Specialty material company Celanese Corp. (CE) reported adjusted earnings of $1.27 per share in the third quarter of 2011, beating the Zacks Consensus Estimate of $1.11.
Diluted earnings per share in the quarter were $1.05 per share, up 12.9% year over year.
Revenues and Margins
Quarterly revenues grew 20% year over year to $1.81 billion, primarily driven by higher pricing across all operating segments and favorable currency impacts. Results were above the Zacks Consensus Estimate of $1.69 billion. Operating profit was $196 million compared with $221 million in the prior-year quarter.
Segment Review
Advanced Engineered Materials: Net sales jumped 22.5% year over year to $332 million, driven by higher pricing, increased volumes, revenue associated with the company's recently acquired product lines and favorable currency impacts. During the quarter, the company opened the world's largest polyacetal products (POM) production facility, which is expected to meet the increased global demand for its innovative specialty solutions in polymer-based products.
Operating profit of $14 million in the third quarter of 2011 was below $63 million in the year-ago period. The plant startup resulted in other charges and other adjustments of $19 million, primarily due to an inventory draw and related expenses. The higher pricing and volumes offset higher raw material costs and increased spending, primarily associated with geographic expansion into Asia. Operating EBITDA, excluding other charges and other adjustments in both periods, was $112 million in the third quarter of 2011 compared with $90 in the prior-year period.
Equity earnings from the company’s affiliates were $52 million compared with $31 million in the third quarter of 2010, primarily driven by higher earnings in its Ibn Sina venture, which provides an economic hedge against raw material costs.
Consumer Specialties: This segment delivered strong results, reflecting the company's leading global positions and strong strategic affiliate performance. Net sales were $298 million compared with $288 million in the year-ago quarter as higher pricing offset slightly lower volumes. Volumes in the company's Acetate Products business were impacted by a temporary manufacturing outage in the current period, but were partially offset by higher volumes in the company's Nutrinova business.
Operating profit was $66 million versus $71 million in the prior-year period, as the higher pricing offset higher raw material and energy costs, but did not fully offset increased spending associated with the temporary manufacturing outage. Operating EBITDA was $78 million compared with $81 million in the same period last year.
Industrial Specialties: For the reported quarter, net sales in the segment were $332 million, up 20.3% from $276 million in the year-ago quarter. The segment benefited from higher pricing and demand for innovative applications in the emulsions and EVA performance polymers businesses, particularly in the growing Asia region. The higher pricing resulted from pricing actions to successfully recover rising raw material costs, particularly for ethylene and related products.
Operating profit was $30 million compared with $50 million in the same period last year. Operating EBITDA, which excluded the insurance proceeds in the prior-year period, increased to $43 million from $36 million in the same period last year, as higher pricing more than offset rising raw material costs.
Acetyl Intermediates: Net sales climbed 25.5% to $975 million driven by higher pricing across major acetyl derivative product lines in all regions and favorable currency impacts. Higher pricing in the quarter reflected elevated year-over-year industry utilization due to planned and unplanned production outages of multiple acetyl producers and robust end-market demand for acetyl products. The higher pricing also reflected the recovery of higher raw material costs as compared to the prior-year period. Operating profit in the current period increased to $128 million from $81 million in the prior-year period on expanded margins. Operating EBITDA was $168 million compared with $110 million in the same period last year.
Liquidity
Cash and cash equivalents at the end of the third quarter of 2011 were $704 million versus $740 million as of December 31, 2010. Cash flow provided by operating activities was $481 million as of September 30, 2011 compared with $363 million in the prior-year period as higher trade working capital and higher cash taxes offset the improved operating performance. Total debt was $2.9 billion, flat year over year.
Outlook
The company raised its outlook for the full-year 2011, encouraged by the strength of its third-quarter 2011 performance, its confidence in its earnings growth programs, and its expectations for a continued modest global economic recovery. The company now expects 2011 operating EBITDA to be at least $280 million higher than 2010’s results of $1,122 million, and adjusted earnings per share to be at least $1.30 higher than 2010’s results of $3.37, based on tax rate and diluted share count of 17% and 159 million shares, respectively. The company had previously expected 2011 operating EBITDA and adjusted earnings per share to be at least $275 million and $1.20 higher than 2010, respectively.
Zacks Recommendation
Celanese is one of the world’s largest producers of acetyl products, as well as a leading global producer of high-performance engineered polymers. The company’s earnings outlook has been improving, driven by the strong performance in the Advanced Engineered Materials business.
The company is operating its facilities in the Acetyl Intermediates segment at above the industry utilization rates of 80%, which provides cost advantages. Capacity utilization has also improved in the Industrial Specialties segment due to rising demand in the Asia Pacific region.
However, Celanese is exposed to volatile raw material (natural gas, ethylene and methanol) prices used in the production of basic chemicals in the Acetyl Intermediates segment, principally formaldehyde, acetic acid and vinyl acetate monomer.
The company also faces stiff competition from larger peers E.I. DuPont de Nemours and Co. (DD) and The Dow Chemical Co. (DOW) in the Advanced Engineered Material Segment, as well as in the Industrial Specialties segment. Celanese’s balance sheet leverage is also relatively high, which limits its financial flexibility.
Currently, Celanese has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months and higher) Outperform recommendation.
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