Celanese Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise. Celanese is a global technology and specialty materials company. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $1,633 | $1,589; up $44 (about 3%) |
| Gross profit / gross margin | $270 / 16.5% | $351 / 22.1% |
| Operating profit / operating margin | $98 / 6.0% | $188 / 11.8% |
| Continuing-operations earnings | $183; diluted EPS $1.15 | $138; diluted EPS $0.87 |
| Net earnings | $183; diluted EPS $1.15 | $142; diluted EPS $0.90 |
| Operating cash flow | $215 | $132 |
| Cash and cash equivalents, March 31 | $727 | $682 at December 31, 2011 |
| Total debt | $3,030 | $3,017 at December 31, 2011 |
- Net cash used in investing activities was $155 million, including $106 million of property and equipment capital expenditures, $21 million for the Kelsterbach relocation, and $23 million for acquisitions. Financing activities used $21 million. Cash increased $45 million during the quarter.
- Cash less total debt was approximately $2.30 billion at quarter-end. Celanese reported $600 million available under its revolving facility and $154 million available under its credit-linked facility; it was in compliance with debt covenants.
- Stockholders’ equity was $1.54 billion, up from $1.34 billion at year-end 2011. Trade working capital was $923 million, compared with $910 million at year-end.
Performance changes
- Sales rose on higher volumes, principally in Acetyl Intermediates and Industrial Specialties, and modest consolidated pricing gains. Unfavorable currency effects reduced sales by about 1%.
- Operating profit fell 48%. Higher raw-material costs—especially ethylene—higher depreciation and spending on expansions and restructuring outweighed volume and pricing benefits. Management expected raw-material costs in 2012 to be $100 million above 2011.
- Operating profit declined in every major segment: Advanced Engineered Materials $21 million versus $38 million; Consumer Specialties $39 million versus $54 million; Industrial Specialties $19 million versus $25 million; and Acetyl Intermediates $60 million versus $112 million.
- Acetyl Intermediates sales increased with higher volumes, but lower prices and raw-material costs pressured profit. The company idled its 600,000-ton Singapore acetic acid plant, citing unsatisfactory industry margins.
- Consumer Specialties volumes were affected by a temporary production interruption at its Narrows, Virginia facility; the company reported $10 million of related maintenance and reliability spending. Industrial Specialties sales benefited partly from the Ashland Vinac and Flexbond product-line acquisition.
Outlook, management commentary, and risks
- There is no specific consolidated earnings guidance in the provided filing text. Management said it expected 2012 cash capital expenditures of $350–$400 million, excluding Kelsterbach relocation and European capacity expansion expenditures.
- Celanese received approvals to modify its Nanjing facility for industrial ethanol production. The company expected startup in mid-2013 and stated planned capacity would be 30%–40% above the previously announced 200,000 tons, without increased capital investment. A Clear Lake, Texas technology development unit was expected to be operational by mid-2012.
- Management said it expected sufficient resources to meet 2012 liquidity needs, including debt service, while noting that weaker operating cash flow could require additional borrowing, deferred capital spending, or refinancing. Approximately $591 million of quarter-end cash was held by foreign subsidiaries; taxable repatriation could be required if used for U.S. operations.
- Net earnings included a $142 million tax benefit from amending prior-year returns to recognize foreign tax credit carryforwards, partly offset by $47 million of deferred tax charges associated with foreign earnings and the Polyplastics investment. The effective tax rate was negative 71%, versus 23% in Q1 2011; the reported earnings increase therefore does not reflect the decline in operating profit.
- The company disclosed $3.8 billion of unconditional purchase obligations, including take-or-pay arrangements, and preliminarily estimated U.S. Boiler MACT compliance costs above $100 million over four years, depending on final requirements. It did not expect material take-or-pay losses.
- Southern Chemical seeks $1.3 billion in damages in a methanol-supply contract dispute; Celanese disputes the claims and said it could not estimate possible loss beyond immaterial amounts accrued. For the Lower Passaic River matter, the company said it could not reliably estimate its eventual share of cleanup costs, although it currently believed its contribution would be less than approximately 1%–2% of total costs.
- Other risks cited include economic and industry cycles, raw-material and energy prices, ability to pass costs through, plant utilization and interruptions, currency and interest-rate changes, environmental obligations, litigation, and indebtedness. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
- Subsequent to quarter-end, the board approved an increase in the quarterly dividend from $0.06 to $0.075 per share, effective for dividends payable beginning in August 2012.
Most important facts for investors to verify
- Whether operating margins recover from the sharp year-over-year contraction, particularly in Acetyl Intermediates, and the effect of raw-material costs and the Singapore plant idling.
- How much of Q1 net earnings depended on the $142 million tax benefit, and the expected timing and use of remaining foreign tax credit carryforwards.
- Delivery against the $350–$400 million capital-spending outlook, ethanol project schedule and capacity, and other expansion commitments.
- Cash availability and potential tax consequences of foreign cash, debt maturities and covenant headroom, and the sustainability of the higher dividend.
- Developments in the Southern Chemical litigation, environmental exposures, and final Boiler MACT requirements and costs.