Celanese Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with the three months ended March 31, 2013. Amounts are in U.S. dollars unless otherwise noted.
Business context
Celanese is a global technology and specialty materials company. Its four reporting segments are Advanced Engineered Materials, Consumer Specialties, Industrial Specialties, and Acetyl Intermediates. The company produces engineered polymers and acetyl products for a broad range of industrial and consumer applications.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $1.705 billion | $1.605 billion; up 6% |
| Gross profit | $378 million | $333 million |
| Operating profit | $243 million | $184 million; up 32% |
| Operating margin | 14.3% | 11.5% |
| Net earnings attributable to Celanese | $196 million | $142 million |
| Diluted earnings per share | $1.25 | $0.89 |
| Operating cash flow | $164 million | $147 million |
| Cash and cash equivalents at quarter-end | $998 million | $984 million at December 31, 2013 |
| Total debt at quarter-end | $3.038 billion | $3.064 billion at December 31, 2013 |
Capital spending was $78 million for property, plant and equipment and $70 million for the Fairway Methanol project. Cash used in investing activities was $151 million. Cash flow from operations benefited from stronger earnings and higher affiliate dividends, partly offset by increased benefit-plan contributions, including lump-sum retiree payments.
Current assets were $3.246 billion and current liabilities were $1.510 billion. The company reported $600 million available under its revolving credit facility and $17 million available under its receivables securitization facility. Of quarter-end cash, $716 million was held by foreign subsidiaries; repatriation to the U.S. could entail taxes. Debt covenants were reported in compliance.
Material changes and segment performance
- Sales increased across all four segments. Management attributed the overall increase to higher engineered-materials and industrial-specialties volumes, and higher VAM and acetic-acid pricing.
- Advanced Engineered Materials sales rose 13% to $373 million; operating profit increased to $57 million from $36 million, primarily on higher volumes.
- Consumer Specialties sales rose 2% to $302 million; operating profit increased to $99 million from $78 million, supported by acetate tow pricing and productivity-related cost reductions.
- Industrial Specialties sales rose 8% to $312 million; operating profit increased to $20 million from $15 million, mainly on higher emulsion-polymer volumes.
- Acetyl Intermediates sales rose 4% to $841 million; operating profit increased to $97 million from $75 million. Higher VAM and acetic-acid prices and lower plant costs more than offset lower volumes and higher raw-material and energy costs.
- Equity earnings from affiliates declined to $40 million from $54 million. Interest expense decreased to $39 million from $43 million. The effective tax rate was 29%, versus 35%.
Outlook, management commentary, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected 2014 capital expenditures of $450 million to $500 million, primarily for the Clear Lake methanol unit and boiler replacement at Narrows, Virginia.
- Celanese and Mitsui formed Fairway Methanol LLC, a 50%-owned venture that Celanese consolidates as a variable-interest entity. The planned 1.3-million-ton annual-capacity facility is expected to begin operating in the second half of 2015. Total shared investment is estimated at $800 million, with Celanese’s share estimated at $300 million, in addition to previously invested site assets.
- Celanese began construction at Clear Lake after receiving its final greenhouse-gas permit and announced it was exploring a possible 1.3-million-ton methanol unit at Bishop, Texas; the filing does not provide a committed construction schedule for Bishop.
- Q1 operating profit included $20 million of amortization of a prior-service credit related to changes to the U.S. postretirement health-care plan. Celanese made $30 million in lump-sum buyout payments during the quarter. The plan is scheduled to terminate at year-end 2014.
- Celanese closed its Roussillon, France acetic-anhydride facility and Tarragona, Spain VAM facility in December 2013. Q1 other charges, net, were $1 million, compared with $4 million in the prior-year quarter.
- Environmental remediation reserves were $95 million. For the Lower Passaic River, the EPA’s proposed cleanup alternatives were estimated at $365 million to $3.2 billion; the remedy and Celanese’s potential share were not determined, and the company said it could not reliably estimate its exposure.
- In a supplier arbitration, Linde Gas sought $68 million in damages and injunctive relief. Celanese said the matter could affect results or cash flows in a given period, while stating it did not expect a significant adverse effect on financial position.
- Unconditional purchase obligations totaled $3.6 billion through 2036. Management stated it did not expect material losses under take-or-pay arrangements. The filing cites raw-material and energy prices, demand cycles, plant utilization, regulation, litigation, currency and interest rates, and indebtedness among risks that could affect results.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- How much of the operating-profit increase is sustainable after excluding the $20 million postretirement credit and other favorable pricing or cost factors.
- Whether segment pricing, volumes, and raw-material and energy costs continue to develop as management described, particularly in Acetyl Intermediates.
- Fairway’s construction costs, Celanese’s remaining funding requirements, and the project’s expected second-half 2015 start-up.
- The use and tax implications of foreign-held cash, and liquidity available under the revolving and receivables facilities.
- Developments in the Passaic River cleanup process, the Linde arbitration, and other environmental and legal contingencies.
- Actual 2014 capital expenditures compared with the $450 million to $500 million estimate and progress on the Narrows boiler project.