Celanese Corporation — Q2 2012 Form 10-Q
Business context and period: Global technology and specialty materials company; unaudited results for the quarter and six months ended June 30, 2012, compared with 2011. Unless stated otherwise, amounts are U.S. dollars in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,675 | $1,753 | $3,308 | $3,342 |
| Gross profit | $331 | $410 | $601 | $761 |
| Operating profit | $164 | $209 | $262 | $397 |
| Operating margin | 9.8% | 11.9% | 7.9% | 11.9% |
| Continuing-operations earnings | $210 | $205 | $393 | $343 |
| Diluted EPS | $1.31 | $1.29 | $2.47 | $2.16 |
| Operating cash flow | Not separately presented for the quarter | $402 | $316 |
Six-month income-tax benefit was $22, versus a $117 provision in 2011; the 2012 effective tax rate was (6)%. Management attributed the unusually low rate principally to a $142 tax benefit from foreign tax credit carryforwards, partly offset by a $38 deferred tax charge related to foreign earnings.
Liquidity, debt, and cash flow
- At June 30, cash and equivalents were $800, up from $682 at year-end; $618 was held by foreign subsidiaries. Total debt was $2,976, down from $3,017. Cash less total debt was approximately $2,176.
- Current assets were $2,866 and current liabilities $1,340. The company reported $600 available on its revolving facility and $154 available on its credit-linked facility; it was in compliance with debt covenants.
- Six-month operating cash flow of $402 was partly offset by $283 of investing outflows, including $183 of capital expenditures, and $4 of net financing inflows. Cash increased $118.
- Six-month pension and other postretirement contributions were $108, compared with $68 in the prior-year period.
Changes and management commentary
- Q2 sales fell 4% and six-month sales fell 1% year over year. Management cited lower Acetyl Intermediates pricing and unfavorable currency effects; volume growth partly offset these pressures.
- Operating profit declined 22% in Q2 and 34% for the six-month period. Acetyl Intermediates operating profit fell $75 in Q2 and $127 year to date, principally due to lower prices after 2011 industry supply constraints eased. Its margin fell to 9.4% in Q2 from 16.6%.
- Consumer Specialties operating profit increased $27 in Q2, supported by acetate pricing and volume, including a production interruption that shifted volume into Q2. A $6 insurance recovery also benefited the segment, offset by a captive-insurance charge in Other Activities.
- Advanced Engineered Materials operating profit was lower, partly reflecting increased depreciation from the new German POM facility. Industrial Specialties was broadly steady year to date.
- Six-month earnings benefited from the tax credit carryforwards and higher affiliate earnings; therefore, earnings growth was not matched by operating-profit growth.
Outlook, risks, and contingencies
- Management expected 2012 cash capital expenditures of $325–$350, excluding Kelsterbach relocation costs and European capacity expansion. It preliminarily estimated U.S. Boiler MACT compliance costs would exceed $150 over four years, depending on final requirements.
- The company planned a Clear Lake, Texas, methanol facility expected to start up after July 1, 2015, and expected its enhanced Nanjing ethanol unit to start up in mid-2013. These are forward-looking plans, not completed operations.
- The 600,000-ton-per-year Singapore acetic acid plant was temporarily idled; management said it would continue assessing the facility in light of market conditions and expected lower ethylene prices to affect future results.
- Southern Chemical sought $1.3 billion in compensatory damages, plus interest, fees, and punitive damages, in a methanol-contract dispute; trial began July 16, 2012. The company disputed the claims and said it could not estimate possible loss beyond immaterial accruals. A separate Linde arbitration had unspecified damages that the company also could not estimate.
- Environmental remediation reserves totaled $93. The company could not reliably estimate its share of final Lower Passaic River remediation costs; it believed its contribution would be less than approximately 1%–2%. It said environmental costs could materially affect results or cash flows in a given period.
- Unconditional purchase obligations totaled $3.7 billion and extend through 2034; the company did not expect material losses under take-or-pay arrangements. It also reported $232 of maximum exposure related to certain variable-interest entities.
- Cash held abroad may incur U.S. taxes if repatriated. Other principal risks include economic and industry cycles, raw-material and energy prices, ability to pass costs through, currency and interest-rate changes, operating disruptions, environmental regulation, litigation, and leverage.
Important facts for investors to verify
- Whether Acetyl Intermediates pricing and margins stabilize, and whether the Singapore facility remains idled.
- How much of reported earnings reflects the foreign tax-credit benefit and other tax items, and the timing of credit utilization or expiration.
- Progress, spending, and expected returns for methanol, ethanol, and other capacity projects, including the stated capital-expenditure outlook.
- Developments and potential exposure in the Southern Chemical and Linde disputes and environmental matters.
- Availability and location of cash, debt covenant headroom, pension funding needs, and the company’s ability to fund dividends and investment plans.