Celanese Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Celanese is a global technology and specialty materials company, with businesses including acetyl products, engineered polymers, cellulose derivatives and emulsion polymers. Financial amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1.769bn | $1.636bn | $5.243bn | $4.894bn |
| Gross profit | $436m | $346m | $1.222bn | $998m |
| Operating profit | $310m | $211m | $812m | $564m |
| Operating margin | 17.5% | 12.9% | 15.5% | 11.5% |
| Continuing-operations earnings attributable to Celanese | $258m | $171m | $713m | $445m |
| Net earnings attributable to Celanese | $253m | $172m | $708m | $447m |
| Diluted EPS, continuing operations | $1.66 | $1.07 | $4.56 | $2.79 |
Q3 sales rose 8% and nine-month sales rose 7%. Acetyl Intermediates was the principal operating-profit growth driver: segment operating profit was $174m in Q3 versus $67m and $413m for nine months versus $197m. Q3 sales were also higher in Advanced Engineered Materials and Industrial Specialties, while Consumer Specialties sales declined.
Nine-month net cash provided by operating activities was $796m, up from $608m. Investing activities used $477m versus $290m, including $275m of Fairway Methanol spending. Financing activities provided $237m, compared with $183m used in the prior-year period.
At September 30, cash and equivalents were $1.510bn, versus $984m at year-end 2013. Total debt was $3.404bn, versus $3.064bn; this included $765m of short-term borrowings and current debt installments and $2.639bn of long-term debt. Current assets were $3.687bn and current liabilities $2.189bn. The company reported $900m available on its revolving facility and $21m available under its receivables securitization facility. Cash held by foreign subsidiaries was $679m; management said it intended to permanently reinvest these funds outside the U.S., subject to stated exceptions.
Material changes and notable items
- Higher VAM and acetic acid prices, linked to European capacity reductions and industry outages, drove much of the sales and profit improvement. The company cited $32m of higher raw-material costs in Q3 and $75m for nine months in Acetyl Intermediates, partly offset by pricing and operational improvements.
- Results included postretirement health-plan prior-service-credit amortization benefits of $21m in Q3 and $62m for nine months. These credits followed changes to the U.S. postretirement health plan.
- Other gains included $21m in commercial-dispute recoveries in Q3 and nine months: $15m from an arbitration award involving a former utility operator and $6m from settlement with a bankrupt supplier. Nine-month equity earnings also benefited from a $48m gain related to restructuring debt at an InfraServ subsidiary.
- Celanese issued €300m of 3.250% senior notes due 2019 and amended its credit facilities, extending most term loans and the $900m revolver to October 2018. On October 15, 2014, after quarter-end, it redeemed $600m of 6.625% notes at a premium, paying $620m plus accrued interest of $20m. The filing classified those notes as current debt at September 30.
- Celanese repurchased $201m of shares and paid $106m in dividends during the first nine months. The annualized dividend rate increased to $1.00 per share beginning May 2014.
Outlook, risks and contingencies
The filing provides no specific earnings or sales guidance. Management said it expected sufficient resources to meet liquidity requirements, including debt service, for the next twelve months, while noting that operating cash flows could be lower than current levels. It estimated 2014 capital expenditures of $400m–$450m, primarily for the Clear Lake methanol project and replacement of coal-fired boilers at Narrows. The Fairway Methanol facility, a consolidated 50%-owned venture, was expected to begin operating in the second half of 2015; the company estimated its share of the investment at $300m, in addition to previously invested assets.
- Risks identified include economic and industry cycles, raw-material and energy prices, ability to pass costs through, plant utilization and execution of capacity projects, competition, currency and interest-rate movements, environmental requirements, litigation, and indebtedness.
- Environmental remediation reserves were $91m. The company said environmental costs were not expected to materially affect its financial position, but could materially affect results or cash flows in a period. Its share of potential Lower Passaic River cleanup costs could not be reliably estimated; the EPA’s proposed alternatives ranged from $365m to $3.2bn for the overall remediation.
- In the Linde Gas arbitration, the claimant was seeking $68m plus legal fees. The company said any possible loss, including amounts above reserves, was not expected to significantly affect financial position but could significantly affect results or cash flows in a period.
- Unconditional purchase obligations totaled $3.4bn through 2036. The company also disclosed indemnities and guarantees for which some possible losses could not be estimated. It reported compliance with debt covenants at September 30 and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable pricing, volumes and operating performance versus the $21m Q3 and $62m nine-month pension-credit benefit and other unusual gains.
- Whether VAM and acetic acid pricing and industry conditions persist, and how raw-material cost changes affect margins across segments.
- Progress, spending and timing for the Fairway Methanol and Narrows boiler projects, relative to the stated capital-expenditure range and expected operating dates.
- The effect of the October 2014 note redemption on cash, debt, interest expense and refinancing costs; confirm subsequent-period balances and terms.
- Developments in the Linde arbitration, Passaic River matter, other environmental exposures and tax audits, including any changes to reserves or reasonably possible losses.
- Liquidity and cash availability, including the location and intended use of foreign cash, facility availability, and the company’s substantial purchase commitments.