Celanese Corporation — Q2 2022 Form 10-Q
Business and period: Celanese is a global chemical and specialty materials company. This unaudited report covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2.486 billion | $2.198 billion | $5.024 billion | $3.996 billion |
| Gross profit | $705 million | $761 million | $1.450 billion | $1.246 billion |
| Operating profit | $483 million | $567 million | $1.014 billion | $893 million |
| Net earnings attributable to Celanese | $434 million | $538 million | $936 million | $860 million |
| Diluted earnings per share | $3.98 | $4.77 | $8.57 | $7.58 |
| Operating margin | 19.4% | 25.8% | 20.2% | 22.3% |
Q2 sales rose 13%, but operating profit fell 15% and operating margin contracted 6.4 percentage points. For the first half, sales rose 26% and operating profit 14%, while margin declined 2.1 percentage points. Management attributed profit pressure principally to higher raw-material, energy, logistics and operating costs. Price increases supported sales, but did not fully offset cost inflation in Q2.
Cash flow and investment: First-half operating cash flow was $811 million, versus $543 million a year earlier. Capital expenditures were $261 million, compared with $202 million; investing cash flow was an outflow of $285 million, versus an inflow of $275 million in 2021, which included $500 million of marketable-securities proceeds. Financing cash flow was an outflow of $254 million. Cash increased by $247 million to $783 million.
Debt and liquidity: Total debt was $3.831 billion at June 30, 2022, versus $3.967 billion at year-end 2021. Cash was $783 million; current borrowings and current debt installments totaled $809 million. The $1.75 billion revolving facility had $245 million drawn and $1.505 billion available. The company stated it was compliant with debt covenants and believed available liquidity sufficient for foreseeable needs.
Segments: Q2 Engineered Materials sales rose 39% to $948 million and operating profit increased to $166 million from $123 million; higher price and Santoprene-related volume were offset by substantial cost increases. Acetyl Chain sales rose 3% to $1.456 billion, while operating profit fell 17% to $429 million amid higher input, energy and operating costs and weaker Asian demand. Acetate Tow sales fell 14% to $119 million, and the segment recorded a $1 million operating loss versus $24 million profit, reflecting lower volume and higher energy costs.
Material developments and outlook
- Celanese agreed to acquire most of DuPont’s Mobility & Materials business for $11.0 billion, subject to adjustments and closing conditions. At quarter-end, management expected closing around year-end 2022, subject to regulatory approvals and customary conditions.
- After quarter-end, Celanese issued $7.5 billion of U.S.-dollar notes and €1.5 billion of euro notes. The offerings reduced remaining bridge-facility commitments to $552 million. Proceeds, other debt financing and cash were intended to fund the acquisition.
- The acquisition would increase leverage and interest expense. Management said it was committed to rapid deleveraging and maintaining investment-grade ratings, paused share repurchases, reduced expected 2022 capital expenditures by approximately $50 million, and was evaluating additional cash-generation opportunities. Expected 2022 capital expenditures were approximately $550 million.
- Management reported persistent inflation and supply disruptions in raw materials, energy, logistics and labor; it expected these pressures to remain significant through 2022. Acetyls pricing was expected to moderate toward more normalized levels as the year progressed.
- COVID-19 effects, including Chinese lockdowns, and the Russia-Ukraine conflict contributed to demand, supply-chain, transportation and cost uncertainty. Russia, Belarus and sanctioned Ukrainian regions represented less than 1% of 2021 consolidated sales; Celanese had suspended sales into those areas.
Risks, contingencies and unusual items
- If the M&M transaction is not completed by the applicable outside date (August 17, 2023, unless extended) or is terminated, the acquisition notes are subject to a special mandatory redemption at 101% of principal plus accrued interest. The filing cautions that funds may not be sufficient to redeem all notes.
- The company reported $3.5 billion of unconditional purchase obligations extending through 2042. Environmental remediation liabilities totaled $62 million. Management said environmental costs may materially affect results or cash flows in a given period, though it did not expect a material financial-position impact.
- A methanol pipeline leak near the Bishop, Texas facility was contained and repaired. The company recorded a reserve for anticipated cleanup costs and possible penalties; it reported no notice of violation or fines to date and did not expect a material impact.
- Tax audits include U.S., Netherlands and Germany examinations for 2013–2015, with proposed transfer-pricing adjustments potentially extending to open years through 2019. The company said it had made an adequate provision but noted that an adverse outcome could materially affect results or cash flows in the period recorded.
- Q2 included a $12 million net gain on disposition of businesses and assets; first-half results included a $9 million gain. First-half operating cash flow benefited from the nonrecurrence of a $100 million European Commission settlement payment made in 2021.
Important facts for investors to verify
- Progress toward regulatory approval and closing of the $11.0 billion M&M acquisition, its final funding mix, and the resulting leverage and interest burden.
- Whether pricing can keep pace with raw-material, energy, labor and logistics costs, especially as acetyls pricing moderates.
- Operating cash generation, working-capital requirements, capital spending and progress toward management’s deleveraging objectives.
- Any change in the risk of special mandatory redemption of the acquisition notes if the transaction is delayed or not completed.
- Developments in the tax examinations, environmental matters and methanol leak remediation, and any resulting changes to reserves or financial exposure.