Celanese Corporation — Q2 2018 Form 10-Q
Business context and reporting period. Celanese is a global technology and specialty materials company producing engineered polymers, acetyl products and other chemicals. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are to 2017, with certain prior-period figures adjusted for accounting presentation. Effective January 1, 2018, the company reorganized reportable segments, moving food ingredients into Engineered Materials and renaming the former Consumer Specialties segment Acetate Tow.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1.844 billion | $1.510 billion | $3.695 billion | $2.981 billion |
| Gross profit | $521 million | $365 million | $1.036 billion | $715 million |
| Operating profit | $358 million | $218 million | $701 million | $388 million |
| Operating margin | 19.4% | 14.4% | 19.0% | 13.0% |
| Net earnings attributable to Celanese | $344 million | $231 million | $707 million | $414 million |
| Diluted earnings per share | $2.52 | $1.66 | $5.18 | $2.96 |
Margins and drivers. Gross margin was approximately 28.3% in Q2 2018 versus 24.2% in Q2 2017, and 28.0% for the first half versus 24.0%. Sales increased 22% for the quarter and 24% for the first half. Management attributed growth primarily to higher pricing, increased volume in Engineered Materials and Acetyl Intermediates, and favorable currency effects. Higher raw-material costs and increased operating, functional and incentive-compensation spending partly offset the improvement.
Segment highlights. Q2 sales and operating profit were $664 million and $114 million in Engineered Materials, $162 million and $39 million in Acetate Tow, $288 million and $22 million in Industrial Specialties, and $861 million and $251 million in Acetyl Intermediates. Acetyl Intermediates benefited from stronger pricing and demand; Acetate Tow results were pressured by lower pricing and industry utilization. Industrial Specialties profit declined despite higher sales, primarily due to higher raw-material costs.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $728 million, up from $490 million. The increase reflected higher earnings, partly offset by $67 million of unfavorable trade working capital, mainly from increased receivables.
- First-half investing cash outflow was $331 million, including $165 million in capital expenditures and $144 million for the Omni Plastics acquisition. Financing cash outflow was $256 million, including $100 million of share repurchases and $136 million of dividends.
- Cash and cash equivalents were $708 million at June 30, 2018, up from $576 million at year-end; $572 million was held by foreign subsidiaries. Total debt was $3.594 billion, compared with $3.641 billion at year-end. The company reported $875 million available under its revolving credit facility and $14 million under its receivables securitization facility.
- Current assets were $3.153 billion and current liabilities $1.610 billion. The company stated it expected to have resources to meet liquidity needs, including debt service, over the next 12 months, while noting that insufficient operating cash flow could require borrowing, reduced or delayed capital spending, or refinancing.
Changes, outlook, risks and unusual items
- Operating profit rose 64% in Q2 and 81% in the first half. First-half comparison benefited by $50 million because 2017 included Nanjing ethanol-unit closure charges that did not recur; higher costs and spending partly offset the increase.
- The company acquired Omni Plastics on February 1, 2018, for net assets acquired of $146 million; its contribution to reported earnings was not material. The proposed cellulose derivatives joint venture with Blackstone affiliates was abandoned in March after the parties could not agree with the European Commission on acceptable conditions.
- Celanese began closing its acetate tow manufacturing unit in Ocotlán, Mexico; the acetate flake unit will remain open. It recorded $5 million of related charges in Q2 and expects approximately $16 million of additional exit and shutdown costs through the remainder of 2018, primarily accelerated depreciation.
- Management forecast 2018 capital expenditures of $325 million to $350 million, principally for growth investments in Engineered Materials and Acetyl Intermediates. The filing provides no earnings or revenue guidance.
- The Q2 effective tax rate was 22%, versus 14% a year earlier; the first-half rate was 19%, versus 18%. Q2 included a $56 million increase in provisional valuation allowances for foreign tax credit carryforwards under the Tax Cuts and Jobs Act. Management said estimates remain subject to refinement.
- Key exposures include raw-material and energy prices, customers’ acceptance of price increases, demand and industry cycles, currency and interest-rate changes, operational disruptions, environmental obligations, indebtedness and litigation. An EU competition investigation concerns certain ethylene purchases; its outcome and any potential fines could not be determined. The company is defending US tax audit proposed adjustments of $192 million for 2009–2010 and $198 million for 2011–2012, which it believes are without merit.
- Environmental remediation reserves totaled $71 million. The company reported a new Passaic River-related lawsuit, but said it did not change its estimated liability and that its expected allocable share of Lower Passaic River cleanup costs was less than 1% and not expected to be material. Unconditional purchase obligations were $1.6 billion through 2036.
Most important facts for investors to verify
- Whether strong Acetyl Intermediates pricing and demand, and Engineered Materials project growth, are sustainable as raw-material costs and spending rise.
- The size, timing and cash impact of expected Ocotlán closure costs, and the operational effect of consolidating acetate manufacturing.
- Future realization of foreign tax credits and any further changes to the provisional Tax Act accounting or tax-audit exposure.
- Liquidity, debt maturities and covenant headroom, including the role of receivables financing and the $40 million of receivables factored at quarter-end.
- Developments in the EU competition investigation, environmental proceedings and other contingencies; outcomes and potential losses are uncertain.