Celanese Corporation — Q3 2017 Form 10-Q
Business context and reporting period. Celanese is a global technology and specialty materials company. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods. Amounts are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,566 million | $1,323 million | $4,547 million | $4,078 million |
| Gross profit | $385 million | $355 million | $1,104 million | $1,083 million |
| Operating profit | $252 million | $246 million | $684 million | $776 million |
| Net earnings attributable to Celanese | $226 million | $262 million | $640 million | $740 million |
| Diluted EPS, net earnings | $1.65 | $1.81 | $4.60 | $5.05 |
| Operating margin | 16.1% | 18.6% | 15.0% | 19.0% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $745 million | $940 million |
For the first nine months, capital expenditures were $180 million, acquisitions used $269 million net of cash acquired, and cash used in financing was $496 million. Cash and cash equivalents declined to $461 million from $638 million at year-end 2016. Total debt was $3.389 billion, compared with $3.008 billion at year-end 2016; debt included $435 million of short-term borrowings and current maturities and $2.954 billion of long-term debt. The company reported $780 million available under its revolving credit facility and $7 million under its receivables securitization facility. It was in compliance with debt covenants.
Changes and operating performance
- Q3 sales rose 18.4%, while operating profit increased 2.4%; lower net earnings reflected, among other factors, a higher effective tax rate and other income/expense. Nine-month sales rose 11.5%, but operating profit fell 11.9% and Celanese-attributable earnings declined $100 million.
- Advanced Engineered Materials sales grew 48.8% in Q3 and 43.1% year to date, largely reflecting SO.F.TER. and Nilit acquisitions and base-business growth. Higher plant costs, depreciation and raw-material costs constrained margins.
- Consumer Specialties sales fell 16.9% in Q3 and 15.1% year to date, driven by lower acetate tow pricing and volume amid lower global industry utilization.
- Industrial Specialties sales increased 7.8% in Q3 and 1.4% year to date, but operating profit declined in both periods as higher spending and raw-material costs offset sales growth.
- Acetyl Intermediates sales rose 16.1% in Q3 and 5.9% year to date, primarily from higher pricing. Nine-month operating profit was lower, with higher feedstock costs, turnaround expenses and a $50 million Nanjing closure charge among the factors.
Outlook, commentary and notable items
- Management expects 2017 capital expenditures of $250–$300 million, primarily for growth opportunities in Advanced Engineered Materials and Acetyl Intermediates. It stated that available resources should meet liquidity needs, including debt service, for the next 12 months; this is not earnings guidance.
- Celanese recorded approximately $50 million of estimated Nanjing, China plant/office closure costs after terminating a key raw-material supply contract. The amount included a $24 million contract termination charge and an $18 million reduction to a non-income tax receivable. The shutdown also contributed to lower ethanol volume.
- Hurricane Harvey temporarily halted production at three Texas sites. The company reported approximately $11 million of Q3 operating-profit impact from lost sales opportunities and fixed overhead, cleanup and restart costs; sites were operational by the filing date, with no significant asset damage reported.
- The planned cellulose derivatives joint venture with Blackstone remained subject to customary conditions, including regulatory approvals and internal reorganization. The venture had commitments for $2.4 billion of financing; approximately $2.2 billion of proceeds were expected to fund, in part, repayment of existing debt and a $1.6 billion dividend to Celanese. Celanese expected about $40 million of pre-closing carve-out costs and would guarantee specified portions of the venture’s financing.
- The company repurchased $500 million of shares during the first nine months and approved an additional $1.5 billion repurchase authorization in July. The quarterly common dividend increased to $0.46 per share effective May 2017.
- Risks and contingencies include volatile raw-material and energy costs, cyclicality and pricing pressure, foreign exchange and interest-rate exposure, environmental obligations, and legal and regulatory matters. A European Commission competition investigation concerning certain raw-material purchases was at an early stage; the company could not determine its outcome or potential fines. U.S. tax audits included proposed $192 million pre-tax adjustments relating to intercompany charges; the company disputed them and said a wholly unsuccessful defense could consume up to $67 million of foreign tax credit carryforwards. Environmental remediation reserves were $71 million; the company said its estimated share of the Lower Passaic River cleanup was less than 1% and not expected to be material.
Important facts for investors to verify
- Whether acquired-business growth and new project launches translate into sustained operating profit and margins, particularly as acquisition-related plant and depreciation costs continue.
- Progress and closing conditions for the Blackstone joint venture, including the proposed dividend, Celanese guarantees, and expected carve-out costs.
- Cash conversion and working-capital trends: operating cash flow fell to $745 million from $940 million, partly due to lower earnings and acquisition-related receivables.
- Exposure to acetate tow market weakness, feedstock cost changes, and the Nanjing shutdown and closure costs.
- Developments in the European Commission investigation, U.S. tax audits and environmental matters, including any changes to accrued reserves or potential exposure.