Celanese Corporation — Q1 2013 Form 10-Q
Unaudited results for the three months ended March 31, 2013, compared with Q1 2012 unless otherwise noted. Celanese is a global technology and specialty materials company. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,605 | $1,633 |
| Gross profit | $333 | $274 |
| Operating profit | $184 | $111 |
| Operating margin | 11.5% | 6.8% |
| Continuing-operations earnings | $141 | $193 |
| Net earnings attributable to Celanese | $142 | $193 |
| Diluted EPS | $0.89 | $1.21 |
| Operating cash flow | $147 | $215 |
| Capital expenditures, including Kelsterbach relocation | $77 | $127 |
Gross margin was approximately 20.7%, versus 16.8% in Q1 2012. Operating profit improved despite sales declining $28 million. Management attributed the improvement mainly to lower raw-material costs, lower plant expenses, productivity and efficiency initiatives, and reduced SG&A.
Segments and period-over-period changes
- Advanced Engineered Materials: Sales rose to $329 million from $317 million; operating profit increased to $36 million from $24 million. Higher pricing and lower input costs helped, while volumes were flat.
- Consumer Specialties: Sales rose to $295 million from $264 million; operating profit increased to $78 million from $40 million. Higher pricing and volumes, lower plant costs, and the absence of a prior-year Narrows outage contributed. A $24 million dividend from cost investments also benefited pretax results; payment timing differed from 2012.
- Industrial Specialties: Sales declined to $288 million from $309 million and operating profit fell to $15 million from $20 million, reflecting lower volume and pricing amid weak demand and a prolonged European winter.
- Acetyl Intermediates: Sales declined to $808 million from $852 million, while operating profit increased to $75 million from $62 million. Lower volumes and slightly lower pricing were more than offset by lower raw-material and fixed costs.
Net earnings fell from $193 million despite stronger operating profit. The prior-year comparison included a substantial tax benefit: the 2012 effective tax rate was negative 61%, versus 35% in 2013. The 2012 tax result included recognition of $142 million of foreign tax credit carryforwards, partly offset by a deferred tax charge related to foreign earnings. The company also reported $24 million of dividend income from cost investments in Q1 2013, primarily reflecting dividend timing.
Cash, debt and liquidity
- Cash and cash equivalents were $978 million at March 31, 2013, up from $959 million at year-end; $652 million was held by foreign subsidiaries, which the company intended to reinvest outside the United States.
- Total debt was $3.071 billion, compared with $3.098 billion at December 31, 2012. Cash less total debt was approximately $2.093 billion. Long-term debt was $2.959 billion; short-term borrowings and current debt installments were $112 million.
- Cash from operations was $147 million, down $68 million year over year, which management attributed chiefly to the absence of a prior-year affiliate dividend and changes in trade working capital. Receivables and inventories increased; pension contributions were $47 million lower year over year.
- Cash used in investing was $87 million; cash used in financing was $35 million. Cash increased by $19 million during the quarter.
- Available borrowing capacity was $600 million under the revolving facility and $50 million under the credit-linked facility. The company reported compliance with debt covenants.
Outlook, risks and unusual items
- Management expected 2013 capital expenditures of $375 million to $400 million. Planned investment included replacing Narrows, Virginia coal-fired boilers with natural-gas boilers at an estimated cost exceeding $150 million, and development of a 1.3-million-ton-per-year methanol plant in Clear Lake, Texas; the company was evaluating alternatives to share that project’s offtake and reduce its capital burden.
- The company expected its TCX ethanol unit in Nanjing to start up in mid-2013, and its Clear Lake methanol plant in mid-2015. These are expectations, not guarantees.
- Management said available resources were expected to meet liquidity requirements, including debt service, for the next 12 months, while cautioning that operating cash flows could be insufficient and might require borrowing, delayed or reduced capital spending, or refinancing.
- Unconditional purchase obligations were $3.3 billion through 2034. Management did not expect material losses under take-or-pay arrangements.
- Environmental remediation reserves were $94 million. The company could not reliably estimate its ultimate share of Lower Passaic River cleanup costs; it currently estimated its share at less than approximately 1%–2%. It also disclosed an EPA Clean Air Act notice concerning its Meredosia site and said it could not rule out a penalty below $100,000.
- Other legal matters included a Singapore supplier arbitration seeking $38 million plus unspecified damages; the company said it believed the claims lacked merit and did not consider the possible loss material. It could not estimate possible loss for certain German squeeze-out claims.
- Effective January 1, 2013, the company changed its pension and postretirement accounting policy to recognize actuarial gains and losses and asset-value changes in the fourth quarter or upon plan remeasurement. Prior periods were retrospectively adjusted. The company said the change did not affect plan funding or participant benefits.
- Q1 included $4 million of other charges: $2 million for employee termination benefits and $2 million related to the Kelsterbach plant relocation. The $24 million cost-investment dividend was timing-sensitive. The filing states that proceeds deferred from the Kelsterbach settlement will be recognized when title transfers, subject to specified asset reductions.
Important facts for investors to verify
- Whether Q1 operating-profit gains from lower raw-material costs and cost reductions can persist amid weaker demand and lower sales in Industrial Specialties and Acetyl Intermediates.
- The sustainability and timing of affiliate dividends, including the $24 million Q1 dividend from cost investments, and the effect of the higher 2013 tax rate versus the unusually favorable 2012 comparison.
- Cash conversion and working-capital trends, including growth in receivables and inventories, and the availability and location of cash held by foreign subsidiaries.
- Execution, timing, and funding of major capital projects, planned 2013 capital spending, and the company’s ability to meet its stated liquidity outlook.
- Potential exposure from environmental and legal matters, purchase commitments, and the deferred Kelsterbach proceeds; several ultimate liabilities remain uncertain or not estimable.