Celanese Corporation — 2016 Form 10-K
Business context and reporting period. Celanese is a global specialty materials and chemicals producer, with businesses in engineered polymers, consumer specialties, industrial polymers and acetyl intermediates. This annual report covers the fiscal year ended December 31, 2016; it also reports quarterly results, including the fourth quarter. Amounts below are in U.S. dollars unless otherwise noted.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $5.389 billion | $5.674 billion |
| Gross profit / margin | $1.405 billion / 26.1% | $1.318 billion / 23.2% |
| Operating profit / margin | $893 million / 16.6% | $326 million / 5.7% |
| Net earnings attributable to Celanese | $900 million | $304 million |
| Diluted earnings per share | $6.18 | $2.00 |
| Cash from operations | $893 million | $862 million |
| Capital expenditures | $246 million cash outflow | $232 million cash outflow |
| Cash and cash equivalents at year-end | $638 million | $967 million |
| Total debt at year-end | $3.008 billion | $2.981 billion |
Operating margin improved substantially, while revenue declined 5%. Cash from operations less cash capital expenditures was approximately $647 million, a derived measure, not a company-reported free-cash-flow figure. Year-end current assets were $2.472 billion and current liabilities $1.077 billion. Cash less total debt was approximately negative $2.370 billion.
Fourth quarter
For the three months ended December 31, 2016, net sales were $1.311 billion, operating profit $117 million, net earnings attributable to Celanese $160 million, and diluted EPS $1.12. The comparable 2015 quarter recorded sales of $1.334 billion, an operating loss of $305 million and a net loss of $298 million. The 2015 quarter included major charges for a Singapore supplier-contract termination and impairment of ethanol-related assets; 2016 Q4 operating profit also included $103 million of net actuarial losses related to benefit obligations.
Business segment results
| Segment | 2016 sales | 2016 operating profit | Change versus 2015 |
|---|---|---|---|
| Advanced Engineered Materials | $1.444 billion | $350 million | Sales rose 8.9%; profit rose $115 million |
| Consumer Specialties | $929 million | $302 million | Sales fell 4.1%; profit rose $40 million |
| Industrial Specialties | $979 million | $105 million | Sales fell 9.5%; profit rose $33 million |
| Acetyl Intermediates | $2.441 billion | $340 million | Sales fell 11.0%; profit rebounded from a $3 million loss |
Material changes versus prior year
- Revenue fell mainly because of lower prices, especially for acetic acid and VAM, acetate tow, and Industrial Specialties products. Higher volume in Advanced Engineered Materials and acetate tow partly offset the decline.
- Operating profit increased by $567 million. Contributing factors included lower raw-material and energy costs, reduced SG&A, productivity savings and the absence of $297 million in 2015 charges, principally the $174 million Singapore contract termination and $123 million Nanjing ethanol-asset impairment.
- Cash from operations increased $31 million, but pension and postretirement contributions rose to $350 million from $63 million, and trade working capital was a $56 million headwind. Investing cash outflow was $439 million, including $178 million for the SO.F.TER. acquisition. Financing cash outflow was $759 million, including $500 million of share repurchases and $201 million of dividends.
- The effective tax rate declined to 12% from 41%, reflecting valuation-allowance releases, improved results in China, and tax settlements and clarifications. The rate may vary with earnings mix and discrete tax items.
- Celanese acquired SO.F.TER., a thermoplastic compounder, in December 2016. The acquisition added $106 million of goodwill and $79 million of intangible assets in the preliminary purchase allocation.
Outlook, risks and contingencies
- Management expected 2017 capital expenditures of $250 million to $300 million, mainly for growth projects in Advanced Engineered Materials and Acetyl Intermediates. It stated it expected available resources to meet 2017 liquidity needs, including debt service; this is not earnings guidance.
- After year-end, Celanese agreed to acquire Nilit Group’s nylon compounding division, subject to customary conditions, with closing expected in the second or third quarter of 2017. The company did not expect the transaction to be material to 2017 results or financial position.
- In July 2016, Celanese entered a new credit agreement with a $500 million unsecured term loan and a $1.0 billion unsecured revolving facility, both maturing in 2021. The company issued €750 million of 1.125% notes due 2023. It reported compliance with debt covenants at year-end and $1.0 billion available under the revolving facility, plus $52 million under its receivables facility.
- Key exposures include raw-material and energy cost volatility, inability to pass through cost changes, cyclical demand and competition, production disruptions, foreign exchange and interest-rate movements, environmental and product-liability matters, regulatory and tax changes, and pension funding volatility. Management estimated that a one-cent change in the euro/U.S. dollar rate would affect annual earnings by about $4 million.
- Unconditional purchase obligations totaled $2.446 billion, primarily take-or-pay commitments. Environmental remediation reserves were $64 million. The company described numerous indemnities and legal matters; it could not estimate possible losses beyond recorded amounts for certain obligations. For the Lower Passaic River site, the EPA estimated remediation of about $1.4 billion; Celanese estimated its allocable share at less than 1% and believed it would not be material.
- Of year-end cash, $552 million was held by foreign subsidiaries. Celanese stated it would access those funds for U.S. needs in a tax-efficient manner. It had not accrued U.S. and foreign withholding taxes on $4.3 billion of accumulated undistributed earnings intended to be permanently reinvested or otherwise remitted substantially free of incremental U.S. federal tax.
Important facts for investors to verify
- How much of the 2016 profit improvement reflects sustainable operating performance versus the prior-year unusual charges, lower input costs and the unusually low tax rate.
- Whether pricing and volumes stabilize in Acetyl Intermediates, Industrial Specialties and Consumer Specialties, and whether engineered-materials growth continues.
- Cash conversion and liquidity after the $350 million of benefit-plan contributions, share repurchases, dividends and planned 2017 capital spending.
- Debt maturities, euro-denominated exposure, covenant headroom and availability of cash held outside the United States.
- Final SO.F.TER. purchase accounting, integration outcomes and the closing, funding and performance of the proposed Nilit acquisition.
- Developments in pension obligations, environmental remediation and other contingencies, including matters for which the company cannot currently estimate possible losses.