Celanese Corporation — Q1 2011 Form 10-Q Summary
Business context and reporting period
Celanese is a global technology and specialty materials company that processes chemical and natural raw materials into chemicals, polymers and related products. This unaudited filing covers the three months ended March 31, 2011, compared with Q1 2010; 2010 figures are adjusted for retrospective accounting and segment presentation changes. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1,589 | $1,388 |
| Gross profit / margin | $351 / 22.1% | $218 / 15.7% |
| Operating profit (loss) / margin | $188 / 11.8% | $(14) / (1.0)% |
| Continuing operations earnings | $138 | $13 |
| Net earnings attributable to Celanese | $142 | $14 |
| Diluted EPS | $0.90 | $0.07 |
| Operating cash flow | $132 | $55 |
| Capital expenditures on PP&E | $77 | $44 |
- Sales increased 14%, driven by 11% higher pricing and 4% higher volume, partly offset by a 1% unfavorable currency effect. Price increases reflected higher raw-material and freight costs.
- SG&A was $128, or 8.1% of sales, down from 8.9% of sales a year earlier. Interest expense increased to $55 from $49. The effective tax rate was 23%, versus (286)% in Q1 2010, which was affected by Mexican tax items and other factors.
- At March 31, cash and cash equivalents were $722, current assets $2,851 and current liabilities $1,610. Total debt was $3,222, comprising $219 current and $3,003 long-term debt; cash less total debt was approximately $2,500. Shareholders’ equity was $1,136.
- Cash declined $18 from year-end. Investing activities used $151, including $77 of PP&E capital expenditures and $54 for the Kelsterbach relocation; financing activities used $11. Cash flow less reported PP&E capital expenditures was $55, before other investing uses.
- Available borrowing capacity was $600 under the revolving facility and $148 under the credit-linked revolving facility. The company reported compliance with debt covenants; its estimated first-lien secured leverage ratio was 1.71x versus a 3.90x maximum.
Material changes versus the prior comparable period
- Operating profit improved by $202, from a $14 loss to $188 profit. Higher selling prices more than offset higher raw-material, energy and freight costs; the comparison also benefited from the prior-year $72 Spondon impairment and other 2010 charges.
- Acetyl Intermediates sales rose $89 and operating profit rose $112, with pricing, lower plant costs after the Pardies closure, and favorable other charges contributing. Consumer Specialties returned to profit ($54 versus a $30 loss), largely reflecting the absence of the 2010 Spondon impairment and improved sales. Industrial Specialties operating profit increased to $25 from $12. Advanced Engineered Materials profit declined to $38 from $48 as higher input costs, innovation investment and other charges outweighed improved pricing and volume.
- Operating cash flow increased $77, supported by higher earnings and a $6 tax refund, compared with $11 of net cash taxes paid in Q1 2010. Working capital absorbed cash, including increases in receivables and inventories.
- Comparison caveat: Q1 2010 results were retrospectively adjusted for equity-method accounting and reassignment of the Ibn Sina affiliate. The 2010 quarter also included $22 of accelerated amortization related to a supplier purchase agreement and asset write-offs.
Outlook, management commentary, risks and contingencies
- No specific full-year earnings guidance was provided. Management said it expected resources to meet 2011 liquidity needs, including debt service, while cautioning that cash flow could fall below current levels.
- Management expected approximately $350 of 2011 capital expenditures, excluding the Kelsterbach relocation and European capacity expansion. For Kelsterbach, operations were scheduled to cease by July 31, 2011; a final €110 million Fraport installment was expected in June, and 2011 relocation capital outflows were expected to be €185 million. The expanded project scope was expected to cost more than total Fraport proceeds.
- The company announced plans to expand higher-vinyl-acetate EVA capacity at Edmonton by up to 15% in the second half of 2011. Letters of intent for two industrial ethanol facilities in China contemplated initial investment of approximately $300 per plant and nameplate capacity of 400,000 tons annually per plant, subject to approvals. The company’s expected share of the Ibn Sina POM project investment was approximately $165, expected to be funded primarily from venture operations.
- Q1 unusual items included a $20 net gain from commercial dispute resolutions, including a $16 settlement with a bankrupt supplier and an additional $3 recovery from an unrelated dispute. Kelsterbach relocation expenses were $13. The company recorded $2 of Spondon employee termination costs and $4 of accelerated depreciation. Management estimated total Spondon exit and shutdown expenses of approximately $35–$45 and said it was considering options regarding the announced closure.
- Environmental remediation reserves were $104. The company identified potential exposure at approximately 38 U.S. Superfund sites and warned that environmental costs could materially affect results or cash flows in an individual period. New EPA boiler and process-heater rules could require significant capital expenditures over the next three to four years.
- Other exposures include pending litigation and indemnities, uncertain tax audits, and $1.9 billion of future take-or-pay commitments plus $598 of other purchase commitments. Management did not expect material losses under take-or-pay contracts. Raw-material availability and pricing, ability to pass costs through, business cycles, competition, foreign exchange, interest rates, construction execution and indebtedness were identified risks.
- Subsequent to quarter-end, the board approved a 20% dividend increase to $0.06 per share quarterly, effective for dividends beginning in August 2011, and increased the share-repurchase authorization by $129 to $200 remaining authorization.
Important facts for investors to verify
- Whether pricing continues to offset raw-material, energy and freight inflation, and whether the Q1 margin improvement is sustainable.
- Cash conversion and working-capital trends, particularly receivables and inventory growth, alongside planned capital spending and relocation costs.
- Execution, timing and funding of the Kelsterbach relocation, EVA expansion, proposed China ethanol projects and Ibn Sina POM facility.
- Progress and final costs of the Spondon closure, and the company’s stated reconsideration of options for that facility.
- Debt covenant headroom, actual availability of revolving facilities, and the impact of dividends and repurchases on liquidity.
- Developments in environmental regulation, tax audits, litigation and indemnification matters that could change estimated liabilities or cash requirements.