Celanese Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; amounts in U.S. dollars unless noted. Celanese is a global chemicals and specialty materials company, with Engineered Materials, Acetate Tow and Acetyl Chain segments.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,592m | $1,844m | $3,279m | $3,695m |
| Gross profit | $423m | $521m | $876m | $1,036m |
| Operating profit | $186m | $358m | $506m | $701m |
| Net earnings attributable to Celanese | $209m | $344m | $546m | $707m |
| Diluted EPS | $1.66 | $2.52 | $4.30 | $5.18 |
| Operating margin | 11.7% | 19.4% | 15.4% | 19.0% |
Gross margin was approximately 26.6% in Q2 versus 28.3% a year earlier, and 26.7% for the six-month period versus 28.0%. The effective tax rate fell to 12% from 22% in Q2 and to 12% from 19% for the first half, primarily because of reduced valuation allowances on foreign tax credits.
First-half operating cash flow was $731m, versus $728m; capital expenditures were $144m, giving operating cash flow less capital expenditures of $587m. Investing cash outflow was $243m and financing cash outflow was $437m. Cash was $491m at June 30, 2019, up from $439m at year-end. Total debt was $3,763m, up from $3,531m; cash less total debt was approximately $3,272m net debt. Current assets were $2,876m and current liabilities $1,408m. The company reported $1,102m available on its revolving facility and $5m available on its receivables facility; it was in compliance with debt covenants.
Material changes versus prior period
- Q2 sales declined 14% and first-half sales declined 11%. Management attributed the decreases to lower Acetyl Chain prices, weaker volumes amid slower global conditions and customer destocking, and unfavorable currency effects. Lower raw-material costs partly offset pressure on operating profit.
- Acetyl Chain sales fell 18% in Q2 and 17% in the first half, driven mainly by price declines and weaker Asian demand. Engineered Materials sales decreased 11% and 5%, respectively, principally on lower volume and currency. Acetate Tow sales were broadly flat.
- Q2 operating profit decreased 48%; first-half operating profit decreased 28%. Acetate Tow recorded an $83m impairment following the announced closure of acetate flake manufacturing operations in Ocotlán, Mexico.
- First-half equity earnings from affiliates fell $25m, including lower earnings from Polyplastics amid softer Chinese markets and from Ibn Sina due to turnaround activity.
- Share repurchases totaled 4.89m shares for approximately $500m in the first half. The quarterly dividend was increased to $0.62 per share, declared in July.
Outlook, management commentary and risks
- The filing provides no specific earnings or revenue guidance. Management expected 2019 capital expenditures of $350m–$400m, mainly for growth investments in Engineered Materials and Acetyl Chain.
- Celanese expected approximately $20m of additional Ocotlán exit and shutdown costs, primarily employee termination benefits and accelerated depreciation, through Q1 2020.
- Management stated that available resources were expected to meet liquidity needs, including debt service, over the next 12 months, while cautioning that future operating cash flow is not assured. It cited slower global economic conditions, reduced customer demand, raw-material prices, currency and industry cycles among key risks.
- In May, Celanese issued $500m of 3.5% senior notes due 2024, using proceeds in part to redeem its 3.25% notes due 2019 and repay revolving borrowings. The new $1.25bn revolving credit facility matures in 2024. The receivables securitization facility was extended after quarter-end to July 2020.
- Unconditional purchase obligations were $1.2bn through 2036. The European Commission’s investigation concerning certain ethylene purchases remained ongoing; the company could not estimate the outcome or potential fines. A proposed $198m pre-tax adjustment in the 2011–2012 U.S. tax audit remained contested; the company said it believed the adjustments lacked merit.
- Environmental remediation liabilities were $65m. For the Lower Passaic River Superfund matter, the company estimated its allocable share at less than 1% and said it did not expect a material effect. The filing also describes indemnities and other legal proceedings whose ultimate outcomes may be uncertain.
Important facts for investors to verify
- Whether weaker global demand and Acetyl Chain pricing continue, and whether lower input costs sufficiently offset revenue pressure.
- The timing, total cost and operational effects of the Ocotlán closure, including the expected additional $20m of costs.
- Cash generation, debt levels, refinancing needs, and the company’s use of cash for repurchases, dividends and capital investment.
- Developments in the EU investigation, tax audit and environmental or other legal contingencies.
- Actual 2019 capital expenditures compared with the $350m–$400m outlook and any subsequent change in management expectations.