Celanese Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Celanese is a global technology and specialty materials company with four reportable segments: Engineered Materials, Acetate Tow, Industrial Specialties and Acetyl Intermediates. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,771 | $1,566 | $5,466 | $4,547 |
| Gross profit | $516 | $383 | $1,552 | $1,098 |
| Operating profit | $374 | $229 | $1,075 | $617 |
| Operating margin | 21.1% | 14.6% | 19.7% | 13.6% |
| Net earnings attributable to Celanese | $401 | $226 | $1,108 | $640 |
| Diluted EPS | $2.96 | $1.65 | $8.12 | $4.60 |
| Effective tax rate | 12% | 20% | 16% | 19% |
- For Q3, sales rose 13% and operating profit rose 63% year over year. For the first nine months, sales increased 20% and operating profit increased 74%. Management cited higher pricing across most segments; nine-month growth also reflected Engineered Materials volume, acquisitions and favorable foreign exchange.
- Raw-material costs increased across most segments and partly offset revenue gains. The lower tax rates primarily reflected U.S. tax reform and releases of valuation allowances in China and Singapore, partly offset by valuation allowances related to U.S. foreign tax credits.
- Nine-month operating cash flow was $1,195, versus $745 in 2017. Higher earnings were partly offset by $117 of unfavorable trade working capital, principally inventory growth.
- Cash and cash equivalents were $703 at September 30, up from $576 at year-end 2017; $591 was held by foreign subsidiaries. Total debt was $3,425, down from $3,641 at year-end. Current assets were $3,180 and current liabilities $1,532. The company reported $1,000 available under its revolving credit facility and $5 available under its receivables securitization facility.
- Nine-month capital expenditures were $244, compared with $180 in 2017. The company used $250 for share repurchases and paid $209 in common dividends during the period.
Material changes and segment trends
- Acetyl Intermediates: Q3 sales increased 22% to $835 and operating profit increased to $268 from $128, primarily on higher pricing associated with industry utilization. Nine-month sales rose 32% and operating profit rose to $750 from $264. Q3 volume was affected by a Nanjing turnaround.
- Engineered Materials: Q3 sales increased 12% to $642 and operating profit increased 18% to $124. Nine-month sales rose 21% to $1,971; operating profit increased 16% to $365. Growth reflected project launches, acquisitions and pricing, partly offset by higher raw-material, distribution and acquisition-related costs.
- Acetate Tow: Q3 sales were essentially flat at $158, while operating profit declined to $26 from $45. Nine-month sales fell 5% and operating profit fell 25%, reflecting lower industry utilization, lower pricing and higher depreciation and costs.
- Industrial Specialties: Q3 sales increased 3% to $273 and operating profit was $19, unchanged year over year. Nine-month operating profit declined to $64 from $70 as higher raw-material costs partly offset higher sales.
- In February, Celanese acquired Omni Plastics for net assets acquired of $146; its operations are included in Engineered Materials. In June, the company began closing its acetate tow unit in Ocotlán, Mexico, while keeping the acetate flake unit operating. It recorded $15 of related charges through September and expected about $5 of additional exit and shutdown costs in the remainder of 2018.
- Prior-year comparisons reflect the retrospective adoption of pension-cost presentation guidance, which moved non-service pension components outside operating profit; the reclassification did not change prior-year net earnings.
Outlook, risks and unusual items
- The filing provides no specific earnings guidance. Management expected 2018 capital expenditures of $325–$350, principally for growth projects in Engineered Materials and Acetyl Intermediates, and stated it expected liquidity to meet requirements, including debt service, over the next 12 months.
- A $13 non-income-tax receivable refund from Nanjing increased other gains in 2018. The comparison also benefited from the absence of $50 in 2017 Nanjing closure-related charges. These items contributed to the year-over-year improvement in operating profit.
- Unconditional purchase obligations totaled $1.5 billion through 2036. Environmental remediation reserves were $76. The company said environmental costs may materially affect results or cash flows in a given period, although it did not expect a material adverse effect on financial position.
- The company is cooperating with a European Commission competition investigation concerning certain ethylene purchases; it could not estimate the outcome or any potential fine. It is also defending U.S. tax audit proposed adjustments of $192 for 2009–2010 and $198 for 2011–2012; management said it believes the adjustments are without merit and does not currently anticipate a material impact from the 2009–2010 appeals.
- Celanese estimated its allocable share of Lower Passaic River cleanup costs at less than 1% and said it did not expect the amount to be material. The ultimate liability remains uncertain.
- On October 10, 2018, the company agreed to acquire India-based Next Polymers, expecting to close in Q1 2019, subject to customary conditions. The company did not expect the acquisition to be material to 2019 results or financial position.
Important facts for investors to verify
- How much of the earnings improvement reflects durable pricing, volume and operating performance versus the Nanjing refund and the prior-year charge comparison.
- Whether higher raw-material, freight, distribution and acquisition-related costs pressure margins, particularly in Engineered Materials and Industrial Specialties.
- Acetate Tow closure execution, expected remaining costs and the segment’s performance amid low industry utilization.
- Cash conversion and working-capital trends, including inventory growth, alongside planned capital expenditures and shareholder returns.
- Developments in the European Commission investigation, U.S. tax audits and environmental matters, including any changes to recorded reserves or estimates.
- Acquisition integration and funding plans for Next Polymers, and availability under the receivables securitization facility, which had only $5 available at quarter-end.