Celanese Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. Celanese is a global integrated chemicals and advanced materials producer. Figures below are in millions of U.S. dollars except per-share data, percentages, and where otherwise stated.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 / comparison |
|---|---|---|
| Net sales | $1,388 | $1,146; up 21% |
| Gross profit / margin | $218 / 15.7% | $200 / 17.4% |
| Operating profit (loss) / margin | $(14) / (1.0)% | $27 / 2.4% |
| Continuing operations earnings (loss), attributable to Celanese | $17 | $(21) |
| Net earnings (loss), attributable to Celanese | $18; $0.10 diluted EPS | $(20); $(0.16) diluted EPS |
| Cash provided by operating activities | $55 | $199 |
| Cash and cash equivalents | $1,139 at March 31 | $1,254 at December 31, 2009 |
| Total debt | $3,491 at March 31 | $3,501 at December 31, 2009 |
| Current assets / current liabilities | $2,851 / $1,540 | $2,856 / $1,607 at December 31, 2009 |
| Capital expenditures | $44, excluding separately presented relocation spending | $56 |
Net cash used in investing activities was $132, including $85 of spending on the Ticona Kelsterbach relocation; financing activities used $15. Cash declined by $115 during the quarter, including a $23 adverse exchange-rate effect. The company reported $138 available under its credit-linked revolving facility and $600 available under its revolving credit facility, with no revolving-facility borrowings or letters of credit outstanding. It estimated first-lien leverage at 3.02x (3.66x if the revolving facility were fully drawn), against a 4.75x limit for the quarter, and reported compliance with debt covenants.
Material changes and segment performance
- Sales growth reflected higher volumes across most businesses as the global economy recovered, favorable currency effects, and higher prices in Acetyl Intermediates. Consumer Specialties sales fell 11% on lower volumes. Management said higher raw-material and energy costs were only partly offset by pricing; gross margin declined.
- Advanced Engineered Materials sales rose to $282 from $165 and operating profit improved to $46 from a $19 loss, largely on volume recovery and affiliate earnings.
- Consumer Specialties sales declined to $238 from $266; the segment reported a $30 operating loss versus $66 operating profit, including a $72 impairment related to the proposed Spondon, U.K. facility closure.
- Industrial Specialties sales were $242, unchanged, and operating profit was $12 versus $10. The prior-year comparison is affected by the 2009 sale of the PVOH business.
- Acetyl Intermediates sales increased to $724 from $572, while operating profit fell to $2 from $12. Increased volumes and prices were offset by higher variable costs, shutdown-related costs, asset write-offs, depreciation and amortization, and a $20 accelerated write-off of a raw-material contract prepayment.
Outlook, management commentary, risks, and unusual items
- Management said it expected sufficient resources to meet liquidity requirements, including debt service, for the remainder of 2010, while cautioning that cash generation and borrowing access are not assured. Expected 2010 capital expenditures were approximately $265, excluding the Kelsterbach relocation; relocation cash outflows were expected to be €238.
- The company recorded $77 of net other charges, including the $72 Spondon impairment and $7 of Pardies, France closure exit costs, partly offset by plumbing-case recoveries. The Pardies shutdown also involved $2 of environmental reserves, $4 of inventory write-offs, and $3 of other shutdown costs; up to a further $14 of contingent employee termination benefits may be incurred.
- A supplier’s bankruptcy and amendment of a raw-material purchase agreement triggered $22 of accelerated amortization in cost of sales. The company also reported $17 of write-offs of other productive assets at Singapore and Nanjing facilities.
- The effective tax rate was 667%, reflecting a $20 tax benefit despite a $3 pretax loss; the rate was affected by Mexican tax-law developments and other jurisdictional tax items. The filing states the Mexican tax reform liability estimate was $35 at quarter-end.
- After quarter-end, Celanese announced a planned $150 investment over three years in an Ibn Sina joint-venture POM expansion; its economic interest is expected to rise from 25% to 32.5% after successful startup. It also announced a 25% increase in the quarterly common dividend, to $0.05 per share beginning with dividends payable in August 2010.
- Key risks include economic and industry cycles, raw-material and energy prices, ability to pass costs through, plant utilization and execution, competition, foreign-exchange and interest-rate movements, environmental obligations, and litigation. Environmental remediation reserves totaled $106. The company disclosed approximately $1.7 billion of future take-or-pay purchase commitments and $684 of other commitments.
Important facts for investors to verify
- Whether demand and pricing recovery can offset rising raw-material and energy costs, especially in Acetyl Intermediates and Consumer Specialties.
- The valuation assumptions and execution implications behind the $72 Spondon impairment and proposed facility closure.
- Cash conversion and working-capital needs: operating cash flow was $55, down from $199, while receivables and inventory increased.
- Debt covenant headroom and liquidity availability as leverage limits tighten after 2010.
- Potential cash requirements and outcomes associated with environmental, plumbing, antitrust, indemnification, and other legal contingencies.
- Whether projected capital spending, the Kelsterbach relocation, and the Ibn Sina investment can be funded while sustaining the increased dividend.