Celanese Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited results; amounts in U.S. dollars unless noted. Celanese is a global specialty materials and chemicals company.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,506 million | $1,304 million | $4,411 million | $3,694 million |
| Gross profit / margin | $346 million / 23.0% | $266 million / 20.4% | $867 million / 19.7% | $714 million / 19.3% |
| Operating profit / margin | $221 million / 14.7% | $65 million / 5.0% | $363 million / 8.2% | $181 million / 4.9% |
| Net earnings | $145 million | $398 million | $319 million | $492 million |
| Diluted EPS | $0.92 | $2.53 | $2.01 | $3.14 |
| Operating cash flow | Not presented by quarter | $363 million | $408 million |
Q3 sales rose about 15%; nine-month sales rose about 19%. Management attributed growth principally to recovering demand and higher volumes, with pricing increases also contributing. Q3 gross margin improved as pricing more than offset higher raw-material and energy costs; nine-month gross margin was broadly stable.
Net earnings fell despite higher operating profit, primarily because the prior-year comparison benefited from a large U.S. deferred-tax valuation-allowance release. Continuing-operations earnings were $147 million in Q3 2010 versus $398 million in Q3 2009, and $323 million for the first nine months versus $492 million. The filing reports effective tax rates of 23% and 21% for Q3 and nine-month 2010, compared with unusually negative rates of (729%) and (200%) in 2009.
Liquidity, debt and cash flow
- At September 30, cash was $884 million, versus $1,254 million at year-end 2009. Total debt was $3,271 million, versus $3,501 million; net debt increased to $2,387 million from $2,247 million.
- Nine-month operating cash flow was $363 million, down from $408 million. Investing cash flow was a $381 million outflow, compared with a $191 million inflow in 2009; the prior period included Fraport relocation proceeds and proceeds from the PVOH business sale.
- Nine-month cash uses included $122 million of property, plant and equipment capital expenditures and $219 million of Kelsterbach relocation expenditures. Financing cash outflow was $332 million, including $248 million of net long-term debt repayments and $41 million of share repurchases.
- Current assets were $2,767 million and current liabilities $1,637 million at quarter-end. The company reported $600 million available under its revolving facility and $144 million under its credit-linked revolving facility. It was in compliance with debt covenants at September 30.
Material changes and notable items
- Celanese issued $600 million of 6⅝% senior unsecured notes due 2018 and amended its secured credit facilities. It used the proceeds and $200 million of cash to repay $800 million of term loans; portions of remaining term loans were extended to 2016. The refinancing generated $16 million of expense in Q3.
- Q3 other gains, net were $36 million, compared with charges of $96 million a year earlier. Q3 2010 included $26 million of plumbing-claim reserve reductions, $18 million of net insurance recoveries, and a $15 million commercial-dispute settlement, partly offset by employee termination and relocation costs. For the nine months, other charges were $47 million, including $72 million of Spondon asset impairment.
- The company completed a $46 million acquisition of DuPont’s Zenite LCP and Thermx PCT product lines. It also changed Ibn Sina investment accounting from the cost method to the equity method and moved the affiliate to Advanced Engineered Materials; prior periods were retrospectively adjusted.
- Preferred shares were converted or redeemed into common shares during February. The quarterly common dividend was raised 25%, to $0.05 per share. Celanese repurchased 1.47 million shares for $41 million during the first nine months.
Outlook, risks and contingencies
- Management described a gradual global economic recovery, supporting volume growth across segments, but highlighted uncertainty around industry cycles, raw-material and energy prices, pricing pass-through, plant utilization, competition, foreign exchange and interest rates.
- The company expects 2010 capital expenditures of approximately $221 million, excluding the Kelsterbach relocation. Kelsterbach relocation spending was expected to be €234 million in 2010, with €166 million spent through September; a final €110 million Fraport installment was expected in 2011. The expanded relocation project is expected to cost more than total Fraport proceeds.
- Celanese expects to invest its pro rata share of approximately $150 million in the Ibn Sina POM facility over three years beginning in late 2010. The planned facility is 50,000 tons; upon successful startup, Celanese’s indirect economic interest in Ibn Sina is expected to rise from 25% to 32.5%.
- The Spondon, U.K. acetate flake and tow operations are planned to close in late 2011. The filing cites expected annual savings of $40–$60 million, but gives differing cost figures: $80–$120 million for the project in its overview and approximately $35–$45 million of total expenses in the liquidity discussion. The difference in scope is not clearly reconciled in the filing text.
- Commitments include $1.7 billion under take-or-pay contracts and $487 million of other purchase commitments. Environmental remediation reserves were $104 million; the company identified potential responsibility at approximately 40 U.S. Superfund sites. Plumbing-action accruals were $28 million. Certain insurance indemnifications have stated maximum exposure of $95 million, while other agreements have no stated monetary or time limits.
- A separate Koch-related polyester-staple dispute remained unresolved; the company said it could not estimate its potential loss. The filing also describes other litigation and warns that individual matters could materially affect results or cash flows in a period.
Important facts for investors to verify
- How much of improved operating profit reflects durable volume, pricing and cost performance versus one-time reserve releases, insurance recoveries and settlements.
- Whether working-capital demands and planned capital spending will continue to pressure cash generation and liquidity.
- The scope and reconciliation of the two disclosed Spondon closure-cost estimates, and whether expected savings arrive on schedule.
- Execution costs, timing and customer-supply risks for the Kelsterbach relocation, and the planned Ibn Sina investment.
- Debt refinancing terms, covenant headroom and the company’s ability to service debt while meeting substantial purchase commitments and legal or environmental obligations.