Celanese Corporation — Q3 2019 Form 10-Q
Business context and period. Celanese is a global chemicals and specialty materials company, with Engineered Materials, Acetate Tow and Acetyl Chain segments. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1.586bn | $1.771bn | $4.865bn | $5.466bn |
| Gross profit | $414m | $516m | $1.290bn | $1.552bn |
| Operating profit | $260m | $374m | $766m | $1.075bn |
| Operating margin | 16.4% | 21.1% | 15.7% | 19.7% |
| Net earnings attributable to Celanese | $263m | $401m | $809m | $1.108bn |
| Diluted EPS | $2.13 | $2.96 | $6.43 | $8.12 |
Cash flow and liquidity. Nine-month operating cash flow was $1.128bn, versus $1.195bn; capital expenditures were $226m, producing approximate operating cash flow less capital expenditures of $902m versus $951m. Cash was $497m at September 30, 2019, including $46m restricted at a consolidated variable-interest entity. Total debt was $3.727bn ($368m current and $3.359bn long-term), compared with $3.531bn at year-end 2018. Cash less total debt implies net debt of approximately $3.230bn, up from $3.092bn. The company reported $1.091bn available on its revolving credit facility and $5m on its receivables facility; it was in compliance with debt covenants.
Other metrics. Nine-month dividends were $225m and share repurchases were $763m. A quarterly dividend of $0.62 per share was declared after quarter-end. The company’s stated 2019 capital expenditure outlook was $375m–$400m.
Material changes and management commentary
- Q3 sales fell 10% year over year; nine-month sales fell 11%. Management attributed the declines mainly to lower Acetyl Chain pricing, weaker demand and customer destocking in Engineered Materials, and unfavorable foreign exchange. Lower raw-material costs partly offset pressure on operating profit.
- Acetyl Chain sales declined 14% in Q3 and 16% year to date, with pricing the main driver. Engineered Materials sales fell 8% in Q3 and 6% year to date, reflecting weaker volumes and currency effects. Acetate Tow sales were flat in both comparison periods.
- Nine-month operating profit included an $83m impairment tied to the planned closure of acetate flake operations in Ocotlán, Mexico. The company expects about $12m of additional closure and shutdown costs through Q1 2020. Nine-month results also included $20m of employee termination benefits.
- A September 21 fire at the Clear Lake, Texas facility damaged a carbon monoxide production unit. Approximately $6m of depreciation and cleanup costs were recorded in Q3; management estimated a further $35m–$45m impact to Q4 operating profit, excluding lost sales opportunities.
- The company issued $500m of 3.5% senior notes due 2024, used in part to redeem 3.25% notes due 2019 and repay revolving-credit borrowings. Its $1.25bn unsecured revolving facility matures in 2024.
Risks, contingencies and unusual items
- Management identifies economic and industry cycles, customer demand, raw-material and energy prices, pricing power, plant utilization, currency and interest-rate movements, trade and regulatory changes, environmental obligations, litigation and indebtedness as risks to results.
- The company reported $63m in environmental remediation liabilities. For the Lower Passaic River Superfund matter, it estimated its allocable share at less than 1% and said it did not expect the share to be material; ultimate site costs and liability remain uncertain.
- A European Commission investigation into certain ethylene purchases is ongoing. The company could not determine its outcome or whether a fine would be assessed.
- Unconditional purchase obligations totaled $1.2bn, extending through 2036. The filing also describes indemnities and other legal contingencies whose ultimate exposure may be uncertain.
- Foreign tax-credit valuation allowances and related tax estimates affected the effective tax rate; the company is defending proposed $198m pre-tax adjustments for its 2011–2012 U.S. tax audit, which it believes are without merit.
Most important facts for investors to verify
- Whether weaker demand, pricing and customer destocking persist, particularly in Acetyl Chain and Engineered Materials.
- The realized Q4 impact of the Clear Lake fire, including repair timing, lost sales and any further costs.
- Actual Ocotlán closure costs versus the remaining estimate and the effect on Acetate Tow operations.
- Cash generation, debt and liquidity trends, including the substantial share repurchases and the availability and terms of borrowing facilities.
- Developments in the European Commission investigation, environmental matters and tax audits, including any change in expected exposure.