B | $2.927B | $3.474B |
| Gross profit | $375M | $408M | $756M | $786M |
| Operating profit | $188M | $259M | $445M | $502M |
| Operating margin | 12.7% | 14.6% | 15.2% | 14.5% |
| Net earnings attributable to Celanese | $205M | $259M | $441M | $455M |
| Diluted EPS | $1.33 | $1.66 | $2.86 | $2.91 |
| Operating cash flow | Not presented by quarter | $553M | $417M |
- Q2 sales fell 16.5% year over year; operating profit declined 27.4%. For the first half, sales fell 15.7% and operating profit fell 11.4%.
- Q2 gross margin was approximately 25.4%, versus 23.1% a year earlier. The filing reports operating margins directly.
- First-half capital expenditures were $327M, including $210M for Fairway Methanol. Operating cash flow less these expenditures was approximately $226M.
- At June 30, cash was $988M, total debt was $2.675B, and cash less total debt was approximately negative $1.687B. Cash increased $208M from year-end; $870M was held by foreign subsidiaries.
- Current assets were $2.923B and current liabilities were $1.268B. The $900M revolving facility was undrawn and available; $16M was available under the receivables securitization facility.
Drivers and segment changes
- Lower sales reflected unfavorable currency effects, lower prices, and weaker volumes. The strong U.S. dollar affected all segments. Acetyl Intermediates faced normalized VAM pricing after prior-year industry outages, as well as lower volumes; Consumer Specialties was affected by acetate-tow customer destocking and lower industry utilization.
- Acetyl Intermediates operating profit fell to $54M in Q2 from $142M, including $39M of accelerated depreciation for equipment no longer in use at the Clear Lake ethanol technology development unit. Lower raw-material costs partly offset weaker sales.
- Consumer Specialties Q2 operating profit was $77M, down from $80M; first-half profit was $139M, down from $179M. Advanced Engineered Materials and Industrial Specialties increased first-half operating profit to $126M and $57M, respectively, despite lower sales, helped by lower input costs.
- Equity earnings from affiliates declined $61M in Q2 and $53M in the first half. The comparisons include a $48M prior-year gain from restructuring debt at an InfraServ subsidiary that did not recur; lower MTBE and methanol pricing also reduced affiliate earnings.
Outlook, risks, and unusual items
- Management forecast 2015 cash capital expenditures of $350M–$400M, primarily reflecting Fairway and growth investments. The 1.3-million-ton-per-year Fairway methanol unit was expected to start operations in Q4 2015; total shared project investment was estimated at $875M–$900M, with Celanese’s portion at $350M–$375M excluding previously invested infrastructure.
- Management expected the centralized European operating company to produce operational savings and potentially improve margins, while changing earnings mix and creating both favorable and unfavorable tax effects. No general earnings or EPS guidance was provided in the supplied filing text.
- Celanese recorded $10M of employee termination benefits in Q2 and $14M in the first half. The $39M accelerated depreciation charge was included in R&D expense. The Q2 effective tax rate was 11% versus 27%, primarily reflecting a $30M reduction of prior-year tax positions following audit closures and technical clarifications; the first-half rates were 18% and 28%.
- The company was consulting on a potential 50% capacity reduction at its Lanaken, Belgium acetate-tow plant; consultation was expected to continue into Q3. No significant related termination or impairment charges had been incurred by June 30.
- Environmental remediation reserves totaled $79M. For the Lower Passaic River, the EPA’s preferred plan was estimated at $1.7B; Celanese said its estimated allocable share was substantially below 1% and not material, while the final remedy remained uncertain. Other legal and indemnification exposures may exceed accrued amounts and are not always estimable.
- Unconditional purchase obligations were $2.9B through 2036. The company said it was in compliance with debt covenants and believed resources were sufficient for liquidity needs over the next 12 months, while noting cash-flow, refinancing, commodity-price, currency, demand, operational, environmental, and litigation risks.
Important facts for investors to verify
- Whether sales and margins stabilize, especially in Acetyl Intermediates and Consumer Specialties, and how much lower input costs continue to offset pricing and volume pressure.
- Fairway’s commissioning schedule, remaining capital needs, and expected operating contribution; compare spending with management’s $350M–$400M full-year capital expenditure outlook.
- Cash availability and location, particularly the $870M held by foreign subsidiaries, alongside debt maturities, facility availability, and covenant compliance.
- Progress and potential costs from the Lanaken consultation, ethanol-unit asset actions, and environmental and other contingencies, including the Passaic River remedy.
- Durability of the lower tax rate and expected savings from the European operating-company model; the filing cautions that tax outcomes vary by jurisdiction.