Celanese Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Celanese is a global technology and specialty materials company. Financial statements are unaudited and prepared under U.S. GAAP; results for the interim period are not necessarily indicative of full-year results. Amounts below are in millions of dollars except per-share data and percentages.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,609 | $1,807 | $4,917 | $5,149 |
| Gross profit | $324 | $401 | $925 | $1,162 |
| Operating profit | $163 | $196 | $425 | $593 |
| Operating margin | 10.1% | 10.8% | 8.6% | 11.5% |
| Net earnings | $117 | $167 | $510 | $512 |
| Diluted EPS | $0.73 | $1.05 | $3.20 | $3.22 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $661 | $481 |
- Q3 gross margin was about 20.1%, down from 22.2%; nine-month gross margin was about 18.8%, down from 22.6%.
- At September 30, cash was $928; total debt was $2,980, down from $3,017 at year-end 2011. Cash less total debt was approximately $2,052.
- Current assets were $2,968 and current liabilities $1,395 (current ratio approximately 2.1). Equity was $1,915, versus $1,341 at December 31, 2011.
- Nine-month investing cash outflow was $397, including $270 of capital expenditures and $43 related to the Kelsterbach relocation. Financing cash outflow was $21. Cash increased $246 during the nine months.
Material changes versus comparable periods
- Q3 sales fell $198 (11%) and operating profit fell $33 (17%). Nine-month sales declined $232 (5%) and operating profit fell $168 (28%).
- Acetyl Intermediates drove much of the deterioration: Q3 operating profit was $62 versus $128; nine-month profit was $199 versus $392. Lower acetyl pricing, weaker demand and unfavorable currency effects were principal factors. Prior-year pricing benefited from industry production outages that did not recur.
- For the nine months, Consumer Specialties operating profit rose to $184 from $168; Advanced Engineered Materials rose to $85 from $79. Industrial Specialties declined to $76 from $83.
- Nine-month earnings were broadly flat despite lower operating profit, helped by a $142 tax benefit recognized in Q1 for foreign tax credit carryforwards. A $38 deferred tax charge related to Polyplastics partly offset that benefit. The nine-month effective tax rate was 6%, versus 23% in 2011; Q3 rates were 31% and 17%, respectively.
Outlook, commentary, risks and unusual items
- Management said it believed available resources would cover liquidity needs, including debt service, for the next 12 months. It cited $600 of available revolving credit and $158 available under the credit-linked facility; the company reported compliance with debt covenants.
- Management highlighted economic weakness in Europe and Asia, softer acetyl demand, raw-material price volatility, currency movements and the ability to pass costs through as key factors affecting results. It temporarily idled its 600,000-ton-per-year Singapore acetic acid plant beginning in Q1 2012 and said operations would be assessed against demand and feedstock costs.
- 2012 capital expenditure cash outflows were expected to be $325–$350, excluding approximately €43 related to the Kelsterbach relocation and European capacity expansion. Planned projects include a 1.3-million-ton-per-year Clear Lake methanol plant, expected to start up in July 2015, and a Nanjing ethanol unit expected to start up in mid-2013. These are plans, not earnings guidance.
- Celanese estimated U.S. Boiler MACT compliance costs at approximately $150 over four years, subject to final rule timing and requirements. Unconditional purchase obligations were $3.5 billion, extending through 2034.
- Environmental remediation reserves were $102. For the Lower Passaic River matter, the company said it could not reliably estimate its ultimate share; it currently believed its contribution would be below approximately 1%–2% of costs. Certain other legal and indemnification exposures were not estimable; outcomes may exceed recorded accruals.
- Southern Chemical’s $1.3 billion claim ended in an August jury verdict of no liability and no damages; the court entered final judgment on October 10, 2012. Southern could seek a new trial or appeal. Linde Gas arbitration over a carbon monoxide supply contract was ongoing, and Celanese could not estimate possible loss.
- Other notable actions: the quarterly dividend increased to $0.075 per share; the board approved a further $400 share-repurchase authorization on October 18, after $136 remained under the prior authorization at quarter-end. The Spondon acetate facility closure was expected during Q4 2012. The Kelsterbach relocation generated $907 of deferred proceeds through September 30, which are not recognized as income until title transfers.
Important facts for investors to verify
- Whether acetyl pricing, demand and plant utilization recover, and whether the Singapore facility returns to sustained operation.
- How much of reported nine-month earnings and the low effective tax rate depends on the $142 foreign tax credit benefit, and whether the credits are ultimately utilized as expected.
- Execution, timing and funding of announced methanol, ethanol and capacity projects, alongside the projected capital spending and Boiler MACT costs.
- Developments in environmental, legal and indemnification matters, including the Passaic River, Linde arbitration and any Southern Chemical appeal.
- Cash accessibility: $677 of $928 cash was held by foreign subsidiaries, and repatriation for U.S. use could incur taxes. Also monitor debt, credit availability, pension funding and dividend/repurchase commitments.