Celanese Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited, U.S. GAAP. Celanese is a global technology and specialty materials company. Unless noted, financial amounts are in millions of dollars.
Financial performance and position
- Second-quarter revenue: $1,769, up 7% from $1,653. Gross profit was $408 versus $319; gross margin was approximately 23.1%, compared with 19.3%. Operating profit rose 53% to $259 from $169; reported operating margin increased to 14.6% from 10.2%.
- Second-quarter earnings: Earnings attributable to Celanese were $259, or $1.66 per diluted share, versus $133, or $0.83, a year earlier. Continuing-operations earnings were also $259. Equity earnings from affiliates were $101, up from $55.
- First-half results: Revenue was $3,474, up 7%; operating profit was $502, up 42%; and earnings attributable to Celanese were $455, up from $275. Diluted EPS was $2.91 versus $1.72. Operating margin was 14.5% versus 10.8%.
- Cash flow: First-half operating cash flow was $417, versus $376. Investing used $283, including $143 for Fairway Methanol; financing used $50. Cash increased $80 to $1,064. The company reported $810 of cash held by foreign subsidiaries and $44 of cash restricted to Fairway.
- Debt and liquidity: Total debt was $3,038, down from $3,064 at year-end 2013; cash less total debt was approximately $1,974. Current assets were $3,339 and current liabilities $1,543. The company reported $600 available under its revolving facility and $21 under its receivables securitization facility, and said it was compliant with debt covenants.
- Capital returns and investment: First-half share repurchases were $103 and dividends were $67. The quarterly dividend was increased to $0.25 per share, or $1.00 annualized. First-half capital expenditures were $273, comprising $130 of property and equipment expenditures and $143 for Fairway.
Material changes and operating drivers
- Acetyl Intermediates was the largest earnings driver: Q2 sales rose 11% to $901 and operating profit rose to $142 from $55, mainly on higher VAM and acetic acid prices. Capacity reductions and industry outages supported pricing; lower volumes and higher raw-material costs partly offset gains.
- Advanced Engineered Materials sales increased 11% to $389, with operating profit rising to $56 from $39, primarily on higher volumes. Industrial Specialties sales rose 13% to $333 and operating profit increased to $24 from $18. Consumer Specialties sales fell 8% to $289 amid lower acetate-tow volumes; operating profit declined to $80 from $83.
- Results included a $48 affiliate-earnings gain from restructuring debt at an InfraServ subsidiary. A $21 postretirement-plan prior-service-credit benefit also helped Q2 operating profit; the comparable first-half benefit was $41. These items contributed to year-over-year earnings growth.
- The effective tax rate fell to 27% for Q2 and 28% for the first half, from 36% in each 2013 comparison, mainly because of fewer valuation allowances and lower losses in jurisdictions without tax benefits.
Outlook, risks and contingencies
- Management expected 2014 cash capital expenditures of $450–$500, primarily for Fairway and replacement of coal-fired boilers at the Narrows facility. Fairway’s planned 1.3-million-ton annual-capacity methanol unit was expected to start up in the second half of 2015; the company estimated its investment at about $300, within an estimated $800 total shared project investment.
- The filing does not provide a specific earnings or revenue forecast. Management said it expected to have resources to meet liquidity needs, including debt service, for the next 12 months, while cautioning that cash flows could fall below current levels.
- Key risks cited include economic and industry cycles, raw-material and energy prices, the ability to pass cost increases through to customers, plant utilization and execution of expansions, competition, currency and interest-rate changes, indebtedness, environmental obligations, litigation, and operational disruptions.
- Environmental remediation reserves were $92 at June 30. For the Lower Passaic River, the EPA’s proposed cleanup alternatives ranged from $365 to $3.2 billion, with a preferred alternative estimated at $1.7 billion; Celanese said its share could not then be reliably estimated and that it found no evidence it contributed primary contaminants.
- In a supplier arbitration, Linde Gas was seeking $68 in damages; a decision was expected in 2014. Celanese said a loss would not significantly affect financial position, but could significantly affect results or cash flows in a period. Unconditional purchase obligations totaled $3.4 billion through 2036.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change to the risk factors in the 2013 Form 10-K.
Most important facts for investors to verify
- How much of the profit increase persists after the $48 affiliate gain and postretirement-credit benefit, and whether pricing gains in Acetyl Intermediates continue.
- Fairway’s construction progress, remaining funding needs, and the expected timing and economics of the 2015 start-up.
- Cash availability and potential tax costs associated with foreign-held cash, alongside refinancing and covenant terms for debt.
- Developments in the Lower Passaic River cleanup process and the Linde arbitration, including any change in estimable exposure.
- Whether working-capital needs, pension contributions, and planned capital spending affect cash generation and capital returns.