Celanese Corp - Annual Report: 2019 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________
Form 10-K
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended | ||
December 31, 2019 | ||
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
CELANESE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware | 98-0420726 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
222 W. Las Colinas Blvd., Suite 900N
Irving, TX 75039-5421
(Address of Principal Executive Offices and zip code)
(972) 443-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Securities registered pursuant to Section 12(g) of the Act
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, par value $0.0001 per share | CE | New York Stock Exchange |
1.125% Senior Notes due 2023 | CE /23 | New York Stock Exchange |
1.250% Senior Notes due 2025 | CE /25 | New York Stock Exchange |
2.125% Senior Notes due 2027 | CE /27 | New York Stock Exchange |
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated Filer þ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the registrant's common stock held by non-affiliates as of June 30, 2019 (the last business day of the registrants' most recently completed second fiscal quarter) was $11,747,066,605.
The number of outstanding shares of the registrant's common stock, $0.0001 par value, as of January 30, 2020 was 119,555,928.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Definitive Proxy Statement relating to the 2020 annual meeting of stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III.
CELANESE CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 2019
TABLE OF CONTENTS
Page | ||
PART I | ||
PART II | ||
PART III | ||
PART IV | ||
2
Special Note Regarding Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K ("Annual Report") or in other materials we have filed or will file with the Securities and Exchange Commission ("SEC"), and incorporated herein by reference, are forward-looking in nature as defined in Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "plan," "may," "can," "could," "might," "will" and similar expressions identify forward-looking statements, including statements that relate to such matters as planned and expected capacity increases and utilization rates; anticipated capital spending; environmental matters; legal proceedings; sources of raw materials and exposure to, and effects of hedging of raw material and energy costs and foreign currencies; interest rate fluctuations; global and regional economic, political, business and regulatory conditions; expectations, strategies, and plans for individual assets and products, business segments, as well as for the whole Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; anticipated restructuring, divestiture, and consolidation activities; planned construction or operation of facilities; cost reduction and control efforts and targets and integration of acquired businesses.
Forward-looking statements are not historical facts or guarantees of future performance but instead represent only our beliefs at the time the statements were made regarding future events, which are subject to significant risks, uncertainties, and other factors, many of which are outside of our control and certain of which are listed above. Any or all of the forward-looking statements included in this Annual Report and in any other materials incorporated by reference herein may turn out to be materially inaccurate. This can occur as a result of incorrect assumptions, in some cases based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, or as a consequence of known or unknown risks and uncertainties. Many of the risks and uncertainties mentioned in this Annual Report, such as those discussed in Item 1A. Risk Factors, Item 3. Legal Proceedings and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations will be important in determining whether these forward-looking statements prove to be accurate. Consequently, neither our stockholders nor any other person should place undue reliance on our forward-looking statements and should recognize that actual results may differ materially from those anticipated by us.
All forward-looking statements made in this Annual Report are made as of the date hereof, and the risk that actual results will differ materially from expectations expressed in this Annual Report will increase with the passage of time. We undertake no obligation, and disclaim any duty, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changes in our expectations or otherwise. However, we may make further disclosures regarding future events, trends and uncertainties in our subsequent reports on Forms 10-K, 10-Q and 8-K to the extent required under the Exchange Act. The above cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed above or in Item 1A. Risk Factors, Item 3. Legal Proceedings and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations below, including factors unknown to us and factors known to us which we have determined not to be material, could also adversely affect us.
3
Item 1. Business
Basis of Presentation
In this Annual Report on Form 10-K, the term "Celanese" refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The terms "Company," "we," "our" and "us" refer to Celanese and its subsidiaries on a consolidated basis. The term "Celanese US" refers to the Company's subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, and not its subsidiaries.
Industry
This Annual Report on Form 10-K includes industry data obtained from industry publications and surveys, as well as our own internal company surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable.
Overview
We are a global chemical and specialty materials company. We are a leading global producer of high performance engineered polymers that are used in a variety of high-value applications, as well as one of the world's largest producers of acetyl products, which are intermediate chemicals, for nearly all major industries. As a recognized innovator in the chemicals industry, we engineer and manufacture a wide variety of products essential to everyday living. Our broad product portfolio serves a diverse set of end-use applications including automotive, chemical additives, construction, consumer and industrial adhesives, consumer and medical, energy storage, filtration, food and beverage, paints and coatings, paper and packaging, performance industrial and textiles. Our products enjoy leading global positions due to our differentiated business models, large global production capacity, operating efficiencies, proprietary technology and competitive cost structures.
Our large and diverse global customer base primarily consists of major companies across a broad array of industries. We hold geographically balanced global positions and participate in diversified end-use applications. We combine a demonstrated track record of execution, strong performance built on differentiated business models and a clear focus on growth and value creation. Known for operational excellence, reliability and execution of our business strategies, we partner with our customers around the globe to deliver best-in-class technologies and solutions.
Celanese's history began in 1918, the year that its predecessor company, The American Cellulose & Chemical Manufacturing Company, was incorporated. The company, which manufactured cellulose acetate, was founded by Swiss brothers Drs. Camille and Henri Dreyfus. The current Celanese was incorporated in 2004 under the laws of the State of Delaware and is a US-based public company traded on the New York Stock Exchange under the ticker symbol CE.
Headquartered in Irving, Texas, our operations are primarily located in North America, Europe and Asia and consist of 30 global production facilities and an additional 9 strategic affiliate production facilities. As of December 31, 2019, we employed 7,714 people worldwide.
Business Segment Overview
We operate principally through three business segments: Engineered Materials, Acetate Tow and the Acetyl Chain. See Business Segments below and Note 26 - Segment Information and Note 27 - Revenue Recognition in the accompanying consolidated financial statements for further information.
4
Business Segments
Engineered Materials
Products | Major End-Use Applications | Principal Competitors | Key Raw Materials | |||
• Polyoxymethylene ("POM") • Ultra-high molecular weight polyethylene ("UHMW-PE") • Polybutylene terephthalate ("PBT") • Long-fiber reinforced thermoplastics ("LFRT") • Liquid crystal polymers ("LCP") • Thermoplastic elastomers ("TPE") • Nylon compounds or formulations • Polypropylene compounds or formulations • Polyphenylene sulfide ("PPS") • Acesulfame potassium ("Ace-K") • Potassium sorbate • Sorbic acid | • Automotive • Medical • Industrial • Energy storage • Consumer electronics • Appliances • Filtration equipment • Telecommunications • Beverages • Confections • Baked goods | • Ajinomoto Co. Inc. • Anhui Jinhe Industry Co., Ltd. • BASF SE • Daicel Corporation • E. I. du Pont de Nemours and Company • Koninklijke DSM N.V. • Nantong Acetic Acid Chemical Co., Ltd. • The NutraSweet Company • SABIC Innovative Plastics • Solvay S.A. • Suzhou Hope Technology Co., Ltd. • Tate & Lyle plc Other regional competitors: • Asahi Kasei Corporation • Braskem S.A. • Lanxess AG • Mitsubishi Gas Chemical Company, Inc. • Sumitomo Corporation • Teijin Limited • Toray Industries, Inc. | • Formaldehyde (for POM) • Ethylene (for UHMW-PE and TPE) • Polypropylene (for LFRT) • Fibers (for LFRT) • Acetic anhydride (for LCP) • Propylene (for TPE) • Styrene (for TPE) • Butadiene (for TPE) • PA6 (for nylon) • PA66 (for nylon) • Para-dichlorobenzene (for PPS) • Diketene (for Ace-K) For potassium sorbate and sorbic acid: • Acetic acid • Crotonaldehyde • Ethylene • Potassium hydroxide | |||
• | Overview |
Our Engineered Materials segment includes our engineered materials business, our food ingredients business and certain strategic affiliates. The engineered materials business leverages our leading project pipeline model to more rapidly commercialize projects. Our unique approach is based on deep customer engagement to develop new projects that are aligned with our skill domains to address critical customer needs and ensure our success and growth.
Engineered Materials is a project-based business where growth is driven by increasing new project commercializations from the pipeline. Our project pipeline model leverages competitive advantages that include our global assets and resources, marketplace presence, broad materials portfolio and differentiated capabilities. Our global assets and resources are represented by our operations, including polymerization, compounding, research and development, and customer technology centers in all regions of the world, including Brazil, China, Germany, India, Italy, Japan, Mexico, South Korea, the United Kingdom and the US, along with sites associated with our four strategic affiliates in Japan, Malaysia, Saudi Arabia, South Korea and the US.
Our broad marketplace presence reflects our deep understanding of global and customer trends, including the growing global demand for more sophisticated vehicles, elevated environmental considerations, increased global connectivity, and improved health and wellness. These global trends drive a range of needed customer solutions, such as vehicle lightweighting, precise components, aesthetics and appearance, low emissions, heat resistance and low-friction for medical applications, that we are uniquely positioned to address with our materials portfolio. In addition, the opportunity pipeline process identifies a number of emerging trends early, enabling faster growth.
Our materials portfolio offers differentiated chemical and physical properties that enable them to perform in a variety of conditions. These include enduring a wide range of temperatures, resisting adverse chemical interactions and withstanding deformation. POM, PBT and LFRT are used in a broad range of performance-demanding applications, including fuel system components, automotive safety systems, consumer electronics, appliances, industrial products and medical applications.
5
UHMW-PE is used in battery separators, industrial products, filtration equipment, coatings and medical applications. Primary end uses for LCP are electrical applications or products and consumer electronics. Thermoplastic elastomers offer unique attributes for use in automotive, appliances, consumer goods, electrical, electronic and industrial applications. Nylon compounds are used in a range of applications including automotive, consumer, electrical, electronic and industrial. These value-added applications in diverse end uses support the business' global growth objectives.
We also have several differentiated polymer technologies designed for the utility industry, the oil and gas industry, original equipment manufacturers and companies that enhance supply chain efficiency. These include composite technologies for the utility industry that deliver greater reliability, capacity and performance for utility transmission lines.
Our differentiated capabilities are highlighted in our intimate and unique customer engagement which allows us to work across the entirety of our customers' value chain. For example, in the automotive industry we work with original equipment manufacturers as well as system and tier suppliers and injection molders in numerous areas, including polymer formulation and functionality, part and structural design, mold design, color development, part testing and part processing. This broad access allows us to create a demand pull for our solutions. This business segment also includes four strategic affiliates that complement our global reach, improve our ability to capture growth opportunities in emerging economies and positions us as a leading participant in the global specialty polymers industry.
We are a leading global supplier of Ace-K for the food and beverage industry and a leading producer of food protection ingredients, such as potassium sorbate and sorbic acid. We have over fifty years of experience in developing and marketing specialty ingredients for the food and beverage industry and are the only western producer of Ace-K. We have a production facility in Germany, with sales and distribution facilities in all major regions of the world.
On March 5, 2019, we announced the expansion of the thermoplastic co-polyester production unit at the Donegani facility in Ferrara, Italy to support continued growth of our engineered materials business. We expect to expand the production capacity of the unit further by adding a polymerization line to be completed in 2020.
On January 2, 2019, we completed the acquisition of 100% of the ownership interests of Next Polymers Ltd., an India-based engineering thermoplastics ("ETP") compounder. The acquisition strengthens our position in the Indian ETP market and further expands our global manufacturing footprint.
• | Key Products |
POM. Commonly known as polyacetal in the chemical industry, POM is sold by our engineered materials business under the trademarks Celcon® and Hostaform®. POM is used for diverse end-use applications in the automotive, industrial, consumer and medical industries. These applications include mechanical parts in automotive fuel system components and window lift systems, water handling, conveyor belts, sprinkler systems, drug delivery systems and gears in large and small home appliances.
We continue to innovate and broaden the portfolio of Celcon® and Hostaform® in order to support the industry needs for higher performing polyacetal. We have expanded our portfolio to include products with higher impact resistance and stiffness, low emissions, improved wear resistance and enhanced appearance such as laser marking and metallic effects.
Polyplastics Co., Ltd., our 45%-owned strategic affiliate ("Polyplastics"), and Korea Engineering Plastics Co., Ltd., our 50%-owned strategic affiliate ("KEPCO"), also manufacture POM and other engineering resins in the Asia-Pacific region.
The primary raw material for POM is formaldehyde, which is manufactured from methanol. Raw materials are sourced from internal production and from third parties, generally through long-term contracts.
Sales of POM amounted to 12%, 11% and 12% of our consolidated net sales for the years ended December 31, 2019, 2018 and 2017, respectively.
UHMW-PE. Celanese is a global leader in UHMW-PE products, which are sold under the GUR® and VitalDose® trademarks. They are highly engineered thermoplastics designed for a variety of industrial, consumer and medical applications. Primary applications for the material include lead acid battery separators, heavy machine components, lithium ion separator membranes, and noise and vibration dampening tapes. Several specialty grades are also produced for applications in high performance filtration equipment, ballistic fibers, thermoplastic and elastomeric additives, as well as medical implants.
Polyesters. Our products include a series of thermoplastic polyesters including Celanex® PBT and Thermx® PCT (polycyclohexylene-dimethylene terephthalate), as well as Riteflex®, a thermoplastic polyester elastomer. These products are
6
used in a wide variety of automotive, electrical and consumer applications, including ignition system parts, radiator grilles, electrical switches, appliance and sensor housings, light emitting diodes and technical fibers.
Nylon. Our nylon products include Nylfor® A (PA 6.6), Nylfor® B (PA 6), NILAMID® (PA 6, PA 66, PPA), FRIANYL® (flame retardant PA 6, PA 66, PPA compounds) and ECOMID® (recycled polyamide) and are used in automotive, appliances, industrial and consumer applications due to their mechanical properties, high impact resistance, resistance to organic solvents, high wear and fatigue resistance even at high temperatures, and easy processing and molding.
LFRT. Celstran® and Factor®, our LFRT products, impart extra strength and stiffness, making them more suitable for larger parts than conventional thermoplastics. These products are used in automotive, transportation and industrial applications, such as instrument panels, consoles and front end modules. LFRTs meet a wide range of end-user requirements and are excellent candidates for metal replacement where they provide the required structural integrity with significant weight reduction, corrosion resistance and the potential to lower manufacturing costs.
LCP. Vectra® and Zenite®, our LCP brands, are primarily used in electrical and electronics applications for precision parts with thin walls and complex shapes and applications requiring heat dissipation. They are also used in high heat cookware applications.
TPE. Forprene®, Sofprene® T, Pibiflex® and Laprene®, our TPE brands, are primarily used in automotive, construction, appliances and consumer applications due to their ability to combine the advantages of both flexible and plastic materials. These materials are selected for their ability to stretch and return to their near original shape creating a longer life and better physical range than other materials.
Polypropylene. Our polypropylene products include Polifor® and Tecnoprene® and are primarily used in automotive, appliances, electrical and consumer applications due to their high impact and fatigue resistance, exceptional rigidity at high temperatures and an ability to withstand chemical agents.
Sunett® sweetener. Ace-K, a non-nutritive high intensity sweetener sold under the trademark Sunett®, is used in a variety of beverages, confections and dairy products throughout the world. Sunett® sweetener is the ideal blending partner for caloric and non-caloric sweeteners as it balances the sweetness profile. It is recognized in the food industry for its consistent product quality and reliable supply. The primary raw material for Sunett® is diketene.
Food protection ingredients. Our food protection ingredients, potassium sorbate and sorbic acid, are mainly used in foods, beverages and personal care products.
• | Customers |
Engineered Materials' principal customers are original equipment manufacturers and their suppliers serving the automotive, medical, industrial and consumer industries. We utilize our customer options mapping process to collaborate with our customers to identify customized solutions that leverage our broad range of polymers and technical expertise. Our engineered materials business has long-standing relationships through multi-year and annual arrangements with many of its major customers and utilizes distribution partners to expand its customer base. We primarily sell Sunett® sweetener to a limited number of large multinational and regional customers in the food and beverage industry under multi-year and annual contracts. Food protection ingredients are primarily sold through regional distributors to small and medium sized customers and directly to large multinational customers in the food industry.
Because Engineered Materials is a project-based business focused on solutions, the pricing of products in this segment is primarily based on the value-in-use and is generally independent of changes in the cost of raw materials. Therefore, in general, margins may expand or contract in response to changes in raw material costs.
See Note 27 - Revenue Recognition in the accompanying consolidated financial statements for further information.
7
Acetate Tow
Products | Major End-Use Applications | Principal Competitors | Key Raw Materials | |||
• Acetate tow • Acetate flake | • Filtration • Films • Flexible packaging | • Cerdia • Daicel Corporation • Eastman Chemical Company • Mitsubishi Rayon Co., Ltd | • Wood pulp • Acetic acid • Acetic anhydride | |||
• | Overview |
Our Acetate Tow business is a leading global producer and supplier of acetate tow and acetate flake, primarily used in filter products applications. We hold an approximately 30% ownership interest in three separate ventures in China that produce acetate flake and acetate tow. China National Tobacco Corporation, a Chinese state-owned tobacco entity, has been our venture partner for over three decades. Our Acetate Tow business has production sites in Belgium and the US, along with sites at our three Acetate Tow strategic affiliates in China.
On June 28, 2019, we announced the consolidation of our global acetate manufacturing operations with the closure of our acetate flake manufacturing operations at the Ocotlán, Mexico facility. The closure is intended to strengthen our competitive position and align future production capacities with anticipated industry demand trends. See Note 4 - Acquisitions, Dispositions and Plant Closures in the accompanying consolidated financial statements for further information.
• | Key Products |
Acetate tow and acetate flake. Acetate tow is a fiber used primarily in cigarette filters. In order to produce acetate tow, we first produce acetate flake by processing wood pulp with acetic acid and acetic anhydride. Wood pulp generally comes from reforested trees and is purchased externally from a variety of sources, and acetic anhydride is an intermediate chemical that we produce from acetic acid in our intermediate chemistry business. Acetate flake is then further processed into acetate tow.
Sales of acetate tow amounted to 9%, 8% and 10% of our consolidated net sales for the years ended December 31, 2019, 2018 and 2017, respectively.
• | Customers |
Acetate tow is sold principally to the major tobacco companies that account for a majority of worldwide cigarette production.
The pricing of products within the Acetate Tow segment is sensitive to demand and is primarily based on the value-in-use. Many sales are conducted under contracts with pricing for one or more years. As a result, margins may expand or contract in response to changes in raw material costs over these similar periods, and we may be unable to adjust pricing due to other factors, such as the intense level of competition in the industry.
See Note 27 - Revenue Recognition in the accompanying consolidated financial statements for further information.
8
Acetyl Chain
Products | Major End-Use Applications | Principal Competitors | Key Raw Materials | |||
Intermediate chemistry | ||||||
• Acetic acid • VAM • Acetic anhydride • Acetaldehyde • Ethyl acetate • Formaldehyde • Butyl acetate | • Paints • Coatings • Adhesives • Lubricants • Pharmaceuticals • Films • Textiles • Inks • Plasticizers • Solvents | • BASF SE • BP PLC • Chang Chun Petrochemical Co., Ltd. • Daicel Corporation • DowDupont Inc. • Eastman Chemical Company • E. I. du Pont de Nemours and Company • Jiangsu Sopo (Group) Co., Ltd. • Kuraray Co., Ltd. • LyondellBasell Industries N.V. • Nippon Gohsei • Perstorp Inc. • Showa Denko K.K. | For acetic acid and Vinyl acetate monomer ("VAM"): • Carbon monoxide • Methanol • Ethylene For solvents and derivatives: • Methanol • Acetic acid | |||
Emulsion polymers | ||||||
• Conventional emulsions • Vinyl acetate ethylene ("VAE") emulsions | • Paints • Coatings • Adhesives • Textiles • Paper finishing | • BASF SE • Dairen Chemical Corporation • The Dow Chemical Company • Wacker Chemie AG | • VAM • Ethylene • Acrylate esters • Styrene | |||
EVA polymers | ||||||
• Ethylene vinyl acetate ("EVA") resins and compounds • Low-density polyethylene resins ("LDPE") | • Flexible packaging • Lamination products • Automotive parts • Hot melt adhesives | • Arkema • E. I. du Pont de Nemours and Company • ExxonMobil Chemical | • VAM • Ethylene | |||
• | Overview |
The Acetyl Chain segment, which includes the integrated chain of intermediate chemistry, emulsion polymers and EVA polymers businesses, is active in every major global industrial sector and serves diverse consumer end-use applications. These include traditional vinyl-based end uses, such as paints and coatings and adhesives, as well as other unique, high-value end uses including flexible packaging, thermal laminations, wire and cable, and compounds.
Our intermediate chemistry business produces and supplies acetyl products, including acetic acid, VAM, acetic anhydride and acetate esters. These products are generally used as starting materials for colorants, paints, adhesives, coatings and pharmaceuticals. Our intermediate chemistry business also produces organic solvents and intermediates for pharmaceutical, agricultural and chemical products.
We have focused in recent years on enhancing our ability to drive incremental value through our global production network and productivity initiatives as well as proactively managing the intermediate chemistry business in response to trade flows and prevailing industry trends. Our intermediate chemistry business has production sites in China, Germany, Mexico, Singapore and the US. We are a global industry leader, with a broad acetyls product portfolio, leading technology, low cost production footprint and a global supply chain. With decades of experience, advanced proprietary process technology and favorable capital and production costs, we are a leading global producer of acetic acid and VAM. AOPlus®3 technology extends our historical technology advantage and enables us to construct a greenfield acetic acid facility with a capacity of 1.8 million metric tons at a
9
lower capital cost than our competitors. Our VAntage®2 technology could increase VAM capacity to meet growing customer demand globally with minimal investment. We believe our production technology is among the lowest cost in the industry and provides us with global growth opportunities through low cost expansions and a cost advantage over our competitors.
Our emulsion polymers business is a leading global producer of vinyl acetate-based emulsions and develops products and application technologies to improve performance, create value and drive innovation in applications such as paints and coatings, adhesives, construction, glass fiber, textiles and paper. Our emulsion polymers products are sold under globally and regionally recognized brands including EcoVAE®, Mowilith®, Vinamul®, Celvolit®, Dur-O-Set®, TufCOR® and Avicor®. The emulsion polymers business has production facilities in Canada, China, Germany, the Netherlands, Singapore, Sweden and the US and is supported by expert technical service regionally.
Our EVA polymers business is a leading North American manufacturer of a full range of specialty EVA resins and compounds, as well as select grades of LDPE. Sold under the Ateva® brand, these products are used in many applications, including flexible packaging films, lamination film products, hot melt adhesives, automotive parts and carpeting. Our EVA polymers business has a production facility in Canada.
Our intermediate chemistry business produces VAM, a primary raw material for our emulsion polymers and EVA polymers businesses. Ethylene, another key raw material, is purchased externally from a variety of sources through annual or multi-year contracts.
Our emulsion polymers business has experienced significant growth in Asia, and we have made investments to support continued growth in the region including production at our VAE emulsions unit in Singapore, supporting growing demand for ecologically friendly materials in Southeast Asia. In addition to geographic growth, the businesses are focused on supporting our overall manufacturing footprint strategy to increase value, such as integrating our production sites to provide critical economies of scale.
• | Key Products |
Acetyl Products. Acetyl products include acetic acid, VAM, acetic anhydride and acetaldehyde. Acetic acid is primarily used to manufacture VAM, purified terephthalic acid and other acetyl derivatives. VAM is used in a variety of adhesives, paints, films, coatings and textiles. Acetic anhydride is a raw material used in the production of cellulose acetate, detergents and pharmaceuticals. Acetaldehyde is a major feedstock for the production of a variety of derivatives, such as pyridines, which are used in agricultural products. We manufacture acetic acid, VAM and acetic anhydride for our own use in producing downstream, value-added products, as well as for sale to third parties.
Acetic acid and VAM, our basic acetyl intermediates products, leverage global supply and demand fundamentals. The principal raw materials in these products are carbon monoxide, methanol and ethylene. We generally purchase carbon monoxide under long-term contracts, and we now have the ability to produce carbon monoxide internally with the purchase of the synthesis gas unit from Linde AG. We generally purchase methanol and ethylene under both annual and multi-year contracts. Methanol and ethylene are commodity products and generally available from a wide variety of sources, while carbon monoxide is typically purpose-made in close proximity.
We have a joint venture, Fairway Methanol LLC ("Fairway"), with Mitsui & Co., Ltd., of Tokyo, Japan ("Mitsui"), in which we own a 50% interest, for the production of methanol at our integrated chemical plant in Clear Lake, Texas. The methanol unit utilizes natural gas in the US Gulf Coast region as a feedstock. Almost all of our North American methanol needs are met from our share of the production, as well as the long-term contract we have with our joint venture partner, Mitsui.
On September 21, 2019, a localized fire occurred at our Clear Lake, Texas facility, resulting in damage to the carbon monoxide production unit. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.
On February 13, 2019, we completed the acquisition of a 365kt synthesis gas production unit from Linde AG, located at our Clear Lake, Texas facility. The acquisition further strengthens our capability of managing future productivity and growth in the production of acetic acid.
Sales from acetyl products amounted to 27%, 31% and 27% of our consolidated net sales for the years ended December 31, 2019, 2018 and 2017, respectively.
10
Solvents and Derivatives. We manufacture a variety of solvents, formaldehyde and other chemicals, which in turn are used in the manufacture of paints, coatings, adhesives and other products. Many solvents and derivatives products are derived from our production of acetic acid. Primary products are:
• | Ethyl acetate, an acetate ester that is a solvent used in coatings, inks and adhesives; |
• | Butyl acetate, an acetate ester that is a solvent used in inks, pharmaceuticals and perfume; and |
• | Formaldehyde and paraformaldehyde, which are primarily used to produce adhesive resins for plywood, particle board, coatings, POM engineering resins and a compound used in making polyurethane. |
Emulsion Polymers. Our emulsion polymers business produces conventional vinyl- and acrylate-based emulsions and VAE emulsions. VAE emulsions are a key component of water-based architectural coatings, adhesives, non-wovens, textiles, glass fiber and other applications. VAE emulsions are in high demand in Europe and Asia as they enable low volatile organic compound paints, specifically in interior paints.
Sales from emulsion polymer products amounted to 14%, 13% and 13% of our consolidated net sales for the years ended December 31, 2019, 2018 and 2017, respectively.
EVA Polymers. Our EVA polymers business produces low-density polyethylene, EVA resins and compounds. Low-density polyethylene is produced in high-pressure reactors from ethylene, while EVA resins and compounds are produced in high-pressure reactors from ethylene and VAM.
• | Customers |
Our intermediate chemistry business sells its products both directly to customers and through distributors. Acetic acid, VAM and acetic anhydride are global businesses, and we generally supply our customers under a mix of short- and long-term agreements. Acetic acid, VAM and acetic anhydride customers produce polymers used in water-based paints, adhesives, paper coatings, polyesters, film modifiers, pharmaceuticals, cellulose acetate and textiles. We have long-standing relationships with most of these customers. Solvents and derivatives are sold to a diverse group of regional and multinational customers under multi-year contracts and on the basis of long-standing relationships. Solvents and derivatives customers are primarily engaged in the production of paints, coatings and adhesives. We manufacture formaldehyde for our own use as well as for sale to a few regional customers.
Emulsion and EVA polymers products are sold to a diverse group of regional and multinational customers. Customers of our emulsion polymers business are manufacturers of water-based paints and coatings, adhesives, paper, building and construction products, glass fiber, non-wovens and textiles. Customers of our EVA polymers business are engaged in the manufacture of a variety of products, including hot melt adhesives, automotive components, thermal laminations, and flexible and food packaging materials.
Pricing of our products within the Acetyl Chain segment is influenced by industry utilization and changes in the cost of raw materials. Therefore, in general, there is a direct correlation between these factors and our Net sales for most products. This impact to pricing typically lags changes in raw material costs over months or quarters and impacts profit margins over those periods.
See Note 27 - Revenue Recognition in the accompanying consolidated financial statements for further information.
Other Activities
Other Activities primarily consists of corporate center costs, including administrative activities such as finance, information technology and human resource functions, interest income and expense associated with our financing activities and results of our captive insurance companies. Our two wholly-owned captive insurance companies are a key component of our global risk management program, as well as a form of self-insurance for our liability and workers compensation risks. The captive insurance companies retain risk at levels approved by management and obtain reinsurance coverage from third parties to limit the net risk retained. One of the captive insurance companies also insures certain third-party risks. Other Activities also includes the interest cost, expected return on assets and net actuarial gains and losses components of our net periodic benefit cost for our defined benefit pension plans and other postretirement plans, which are not allocated to our business segments. Ongoing merger, acquisition and integration related costs are also included in Other Activities.
11
Strategic Affiliates
Our strategic affiliates represent an important component of our strategy for accelerated growth and global expansion. We have a substantial portfolio of affiliates in various regions, including Asia-Pacific, North America and the Middle East. These affiliates, some of which date back as far as the 1960s, have sizeable operations and are significant within their industries.
With shared characteristics such as products, applications and manufacturing technology, these strategic affiliates complement and extend our technology and specialty materials portfolio. We have historically entered into these investments to gain access to local demand, minimize costs and accelerate growth in areas we believe have significant future business potential.
Our strategic affiliates contribute substantial earnings and cash flows to us. During the year ended December 31, 2019, our equity method strategic affiliates generated combined sales of $2.4 billion, resulting in our recording $157 million of equity in net earnings of affiliates and $143 million of dividends.
Our strategic affiliates as of December 31, 2019 are as follows:
Location of Headquarters | Ownership | Partner(s) | Year Entered | ||||
Equity Investments | |||||||
Engineered Materials | |||||||
National Methanol Company | Saudi Arabia | 25 % | Saudi Basic Industries Corporation (50%); Texas Eastern Arabian Corporation Ltd. (25%) | 1981 | |||
KEPCO | South Korea | 50 % | Mitsubishi Gas Chemical Company, Inc. (40%); Mitsubishi Corporation (10%) | 1999 | |||
Polyplastics | Japan | 45 % | Daicel Corporation (55%) | 1964 | |||
Fortron Industries LLC | US | 50 % | Kureha America Inc. (50%) | 1992 | |||
Equity Investments Without Readily Determinable Fair Value | |||||||
Acetate Tow | |||||||
Kunming Cellulose Fibers Co. Ltd. | China | 30 % | China National Tobacco Corporation (70%) | 1993 | |||
Nantong Cellulose Fibers Co. Ltd. | China | 31 % | China National Tobacco Corporation (69%) | 1986 | |||
Zhuhai Cellulose Fibers Co. Ltd. | China | 30 % | China National Tobacco Corporation (70%) | 1993 | |||
National Methanol Company (Ibn Sina). National Methanol Company represents approximately 1% of the world's methanol production capacity and is one of the world's largest producers of methyl tertiary-butyl ether, a gasoline additive. Its production facilities are located in Saudi Arabia. Saudi Basic Industries Corporation ("SABIC") is responsible for all product marketing. Methanol is a key feedstock for POM production and is produced by our Ibn Sina affiliate which provides an economic hedge against raw material costs in our engineered materials business.
KEPCO. KEPCO is the leading producer of POM in South Korea. KEPCO has polyacetal production facilities in Ulsan, South Korea, compounding facilities for PBT and nylon in Pyongtaek, South Korea, and participates with Polyplastics and Mitsubishi Gas Chemical Company, Inc. in a world-scale POM facility in Nantong, China.
Polyplastics. Polyplastics is a leading supplier of engineered plastics. Polyplastics is a manufacturer and/or marketer of POM, LCP and PPS, with principal production facilities located in Japan and Malaysia.
Fortron Industries LLC. Fortron Industries LLC ("Fortron") is a leading global producer of PPS, sold under the Fortron® brand, which is used in a wide variety of automotive and other applications, especially those requiring heat and/or chemical resistance. Fortron's facility is located in Wilmington, North Carolina. This venture combines our sales, marketing, distribution, compounding and manufacturing expertise with the PPS polymer technology expertise of Kureha America Inc.
Acetate Tow strategic ventures. Our Acetate Tow ventures generally fund their operations using operating cash flow and pay dividends based on each ventures' performance in the preceding year. In 2019, 2018 and 2017, we received cash dividends of $112 million, $112 million and $107 million, respectively.
Although our ownership interest in each of our Acetate Tow ventures exceeds 20%, we account for these investments at cost after considering observable price changes for similar instruments, minus impairment, if any, because we determined that we
12
cannot exercise significant influence over these entities due to local government investment in and influence over these entities, limitations on our involvement in the day-to-day operations and the present inability of the entities to provide timely financial information prepared in accordance with generally accepted accounting principles in the United States of America. Further, these investments were determined not to have a readily determinable fair value.
Other Equity Method Investments
InfraServs. We hold indirect ownership interests in several German InfraServ Groups that own and develop industrial parks and provide various technical and administrative services to tenants. Our ownership interest in the equity investments in InfraServ affiliates are as follows:
______________________________
As of December 31, 2019 | |
(In percentages) | |
InfraServ GmbH & Co. Gendorf KG | 30 |
InfraServ GmbH & Co. Hoechst KG | 32 |
YNCORIS GmbH & Co. KG(1) | 22 |
(1) | Formerly known as InfraServ GmbH & Co. Knapsack KG. |
Intellectual Property
We attach importance to protecting our intellectual property, including safeguarding our confidential information and through our patents, trademarks and copyrights, in order to preserve our investment in research and development, manufacturing and marketing. Patents may cover processes, equipment, products, intermediate products and product uses. We also seek to register trademarks as a means of protecting the brand names of our Company and products.
Patents. In most industrial countries, patent protection exists for new substances and formulations, as well as for certain unique applications and production processes. However, we do business in regions of the world where intellectual property protection may be limited and difficult to enforce.
Confidential Information. We maintain stringent information security policies and procedures wherever we do business. Such information security policies and procedures include data encryption, controls over the disclosure and safekeeping of confidential information and trade secrets, as well as employee awareness training.
Trademarks. Amcel®, AOPlus®, Ateva®, Avicor®, Celanese®, Celanex®, Celanyl®, Celcon®, Celstran®, Celvolit®, Clarifoil®, Dur-O-Set®, ECOMID®, EcoVAE®, Factor®, Forprene®, FRIANYL®, Fortron®, GHR®, GUR®, Hostaform®, Laprene®, MetaLX®, Mowilith®, MT®, NILAMID®, Nutrinova®, Nylfor®, OmniLon®, Pibiflex®, Pibifor®, Pibiter®, Polifor®, Resyn®, Riteflex®, SlideX®, Sofprene®, Sofpur®, Sunett®, Talcoprene®, Tecnoprene®, Thermx®, TufCOR®, VAntage®, Vectra®, Vinac®, Vinamul®, VitalDose®, Zenite® and certain other branded products and services named in this document are registered or reserved trademarks or service marks owned or licensed by Celanese. The foregoing is not intended to be an exhaustive or comprehensive list of all registered or reserved trademarks and service marks owned or licensed by Celanese. Fortron® is a registered trademark of Fortron Industries LLC. Hostaform® is a registered trademark of Hoechst GmbH. Mowilith® and NILAMID® are registered trademarks of Celanese in most European countries.
We monitor competitive developments and defend against infringements on our intellectual property rights. Neither Celanese nor any particular business segment is materially dependent upon any one patent, trademark, copyright or trade secret.
Environmental and Other Regulation
Matters pertaining to environmental and other regulations are discussed in Item 1A. Risk Factors, as well as Note 2 - Summary of Accounting Policies, Note 16 - Environmental and Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements.
13
Employees
Our employees employed on a continuing basis throughout the world are as follows:
Employees as of December 31, 2019 | ||
North America | ||
US | 2,764 | |
Canada | 184 | |
Mexico | 572 | |
Total | 3,520 | |
Europe | ||
Germany | 1,560 | |
Other Europe | 1,417 | |
Total | 2,977 | |
Asia | 1,083 | |
Rest of World | 134 | |
Total | 7,714 | |
Backlog
We do not consider backlog to be a significant indicator of the level of future sales activity. In general, we do not manufacture our products against a backlog of orders. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is not material to understanding our overall business and should not be considered a reliable indicator of our ability to achieve any particular level of net sales or financial performance.
Available Information — Securities and Exchange Commission ("SEC") Filings and Corporate Governance Materials
We make available free of charge, through our internet website (http://www.celanese.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as ownership reports on Form 3 and Form 4, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. References to our website in this report are provided as a convenience, and the information on our website is not, and shall not be deemed to be a part of this report or incorporated into any other filings we make with the SEC. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Celanese Corporation, that electronically file with the SEC at http://www.sec.gov.
We also make available free of charge, through our website, our Corporate Governance Guidelines of our Board of Directors and the charters of each of the standing committees of our Board of Directors.
14
Item 1A. Risk Factors
Many factors could have an effect on our financial condition, cash flows and results of operations. We are subject to various risks resulting from changing economic, environmental, political, industry, business, financial and regulatory conditions. The factors described below represent our principal risks.
Risks Related to Our Business
We are exposed to general economic, political and regulatory conditions and risks in the countries in which we have operations and customers.
We operate globally and have customers in many countries. Our major facilities are primarily located in North America, Europe and Asia, and we hold interests in affiliates that operate in the United States ("US"), Germany, China, Japan, Malaysia, South Korea and Saudi Arabia. Our principal customers are similarly global in scope and the prices of our most significant products are typically regional or world market prices. Consequently, our business and financial results are affected, directly and indirectly, by world economic conditions, including instability in credit markets, declining consumer and business confidence, fluctuating commodity prices and interest rates, volatile exchange rates and other challenges such as the changing regulatory environment.
Our operations are also subject to global political conditions. For example, any future withdrawal or renegotiation of trade agreements, or the failure to reach agreement over trade agreements, or the imposition of new or increased tariffs on our products or raw materials, or the more aggressive prosecution of trade disputes with countries like China, may increase costs or reduce profitability, or adversely affect our ability to operate our business and execute our growth strategy. In addition, it may be more difficult for us to enforce agreements, collect receivables, receive dividends and repatriate earnings through foreign legal systems. In certain foreign jurisdictions our operations are subject to nationalization and expropriation risk and some of our contractual relationships within these jurisdictions are subject to cancellation without full compensation for loss. Furthermore, in certain cases where we benefit from local government subsidies or other undertakings, such benefits are subject to the solvency of local government entities and are subject to termination without meaningful recourse or remedies.
We have invested significant resources in China and other Asian countries. This region's growth may slow, and we may fail to realize the anticipated benefits associated with our investment there and, consequently, our financial results may be adversely impacted.
In addition, we have significant operations and financial relationships based in Europe. Historically, sales originating in Europe have accounted for over one-third of our net sales. For example, in 2019, sales originating in Europe accounted for approximately 40% of our net sales. Adverse conditions in the European economy related to the United Kingdom's exit from the European Union ("EU") membership or otherwise may negatively impact our overall financial results due to reduced economic growth, decreased end-use customer demand or other factors.
We are subject to risks associated with the increased volatility in the prices and availability of key raw materials and energy, which could have a significant adverse effect on the margins of our products and our financial results.
We purchase significant amounts of ethylene, methanol, carbon monoxide and natural gas from third parties primarily for use in our production of basic chemicals in our intermediate chemistry business, principally acetic acid, vinyl acetate monomer ("VAM") and formaldehyde. We use a portion of our output of these chemicals, in turn, as inputs in the production of downstream products in all of our business segments. We also purchase some of these raw materials for use in our emulsion polymers and EVA polymer businesses, primarily for vinyl acetate ethylene emulsions and ethylene vinyl acetate production, as well as significant amounts of wood pulp for use in our production of acetate tow. The price of many of these items is dependent on the available supply of that item and may increase significantly as a result of uncertainties associated with war, terrorist activities, civil unrest, epidemics, pandemics, weather, natural disasters, the effects of climate change or political instability, plant or production disruptions, strikes or other labor unrest, breakdown or degradation of transportation infrastructure used in the delivery of raw materials and energy commodities, or changes in laws or regulations in any of the countries in which we have significant suppliers. In particular, to the extent of our vertical integration in the production of chemicals, shortages in the availability of raw material chemicals, such as natural gas, ethylene and methanol, or the loss of our dedicated supplies of carbon monoxide, may have an increased adverse impact on us as it can cause a shortage in intermediate and finished products. Such shortages would adversely impact our ability to produce certain products and increase our costs resulting in reduced margins and adverse financial results.
15
We are exposed to volatility in the prices of our raw materials and energy. Although we have long-term supply agreements, multi-year purchasing and sales agreements and forward purchase contracts providing for the supply of ethylene, methanol, carbon monoxide, wood pulp, natural gas and electricity, the contractual prices for these raw materials and energy can vary with economic conditions and may be highly volatile. In addition to the factors noted above that may impact supply or price, factors that have caused volatility in our raw material prices in the past and which may do so in the future include:
• | Shortages of raw materials due to increasing demand, e.g., from growing uses or new uses; |
• | Capacity constraints, e.g., due to construction delays, labor disruption, involuntary shutdowns or turnarounds; |
• | The inability of a supplier to meet our delivery orders or a supplier's choice not to fulfill orders or to terminate a supply contract or our inability to obtain or renew supply contracts on favorable terms; |
• | The general level of business and economic activity; and |
• | The direct or indirect effect of governmental regulation (including the impact of government regulation relating to climate change). |
If we are not able to fully offset the effects of higher energy and raw material costs through price increases, productivity improvements or cost reduction programs, or if such commodities become unavailable, it could have a significant adverse effect on our ability to timely and profitably manufacture and deliver our products resulting in reduced margins and adverse financial results.
We have a practice of maintaining, when available, multiple sources of supply for raw materials and services. However, some of our individual plants may have single sources of supply for some of their raw materials, such as carbon monoxide, steam and ethylene, or site services. Although we have been able to obtain sufficient supplies of raw materials and services, there can be no assurance that unforeseen developments will not affect our ability to source raw materials or services in the future. Even if we have multiple sources of supply for a raw material or a service, there can be no assurance that these sources can make up for the loss of a major supplier. Furthermore, if any sole source or major supplier were unable or unwilling to deliver a raw material or a service for an extended period of time, we may not be able to find an acceptable alternative or any such alternative could result in increased costs. It is also possible profitability will be adversely affected if we are required to qualify additional sources of supply for a raw material or a service to our specifications in the event of the loss of a sole source or major supplier.
Almost all of our supply of methanol in North America is currently obtained from our joint venture, Fairway Methanol LLC ("Fairway"), with Mitsui & Co., Ltd., of Tokyo, Japan, in which we own a 50% interest, for the production of methanol at our integrated chemical plant in Clear Lake, Texas.
Production at our manufacturing facilities, or at our suppliers', could be disrupted for a variety of reasons, which could prevent us from producing enough of our products to maintain our sales and satisfy our customers' demands.
A disruption in production at one or more of our manufacturing facilities, or our suppliers, could have a material adverse effect on our business. Disruptions could occur for many reasons, including fire, natural disasters, weather, unplanned maintenance or other manufacturing problems, disease, strikes or other labor unrest, transportation interruption, government regulation, political unrest or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance. If one of our key manufacturing facilities is unable to produce our products for an extended period of time, our sales may be reduced by the shortfall caused by the disruption and we may not be able to meet our customers' needs, which could cause them to seek other suppliers. In particular, production disruptions at our manufacturing facilities that produce chemicals used as inputs in the production of chemicals in other business segments, such as acetic acid, VAM and formaldehyde, could have a more significant adverse effect on our business and financial performance and results of operations to the extent of such vertical integration. Furthermore, to the extent a production disruption occurs at a manufacturing facility that has been operating at or near full capacity, the resulting shortage of our product could be particularly harmful because production at such manufacturing facility may not be able to reach levels achieved prior to the disruption. During 2019, production of acetic acid and VAM was disrupted due to a localized fire at our Clear Lake, Texas facility, which caused reduced sales and profits.
Disruptions or interruptions of production or operations could also occur due to accidents, interruptions in sources of raw materials, cyber security incidents, terrorism or political unrest, public health crises (including, but not limited to, the coronavirus outbreak), or other unforeseen events or delays in construction or operation of facilities, including as a result of
16
geopolitical conditions, the occurrence of acts of war or terrorist incidents or as a result of weather, natural disasters, or other crises including public health crises.
Failure to develop new products and production technologies or to implement productivity and cost reduction initiatives successfully, may harm our competitive position.
Our operating results depend significantly on the development of commercially viable new products, product grades and applications, as well as process technologies, free of any legal restrictions. If we are unsuccessful in developing new products, applications and production processes in the future, including failing to leverage our opportunity pipeline in our Engineered Materials segment, our competitive position and operating results may be negatively affected. However, as we invest in new technology, we face the risk of unanticipated operational or commercialization difficulties, including an inability to obtain necessary permits or governmental approvals, the development of competing technologies, failure of facilities or processes to operate in accordance with specifications or expectations, construction delays, cost over-runs, the unavailability of financing, required materials or equipment and various other factors. Likewise, we have undertaken and are continuing to undertake initiatives in all of our business segments to improve productivity and performance and to generate cost savings. These initiatives may not be completed or beneficial or the estimated cost savings from such activities may not be realized.
Our business exposes us to potential product liability, warranty, and tort claims, and recalls, which could adversely affect our financial condition and performance.
The development, manufacture and sale of specialty chemical products by us, including products produced for the food and beverage, cigarette, automobile, construction, aerospace, medical device and pharmaceutical industries, involves a risk of exposure to product liability, warranty, and tort claims, product recalls, product seizures and related adverse publicity. A product liability, warranty, or tort claim or judgment against us that is larger than those typically experienced in the regular course of business could also result in substantial and unexpected expenditures, affect consumer or customer confidence in our products, and divert management's attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that this type or the level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a significant partially or completely uninsured judgment against us could have a material adverse effect on our results of operations or financial condition. Although we have standard contracting policies and controls, we may not always be able to contractually limit our exposure to third party claims should our failure to perform result in downstream supply disruptions or product recalls.
We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications.
Our products provide important performance attributes to our customers' products. If one of our products fails to perform in a manner consistent with applicable quality specifications, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as guaranteed. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more key customers.
Our future success depends in part on our ability to protect our intellectual property rights and our rights to use our intellectual property. Our inability to protect and enforce these rights could reduce our ability to maintain our industry position and our profit margins.
We rely on our patents, trademarks, copyrights, know-how and trade secrets, and patents and other technology licensed from third parties, to protect our investment in research and development and our competitive commercial positions in manufacturing and marketing our products. We have adopted internal policies for protecting our know-how and trade secrets. In addition, our practice is to seek patent or trade secret protection for significant developments that provide us competitive advantages and freedom to practice for our businesses. Patents may cover catalysts, processes, products, intermediate products and product uses. These patents are usually filed in strategic countries throughout the world and provide varying periods and scopes of protection based on the filing date and the type of patent application. The legal life and scope of protection provided by a patent may vary among those countries in which we seek protection. As patents expire, the catalysts, processes, products, intermediate products and product uses described and claimed in those patents generally may become available for use by the public subject to our continued protection for associated know-how and trade secrets. We also monitor intellectual property of others, especially patents that could impact our rights to commercially implement research and development, our rights to manufacture and market our products, and our rights to use know-how and trade secrets. We will not intentionally infringe upon the valid intellectual property rights of others, and we will continue to assess and take actions as necessary to protect our positions. We also seek to register trademarks as a means of protecting the brand names of our products, which brand names
17
become more important once the corresponding product or process patents have expired. We operate in regions of the world where intellectual property protection may be limited and difficult to enforce and our continued growth strategy may result in us seeking intellectual property protection in additional regions with similar challenges. We also monitor the trademarks of others and take action when our trademark rights are being infringed upon. If we are not successful in protecting or maintaining our patent, license, trademark or other intellectual property rights, or protecting our rights to commercially make, market and sell our products, our net sales, results of operations and cash flows may be adversely affected.
Our business is exposed to risks associated with the creditworthiness of our suppliers, customers and business partners and the industries in which our suppliers, customers and business partners participate are cyclical in nature, both of which may adversely affect our business and results of operations.
Our business is exposed to risks associated with the creditworthiness of our key suppliers, customers and business partners and reductions in demand for our customers' products. These risks include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our products, delays in or interruptions of the supply of raw materials we purchase and bankruptcy of customers, suppliers or other creditors. Furthermore, some of the industries in which our end-use customers participate, such as the automotive, electrical, construction and textile industries, are highly competitive, to a large extent driven by end-use applications, and may experience overcapacity, all of which may affect demand for and the pricing of our products. In addition, many of these industries are cyclical in nature, thus posing risks to us that vary throughout the year. The occurrence of any of these events may adversely affect our cash flow, profitability and financial condition.
Failure to comply with applicable laws or regulations and/or changes in applicable laws or regulations may adversely affect our business and financial results as a whole.
We are subject to extensive international, national, state, local and other laws and regulations. Failure to comply with these laws, including antitrust and anticorruption laws, rules, regulations or court decisions, could expose us to fines, penalties and other costs. Although we have implemented policies and procedures designed to ensure compliance with these laws, rules, regulations and court decisions, there can be no assurance that our employees and business partners and other third parties acting on our behalf will comply with these laws, rules, regulations and court decisions, which could result in fines, penalties and costs and damage to our business reputation.
Moreover, changes in laws or regulations, including the more aggressive enforcement of such laws and regulations, such as unexpected changes in regulatory requirements (including import or export licensing requirements), or changes in reporting requirements of the US, Canadian, Mexican, German, EU or Asian governmental agencies, could increase the cost of doing business in these regions. In addition, enforcement of environmental or other governmental policy may result in plant shut downs or significantly decreased production, such as in China on high pollution days. Any of these conditions, including the failure to obtain or maintain operating permits for our business, may have an effect on our business and financial results as a whole and may result in volatile current and future prices for our products and raw materials. See Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for further information.
Environmental regulations and other obligations relating to environmental matters could subject us to liability for fines, clean-ups and other damages, require us to incur significant costs to modify our operations and increase our manufacturing and delivery costs.
Costs related to our compliance with environmental laws and regulations, and potential obligations with respect to sites currently or formerly owned or operated by us, may have a significant negative impact on our operating results. We also have obligations related to the indemnity agreement contained in the demerger and transfer agreement between Celanese GmbH and Hoechst AG for environmental matters arising out of certain divestitures that took place prior to the demerger.
Our operations are subject to extensive international, national, state, local and other laws and regulations that govern environmental and health and safety matters. We incur substantial capital and other costs to comply with these requirements. If we violate any one of those laws or regulations, we can be held liable for substantial fines and other sanctions, including limitations on our operations as a result of changes to or revocations of environmental permits involved. Stricter environmental, safety and health laws and regulations could result in substantial costs and liabilities to us or limitations on our operations. Consequently, compliance with these laws and regulations may negatively affect our earnings and cash flows in a particular reporting period. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for further information.
18
Changes in environmental, health and safety regulations in the jurisdictions where we manufacture or sell our products could lead to a decrease in demand for our products.
New or revised governmental regulations and independent studies relating to the effect of our products on health, safety or the environment may affect demand for our products and the cost of producing our products. In addition, products we produce, including VAM, formaldehyde and plastics derived from formaldehyde, may be classified and labeled in a manner that would adversely affect demand for such products. For example, in 2012 the International Agency for Research on Cancer ("IARC"), a research agency within the World Health Organization, classified formaldehyde as carcinogenic to humans (Group 1) based on epidemiological studies linking formaldehyde exposure to nasopharyngeal cancer, a rare cancer in humans, and leukemia. In 2011, a similar conclusion was reached by the National Toxicology Program ("NTP"), a U.S. inter-agency research program. We anticipate that the results of the IARC's and the NTP's reviews will continue to be examined and considered by government regulatory agencies with responsibility for setting worker and environmental exposure standards and labeling requirements.
Other initiatives potentially will require toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. These initiatives include the Frank R. Lautenberg Chemical Safety for the 21st Century Act which amended the Toxic Substances Control Act (TSCA), the United States primary chemicals management law, as well as various European Commission regulatory programs, such as REACH (Registration, Evaluation, Authorization and Restriction of Chemicals), and new initiatives in Asia and other regions. These assessments may result in heightened concerns about the chemicals involved and additional regulatory requirements being placed on the production, handling, labeling and/or use of the subject chemicals. Such concerns and additional requirements could also increase the cost incurred by our customers to use our chemical products and otherwise limit the use of these products, which could lead to a decrease in demand for these products. Such a decrease in demand would likely have an adverse impact on our business and results of operations.
Our production facilities, including facilities we own and/or operate and operations at our facilities owned and/or operated by third parties, handle the processing of some volatile and hazardous materials that subject us to operating and other risks that could have a negative effect on our operating results.
Although we take precautions to enhance the safety of, and minimize the disruption to, our operations and operations at our facilities owned and/or operated by third parties, we are subject to operating and other risks associated with chemical manufacturing, including the storage and transportation of raw materials, finished products and waste. These risks include, among other things, pipeline and storage tank leaks and ruptures, explosions and fires and discharges or releases of toxic or hazardous substances. In addition, we may have limited control over operations at our facilities owned and/or operated by third parties or such operations may not be fully integrated into our safety programs.
These operating and other risks can cause personal injury, property damage, third-party damages and environmental contamination, and may result in the shutdown of affected facilities and the imposition of civil or criminal penalties. The occurrence of any of these events may disrupt production and have a negative effect on the productivity and profitability of a particular manufacturing facility, our operating results and cash flows.
US federal regulations aimed at increasing security at certain chemical production plants and similar legislation that may be proposed in the future, if passed into law, may increase our operating costs and cause an adverse effect on our results of operations.
The Chemical Facility Anti-Terrorism Standards program ("CFATS Program"), which is administered by the Department of Homeland Security ("DHS"), identifies and regulates chemical facilities to ensure that they have security measures in place to reduce the risks associated with potential terrorist attacks on chemical plants located in the US. In December 2014, the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 ("CFATS Act") was enacted. The CFATS Act reauthorizes the CFATS Program for four years. The CFATS Extension Act of 2019 ("HR 251") was signed into law by the President on January 19, 2019. HR 251 extends CFATS for 15 months, until April 19, 2020. This extension does not make any changes to the program and is intended to provide lawmakers the needed time to discuss improvements to CFATS and provides for a longer term authorization. DHS has released an interim final rule under the CFATS Program that imposes comprehensive federal security regulations for high-risk chemical facilities in possession of specified quantities of chemicals of interest. This rule establishes risk-based performance standards for the security of our nation's chemical facilities. It requires covered chemical facilities to prepare Security Vulnerability Assessments, which identify facility security vulnerabilities, and to develop and implement Site Security Plans, which include measures that satisfy the identified risk-based performance standards. We cannot determine with certainty the costs associated with any security measures that DHS may require.
19
We are subject to risks associated with possible climate change legislation, regulation and international accords.
Greenhouse gas emissions have become the subject of a large amount of international, national, regional, state and local attention. For example, the Environmental Protection Agency has promulgated rules concerning greenhouse gas emissions and cap and trade initiatives to limit greenhouse gas emissions have been introduced in the EU. In addition, regulation of greenhouse gas also could occur pursuant to future treaty obligations, statutory or regulatory changes or new climate change legislation. As such, future environmental legislative and regulatory developments related to climate change are possible, which could materially increase operating costs in the chemical industry and thereby increase our manufacturing and delivery costs.
Our business and financial results may be adversely affected by various legal and regulatory proceedings.
We are involved in legal and regulatory proceedings, lawsuits, claims and investigations in the normal course of business and could become subject to additional claims in the future, some of which could be material. The outcome of existing proceedings, lawsuits, claims and investigations may differ from our expectations because the outcomes of such proceedings, including regulatory matters, are often difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable, or permit us to make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments, or changes in applicable law. A future adverse ruling, settlement, or unfavorable development could result in charges that could have a material adverse effect on our business, results of operations or financial condition in any particular period. See Note 16 - Environmental and Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for further information.
Changes in, or the interpretation of, tax legislation or rates throughout the world could materially impact our results.
Our future effective tax rate and related tax balance sheet attributes could be impacted by changes in tax legislation throughout the world. The overall tax environment has made it increasingly challenging for multinational corporations to operate with certainty about taxation in many jurisdictions. For example, the European Commission has been conducting investigations focusing on whether local country tax rulings or tax legislation provide preferential tax treatment that violates EU state aid rules. In addition, the Organization of Economic Cooperation and Development, which represents a coalition of member countries, is supporting changes to numerous long-standing tax principles through its base erosion and profit shifting project, which is focused on a number of issues, including the shifting of profits among affiliated entities located in different tax jurisdictions. Furthermore, a number of countries where we do business, including the US and many countries in the EU, have changed or are considering changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to multinational corporations. The increasingly complex global tax environment could have a material adverse effect on our effective tax rate, results of operations, cash flows and financial condition.
On December 31, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted and was effective January 1, 2018. This overhaul of the US tax law made a number of substantial changes, including the reduction of the corporate tax rate from 35% to 21%, establishing a dividends received deduction for dividends paid by foreign subsidiaries to the US, elimination or limitation of certain deductions (interest, domestic production activities and executive compensation), imposing a mandatory tax on previously unrepatriated earnings accumulated offshore since 1986 and establishing global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments. The US Treasury issued several proposed and final regulations supplementing the TCJA in 2018 and 2019. The final foreign tax credit regulations and base erosion tax regulations issued in 2019 did not have a material impact to our 2019 tax rate, and we do not expect a material impact upon final adoption of the interest expense limitation regulations or the additional proposed foreign tax credit regulations, if adopted in current form. See Note 19 - Income Taxes in the accompanying consolidated financial statements for further information.
Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, expirations of tax holidays or rulings, changes in the assessment regarding the realization of deferred tax assets, or changes in tax laws and regulations or their interpretation. We are subject to the regular examination of our income tax returns by various tax authorities. Examinations in material jurisdictions or changes in laws, rules, regulations or interpretations by local taxing authorities could result in impacts to tax years open under statute or to foreign operating structures currently in place. We regularly assess the likelihood of adverse outcomes resulting from these examinations or changes in laws, rules, regulations or interpretations to determine the adequacy of our provision for taxes. It is possible the outcomes from these examinations will have a material adverse effect on our financial condition and operating results.
20
Our significant non-US operations expose us to global exchange rate fluctuations that could adversely impact our profitability.
We conduct a significant portion of our operations outside the US. Consequently, fluctuations in currencies of other countries, especially the Euro, may materially affect our operating results. Because our consolidated financial statements are presented in US dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into US dollars based on average exchange rates prevailing during the reporting period or the exchange rate at the end of that period. Therefore, increases or decreases in the value of the US dollar against other major currencies will affect our net operating revenues, operating income and the cost of balance sheet items denominated in foreign currencies. Foreign exchange rates can also impact the competitiveness of products produced in certain jurisdictions and exported for sale into other jurisdictions. These changes may impact the value received for the sale of our goods versus those of our competitors.
In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into a purchase or sales transaction using a currency different from the operating subsidiary's functional currency. Given the volatility of exchange rates, particularly the strengthening of the US dollar against major currencies or the currencies of large developing countries, we may not be able to manage our currency transaction and translation risks effectively.
We use financial instruments to hedge certain exposure to foreign currency fluctuations, but those hedges in most cases cover existing balance sheet exposures and not future transactional exposures. We cannot guarantee that our hedging strategies will be effective. In addition, the use of financial instruments creates counterparty settlement risk. Failure to effectively manage these risks could have an adverse impact on our financial position, results of operations and cash flows.
We are subject to information technology security threats that could materially affect our business.
We have been and will continue to be subject to advanced persistent information technology security threats. While some unauthorized access to our information technology systems occurs, we believe to date these threats have not had a material impact on our business. We seek to detect and investigate these security incidents and to prevent their recurrence but in some cases we might be unaware of an incident or its magnitude and effects. The theft, mis-use or publication of our intellectual property and/or confidential business information or the compromising of our systems or networks could harm our competitive position, cause operational disruption, reduce the value of our investment in research and development of new products and other strategic initiatives or otherwise adversely affect our business or results of operations. To the extent that any security breach results in inappropriate disclosure of our employees', customers' or vendors' confidential information, we may incur liability as a result. Although we attempt to mitigate these risks by employing a number of measures, including monitoring of our systems and networks, and maintenance of backup and protective systems, our systems, networks, products and services remain potentially vulnerable to increasingly sophisticated advanced persistent threats that may have a material effect on our business. In addition, the devotion of additional resources to the security of our information technology systems in the future could significantly increase the cost of doing business or otherwise adversely impact our financial results.
Our success depends upon our ability to attract and retain key employees and the identification and development of talent to succeed senior management.
We rely heavily on our management team. Accordingly, our success depends on our ability to attract and retain key personnel. The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect our operations. In addition, because of our reliance on our management team, our future success depends in part on our ability to identify and develop talent to succeed senior management. The retention of key personnel and appropriate senior management succession planning will continue to be important to the successful implementation of our strategies.
Significant changes in pension fund investment performance or assumptions relating to pension costs may have a material effect on the valuation of pension obligations, the funded status of pension plans and our pension cost.
The cost of our pension plans is incurred over long periods of time and involves many uncertainties during those periods of time. Our funding policy for pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level and value of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets will likely result in corresponding increases and decreases in the valuation of plan assets and a change in the discount rate or mortality assumptions, which will likely result in an increase or decrease in the valuation of pension obligations. The combined impact of these changes will affect the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. In recent years, an extended duration strategy in the asset portfolio has been
21
implemented in some plans to reduce the influence of liability volatility due to changes in interest rates. If the funded status of a pension plan declines, we may be required to make unscheduled contributions in addition to those contributions for which we have already planned.
Some of our employees are unionized, represented by workers councils or are subject to local laws that are less favorable to employers than the laws of the US.
As of December 31, 2019, we had 7,714 employees globally. Approximately 16% of our 2,764 US-based employees are unionized. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other employment rights than the laws of the US. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor agreements. Most of our employees in Europe are represented by workers councils and/or unions that must approve any changes in terms and conditions of employment, including potentially salaries and benefits. They may also impede efforts to restructure our workforce. Although we believe we have a good working relationship with our employees and their legal representatives, a strike, work stoppage, or slowdown by our employees could occur, resulting in a disruption of our operations or higher ongoing labor costs.
We may incur significant charges in the event we close or divest all or part of a manufacturing plant or facility.
We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close or divest all or part of a manufacturing plant or facility. We also have shared services agreements at several of our plants and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations. The closure or divestiture of all or part of a manufacturing plant or facility could result in future charges that could be significant. See Note 4 - Acquisitions, Dispositions and Plant Closures in the accompanying consolidated financial statements for further information.
We may not be able to complete future acquisitions or joint venture transactions or successfully integrate them into our business, which could adversely affect our business or results of operations.
As part of our growth strategy, we intend to pursue acquisitions and joint venture opportunities. Successful accomplishment of this objective may be limited by the availability and suitability of acquisition candidates, the ability to obtain regulatory approvals necessary to consummate a planned transaction, and by our financial resources, including available cash and borrowing capacity. Acquisitions and joint venture transactions involve numerous risks, including difficulty determining appropriate valuation, integrating operations, technologies, services and products of the acquired lines or businesses, personnel turnover and the diversion of management's attention from other business matters. In addition, we may be unable to achieve anticipated benefits from these transactions in the time frame that we anticipate, or at all, which could adversely affect our business or results of operations.
The insurance coverage that we maintain may not fully cover all operational risks.
We maintain property, business interruption and casualty insurance but such insurance may not cover all of the risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental remediation. In the future, the types of insurance we obtain and the level of coverage we maintain may be inadequate or we may be unable to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost.
Differences in views with our joint venture participants may cause our joint ventures not to operate according to their business plans, which may adversely affect our results of operations.
We currently participate in a number of joint ventures and may enter into additional joint ventures in the future. The nature of a joint venture requires us to work cooperatively with unaffiliated third parties. Differences in views among joint venture participants may result in delayed decisions or failure to agree on major decisions. If these differences cause the joint ventures to deviate from their business plans or to fail to achieve their desired operating performance, our results of operations could be adversely affected.
22
Risks Related to Our Indebtedness
Our level of indebtedness and other liabilities could diminish our ability to raise additional capital to fund our operations or refinance our existing indebtedness when it matures, limit our ability to react to changes in the economy or the chemicals industry and prevent us from meeting obligations under our indebtedness.
See Note 14 - Debt in the accompanying consolidated financial statements for further information about our indebtedness. See Note 13 - Noncurrent Other Liabilities, Note 15 - Benefit Obligations, Note 16 - Environmental and Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for further information about our other obligations.
Our level of indebtedness and other liabilities could have important consequences, including:
• | Increasing our vulnerability to general economic and industry conditions, including exacerbating the impact of any adverse business effects that are determined to be material adverse events under our existing senior credit agreement (the "Credit Agreement") or our indentures (the "Indentures") governing our $400 million in aggregate principal amount of 5.875% senior unsecured notes due 2021, $500 million in aggregate principal amount of 4.625% senior unsecured notes due 2022, €750 million in aggregate principal amount of 1.125% senior unsecured notes due 2023, $500 million in aggregate principal amount of 3.500% senior unsecured notes due 2024, €300 million in aggregate principal amount of 1.250% senior unsecured notes due 2025 and €500 million in aggregate principal amount of 2.125% senior unsecured notes due 2027 (collectively, the "Senior Notes"); |
• | Requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on indebtedness and amounts payable in connection with the satisfaction of our other liabilities, therefore reducing our ability to use our cash flow to fund operations, capital expenditures and future business opportunities or pay dividends on our common stock, par value $0.0001 per share ("Common Stock"); |
• | Exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest; |
• | Exposing us to the risk of changes in currency exchange rates as certain of our borrowings are denominated in foreign currencies; |
• | Limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; |
• | Limiting our ability to enter into certain commercial arrangements because of concerns of counterparty risks; and |
• | Limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have less debt. |
We may incur additional indebtedness in the future, which could increase the risks described above.
Although covenants under the Credit Agreement and the Indentures limit our ability to incur certain additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness we could incur in compliance with these restrictions could be significant. To the extent that we incur additional indebtedness, the risks associated with our debt described above, including our possible inability to service our debt, including the Senior Notes, would increase.
Our variable rate and euro denominated indebtedness subjects us to interest rate risk and foreign currency exchange rate risk, which could cause our debt service obligations to increase significantly and affect our operating results.
Certain of our borrowings are at variable rates of interest or are euro denominated, which exposes us to interest rate risk and currency exchange rate risk, respectively. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, Item 7A. Quantitative and Qualitative Disclosures About Market Risk below and Note 22 - Derivative Financial Instruments in the accompanying consolidated financial statements for further information.
We may not be able to generate sufficient cash to service our indebtedness and may be forced to take other actions to satisfy obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on the financial condition and operating performance of our subsidiaries, which are subject to prevailing economic and competitive conditions and to certain
23
financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.
Restrictive covenants in our debt agreements may limit our ability to engage in certain transactions and may diminish our ability to make payments on our indebtedness or pay dividends.
The Credit Agreement, the Indentures and the Receivables Purchase Agreement (the "Purchase Agreement") governing our receivables securitization facility each contain various covenants that limit our ability to engage in specified types of transactions. The Credit Agreement contains covenants including, but not limited to, restrictions on our ability to incur additional debt; incur liens securing debt; enter into sale-leaseback transactions; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the Issuer's assets or the assets of its subsidiaries.
In addition, the Indentures limit Celanese US Holdings LLC ("Celanese US") and certain of its subsidiaries' ability to, among other things, incur liens securing debt; enter into sale-leaseback transactions; merge or consolidate with any other person; and sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of Celanese US's assets or the assets of its restricted subsidiaries.
The Purchase Agreement also contains covenants including, but not limited to, restrictions on CE Receivables LLC, a wholly-owned, "bankruptcy remote" special purpose subsidiary of the Company, and certain other Company subsidiaries' ability to incur indebtedness; grant liens on assets; merge, consolidate, or sell certain assets; prepay or modify certain indebtedness; and engage in other businesses.
Such restrictions in our debt obligations could result in us having to obtain the consent of our lenders and holders of the Senior Notes in order to take certain actions. Disruptions in credit markets may prevent us from obtaining or make it more difficult or more costly for us to obtain such consents. Our ability to expand our business or to address declines in our business may be limited if we are unable to obtain such consents.
A breach of any of these covenants could result in a default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, a default under the Credit Agreement could permit lenders to accelerate the maturity of our indebtedness under the Credit Agreement and to terminate any commitments to lend. If the lenders under the Credit Agreement accelerate the repayment of such indebtedness, we may not have sufficient liquidity to repay such amounts or our other indebtedness, including the Senior Notes. In such event, we could be forced into bankruptcy or liquidation.
Celanese and Celanese US are holding companies and depend on subsidiaries to satisfy their obligations under the Senior Notes and the guarantee of Celanese US's obligations under the Senior Notes and the Credit Agreement by Celanese.
As holding companies, Celanese and Celanese US conduct substantially all of their operations through their subsidiaries, which own substantially all of our consolidated assets. Consequently, the principal source of cash to pay Celanese and Celanese US's obligations, including obligations under the Senior Notes and the guarantee of Celanese US's obligations under the Credit Agreement and the Indentures by Celanese, is the cash that our subsidiaries generate from their operations. We cannot assure that our subsidiaries will be able to, or be permitted to, make distributions to enable Celanese US and/or Celanese to make payments in respect of their obligations. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, applicable country or state laws, regulatory limitations and terms of our debt instruments may limit our subsidiaries' ability to distribute cash to Celanese US and Celanese. While the Credit Agreement and the Indentures limit the ability of our subsidiaries to put restrictions on paying dividends or making other intercompany payments to us, these limitations are subject to certain qualifications and exceptions, which may have the effect of significantly restricting the applicability of those limits. In the event Celanese US and/or Celanese do not receive distributions from our subsidiaries, Celanese US and/or Celanese may be unable to make required payments on the indebtedness under the Credit Agreement, the Indentures, the guarantee of Celanese US's obligations under the Credit Agreement and the Indentures by Celanese, or our other indebtedness.
24
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Description of Property
We own or lease numerous production and manufacturing facilities throughout the world. We also own or lease other properties, including office buildings, warehouses, pipelines, research and development facilities and sales offices. We continuously review and evaluate our facilities as a part of our strategy to optimize our business portfolio. The following table sets forth a list of our principal offices, production and other facilities throughout the world as of December 31, 2019.
Site | Leased/Owned | Products/Functions | ||
Corporate Offices | ||||
Amsterdam, Netherlands | Leased | Administrative offices | ||
Budapest, Hungary | Leased | Administrative offices | ||
Irving, Texas, US | Leased | Corporate headquarters | ||
Nanjing, China | Leased | Administrative offices | ||
Shanghai, China | Leased | Administrative offices | ||
Sulzbach, Germany | Leased | Administrative offices | ||
Engineered Materials | ||||
Auburn Hills, Michigan, US | Leased | Automotive Development Center | ||
Bishop, Texas, US | Owned | Polyoxymethylene ("POM"), Ultra-high molecular weight polyethylene ("UHMW-PE"), Compounding | ||
Evansville, Indiana, US | Owned | Compounding | ||
Ferrara, Italy | Leased | Compounding | ||
Florence, Kentucky, US | Owned | Compounding | ||
Forli, Italy | Leased | Compounding | ||
Kaiserslautern, Germany(1) | Leased | Long-fiber reinforced thermoplastics ("LFRT") | ||
Nanjing, China(2) | Owned | LFRT, UHMW-PE, Compounding | ||
Oberhausen, Germany(1) | Leased | UHMW-PE | ||
Shelby, North Carolina, US | Owned | LCP | ||
Silao, Mexico | Leased | Compounding | ||
Silvassa, Gurjarat, India | Owned | Compounding | ||
Suzano, Brazil(1) | Leased | Compounding | ||
Utzenfeld, Germany | Owned | Compounding | ||
Acetate Tow | ||||
Lanaken, Belgium | Owned | Acetate tow | ||
Narrows, Virginia, US | Owned | Acetate tow, Acetate flake | ||
25
Site | Leased/Owned | Products/Functions | ||
Acetyl Chain | ||||
Bay City, Texas, US(1) | Leased | Vinyl acetate monomer ("VAM") | ||
Bishop, Texas, US | Owned | Formaldehyde, Paraformaldehyde | ||
Boucherville, Quebec, Canada | Owned | Conventional emulsions | ||
Cangrejera, Mexico | Owned | Acetic anhydride, Ethyl acetate, Acetone derivatives | ||
Clear Lake, Texas, US(3) | Owned | Acetic acid, VAM, Methanol | ||
Edmonton, Alberta, Canada | Owned | Low-density polyethylene resins, Ethylene vinyl acetate | ||
Enoree, South Carolina, US | Owned | Conventional emulsions, Vinyl acetate ethylene ("VAE") emulsions | ||
Geleen, Netherlands | Owned | VAE emulsions | ||
Jurong Island, Singapore(1) | Leased | Acetic acid, Butyl acetate, Ethyl acetate, VAE emulsions, VAM | ||
Nanjing, China(2) | Owned | Acetic acid, Acetic anhydride, Conventional emulsions, VAE emulsions, VAM | ||
Perstorp, Sweden | Owned | Conventional emulsions, VAE emulsions | ||
(1) | Celanese owns the assets on this site and leases the land through the terms of a long-term land lease. |
(2) | Multiple Celanese business segments conduct operations at the Nanjing facility. Celanese owns the assets on this site. Celanese also owns the land through "land use right grants" for 46 to 50 years with the right to transfer, mortgage or lease such land during the term of the respective land use right grant. |
(3) | Methanol is produced by our joint venture, Fairway Methanol LLC, in which Celanese owns a 50% interest. |
Celanese also has entered into strategic ventures with partners in various locations around the world. See Item 1. Business for a discussion of our investments in affiliates and their respective site locations.
Item 3. Legal Proceedings
The Company is involved in legal and regulatory proceedings, lawsuits, claims and investigations incidental to the normal conduct of its business, relating to such matters as product liability, land disputes, insurance coverage disputes, contracts, employment, antitrust and competition, intellectual property, personal injury and other actions in tort, workers' compensation, chemical exposure, asbestos exposure, taxes, trade compliance, acquisitions and divestitures, claims of legacy stockholders, past waste disposal practices and release of chemicals into the environment. The Company is actively defending those matters where it is named as a defendant. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, the Company's litigation accruals and estimates of possible loss or range of possible loss may not represent the ultimate loss to the Company from legal proceedings. See Note 16 - Environmental and Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for a discussion of material environmental matters and material commitments and contingencies related to legal and regulatory proceedings. See Item 1A. Risk Factors for certain risk factors relating to these legal proceedings.
26
Item 4. Mine Safety Disclosures
None.
Information about our Executive Officers
The names, ages and biographies of our executive officers as of February 6, 2020 are as follows:
Name | Age | Position | |||
Mark C. Rohr | 68 | Executive Chairman (Chairman of the Board of Directors) | |||
Lori J. Ryerkerk | 57 | Chief Executive Officer, President and Director | |||
Scott A. Richardson | 43 | Senior Vice President and Chief Financial Officer | |||
Todd L. Elliott | 54 | Senior Vice President, Acetyls | |||
A. Lynne Puckett | 57 | Senior Vice President and General Counsel | |||
Shannon L. Jurecka | 50 | Senior Vice President and Chief Human Resources Officer | |||
Mark C. Rohr was named our Chairman, President and Chief Executive Officer in April 2012 after being a member of our board of directors since April 2007. Effective May 2019, he was elected Executive Chairman, continuing to serve as Chairman of the Board and a director. Prior to joining the Company, Mr. Rohr was Executive Chairman and a director of Albemarle Corporation, a global developer, manufacturer and marketer of highly engineered specialty chemicals. During his 11 years with Albemarle, he held various executive positions, including Chairman and Chief Executive Officer. Earlier in his career, Mr. Rohr held executive leadership roles with various companies, including Occidental Chemical Corporation and The Dow Chemical Company. Mr. Rohr has served on the board of directors of Ashland Global Holdings Inc. (f/k/a Ashland Inc.) since 2008, and currently serves as chair of its governance and nominating committee and a member of its compensation committee. In 2016, he also served as Chairman of the American Chemistry Council's Executive Committee and as Chairman of the International Council of Chemical Associations. Mr. Rohr received a bachelor's degree in chemistry and chemical engineering from Mississippi State University.
Lori J. Ryerkerk was named our Chief Executive Officer and President and a member of our board of directors effective May 2019. Previously, Ms. Ryerkerk was the Executive Vice President of Global Manufacturing, the largest business in Shell Downstream Inc., where she led a team of 30,000 employees and contractors at refineries and chemical sites worldwide. Ms. Ryerkerk joined Shell in May 2010 as the Regional Vice President of Manufacturing in Europe and Africa, and was responsible for the operation of five Shell manufacturing facilities and five joint ventures. In October 2013, she was named Executive Vice President of Global Manufacturing, Shell Downstream Inc. Before joining Shell, she was Senior Vice President, Refining, Supply and Terminals at Hess Corporation, where she was responsible for refineries, terminals and a distribution network, and supply and trading. Prior to that, Ms. Ryerkerk spent 24 years with ExxonMobil where she started her career as a process technologist at a refinery in Baton Rouge, Louisiana. Throughout her tenure at ExxonMobil, she took on a variety of operational and senior leadership roles in Refining and Chemicals Manufacturing, Power Generation, and various other groups including Supply, Economics and Planning, HSSE and Public Affairs/Government Relations. Ms. Ryerkerk received a Chemical Engineering degree from Iowa State University. She previously served on the board of directors of Axalta Coating Systems, a leading provider of liquid and powder coatings.
Scott A. Richardson was named Chief Financial Officer for Celanese Corporation in February 2018 after serving as Senior Vice President of the Engineered Materials business since December 2015, where he had global responsibility for strategy, product and business management, planning and portfolio development, and pipeline management. Previously, Mr. Richardson served as Vice President and General Manager of the Acetyl Chain since 2011. Mr. Richardson has progressed through several Celanese roles including global commercial director, Acetyls; manager of Investor Relations; business analysis manager, Acetyls; and business line controller, Polyols and Solvents. He joined Celanese in 2005. Prior to joining Celanese, Mr. Richardson held various finance, operational and leadership roles at American Airlines. He earned a Bachelor of Arts in Accounting from Westminster College and a Master of Business Administration from Texas Christian University.
Todd L. Elliott was named Senior Vice President, Acetyls in September 2017 after serving as Senior Vice President of Global Sales (since 2015) and also for the European region since 2016. He has global responsibility for the Celanese Acetyl Chain business. Prior to his current role, Elliott progressed through several roles of increasing responsibility at Celanese including Vice President and General Manager of Cellulose Derivatives, Vice President of Acetate Sales and director of Corporate Development. He joined Celanese in 1987. Mr. Elliot also serves as a director of Polyplastics Company Ltd., a joint venture of Daicel Corp. and Celanese. Mr. Elliott received a Bachelor of Arts in business administration from Westminster College and a Master of Business Administration from Fontbonne College.
27
A. Lynne Puckett joined Celanese Corporation in February 2019 as Senior Vice President and General Counsel. Prior to that, Ms. Puckett was Senior Vice President‚ General Counsel and Secretary of Colfax Corporation since 2010. Prior to Colfax‚ she was a Partner with the law firm of Hogan Lovells. Her experience includes a broad range of corporate and transactional matters‚ including mergers and acquisitions‚ venture capital financings‚ debt and equity offerings‚ and general corporate and securities law matters. Before entering the practice of law‚ Ms. Puckett worked for the U.S. Central Intelligence Agency and a major U.S. defense contractor. Ms. Puckett received a Juris Doctor degree from the University of Maryland School of Law and a Bachelor of Science degree from James Madison University.
Shannon L. Jurecka has served as our Senior Vice President and Chief Human Resources Officer since July 2017. Prior to her current role, Ms. Jurecka served as Vice President of Human Resources for Materials Solutions and the Human Resource leader for Mergers and Acquisitions. Immediately prior to joining the Company in 2016, Ms. Jurecka served as a Human Resources Executive with Bank of America Merrill Lynch for 10 years where she supported multiple businesses during her tenure, including her most recent role supporting over 20,000 operations employees in more than 25 locations across seven states. She also served as the Dallas and Fort Worth Market Human Resource Executive responsible for market strategic talent objectives. Prior to Bank of America, she worked at Dell as a Mechanical Engineering Project Manager prior to moving into Learning and Leadership Development. Ms. Jurecka holds a bachelor's degree in speech communication from Sam Houston State University and a master's degree in organizational leadership and ethics from St. Edwards University. She holds a secondary education teaching certificate in the State of Texas.
28
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock, par value $0.0001 per share ("Common Stock"), has traded on the New York Stock Exchange ("NYSE") under the symbol "CE" since January 21, 2005.
Holders
As of January 30, 2020, there were 47 holders of record of our Common Stock. By including persons holding shares in broker accounts under street names, however, we estimate we have approximately 134,124 beneficial holders.
Dividend Policy
The amount available to us to pay cash dividends is not currently restricted by our existing senior credit facility and our indentures governing our senior unsecured notes. Certain indentures for notes issued prior to 2016 have provisions that restrict the amount available to us to pay cash dividends in the event of a ratings downgrade below investment grade by two or more credit rating agencies. Also, the general corporation law of the State of Delaware imposes additional restrictions on the payment of dividends by all Delaware corporations that do not currently limit our ability to pay cash dividends. See Note 17 - Stockholders' Equity in the accompanying consolidated financial statements for further information.
Celanese Purchases of its Equity Securities
Information regarding repurchases of our Common Stock during the three months ended December 31, 2019 is as follows:
___________________________
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares Remaining that May Be Purchased Under the Program(2) | ||||||||||
October 1 - 31, 2019 | 950,958 | $ | 120.93 | 950,958 | $ | 1,323,000,000 | ||||||||
November 1 - 30, 2019 | 678,064 | $ | 125.36 | 678,064 | $ | 1,238,000,000 | ||||||||
December 1 - 31, 2019 | 202,812 | $ | 123.27 | 202,812 | $ | 1,213,000,000 | ||||||||
Total | 1,831,834 | 1,831,834 | ||||||||||||
(1) | May include shares withheld from employees to cover their withholding requirements for personal income taxes related to the vesting of restricted stock. |
(2) | Our Board of Directors has authorized the aggregate repurchase of $5.4 billion of our Common Stock since February 2008. |
See Note 17 - Stockholders' Equity in the accompanying consolidated financial statements for further information.
29
Performance Graph
The following performance graph compares the cumulative total return on Celanese Corporation common stock from December 31, 2014 through December 31, 2019 to that of the Standard & Poor's ("S&P") 500 Stock Index and the Dow Jones US Chemicals Index. Cumulative total return represents the change in stock price and the amount of dividends received during the indicated period, assuming reinvestment of all dividends. The performance graph assumes an investment of $100 on December 31, 2014. The stock performance shown in the graph is included in response to SEC requirements and is not intended to forecast or to be indicative of future performance.
Comparison of Cumulative Total Return
The above performance graph and related information shall not be deemed "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Recent Sales of Unregistered Securities
Our deferred compensation plan offers certain of our senior employees and directors the opportunity to defer a portion of their compensation in exchange for a future payment amount equal to their deferments plus or minus certain amounts based upon the market-performance of specified measurement funds selected by the participant. These deferred compensation obligations may be considered securities of Celanese. Participants were required to make deferral elections under the plan prior to January 1 of the year such deferrals will be withheld from their compensation. We relied on the exemption from registration provided by Section 4(2) of the Securities Act in making this offer to a select group of employees, fewer than 35 of which were non-accredited investors under the rules promulgated by the Securities and Exchange Commission.
30
Item 6. Selected Financial Data
The balance sheet data as of December 31, 2019 and 2018 and the statements of operations data for the years ended December 31, 2019, 2018 and 2017, all of which are set forth below, are derived from the consolidated financial statements included elsewhere in this Annual Report and should be read in conjunction with those financial statements and the notes thereto. The statements of operations data for the years ended December 31, 2017, 2016 and 2015, set forth below were derived from previously issued financial statements, adjusted for a change in accounting principle for defined benefit pension plans and other postretirement benefit plans.
Year Ended December 31, | ||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
(In $ millions, except per share data) | ||||||||||||||
Statement of Operations Data | ||||||||||||||
Net sales | 6,297 | 7,155 | 6,140 | 5,389 | 5,674 | |||||||||
Other (charges) gains, net | (203 | ) | 9 | (59 | ) | (8 | ) | (349 | ) | |||||
Operating profit (loss) | 834 | 1,334 | 857 | 934 | 385 | |||||||||
Earnings (loss) from continuing operations before tax | 988 | 1,510 | 1,075 | 1,030 | 488 | |||||||||
Earnings (loss) from continuing operations | 864 | 1,218 | 862 | 908 | 287 | |||||||||
Earnings (loss) from discontinued operations | (6 | ) | (5 | ) | (13 | ) | (2 | ) | (2 | ) | ||||
Net earnings (loss) attributable to Celanese Corporation | 852 | 1,207 | 843 | 900 | 304 | |||||||||
Earnings (loss) per common share | ||||||||||||||
Continuing operations — basic | 6.93 | 9.03 | 6.21 | 6.22 | 2.03 | |||||||||
Continuing operations — diluted | 6.89 | 8.95 | 6.19 | 6.19 | 2.01 | |||||||||
Balance Sheet Data (as of the end of period) | ||||||||||||||
Total assets | 9,476 | 9,313 | 9,538 | 8,357 | 8,586 | |||||||||
Total debt | 3,905 | 3,531 | 3,641 | 3,008 | 2,981 | |||||||||
Total Celanese Corporation stockholders' equity | 2,507 | 2,984 | 2,887 | 2,588 | 2,378 | |||||||||
Other Financial Data | ||||||||||||||
Depreciation and amortization | 352 | 343 | 305 | 290 | 357 | |||||||||
Capital expenditures(1) | 390 | 333 | 281 | 247 | 483 | |||||||||
Dividends paid per common share(2) | 2.40 | 2.08 | 1.74 | 1.38 | 1.15 | |||||||||
________________________
(1) | Amounts include accrued capital expenditures, but exclude capital expenditures related to finance lease obligations. |
(2) | Annual dividends for the year ended December 31, 2019 consist of one quarterly dividend payment of $0.54 per share and three quarterly dividend payments of $0.62 per share. Annual dividends for the year ended December 31, 2018 consist of one quarterly dividend payment of $0.46 per share and three quarterly dividend payments of $0.54 per share. See Note 17 - Stockholders' Equity in the accompanying consolidated financial statements for further information. |
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In this Annual Report on Form 10-K ("Annual Report"), the term "Celanese" refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The terms the "Company," "we," "our" and "us," refer to Celanese and its subsidiaries on a consolidated basis. The term "Celanese US" refers to the Company's subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, and not its subsidiaries.
The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes to the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").
Investors are cautioned that the forward-looking statements contained in this section and other parts of this Annual Report involve both risk and uncertainty. Several important factors could cause actual results to differ materially from those anticipated by these statements. Many of these statements are macroeconomic in nature and are, therefore, beyond the control of management. See "Forward-Looking Statements" below.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and other parts of this Annual Report contain certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. Generally, words such as "believe," "expect," "intend," "estimate," "anticipate," "project," "plan," "may," "can," "could," "might," and "will," and similar expressions, as they relate to us are intended to identify forward-looking statements. These statements reflect our current views and beliefs with respect to future events at the time that the statements are made, are not historical facts or guarantees of future performance and involve risks and uncertainties that are difficult to predict and many of which are outside of our control. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. See "Special Note Regarding Forward-Looking Statements" at the beginning of this Annual Report for further discussion.
Risk Factors
Item 1A. Risk Factors of this Annual Report also contains a description of certain risk factors that you should consider which could significantly affect our financial results. In addition, the following factors could cause our actual results to differ materially from those results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among other things:
• | changes in general economic, business, political and regulatory conditions in the countries or regions in which we operate; |
• | the length and depth of product and industry business cycles particularly in the automotive, electrical, textiles, electronics and construction industries; |
• | changes in the price and availability of raw materials, particularly changes in the demand for, supply of, and market prices of ethylene, methanol, natural gas, wood pulp and fuel oil and the prices for electricity and other energy sources; |
• | the ability to pass increases in raw material prices on to customers or otherwise improve margins through price increases; |
• | the ability to maintain plant utilization rates and to implement planned capacity additions, expansions and maintenance; |
• | the ability to reduce or maintain current levels of production costs and to improve productivity by implementing technological improvements to existing plants; |
• | increased price competition and the introduction of competing products by other companies; |
• | the ability to identify desirable potential acquisition targets and to consummate acquisition or investment transactions, including obtaining regulatory approvals, consistent with our strategy; |
• | market acceptance of our technology; |
• | the ability to obtain governmental approvals and to construct facilities on terms and schedules acceptable to us; |
32
• | changes in applicable tariffs, duties and trade agreements, tax rates or legislation throughout the world including, but not limited to, adjustments, changes in estimates or interpretations that may impact recorded or future tax impacts associated with the Tax Cuts and Jobs Act (the "TCJA"); |
• | changes in the degree of intellectual property and other legal protection afforded to our products or technologies, or the theft of such intellectual property; |
• | compliance and other costs and potential disruption or interruption of production or operations due to accidents, interruptions in sources of raw materials, cyber security incidents, terrorism or political unrest, public health crises (including, but not limited to, the coronavirus outbreak), or other unforeseen events or delays in construction or operation of facilities, including as a result of geopolitical conditions, the occurrence of acts of war or terrorist incidents or as a result of weather, natural disasters, or other crises including public health crises; |
• | potential liability for remedial actions and increased costs under existing or future environmental regulations, including those relating to climate change; |
• | potential liability resulting from pending or future claims or litigation, including investigations or enforcement actions, or from changes in the laws, regulations or policies of governments or other governmental activities, in the countries in which we operate; |
• | changes in currency exchange rates and interest rates; |
• | our level of indebtedness, which could diminish our ability to raise additional capital to fund operations or limit our ability to react to changes in the economy or the chemicals industry; and |
• | various other factors, both referenced and not referenced in this Annual Report. |
Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this Annual Report as anticipated, believed, estimated, expected, intended, planned or projected. We neither intend nor assume any obligation to update these forward-looking statements, which speak only as of their dates.
33
Results of Operations
Financial Highlights
_____________________________
Year Ended December 31, | ||||||||
2019 | 2018 | Change | ||||||
(In $ millions, except percentages) | ||||||||
Statement of Operations Data | ||||||||
Net sales | 6,297 | 7,155 | (858 | ) | ||||
Gross profit | 1,606 | 1,972 | (366 | ) | ||||
Selling, general and administrative ("SG&A") expenses | (483 | ) | (546 | ) | 63 | |||
Other (charges) gains, net | (203 | ) | 9 | (212 | ) | |||
Operating profit (loss) | 834 | 1,334 | (500 | ) | ||||
Equity in net earnings (loss) of affiliates | 182 | 233 | (51 | ) | ||||
Non-operating pension and other postretirement employee benefit (expense) income | (20 | ) | (62 | ) | 42 | |||
Interest expense | (115 | ) | (125 | ) | 10 | |||
Refinancing expense | (4 | ) | (1 | ) | (3 | ) | ||
Dividend income - equity investments | 113 | 117 | (4 | ) | ||||
Earnings (loss) from continuing operations before tax | 988 | 1,510 | (522 | ) | ||||
Earnings (loss) from continuing operations | 864 | 1,218 | (354 | ) | ||||
Earnings (loss) from discontinued operations | (6 | ) | (5 | ) | (1 | ) | ||
Net earnings (loss) | 858 | 1,213 | (355 | ) | ||||
Net earnings (loss) attributable to Celanese Corporation | 852 | 1,207 | (355 | ) | ||||
Other Data | ||||||||
Depreciation and amortization | 352 | 343 | 9 | |||||
SG&A expenses as a percentage of Net sales | 7.7 | % | 7.6 | % | ||||
Operating margin(1) | 13.2 | % | 18.6 | % | ||||
Other (charges) gains, net | ||||||||
Restructuring | (23 | ) | (4 | ) | (19 | ) | ||
Asset impairments | (83 | ) | — | (83 | ) | |||
Plant/office closures | (4 | ) | 13 | (17 | ) | |||
Commercial disputes | (4 | ) | — | (4 | ) | |||
European Commission investigation | (89 | ) | — | (89 | ) | |||
Total Other (charges) gains, net | (203 | ) | 9 | (212 | ) | |||
(1) | Defined as Operating profit (loss) divided by Net sales. |
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Balance Sheet Data | |||||
Cash and cash equivalents | 463 | 439 | |||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 496 | 561 | |||
Long-term debt, net of unamortized deferred financing costs | 3,409 | 2,970 | |||
Total debt | 3,905 | 3,531 | |||
34
Factors Affecting Business Segment Net Sales
The percentage increase (decrease) in Net sales attributable to each of the factors indicated for each of our business segments is as follows:
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Volume | Price | Currency | Other | Total | |||||||||
(In percentages) | |||||||||||||
Engineered Materials | (5 | ) | — | (3 | ) | — | (8 | ) | |||||
Acetate Tow | (2 | ) | — | — | — | (2 | ) | ||||||
Acetyl Chain | (1 | ) | (13 | ) | (2 | ) | — | (16 | ) | ||||
Total Company | (3 | ) | (7 | ) | (2 | ) | — | (12 | ) | ||||
Pension and Postretirement Benefit Plan Costs
The increase (decrease) in pension and other postretirement plan net periodic benefit cost for each of our business segments is as follows:
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Engineered Materials | Acetate Tow | Acetyl Chain | Other Activities | Total | ||||||||||
(In $ millions) | ||||||||||||||
Service cost | — | — | (1 | ) | — | (1 | ) | |||||||
Interest cost and expected return on plan assets | — | — | — | 36 | 36 | |||||||||
Amortization of prior service credit | — | — | — | — | — | |||||||||
Special termination benefit | — | — | — | (1 | ) | (1 | ) | |||||||
Recognized actuarial (gain) loss | — | — | — | (78 | ) | (78 | ) | |||||||
Curtailment / settlement (gain) loss | — | — | 1 | — | 1 | |||||||||
Total | — | — | — | (43 | ) | (43 | ) | |||||||
See Note 15 - Benefit Obligations in the accompanying consolidated financial statements for further information.
Consolidated Results
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net sales decreased $858 million, or 12.0%, for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower pricing in our Acetyl Chain segment; |
• | an unfavorable currency impact in our Acetyl Chain and Engineered Materials segments; and |
• | lower volume in our Engineered Materials segment, primarily due to slower global economic conditions and customer destocking. |
Selling, general and administrative expenses decreased $63 million, or 11.5% for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower incentive compensation costs and project spending of $48 million in our Other Activities segment. |
Operating profit decreased $500 million, or 37.5% for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower Net sales across all of our segments; and |
35
• | an unfavorable impact to Other (charges) gains, net. During the year ended December 31, 2019, we recorded a reserve of $89 million in our Other Activities segment as a result of information learned from the European Commission's competition law investigation involving certain subsidiaries of Celanese with respect to certain past ethylene purchases. Additionally, during the year ended December 31, 2019, we recorded an $83 million long-lived asset impairment loss in our Acetate Tow segment related to the closure of our acetate flake manufacturing operations in Ocotlán, Mexico. See Note 4 - Acquisitions, Dispositions and Plant Closures and Note 18 - Other (Charges) Gains, Net in the accompanying consolidated financial statements for further information; |
partially offset by:
• | lower raw material costs within our Acetyl Chain segment; and |
• | lower SG&A expenses. |
On September 21, 2019, a localized fire occurred at our Clear Lake, Texas facility, resulting in damage to the carbon monoxide production unit, for which we recorded accelerated depreciation expense, fixed overhead, clean-up and repair costs of approximately $39 million in our Acetyl Chain segment during the year ended December 31, 2019.
Equity in net earnings (loss) of affiliates decreased $51 million for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | a decrease in equity investment in earnings of $28 million from our Ibn Sina strategic affiliate, primarily as a result of plant turnaround activity and lower pricing for methanol; and |
• | a decrease in equity investment in earnings of $20 million from our Polyplastics Co., Ltd. ("Polyplastics") strategic affiliate as a result of softer market conditions in China. |
Non-operating pension and other postretirement employee benefit expense decreased $42 million during the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | a decrease in recognized actuarial loss of $78 million as a result of higher asset returns, partially offset by a decrease in the weighted average discount rate used to determine benefit obligations from 3.8% to 2.8%. See Note 15 - Benefit Obligations in the accompanying consolidated financial statements for further information. |
Our effective income tax rate for the year ended December 31, 2019 was 13% compared to 19% for the year ended 2018. The lower effective income tax rate for the year ended December 31, 2019 compared to the same period in 2018 was primarily due to a valuation allowance provided against Luxembourg net operating loss carryforwards in 2018. In addition, the 2019 effective income tax rate benefited from the favorable impact of a 2019 release of valuation allowances due to higher projected utilization of foreign tax credit carryforwards. See Note 19 - Income Taxes in the accompanying consolidated financial statements for further information.
Discussion of our financial condition and results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found in Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.
36
Business Segments
Engineered Materials
Year Ended December 31, | % | ||||||||||
2019 | 2018 | Change | Change | ||||||||
(In $ millions, except percentages) | |||||||||||
Net sales | 2,386 | 2,593 | (207 | ) | (8.0 | )% | |||||
Net Sales Variance | |||||||||||
Volume | (5) | % | |||||||||
Price | — | % | |||||||||
Currency | (3) | % | |||||||||
Other | — | % | |||||||||
Other (charges) gains, net | 5 | — | 5 | 100.0 | % | ||||||
Operating profit (loss) | 446 | 460 | (14 | ) | (3.0 | )% | |||||
Operating margin | 18.7 | % | 17.7 | % | |||||||
Equity in net earnings (loss) of affiliates | 168 | 218 | (50 | ) | (22.9 | )% | |||||
Depreciation and amortization | 131 | 126 | 5 | 4.0 | % | ||||||
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net sales decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower volume within our base business driven by slower global economic conditions and customer destocking; and |
• | an unfavorable currency impact resulting from a weaker Euro relative to the US dollar. |
Operating profit decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower Net sales; |
partially offset by:
• | lower energy costs of $19 million, primarily for steam; |
• | lower spending costs of $10 million, primarily related to productivity initiatives; and |
• | a favorable impact of $5 million to Other (charges) gains, net. During the year ended December 31, 2019, we recorded a $15 million gain related to a settlement of a commercial dispute from a previous acquisition, partially offset by $10 million in employee termination benefits, primarily related to business optimization projects. See Note 18 - Other (Charges) Gains, Net in the accompanying consolidated financial statements for further information. |
Equity in net earnings (loss) of affiliates decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | a decrease in equity investment in earnings of $28 million from our Ibn Sina strategic affiliate, primarily as a result of plant turnaround activity and lower pricing for methanol; and |
• | a decrease in equity investment in earnings of $20 million from our Polyplastics strategic affiliate as a result of softer market conditions in China. |
On January 2, 2019, we completed the acquisition of 100% of the ownership interests of Next Polymers Ltd., an India-based engineering thermoplastics ("ETP") compounder. The acquisition strengthens our position in the Indian ETP market and further expands our global manufacturing footprint.
37
Acetate Tow
Year Ended December 31, | % | ||||||||||
2019 | 2018 | Change | Change | ||||||||
(In $ millions, except percentages) | |||||||||||
Net sales | 636 | 649 | (13 | ) | (2.0 | )% | |||||
Net Sales Variance | |||||||||||
Volume | (2 | )% | |||||||||
Price | — | % | |||||||||
Currency | — | % | |||||||||
Other | — | % | |||||||||
Other (charges) gains, net | (88 | ) | (2 | ) | (86 | ) | (4,300.0 | )% | |||
Operating profit (loss) | 52 | 130 | (78 | ) | (60.0 | )% | |||||
Operating margin | 8.2 | % | 20.0 | % | |||||||
Dividend income - equity investments | 112 | 116 | (4 | ) | (3.4 | )% | |||||
Depreciation and amortization | 45 | 58 | (13 | ) | (22.4 | )% | |||||
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net sales decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower acetate tow volume due to lower global industry utilization. |
Operating profit decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | an unfavorable impact of $86 million to Other (charges) gains, net. During the year ended December 31, 2019, we recorded an $83 million long-lived asset impairment loss related to the closure of our acetate flake manufacturing operations in Ocotlán, Mexico. We expect to incur additional exit and shutdown costs related to Ocotlán, Mexico of approximately $12 million through the first quarter of 2021. See Note 4 - Acquisitions, Dispositions and Plant Closures in the accompanying consolidated financial statements for further information; and |
• | lower Net sales; |
partially offset by:
• | lower energy costs of $18 million, primarily related to lower natural gas prices and the closure of our manufacturing operations in Ocotlán, Mexico; and |
• | higher accelerated depreciation and amortization expense of $13 million in 2018 related to the closure of our acetate tow manufacturing unit in Ocotlán, Mexico. |
38
Acetyl Chain
Year Ended December 31, | % | ||||||||||
2019 | 2018 | Change | Change | ||||||||
(In $ millions, except percentages) | |||||||||||
Net sales | 3,392 | 4,042 | (650 | ) | (16.1 | )% | |||||
Net Sales Variance | |||||||||||
Volume | (1) | % | |||||||||
Price | (13) | % | |||||||||
Currency | (2) | % | |||||||||
Other | — | % | |||||||||
Other (charges) gains, net | (3 | ) | 11 | (14 | ) | (127.3 | )% | ||||
Operating profit (loss) | 678 | 1,024 | (346 | ) | (33.8 | )% | |||||
Operating margin | 20.0 | % | 25.3 | % | |||||||
Equity in net earnings (loss) of affiliates | 4 | 6 | (2 | ) | (33.3 | )% | |||||
Depreciation and amortization | 161 | 148 | 13 | 8.8 | % | ||||||
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net sales decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower pricing for most of our products, primarily due to reduced customer demand in Asia, an overall deflationary environment for raw materials, and limited outage and curtailment activity; |
• | an unfavorable currency impact, primarily related to a weaker Euro relative to the US dollar; and |
• | lower volume due to reduced customer demand for acetic acid in all regions, mostly offset by higher volume for VAM due to expansion in the western hemisphere. |
Operating profit decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | lower Net sales; |
• | higher spending costs of $15 million, primarily related to incremental costs at our Clear Lake, Texas facility resulting from a localized fire; |
• | an unfavorable impact of $14 million to Other (charges) gains, net. During the year ended December 31, 2018, we received a $13 million non-income tax receivable refund from Nanjing, China, which did not recur in the current year. See Note 18 - Other (Charges) Gains, Net in the accompanying consolidated financial statements for further information; and |
• | higher accelerated depreciation and amortization expense of $13 million, primarily related to damage to the carbon monoxide production unit from a localized fire at our Clear Lake, Texas facility; |
partially offset by:
• | lower raw material costs for methanol, ethylene and acetic acid, which combined represents more than three-fourths of the decrease. |
39
Other Activities
Year Ended December 31, | % | ||||||||||
2019 | 2018 | Change | Change | ||||||||
(In $ millions, except percentages) | |||||||||||
Other (charges) gains, net | (117 | ) | — | (117 | ) | (100.0 | )% | ||||
Operating profit (loss) | (342 | ) | (280 | ) | (62 | ) | (22.1 | )% | |||
Equity in net earnings (loss) of affiliates | 10 | 9 | 1 | 11.1 | % | ||||||
Non-operating pension and other postretirement employee benefit (expense) income | (20 | ) | (62 | ) | 42 | 67.7 | % | ||||
Dividend income - equity investments | 1 | 1 | — | — | % | ||||||
Depreciation and amortization | 15 | 11 | 4 | 36.4 | % | ||||||
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Operating loss increased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | an unfavorable impact of $117 million to Other (charges) gains, net. In May 2017, we learned that the European Commission opened a competition law investigation involving certain subsidiaries of Celanese with respect to certain past ethylene purchases. During the year ended December 31, 2019, we recorded a reserve of $89 million as a result of information learned from the European Commission's investigation. Additionally, during the year ended December 31, 2019, we recorded $19 million in losses related to settlements with former third-party customers. We also recorded $9 million in employee termination benefits, primarily related to business optimization projects. See Note 18 - Other (Charges) Gains, Net in the accompanying consolidated financial statements for further information; |
partially offset by:
• | lower incentive compensation costs and project spending of $48 million. |
Non-operating pension and other postretirement employee benefit expense decreased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to:
• | a decrease in recognized actuarial loss of $78 million as a result of higher asset returns, partially offset by a decrease in the weighted average discount rate used to determine benefit obligations from 3.8% to 2.8%. See Note 15 - Benefit Obligations in the accompanying consolidated financial statements for further information. |
40
Liquidity and Capital Resources
Our primary source of liquidity is cash generated from operations, available cash and cash equivalents and dividends from our portfolio of strategic investments. In addition, as of December 31, 2019 we have $978 million available for borrowing under our senior unsecured revolving credit facility and $5 million available under our accounts receivable securitization facility to assist, if required, in meeting our working capital needs and other contractual obligations.
While our contractual obligations, commitments and debt service requirements over the next several years are significant, we continue to believe we will have available resources to meet our liquidity requirements, including debt service, for the next twelve months. If our cash flow from operations is insufficient to fund our debt service and other obligations, we may be required to use other means available to us such as increasing our borrowings, reducing or delaying capital expenditures, seeking additional capital or seeking to restructure or refinance our indebtedness. There can be no assurance, however, that we will continue to generate cash flows at or above current levels.
Total cash outflows for capital expenditures are expected to be approximately $500 million in 2020 primarily due to additional investments in growth opportunities in our Engineered Materials and Acetyl Chain segments.
On a stand-alone basis, Celanese and its immediate 100% owned subsidiary, Celanese US, have no material assets other than the stock of their subsidiaries and no independent external operations of their own. Accordingly, they generally depend on the cash flow of their subsidiaries and their ability to pay dividends and make other distributions to Celanese and Celanese US in order to meet their obligations, including their obligations under senior credit facilities and senior notes and to pay dividends on our common stock, par value $0.0001 per share ("Common Stock").
We are subject to capital controls and exchange restrictions imposed by the local governments in certain jurisdictions where we operate, such as China, India and Indonesia. Capital controls impose limitations on our ability to exchange currencies, repatriate earnings or capital, lend via intercompany loans or create cross-border cash pooling arrangements. Our largest exposure to a country with capital controls is in China. Pursuant to applicable regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, the Chinese government imposes certain currency exchange controls on cash transfers out of China, puts certain limitations on duration, purpose and amount of intercompany loans, and restricts cross-border cash pooling.
Cash Flows
Cash and cash equivalents increased $24 million to $463 million as of December 31, 2019 compared to December 31, 2018. As of December 31, 2019, $391 million of the $463 million of cash and cash equivalents was held by our foreign subsidiaries. Under the TCJA, we have incurred a prior year charge associated with the repatriation of previously unremitted foreign earnings, including foreign held cash. These funds are largely accessible, if needed in the US to fund operations. See Note 19 - Income Taxes in the accompanying consolidated financial statements for further information.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
• | Net Cash Provided by (Used in) Operating Activities |
Net cash provided by operating activities decreased $104 million to $1.5 billion for the year ended December 31, 2019 compared to $1.6 billion for the same period in 2018. Net cash provided by operations for the year ended December 31, 2019 decreased primarily due to:
• | a decrease in net earnings; |
partially offset by:
• | favorable trade working capital of $303 million, primarily due to a decrease in trade receivables and inventory. Trade receivables decreased due to timing of collections. Inventory decreased as a result of inventory build-up for plant turnarounds which occurred in the prior year, as well as lower costs for raw materials and the impact of the localized fire at our Clear Lake, Texas facility in the current year. |
41
• | Net Cash Provided by (Used in) Investing Activities |
Net cash used in investing activities decreased $14 million to $493 million for the year ended December 31, 2019 compared to $507 million for the same period in 2018, primarily due to:
• | a net cash outflow of $144 million related to the acquisition of Omni Plastics, L.L.C. and its subsidiaries in February 2018; |
partially offset by:
• | a net cash outflow of $91 million primarily related to the acquisition of Next Polymers, Ltd. in January 2019; and |
• | an increase of $33 million in capital expenditures related to growth and efficiency opportunities in our Engineered Materials and Acetyl Chain segments. |
• | Net Cash Provided by (Used in) Financing Activities |
Net cash used in financing activities decreased $230 million to $935 million for the year ended December 31, 2019 compared to $1.2 billion for the same period in 2018, primarily due to:
• | an increase in net proceeds from short-term debt of $338 million, primarily as a result of higher borrowings under our revolving credit facility and accounts receivable securitization facility during the year ended December 31, 2019 related to the timing of share repurchases of our Common Stock; and |
• | an increase in net proceeds from long-term debt of $114 million, primarily due to the issuance of $500 million in principal amount of the 3.500% senior unsecured notes due May 8, 2024 (the "3.500% Notes"), partially offset by the redemption of the 3.250% senior unsecured notes (the "3.250% Notes") during the year ended December 31, 2019, as discussed below; |
partially offset by:
• | an increase of $191 million in share repurchases of our Common Stock during the year ended December 31, 2019; and |
• | an increase in cash dividends on our Common Stock of $20 million. During the year ended December 31, 2019, we increased our quarterly cash dividend rate from $0.54 to $0.62 per share. |
In addition, exchange rates had an unfavorable impact of $2 million and $23 million on cash and cash equivalents for the years ended December 31, 2019 and 2018, respectively.
Debt and Other Obligations
• | Senior Credit Facilities |
On January 7, 2019, Celanese, Celanese US and certain subsidiary borrowers entered into a new senior credit agreement (the "Credit Agreement") consisting of a $1.25 billion senior unsecured revolving credit facility (with a letter of credit sublimit), maturing in 2024. The Credit Agreement is guaranteed by Celanese, Celanese US and substantially all of its domestic subsidiaries ("the Subsidiary Guarantors"). We borrowed $1.3 billion and repaid $1.1 billion under our senior unsecured revolving credit facility during the year ended December 31, 2019.
42
• | Senior Notes |
We have outstanding senior unsecured notes, issued in public offerings registered under the Securities Act of 1933 ("Securities Act"), as amended, as follows (collectively, the "Senior Notes"):
Senior Notes | Issue Date | Principal | Interest Rate | Interest Pay Dates | Maturity Date | |||||||
(In millions) | (In percentages) | |||||||||||
3.500% Notes | May 2019 | $500 | 3.500 | May 8 | November 8 | May 8, 2024 | ||||||
2.125% Notes | November 2018 | €500 | 2.125 | March 1 | March 1, 2027 | |||||||
1.250% Notes | December 2017 | €300 | 1.250 | February 11 | February 11, 2025 | |||||||
1.125% Notes | September 2016 | €750 | 1.125 | September 26 | September 26, 2023 | |||||||
4.625% Notes | November 2012 | $500 | 4.625 | March 15 | September 15 | November 15, 2022 | ||||||
5.875% Notes | May 2011 | $400 | 5.875 | June 15 | December 15 | June 15, 2021 | ||||||
The Senior Notes were issued by Celanese US and are guaranteed on a senior unsecured basis by Celanese and the Subsidiary Guarantors. Celanese US may redeem some or all of each of the Senior Notes, prior to their respective maturity dates, at a redemption price of 100% of the principal amount, plus a "make-whole" premium as specified in the applicable indenture, plus accrued and unpaid interest, if any, to the redemption date.
On May 8, 2019, Celanese US completed an offering of the 3.500% Notes in a public offering registered under the Securities Act. The 3.500% Notes were issued at a discount to par at a price of 99.895%. Net proceeds from the sale of the 3.500% Notes were used to redeem in full the 3.250% Notes, to repay $156 million of outstanding borrowings under the senior unsecured revolving credit facility and for general corporate purposes. In connection with the issuance of the 3.500% Notes, we entered into a cross-currency swap to effectively convert our fixed-rate US dollar denominated debt under the 3.500% Notes, including annual interest payments and the payment of principal at maturity, to fixed-rate Euro denominated debt.
In November 2018, Celanese US completed an offering of the 2.125% Notes in a public offering registered under the Securities Act. The 2.125% Notes were issued under a base indenture dated May 6, 2011. The 2.125% Notes were issued at a discount to par at a price of 99.231%. Net proceeds from the sale of the 2.125% Notes were used to repay $463 million of our senior unsecured term loan and for general corporate purposes.
• | Other Financing Arrangements |
In June 2018, we entered into a factoring agreement with a global financial institution to sell certain accounts receivable on a non-recourse basis. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the receivables to the buyer. We have no continuing involvement in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. We de-recognized $257 million and $117 million of accounts receivable under this factoring agreement as of December 31, 2019 and 2018, respectively.
Our US accounts receivable securitization facility was amended on July 8, 2019 to extend the maturity date to July 6, 2020. We borrowed $112 million and repaid $74 million under this facility during the year ended December 31, 2019.
Our material financing arrangements contain customary covenants, including the maintenance of certain financial ratios, events of default and change of control provisions. Failure to comply with these covenants, or the occurrence of any other event of default, could result in acceleration of the borrowings and other financial obligations. We are in compliance with all of the covenants related to our debt agreements as of December 31, 2019.
Share Capital
On February 5, 2020, we declared a quarterly cash dividend of $0.62 per share on our Common Stock amounting to $74 million. The cash dividend will be paid on February 28, 2020 to holders of record as of February 18, 2020.
Our Board of Directors has authorized the aggregate repurchase of $5.4 billion of our Common Stock since February 2008. These authorizations give management discretion in determining the timing and conditions under which shares may be repurchased. This repurchase program does not have an expiration date. During the year ended December 31, 2019, we
43
repurchased shares of our Common Stock at an aggregate cost of $1.0 billion. As of December 31, 2019, we had $1.2 billion remaining under authorizations by our Board of Directors.
See Note 17 - Stockholders' Equity in the accompanying consolidated financial statements for further information.
Contractual Debt and Cash Obligations
The following table sets forth our fixed contractual debt and cash obligations as of December 31, 2019:
Payments due by period | |||||||||||||||
Total | Less Than 1 Year | Years 2 & 3 | Years 4 & 5 | After 5 Years | |||||||||||
(In $ millions) | |||||||||||||||
Fixed Contractual Debt Obligations | |||||||||||||||
Senior notes | 3,135 | — | 900 | 1,341 | 894 | ||||||||||
Interest payments on debt and other obligations | 418 | (1) | 108 | 156 | 72 | 82 | |||||||||
Finance lease obligations | 144 | 26 | 51 | 30 | 37 | ||||||||||
Other debt | 644 | (2) | 470 | 3 | 21 | 150 | |||||||||
Total | 4,341 | 604 | 1,110 | 1,464 | 1,163 | ||||||||||
Operating leases | 256 | 35 | 50 | 39 | 132 | ||||||||||
Uncertain tax positions, including interest and penalties | 165 | — | — | — | 165 | (3) | |||||||||
Unconditional purchase obligations | 1,161 | (4) | 331 | 323 | 178 | 329 | |||||||||
Pension and other postretirement funding obligations | 442 | 48 | 91 | 90 | 213 | ||||||||||
Environmental and asset retirement obligations | 75 | 18 | 16 | 13 | 28 | ||||||||||
Total | 6,440 | 1,036 | 1,590 | 1,784 | 2,030 | ||||||||||
(1) | Future interest expense is calculated using the rate in effect on December 31, 2019. |
(2) | Other debt is primarily made up of fixed rate pollution control and industrial revenue bonds, short-term borrowings from affiliated companies, our revolving credit facility, our accounts receivable securitization facility and other bank obligations. |
(3) | Due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities, we are unable to determine the timing of payments related to our uncertain tax obligations, including interest and penalties. These amounts are therefore reflected in "After 5 Years". |
(4) | Unconditional purchase obligations primarily represent the take-or-pay provisions included in certain long-term purchase agreements. We do not expect to incur material losses under these arrangements. These amounts, obtained via a survey of Celanese, also include other purchase obligations such as maintenance and service agreements, energy and utility agreements, consulting contracts, software agreements and other miscellaneous agreements and contracts. |
Contractual Guarantees and Commitments
As of December 31, 2019, we have standby letters of credit of $28 million and bank guarantees of $17 million outstanding, which are irrevocable obligations of an issuing bank that ensure payment to third parties in the event that certain subsidiaries fail to perform in accordance with specified contractual obligations. The likelihood is remote that material payments will be required under these agreements.
See Note 14 - Debt in the accompanying consolidated financial statements for a description of the guarantees under our Senior Notes and Credit Agreement.
See Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for a discussion of commitments and contingencies related to legal and regulatory proceedings.
Off-Balance Sheet Arrangements
We have not entered into any material off-balance sheet arrangements.
44
Market Risks
Critical Accounting Policies and Estimates
Our consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales, expenses and allocated charges during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.
We believe the following accounting policies and estimates are critical to understanding the financial reporting risks present in the current economic environment. These matters, and the judgments and uncertainties affecting them, are also essential to understanding our reported and future operating results. See Note 2 - Summary of Accounting Policies in the accompanying consolidated financial statements for further information.
• | Recoverability of Long-Lived Assets |
Recoverability of Goodwill and Indefinite-Lived Assets
We assess goodwill for impairment at the reporting unit level. Our reporting units are either our operating business segments or one level below our operating business segments for which discrete financial information is available and for which operating results are regularly reviewed by business segment management and the chief operating decision maker. Our reporting units include our engineered materials, acetate tow, food ingredients, emulsion polymers and intermediate chemistry businesses. We assess the recoverability of the carrying amount of our goodwill and other indefinite-lived intangible assets annually during the third quarter of our fiscal year using June 30 balances or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.
When assessing the recoverability of goodwill and other indefinite-lived intangible assets, we may first assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is less than its carrying amount. The qualitative evaluation is an assessment of multiple factors, including the current operating environment, financial performance and market considerations. After assessing qualitative factors, if we determine that it is not more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is less than its carrying amount, then performing a quantitative assessment is not required. If an initial qualitative assessment indicates that it is more likely than not the carrying amount exceeds the fair value of a reporting unit or other indefinite-lived intangible asset, a quantitative analysis will be performed. We may also elect to bypass the qualitative assessment for some or all of our reporting units and proceed directly to a quantitative analysis depending on the facts and circumstances.
In performing a quantitative analysis, recoverability of goodwill for each reporting unit is measured using a discounted cash flow model incorporating discount rates commensurate with the risks involved. Use of a discounted cash flow model is common practice in assessing impairment in the absence of available transactional market evidence to determine the fair value. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. We may engage third-party valuation consultants to assist with this process. The valuation consultants assess fair value by equally weighting a combination of two market approaches (market multiple analysis and comparable transaction analysis) and the discounted cash flow approach. Discount rates are determined by using a weighted average cost of capital ("WACC"). The WACC considers market and industry data as well as company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Operational management, considering industry and company-specific historical and projected data, develops growth rates and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates. If the calculated fair value is less than the current carrying amount, an impairment loss is recorded in the amount by which the carrying amount exceeds the reporting unit's fair value. An impairment loss cannot exceed the carrying amount of goodwill assigned to a reporting unit but may indicate certain long-lived and amortizable intangible assets associated with the reporting unit may require additional impairment testing.
45
Management tests other indefinite-lived intangible assets quantitatively utilizing the relief from royalty method under the income approach to determine the estimated fair value for each indefinite-lived intangible asset. The relief from royalty method estimates our theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the WACC considering any differences in company-specific risk factors. Royalty rates are established by management and are periodically substantiated by third-party valuation consultants. Operational management, considering industry and company-specific historical and projected data, develops growth rates and sales projections associated with each indefinite-lived intangible asset. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales projections beyond the last projected period assuming a constant WACC and low long-term growth rates.
Valuation methodologies utilized to evaluate goodwill and indefinite-lived intangible assets for impairment were consistent with prior periods. We periodically engage third-party valuation consultants to assist us with this process. Specific assumptions discussed above are updated at the date of each test to consider current industry and company-specific risk factors from the perspective of a market participant. The current business environment is subject to evolving market conditions and requires significant management judgment to interpret the potential impact to our assumptions. To the extent that changes in the current business environment result in adjusted management projections, impairment losses may occur in future periods.
See Note 11 - Goodwill and Intangible Assets, Net in the accompanying consolidated financial statements for further information.
• | Environmental Liabilities |
We manufacture and sell a diverse line of chemical products throughout the world. Accordingly, our operations are subject to various hazards incidental to the production of industrial chemicals including the use, handling, processing, storage and transportation of hazardous materials. We recognize losses and accrue liabilities relating to environmental matters if available information indicates that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Depending on the nature of the site, we accrue through 15 years, unless we have government orders or other agreements that extend beyond 15 years. We estimate environmental liabilities on a case-by-case basis using the most current status of available facts, existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Recoveries of environmental costs from other parties are recorded as assets when their receipt is deemed probable.
An environmental liability related to cleanup of a contaminated site might include, for example, a provision for one or more of the following types of costs: site investigation and testing costs, cleanup costs, costs related to soil and water contamination resulting from tank ruptures and post-remediation monitoring costs. These undiscounted liabilities do not take into account any claims or recoveries from insurance. The measurement of environmental liabilities is based on our periodic estimate of what it will cost to perform each of the elements of the remediation effort. We utilize third parties to assist in the management and development of cost estimates for our sites. Changes to environmental regulations or other factors affecting environmental liabilities are reflected in the consolidated financial statements in the period in which they occur.
See Note 16 - Environmental in the accompanying consolidated financial statements for further information.
• | Benefit Obligations |
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined on an actuarial basis. Various assumptions are used in the calculation of the actuarial valuation of the employee benefit plans. These assumptions include the discount rate, compensation levels, expected long-term rates of return on plan assets and trends in health care costs. In addition, actuarial consultants use factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net periodic benefit cost recorded in future periods.
Pension assumptions are reviewed annually in the fourth quarter of each fiscal year and whenever a plan is required to be remeasured. Assumptions are reviewed on a plan and country-specific basis by third-party actuaries and senior management. Such assumptions are adjusted as appropriate to reflect changes in market rates and outlook.
See Note 15 - Benefit Obligations in the accompanying consolidated financial statements for further information.
46
• | Loss Contingencies |
When determinable, we accrue contingent losses for matters that are probable of occurring for which a loss amount can be reasonably estimated. For certain potentially material loss contingency matters, we are sometimes unable to estimate and accrue a loss deemed probable of occurring. For such matters, we disclose an estimate of the possible loss, range of loss or a statement that such estimate cannot be made.
Because our evaluation and assessment of critical facts and circumstances surrounding a contingent loss matter is in advance of the matter's final determination, there is an inherent subjectivity and unpredictability involved in estimating, accounting for and reporting contingent losses. Generally, the less progress made in the resolution of a contingent loss matter or the broader the range of potential outcomes, the more difficult it is for us to estimate, accrue and report a loss. For example, we may disclose certain information about a plaintiff's legal claim against us that is alleged in the plaintiff's pleadings or otherwise publicly available. While information of this type may provide more insight into the potential magnitude of a matter, it might not necessarily be indicative of our estimate of probable or possible loss. In addition, some of our contingent loss exposures may be eligible for reimbursement under the provisions of our insurance coverage. We do not consider the potential availability of insurance coverage in determining our probable or possible loss estimates. As a result of these factors among others, our ultimate contingent loss exposure may be higher or lower, and possibly materially so, than our recorded probable loss accruals and disclosures of possible losses.
See Note 24 - Commitments and Contingencies in the accompanying consolidated financial statements for further information.
• | Income Taxes |
We regularly review our deferred tax assets for recoverability and establish a valuation allowance as needed. In forming our judgment regarding the recoverability of deferred tax assets related to deductible temporary differences and tax attribute carryforwards, we give weight to positive and negative evidence based on the extent to which the forms of evidence can be objectively verified. We attach the most weight to historical earnings due to its verifiable nature. Weight is attached to tax planning strategies if the strategies are prudent and feasible and implementable without significant obstacles. Less weight is attached to forecasted future earnings due to its subjective nature, and expected timing of reversal of taxable temporary differences is given little weight unless the reversal of taxable and deductible temporary differences coincide. Valuation allowances are established primarily on net operating loss carryforwards and other deferred tax assets in the US, Luxembourg, Spain, China, the United Kingdom, Mexico, Canada and France. We have appropriately reflected increases and decreases in our valuation allowance based on the overall weight of positive versus negative evidence on a jurisdiction by jurisdiction basis.
The recoverability of deferred tax assets and the recognition and measurement of uncertain tax positions are subject to various assumptions and management judgment. If actual results differ from the estimates made by management in establishing or maintaining valuation allowances against deferred tax assets, the resulting change in the valuation allowance would generally impact earnings or Other comprehensive income depending on the nature of the respective deferred tax asset. In addition, the positions taken with regard to tax contingencies may be subject to audit and review by tax authorities, which may result in future taxes, interest and penalties.
See Note 19 - Income Taxes in the accompanying consolidated financial statements for further information.
Recent Accounting Pronouncements
See Note 3 - Recent Accounting Pronouncements in the accompanying consolidated financial statements for information regarding recent accounting pronouncements.
47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
Our financial market risk consists principally of exposure to currency exchange rates, interest rates and commodity prices. Exchange rate and interest rate risks are managed with a variety of techniques, including use of derivatives. We have in place policies of hedging against changes in currency exchange rates, interest rates and commodity prices as described below.
See Note 2 - Summary of Accounting Policies in the accompanying consolidated financial statements for further information regarding our derivative and hedging instruments accounting policies related to financial market risk.
See Note 22 - Derivative Financial Instruments in the accompanying consolidated financial statements for further information regarding our market risk management and the related impact on our financial position and results of operations.
• | Foreign Currency Forwards and Swaps |
A portion of our assets, liabilities, net sales and expenses are denominated in currencies other than the US dollar. Fluctuations in the value of these currencies against the US dollar can have a direct and material impact on the business and financial results. Our largest exposures are to the Euro and Chinese Yuan ("CNY"). A decline in the value of the Euro and CNY versus the US dollar results in a decline in the US dollar value of our sales and earnings denominated in Euros and CNYs. Likewise, an increase in the value of the Euro and CNY versus the US dollar would result in an opposite effect. We estimate that a 10% change in the Euro/US dollar and CNY/US dollar exchange rates would impact our earnings by $55 million and $21 million, respectively.
48
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and supplementary data are included in Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.
Quarterly Financial Information
For a discussion of material events affecting performance in each quarter, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | |||||||||||
March 31, 2019 | June 30, 2019 | September 30, 2019 | December 31, 2019 | ||||||||
(Unaudited) (In $ millions, except per share data) | |||||||||||
Net sales | 1,687 | 1,592 | 1,586 | 1,432 | |||||||
Gross profit | 453 | 423 | 414 | 316 | |||||||
Other (charges) gains, net | 4 | (98 | ) | (7 | ) | (102 | ) | ||||
Operating profit (loss) | 320 | 186 | 260 | 68 | |||||||
Earnings (loss) from continuing operations before tax | 385 | 239 | 323 | 41 | |||||||
Amounts attributable to Celanese Corporation | |||||||||||
Earnings (loss) from continuing operations | 338 | 210 | 268 | 42 | |||||||
Earnings (loss) from discontinued operations | (1 | ) | (1 | ) | (5 | ) | 1 | ||||
Net earnings (loss) | 337 | 209 | 263 | 43 | |||||||
Earnings (loss) per common share - basic | |||||||||||
Continuing operations | 2.65 | 1.68 | 2.18 | 0.35 | |||||||
Net earnings (loss) | 2.64 | 1.67 | 2.14 | 0.36 | |||||||
Earnings (loss) per common share - diluted | |||||||||||
Continuing operations | 2.64 | 1.67 | 2.17 | 0.35 | |||||||
Net earnings (loss) | 2.63 | 1.66 | 2.13 | 0.36 | |||||||
49
Three Months Ended | |||||||||||
March 31, 2018 | June 30, 2018 | September 30, 2018 | December 31, 2018 | ||||||||
(Unaudited) (In $ millions, except per share data) | |||||||||||
Net sales | 1,851 | 1,844 | 1,771 | 1,689 | |||||||
Gross profit | 515 | 521 | 516 | 420 | |||||||
Other (charges) gains, net | — | (3 | ) | 12 | — | ||||||
Operating profit (loss) | 343 | 358 | 374 | 259 | |||||||
Earnings (loss) from continuing operations before tax | 432 | 442 | 462 | 174 | |||||||
Amounts attributable to Celanese Corporation | |||||||||||
Earnings (loss) from continuing operations | 365 | 344 | 407 | 96 | |||||||
Earnings (loss) from discontinued operations | (2 | ) | — | (6 | ) | 3 | |||||
Net earnings (loss) | 363 | 344 | 401 | 99 | |||||||
Earnings (loss) per common share - basic | |||||||||||
Continuing operations | 2.69 | 2.54 | 3.02 | 0.73 | |||||||
Net earnings (loss) | 2.67 | 2.54 | 2.98 | 0.75 | |||||||
Earnings (loss) per common share - diluted | |||||||||||
Continuing operations | 2.68 | 2.52 | 3.00 | 0.73 | |||||||
Net earnings (loss) | 2.66 | 2.52 | 2.96 | 0.75 | |||||||
50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, as of December 31, 2019, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2019. The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of the Company's internal control over financial reporting. Their report follows on page 63.
Item 9B. Other Information
None.
51
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated herein by reference from the subsections of "Governance" captioned "Item 1: Election of Directors," "Director Nominees," "Board and Committee Governance," "Additional Governance Features," and the sections "Stock Ownership Information – Delinquent Section 16(a) Reports" and "Questions and Answers – Company Documents, Communications and Stockholder Proposals" of the Company's definitive proxy statement for the 2020 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "2020 Proxy Statement"). Information about executive officers of the Company is contained in Part I of this Annual Report.
Codes of Ethics
The Company has adopted a Business Conduct Policy for directors, officers and employees along with a Financial Code of Ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. These codes are available on the corporate governance portal of the Company's investor relations website at investors.celanese.com. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to and waivers from these codes by posting such information on the same website.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference from the section "Governance – Director Compensation" and the subsections of "Executive Compensation" captioned "Compensation Discussion and Analysis," "Compensation Risk Assessment," "Compensation and Management Development Committee Report," "Compensation Committee Interlocks and Insider Participation" and "Compensation Tables" of the 2020 Proxy Statement.
52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information with respect to beneficial ownership required by this Item 12 is incorporated herein by reference from the section captioned "Stock Ownership Information – Principal Stockholders and Beneficial Owners" of the 2020 Proxy Statement.
Equity Compensation Plans
Securities Authorized for Issuance Under Equity Compensation Plans
The following information is provided as of December 31, 2019 with respect to equity compensation plans:
___________________________
Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) | ||||||||
(a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 1,433,599 | (1) | $ | — | 19,952,545 | (2) | |||||
(1) | Includes (a) options to purchase 0 shares of the Company's common stock, par value $0.0001 per share ("Common Stock") under the Celanese Corporation 2009 Global Incentive Plan, as amended and restated April 19, 2012 and February 9, 2017 (the "2009 Plan"), and (b) 959,696 restricted stock units ("RSUs") granted under the 2009 Plan, and 473,903 RSUs granted under the Celanese Corporation 2018 Global Incentive Plan (the "2018 Plan"), including shares that may be issued pursuant to outstanding performance-based RSUs, assuming currently estimated maximum potential performance; actual shares issued may vary, depending on actual performance. If the performance-based RSUs included in this total vest at the target performance level (as opposed to the maximum potential performance), the aggregate RSUs outstanding would be 1,051,151. Also includes 46,204 share equivalents attributable to RSUs deferred by non-management directors under the Company's 2008 Deferred Compensation Plan (and dividends applied to previous deferrals) and distributable in the form of shares of Common Stock under the 2009 Plan and the 2018 Plan. Upon vesting, a share of the Company's Common Stock is issued for each RSU. Column (b) does not take any of these RSU awards into account because they do not have an exercise price. |
(2) | Includes shares available for future issuance under the 2018 Plan and the Celanese Corporation 2009 Employee Stock Purchase Plan approved by stockholders on April 23, 2009 (the "ESPP"). As of December 31, 2019, an aggregate of 6,244,945 shares were available for future issuance under the 2018 Plan and 13,707,600 shares of our Common Stock were available for future issuance under the ESPP. As of December 31, 2019, 292,400 shares have been offered for purchase under the ESPP. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference from the section captioned "Governance – Director Independence and Related Person Transactions" of the 2020 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference from the section captioned "Audit Matters – Item 3: Ratification of Independent Registered Public Accounting Firm" of the 2020 Proxy Statement.
53
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements. The report of our independent registered public accounting firm and our consolidated financial statements are listed below and begin on page 63 of this Annual Report on Form 10-K.
Page Number | |
2. Financial Statement Schedules.
The financial statement schedules required by this item, if any, are included as Exhibits to this Annual Report on Form 10-K.
3. Exhibit List.
INDEX TO EXHIBITS(1)
Exhibits will be furnished upon request for a nominal fee, limited to reasonable expenses.
Exhibit Number | ||
Description | ||
3.1 | ||
3.1(a) | ||
3.1(b) | ||
3.1(c) | ||
3.2 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
54
Exhibit Number | ||
Description | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | ||
4.9 | ||
4.10 | ||
4.11* | ||
10.1(a) | ||
10.1(b) | ||
10.2 | ||
10.2(a) | ||
10.2(b) | ||
10.2(c) | ||
55
Exhibit Number | ||
Description | ||
10.2(d) | ||
10.2(e) | ||
10.2(f) | ||
10.2(g) | ||
10.2(h) | ||
10.2(i) | ||
10.2(j) | ||
10.3‡ | ||
10.3(a)‡ | ||
10.3(b)‡ | ||
10.4‡ | ||
10.4(a)‡ | ||
10.4(b)‡ | ||
10.4(c)*‡ | ||
56
Exhibit Number | ||
Description | ||
10.5‡ | ||
10.5(a)‡ | ||
10.6‡ | ||
10.6(a)‡ | ||
10.6(b)‡ | ||
10.6(c)‡ | ||
10.7‡ | ||
10.7(a)‡ | ||
10.7(b)‡ | ||
10.7(c)‡ | ||
10.8‡ | ||
10.9‡ | ||
10.9(a)‡ | ||
10.9(b)‡ | ||
10.9(c)‡ | ||
10.9(d)‡ | ||
10.10(a)‡ | ||
10.10(b)‡ | ||
10.11(a)‡ | ||
10.11(b)‡ | ||
10.11(c)‡ | ||
57
Exhibit Number | ||
Description | ||
10.11(d)‡ | ||
10.11(e)‡ | ||
10.11(f)‡ | ||
10.11(g)‡ | ||
10.11(h)‡ | ||
10.11(i)‡ | ||
10.12(a)‡ | ||
10.12(b)‡ | ||
10.12(c)*‡ | ||
10.13‡ | ||
10.14‡ | ||
10.15*‡ | ||
10.15(a)*‡ | ||
10.16*‡ | ||
21.1* | ||
23.1* | ||
24.1* | ||
31.1* | ||
31.2* | ||
32.1* | ||
32.2* | ||
101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
58
Exhibit Number | ||
Description | ||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2019 has been formatted in Inline XBRL. | |
* Filed herewith.
‡ Indicates a management contract or compensatory plan or arrangement.
(1) | The Company and its subsidiaries have in the past issued, and may in the future issue from time to time, long-term debt. The Company may not file with the applicable report copies of the instruments defining the rights of holders of long-term debt to the extent that the aggregate principal amount of the debt instruments of any one series of such debt instruments for which the instruments have not been filed has not exceeded or will not exceed 10% of the assets of the Company at any pertinent time. The Company hereby agrees to furnish a copy of any such instrument(s) to the SEC upon request. |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CELANESE CORPORATION | ||
By: | /s/ LORI J. RYERKERK | |
Name: | Lori J. Ryerkerk | |
Title: | Chief Executive Officer and President | |
Date: | February 6, 2020 | |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Scott A. Richardson and Benita M. Casey, and each of them, his or her true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that any such attorney-in-fact may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the US Securities and Exchange Commission in connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all that such said attorney-in-fact, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ LORI J. RYERKERK | Chief Executive Officer, President and Director (Principal Executive Officer) | February 6, 2020 | ||
Lori J. Ryerkerk | ||||
/s/ SCOTT A. RICHARDSON | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | February 6, 2020 | ||
Scott A. Richardson | ||||
/s/ BENITA M. CASEY | Vice President, Finance, Controller and Chief Accounting Officer (Principal Accounting Officer) | February 6, 2020 | ||
Benita M. Casey | ||||
/s/ JEAN S. BLACKWELL | Director | February 6, 2020 | ||
Jean S. Blackwell | ||||
/s/ WILLIAM M. BROWN | Director | February 6, 2020 | ||
William M. Brown | ||||
/s/ EDWARD G. GALANTE | Director | February 6, 2020 | ||
Edward G. Galante | ||||
/s/ KATHRYN M. HILL | Director | February 6, 2020 | ||
Kathryn M. Hill | ||||
60
Signature | Title | Date | ||
/s/ DAVID F. HOFFMEISTER | Director | February 6, 2020 | ||
David F. Hoffmeister | ||||
/s/ JAY V. IHLENFELD | Director | February 6, 2020 | ||
Jay V. Ihlenfeld | ||||
/s/ MARK C. ROHR | Executive Chairman (Chairman of the Board of Directors) | February 6, 2020 | ||
Mark C. Rohr | ||||
/s/ KIM K.W. RUCKER | Director | February 6, 2020 | ||
Kim K.W. Rucker | ||||
/s/ JOHN K. WULFF | Director | February 6, 2020 | ||
John K. Wulff | ||||
61
CELANESE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number | |
62
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Celanese Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Celanese Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leasing transactions as of January 1, 2019 due to the adoption of Financial Accounting Standards Board's Accounting Standards Update 2016-02, Leases.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
63
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the Company's determination and realizability of foreign tax credit carryforwards
As discussed in Notes 2 and 19 to the consolidated financial statements, the Company had $243 million of U.S. foreign tax credit carryforwards, and a related valuation allowance of $207 million, as of December 31, 2019. Foreign tax credit carryforwards may be used to reduce current U.S. tax liabilities related to foreign-source income or deferred and utilized over a ten-year period. Realization of these deferred tax assets requires generation of sufficient foreign-source taxable income within this period.
We identified the evaluation of the Company's determination and realizability of foreign tax credit carryforwards available for U.S. federal income tax purposes as a critical audit matter. This is due to the magnitude of this deferred tax asset and complex auditor judgment required in evaluating the application of U.S. federal income tax regulations related to the generation and utilization of foreign tax credit carryforwards. Additionally, a high degree of auditor judgment was required in evaluating the Company's related forecast of foreign-source taxable income, allocation of overhead and other directly allocable expenses.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over 1) the computation of foreign tax credit carryforwards generated, 2) assessing the realizability of associated deferred tax assets, and 3) the application of relevant income tax regulations for the generation of foreign tax credit carryforwards and foreign-source taxable income forecasted to be generated prior to carryforward expirations. To assess the Company's ability to forecast, we compared historical forecasts of foreign-source taxable income to actual results. We involved income tax professionals with specialized skills and knowledge, who assisted in evaluating the types and amounts of foreign-source taxable income utilized in the Company's forecasts, including the allocable expenses and method of expense allocation. They also assisted in assessing 1) the application of U.S. federal income tax regulations related to the generation and utilization of foreign tax credit carryforwards, and 2) the determination of the foreign tax credit carryforwards generated, including their realizability, by independently re-performing the computation and comparing our determination to the Company's assessment.
Evaluation of the Company's assessment of changes in, and the application of, international tax regulations
As discussed in Note 19 to the consolidated financial statements, $131 million of income tax expense for the year ended December 31, 2019 was related to the Company's international operations. In the current global tax environment, the Company's effective income tax rate and related income tax attributes are significantly impacted by changes in tax regulation in its significant operating locations. As a result, the Company continuously monitors, evaluates, and responds to these tax regulation changes.
We identified the evaluation of the Company's assessment of changes in, and the application of, international tax regulations as a critical audit matter. This was due to the complex and subjective nature of recent tax regulation changes, the steps taken by the Company in response to such changes, and their collective impacts on multiple foreign income tax computations. As a result, a high degree of auditor judgment was required to 1) evaluate significant tax regulation changes, 2) assess the application of the foreign taxing authorities' regulations on the Company's business operations, and 3) evaluate certain internal restructuring and other transactions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over 1) the changes in, and the application of, international tax regulations, 2) the execution of certain
64
internal restructuring and other transactions, and 3) their collective impacts on multiple foreign income tax computations. We involved income tax professionals with specialized skills and knowledge, who assisted in evaluating the Company's interpretation and application of tax regulations, including tax regulation changes, and the associated income tax consequences. They also assisted in assessing certain internal restructuring and other transactions, including reviewing the underlying legal step documentation and evaluating the resulting impact on the Company's global tax rate.
/s/ KPMG LLP
We have served as the Company's auditor since 2004.
Dallas, Texas
February 6, 2020
65
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions, except share and per share data) | ||||||||
Net sales | 6,297 | 7,155 | 6,140 | |||||
Cost of sales | (4,691 | ) | (5,183 | ) | (4,629 | ) | ||
Gross profit | 1,606 | 1,972 | 1,511 | |||||
Selling, general and administrative expenses | (483 | ) | (546 | ) | (496 | ) | ||
Amortization of intangible assets | (24 | ) | (24 | ) | (20 | ) | ||
Research and development expenses | (67 | ) | (72 | ) | (73 | ) | ||
Other (charges) gains, net | (203 | ) | 9 | (59 | ) | |||
Foreign exchange gain (loss), net | 7 | — | (1 | ) | ||||
Gain (loss) on disposition of businesses and assets, net | (2 | ) | (5 | ) | (5 | ) | ||
Operating profit (loss) | 834 | 1,334 | 857 | |||||
Equity in net earnings (loss) of affiliates | 182 | 233 | 183 | |||||
Non-operating pension and other postretirement employee benefit (expense) income | (20 | ) | (62 | ) | 44 | |||
Interest expense | (115 | ) | (125 | ) | (122 | ) | ||
Refinancing expense | (4 | ) | (1 | ) | — | |||
Interest income | 6 | 6 | 2 | |||||
Dividend income - equity investments | 113 | 117 | 108 | |||||
Other income (expense), net | (8 | ) | 8 | 3 | ||||
Earnings (loss) from continuing operations before tax | 988 | 1,510 | 1,075 | |||||
Income tax (provision) benefit | (124 | ) | (292 | ) | (213 | ) | ||
Earnings (loss) from continuing operations | 864 | 1,218 | 862 | |||||
Earnings (loss) from operation of discontinued operations | (8 | ) | (5 | ) | (16 | ) | ||
Gain (loss) on disposition of discontinued operations | — | — | — | |||||
Income tax (provision) benefit from discontinued operations | 2 | — | 3 | |||||
Earnings (loss) from discontinued operations | (6 | ) | (5 | ) | (13 | ) | ||
Net earnings (loss) | 858 | 1,213 | 849 | |||||
Net (earnings) loss attributable to noncontrolling interests | (6 | ) | (6 | ) | (6 | ) | ||
Net earnings (loss) attributable to Celanese Corporation | 852 | 1,207 | 843 | |||||
Amounts attributable to Celanese Corporation | ||||||||
Earnings (loss) from continuing operations | 858 | 1,212 | 856 | |||||
Earnings (loss) from discontinued operations | (6 | ) | (5 | ) | (13 | ) | ||
Net earnings (loss) | 852 | 1,207 | 843 | |||||
Earnings (loss) per common share - basic | ||||||||
Continuing operations | 6.93 | 9.03 | 6.21 | |||||
Discontinued operations | (0.05 | ) | (0.04 | ) | (0.10 | ) | ||
Net earnings (loss) - basic | 6.88 | 8.99 | 6.11 | |||||
Earnings (loss) per common share - diluted | ||||||||
Continuing operations | 6.89 | 8.95 | 6.19 | |||||
Discontinued operations | (0.05 | ) | (0.04 | ) | (0.10 | ) | ||
Net earnings (loss) - diluted | 6.84 | 8.91 | 6.09 | |||||
Weighted average shares - basic | 123,925,697 | 134,305,269 | 137,902,667 | |||||
Weighted average shares - diluted | 124,651,759 | 135,416,858 | 138,317,395 | |||||
See the accompanying notes to the consolidated financial statements.
66
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Net earnings (loss) | 858 | 1,213 | 849 | |||||
Other comprehensive income (loss), net of tax | ||||||||
Unrealized gain (loss) on marketable securities | — | — | (1 | ) | ||||
Foreign currency translation | (16 | ) | (60 | ) | 174 | |||
Gain (loss) on cash flow hedges | (30 | ) | (10 | ) | (1 | ) | ||
Pension and postretirement benefits | (7 | ) | — | 9 | ||||
Total other comprehensive income (loss), net of tax | (53 | ) | (70 | ) | 181 | |||
Total comprehensive income (loss), net of tax | 805 | 1,143 | 1,030 | |||||
Comprehensive (income) loss attributable to noncontrolling interests | (6 | ) | (6 | ) | (6 | ) | ||
Comprehensive income (loss) attributable to Celanese Corporation | 799 | 1,137 | 1,024 | |||||
See the accompanying notes to the consolidated financial statements.
67
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions, except share data) | |||||
ASSETS | |||||
Current Assets | |||||
Cash and cash equivalents (variable interest entity restricted - 2019: $57; 2018: $24) | 463 | 439 | |||
Trade receivables - third party and affiliates (net of allowance for doubtful accounts - 2019: $9; 2018: $10; variable interest entity restricted - 2019: $6; 2018: $6) | 850 | 1,017 | |||
Non-trade receivables, net | 331 | 301 | |||
Inventories | 1,038 | 1,046 | |||
Marketable securities | 40 | 31 | |||
Other assets | 43 | 40 | |||
Total current assets | 2,765 | 2,874 | |||
Investments in affiliates | 975 | 979 | |||
Property, plant and equipment (net of accumulated depreciation - 2019: $2,957; 2018: $2,803; variable interest entity restricted - 2019: $622; 2018: $659) | 3,713 | 3,719 | |||
Operating lease right-of-use assets | 203 | — | |||
Deferred income taxes | 96 | 84 | |||
Other assets (variable interest entity restricted - 2019: $9; 2018: $5) | 338 | 290 | |||
Goodwill | 1,074 | 1,057 | |||
Intangible assets, net (variable interest entity restricted - 2019: $22; 2018: $23) | 312 | 310 | |||
Total assets | 9,476 | 9,313 | |||
LIABILITIES AND EQUITY | |||||
Current Liabilities | |||||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 496 | 561 | |||
Trade payables - third party and affiliates | 780 | 819 | |||
Other liabilities | 461 | 343 | |||
Income taxes payable | 17 | 56 | |||
Total current liabilities | 1,754 | 1,779 | |||
Long-term debt, net of unamortized deferred financing costs | 3,409 | 2,970 | |||
Deferred income taxes | 257 | 255 | |||
Uncertain tax positions | 165 | 158 | |||
Benefit obligations | 589 | 564 | |||
Operating lease liabilities | 181 | — | |||
Other liabilities | 223 | 208 | |||
Commitments and Contingencies | |||||
Stockholders' Equity | |||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized (2019 and 2018: 0 issued and outstanding) | — | — | |||
Common stock, $0.0001 par value, 400,000,000 shares authorized (2019: 168,973,172 issued and 119,555,207 outstanding; 2018: 168,418,954 issued and 128,095,849 outstanding) | — | — | |||
Treasury stock, at cost (2019: 49,417,965 shares; 2018: 40,323,105 shares) | (3,846 | ) | (2,849 | ) | |
Additional paid-in capital | 254 | 233 | |||
Retained earnings | 6,399 | 5,847 | |||
Accumulated other comprehensive income (loss), net | (300 | ) | (247 | ) | |
Total Celanese Corporation stockholders' equity | 2,507 | 2,984 | |||
Noncontrolling interests | 391 | 395 | |||
Total equity | 2,898 | 3,379 | |||
Total liabilities and equity | 9,476 | 9,313 | |||
See the accompanying notes to the consolidated financial statements.
68
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Year Ended December 31, | |||||||||||||||||
2019 | 2018 | 2017 | |||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||
(In $ millions, except share data) | |||||||||||||||||
Common Stock | |||||||||||||||||
Balance as of the beginning of the period | 128,095,849 | — | 135,769,256 | — | 140,660,447 | — | |||||||||||
Stock option exercises | 14,045 | — | — | — | 20,151 | — | |||||||||||
Purchases of treasury stock | (9,166,267 | ) | — | (7,935,392 | ) | — | (5,436,803 | ) | — | ||||||||
Stock awards | 611,580 | — | 261,985 | — | 525,461 | — | |||||||||||
Balance as of the end of the period | 119,555,207 | — | 128,095,849 | — | 135,769,256 | — | |||||||||||
Treasury Stock | |||||||||||||||||
Balance as of the beginning of the period | 40,323,105 | (2,849 | ) | 32,387,713 | (2,031 | ) | 26,950,910 | (1,531 | ) | ||||||||
Purchases of treasury stock, including related fees | 9,166,267 | (1,000 | ) | 7,935,392 | (818 | ) | 5,436,803 | (500 | ) | ||||||||
Issuance of treasury stock under stock plans | (71,407 | ) | 3 | — | — | — | — | ||||||||||
Balance as of the end of the period | 49,417,965 | (3,846 | ) | 40,323,105 | (2,849 | ) | 32,387,713 | (2,031 | ) | ||||||||
Additional Paid-In Capital | |||||||||||||||||
Balance as of the beginning of the period | 233 | 175 | 157 | ||||||||||||||
Stock-based compensation, net of tax | 22 | 58 | 23 | ||||||||||||||
Stock option exercises, net of tax | (1 | ) | — | 1 | |||||||||||||
Affiliate purchase of shares from noncontrolling interests | — | — | (6 | ) | |||||||||||||
Balance as of the end of the period | 254 | 233 | 175 | ||||||||||||||
Retained Earnings | |||||||||||||||||
Balance as of the beginning of the period | 5,847 | 4,920 | 4,320 | ||||||||||||||
— | — | (1 | ) | ||||||||||||||
Net earnings (loss) attributable to Celanese Corporation | 852 | 1,207 | 843 | ||||||||||||||
Common stock dividends | (300 | ) | (280 | ) | (241 | ) | |||||||||||
Restricted stock unit dividends | — | — | (1 | ) | |||||||||||||
Balance as of the end of the period | 6,399 | 5,847 | 4,920 | ||||||||||||||
Accumulated Other Comprehensive Income (Loss), Net | |||||||||||||||||
Balance as of the beginning of the period | (247 | ) | (177 | ) | (358 | ) | |||||||||||
Other comprehensive income (loss), net of tax | (53 | ) | (70 | ) | 181 | ||||||||||||
Balance as of the end of the period | (300 | ) | (247 | ) | (177 | ) | |||||||||||
Total Celanese Corporation stockholders' equity | 2,507 | 2,984 | 2,887 | ||||||||||||||
Noncontrolling Interests | |||||||||||||||||
Balance as of the beginning of the period | 395 | 412 | 433 | ||||||||||||||
Net earnings (loss) attributable to noncontrolling interests | 6 | 6 | 6 | ||||||||||||||
(Distributions to) contributions from noncontrolling interests | (10 | ) | (23 | ) | (27 | ) | |||||||||||
Balance as of the end of the period | 391 | 395 | 412 | ||||||||||||||
Total equity | 2,898 | 3,379 | 3,299 | ||||||||||||||
See the accompanying notes to the consolidated financial statements.
69
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Operating Activities | ||||||||
Net earnings (loss) | 858 | 1,213 | 849 | |||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities | ||||||||
Asset impairments | 83 | — | — | |||||
Depreciation, amortization and accretion | 356 | 349 | 310 | |||||
Pension and postretirement net periodic benefit cost | (58 | ) | (92 | ) | (80 | ) | ||
Pension and postretirement contributions | (47 | ) | (47 | ) | (363 | ) | ||
Actuarial (gain) loss on pension and postretirement plans | 87 | 165 | 46 | |||||
Pension curtailments and settlements, net | — | (1 | ) | — | ||||
Deferred income taxes, net | (31 | ) | 137 | (152 | ) | |||
(Gain) loss on disposition of businesses and assets, net | 3 | 7 | 5 | |||||
Stock-based compensation | 48 | 71 | 47 | |||||
Undistributed earnings in unconsolidated affiliates | (14 | ) | (12 | ) | (52 | ) | ||
Other, net | 18 | 26 | 12 | |||||
Operating cash provided by (used in) discontinued operations | — | (10 | ) | 8 | ||||
Changes in operating assets and liabilities | ||||||||
Trade receivables - third party and affiliates, net | 165 | (48 | ) | (110 | ) | |||
Inventories | 6 | (158 | ) | (97 | ) | |||
Other assets | (9 | ) | (113 | ) | (7 | ) | ||
Trade payables - third party and affiliates | (59 | ) | 15 | 126 | ||||
Other liabilities | 48 | 56 | 261 | |||||
Net cash provided by (used in) operating activities | 1,454 | 1,558 | 803 | |||||
Investing Activities | ||||||||
Capital expenditures on property, plant and equipment | (370 | ) | (337 | ) | (267 | ) | ||
Acquisitions, net of cash acquired | (91 | ) | (144 | ) | (269 | ) | ||
Proceeds from sale of businesses and assets, net | 1 | 13 | 1 | |||||
Purchases of marketable securities | (16 | ) | — | — | ||||
Other, net | (17 | ) | (39 | ) | (14 | ) | ||
Net cash provided by (used in) investing activities | (493 | ) | (507 | ) | (549 | ) | ||
Financing Activities | ||||||||
Net change in short-term borrowings with maturities of 3 months or less | 247 | (38 | ) | 111 | ||||
Proceeds from short-term borrowings | 117 | 51 | 182 | |||||
Repayments of short-term borrowings | (91 | ) | (78 | ) | (124 | ) | ||
Proceeds from long-term debt | 499 | 561 | 351 | |||||
Repayments of long-term debt | (360 | ) | (536 | ) | (77 | ) | ||
Purchases of treasury stock, including related fees | (996 | ) | (805 | ) | (500 | ) | ||
Stock option exercises | (1 | ) | — | 1 | ||||
Common stock dividends | (300 | ) | (280 | ) | (241 | ) | ||
(Distributions to) contributions from noncontrolling interests | (10 | ) | (23 | ) | (27 | ) | ||
Other, net | (40 | ) | (17 | ) | (27 | ) | ||
Net cash provided by (used in) financing activities | (935 | ) | (1,165 | ) | (351 | ) | ||
Exchange rate effects on cash and cash equivalents | (2 | ) | (23 | ) | 35 | |||
Net increase (decrease) in cash and cash equivalents | 24 | (137 | ) | (62 | ) | |||
Cash and cash equivalents as of beginning of period | 439 | 576 | 638 | |||||
Cash and cash equivalents as of end of period | 463 | 439 | 576 | |||||
See the accompanying notes to the consolidated financial statements.
70
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Basis of Presentation
Description of the Company
Celanese Corporation and its subsidiaries (collectively, the "Company") is a global chemical and specialty materials company. The Company produces high performance engineered polymers that are used in a variety of high-value applications, as well as acetyl products, which are intermediate chemicals for nearly all major industries. The Company also engineers and manufactures a wide variety of products essential to everyday living. The Company's broad product portfolio serves a diverse set of end-use applications including automotive, chemical additives, construction, consumer and industrial adhesives, consumer and medical, energy storage, filtration, food and beverage, paints and coatings, paper and packaging, performance industrial and textiles.
Definitions
In this Annual Report on Form 10-K ("Annual Report"), the term "Celanese" refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The term "Celanese US" refers to the Company's subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, and not its subsidiaries.
Basis of Presentation
The consolidated financial statements contained in this Annual Report were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for all periods presented and include the accounts of the Company, its majority owned subsidiaries over which the Company exercises control and, when applicable, variable interest entities in which the Company is the primary beneficiary. The consolidated financial statements and other financial information included in this Annual Report, unless otherwise specified, have been presented to separately show the effects of discontinued operations.
In the ordinary course of business, the Company enters into contracts and agreements relative to a number of topics, including acquisitions, dispositions, joint ventures, supply agreements, product sales and other arrangements. The Company endeavors to describe those contracts or agreements that are material to its business, results of operations or financial position. The Company may also describe some arrangements that are not material but in which the Company believes investors may have an interest or which may have been included in a Form 8-K filing. Investors should not assume the Company has described all contracts and agreements relative to the Company's business in this Annual Report.
For those consolidated ventures in which the Company owns or is exposed to less than 100% of the economics, the outside stockholders' interests are shown as noncontrolling interests.
The Company has reclassified certain prior period amounts to conform to the current period's presentation.
71
2. Summary of Accounting Policies
Critical Accounting Policies
Recoverability of Goodwill and Indefinite-Lived Assets
The Company assesses the recoverability of the carrying amount of its reporting unit goodwill and indefinite-lived intangible assets either qualitatively or quantitatively annually during the third quarter of its fiscal year using June 30 balances or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. The Company assesses the recoverability of finite-lived intangible assets in the same manner as for property, plant and equipment. Impairment losses are generally recorded in Other (charges) gains, net in the consolidated statements of operations.
Recoverability of the carrying amount of goodwill is measured at the reporting unit level. The qualitative evaluation is an assessment of multiple factors, including the current operating environment, financial performance and market considerations, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass this qualitative assessment for some or all of its reporting units and perform a quantitative test, based on management's judgment. In performing a quantitative analysis, the Company measures the recoverability of goodwill for each reporting unit using a discounted cash flow model incorporating discount rates commensurate with the risks involved, which is classified as a Level 3 fair value measurement. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the weighted average cost of capital ("WACC") considering any differences in company-specific risk factors. The Company may engage third-party valuation consultants to assist with this process.
Management tests indefinite-lived intangible assets for impairment quantitatively utilizing the relief from royalty method under the income approach to determine the estimated fair value for each indefinite-lived intangible asset, which is classified as a Level 3 fair value measurement. The relief from royalty method estimates the Company's theoretical royalty savings from ownership of the intangible asset. The key assumptions used in this model include discount rates, royalty rates, growth rates, tax rates, sales projections and terminal value rates. Discount rates, royalty rates, growth rates and sales projections are the assumptions most sensitive and susceptible to change as they require significant management judgment. Discount rates used are similar to the rates estimated by the WACC considering any differences in company-specific risk factors. Royalty rates are established by management and are periodically substantiated by third-party valuation consultants.
Environmental Liabilities
The Company manufactures and sells a diverse line of chemical products throughout the world. Accordingly, the Company's operations are subject to various hazards incidental to the production of industrial chemicals including the use, handling, processing, storage and transportation of hazardous materials. The Company recognizes losses and accrues liabilities relating to environmental matters if available information indicates that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Depending on the nature of the site, the Company accrues through 15 years, unless the Company has government orders or other agreements that extend beyond 15 years. The Company estimates environmental liabilities on a case-by-case basis using the most current status of available facts, existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. Recoveries of environmental costs from other parties are recorded as assets when their receipt is deemed probable.
An environmental liability related to cleanup of a contaminated site might include, for example, a provision for one or more of the following types of costs: site investigation and testing costs, cleanup costs, costs related to soil and water contamination resulting from tank ruptures and post-remediation monitoring costs. These undiscounted liabilities do not take into account any claims or recoveries from insurance. The measurement of environmental liabilities is based on the Company's periodic estimate of what it will cost to perform each of the elements of the remediation effort. The Company utilizes third parties to assist in the management and development of cost estimates for its sites. Changes to environmental regulations or other factors affecting environmental liabilities are reflected in the consolidated financial statements in the period in which they occur.
72
Pension and Other Postretirement Obligations
The Company recognizes a balance sheet asset or liability for each of its pension and other postretirement benefit plans equal to the plan's funded status as of a December 31 measurement date. The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined on an actuarial basis. Various assumptions are used in the calculation of the actuarial valuation of the employee benefit plans. These assumptions include the discount rate, compensation levels, expected long-term rates of return on plan assets and trends in health care costs. In addition, actuarial consultants use factors such as withdrawal and mortality rates to estimate the projected benefit obligation.
The Company applies the long-term expected rate of return to the fair value of plan assets and immediately recognizes in operating results the change in fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is required to be remeasured. Events requiring a plan remeasurement will be recognized in the quarter in which such remeasurement event occurs. The remaining components of pension and other postretirement plan net periodic benefit costs are recorded on a quarterly basis.
The Company allocates the service cost and amortization of prior service cost (or credit) components of its pension and postretirement plans to its business segments. Interest cost, expected return on assets and net actuarial gains and losses are considered financing activities managed at the corporate level and are recorded to Other Activities. The Company believes the expense allocation appropriately matches the cost incurred for active employees to the respective business segment.
Other postretirement benefit plans provide medical and life insurance benefits to retirees who meet minimum age and service requirements. The key determinants of the accumulated postretirement benefit obligation ("APBO") are the discount rate and the health care cost trend rate.
• | Discount Rate |
As of the measurement date, the Company determines the appropriate discount rate used to calculate the present value of future cash flows currently expected to be required to settle the pension and other postretirement benefit obligations. The discount rate is generally based on the yield on high-quality corporate fixed-income securities.
In the US, the rate used to discount pension and other postretirement benefit plan liabilities is based on a yield curve developed from market data of over 300 Aa-grade non-callable bonds at the measurement date. This yield curve has discount rates that vary based on the duration of the obligations. The estimated future cash flows for the pension and other benefit obligations were matched to the corresponding rates on the yield curve to derive a weighted average discount rate.
The Company determines its discount rates in the Euro zone using the iBoxx Euro Corporate AA Bond indices with appropriate adjustments for the duration of the plan obligations. In other international locations, the Company determines its discount rates based on the yields of high quality government bonds with a duration appropriate to the duration of the plan obligations.
• | Expected Long-Term Rate of Return on Assets |
The Company determines the long-term expected rate of return on plan assets by considering the current target asset allocation, as well as the historical and expected rates of return on various asset categories in which the plans are invested. A single long-term expected rate of return on plan assets is then calculated for each plan as the weighted average of the target asset allocation and the long-term expected rate of return assumptions for each asset category within each plan.
The expected rate of return is assessed annually and is based on long-term relationships among major asset classes and the level of incremental returns that can be earned by the successful implementation of different active investment management strategies. Equity returns are based on estimates of long-term inflation rate, real rate of return, 10-year Treasury bond premium over cash and historical equity risk premium. Fixed income returns are based on maturity, historical long-term inflation, real rate of return and credit spreads.
• | Investment Policies and Strategies |
The investment objectives for the Company's pension plans are to earn, over a moving 20-year period, a long-term expected rate of return, net of investment fees and transaction costs, sufficient to satisfy the benefit obligations of the plan, while at the same time maintaining adequate liquidity to pay benefit obligations and proper expenses, and meet any other cash needs, in the short- to medium-term.
73
The equity and debt securities objectives are to provide diversified exposure across the US and global equity and fixed income markets, and to manage the risks and returns of the plans through the use of multiple managers and strategies. The fixed income strategies are designed to reduce liability-related interest rate risk by investing in bonds that match the duration and credit quality of the plan liabilities. Derivatives-based strategies may be used to mitigate investment risks.
The financial objectives of the qualified pension plans are established in conjunction with a comprehensive review of each plan's liability structure. The Company's asset allocation policy is based on detailed asset/liability analysis. In developing investment policy and financial goals, consideration is given to each plan's demographics, the returns and risks associated with current and alternative investment strategies and the current and projected cash, expense and funding ratios of each plan. Investment policies must also comply with local statutory requirements as determined by each country. A formal asset/liability study of each plan is undertaken every three to five years or whenever there has been a material change in plan demographics, benefit structure or funding status and investment market. The Company has adopted a long-term investment horizon such that the risk and duration of investment losses are weighed against the long-term potential for appreciation of assets. Although there cannot be complete assurance that these objectives will be realized, it is believed that the likelihood for their realization is reasonably high, based upon the asset allocation chosen and the historical and expected performance of the asset classes utilized by the plans. The intent is for investments to be broadly diversified across asset classes, investment styles, market sectors, investment managers, developed and emerging markets and securities in order to moderate portfolio volatility and risk. Investments may be in separate accounts, commingled trusts, mutual funds and other pooled asset portfolios provided they all conform to fiduciary standards.
External investment managers are hired to manage pension assets. Investment consultants assist with the screening process for each new manager hired. Over the long-term, the investment portfolio is expected to earn returns that exceed a composite of market indices that are weighted to match each plan's target asset allocation. The portfolio return should also (over the long-term) meet or exceed the return used for actuarial calculations in order to meet the future needs of each plan.
Loss Contingencies
When determinable, the Company accrues contingent losses for matters that are probable of occurring for which a loss amount can be reasonably estimated. For certain potentially material loss contingency matters, the Company is sometimes unable to estimate and accrue a loss deemed probable of occurring. For such matters, the Company discloses an estimate of the possible loss, range of loss or a statement that such estimate cannot be made.
Because the Company's evaluation and assessment of critical facts and circumstances surrounding a contingent loss matter is in advance of the matter's final determination, there is an inherent subjectivity and unpredictability involved in estimating, accounting for and reporting contingent losses. Generally, the less progress made in the resolution of a contingent loss matter or the broader the range of potential outcomes, the more difficult it is for the Company to estimate, accrue and report a loss. For example, the Company may disclose certain information about a plaintiff's legal claim against the Company that is alleged in the plaintiff's pleadings or otherwise publicly available. While information of this type may provide more insight into the potential magnitude of a matter, it might not necessarily be indicative of the Company's estimate of probable or possible loss. In addition, some of the Company's contingent loss exposures may be eligible for reimbursement under the provisions of its insurance coverage. The Company does not consider the potential availability of insurance coverage in determining its probable or possible loss estimates. As a result of these factors among others, the Company's ultimate contingent loss exposure may be higher or lower, and possibly materially so, than the Company's recorded probable loss accruals and disclosures of possible losses.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates and laws in the respective tax jurisdiction enacted as of the balance sheet date.
The Company reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, remaining carryforward periods, applicable tax strategies and the expected timing of the reversals of existing temporary differences. A valuation allowance is provided when it is more likely than not (likelihood of greater than 50%) that some portion or all of the deferred tax assets will not be realized.
74
The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the positions will be sustained upon examination. Tax positions that meet the more-likely-than-not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence.
The Company recognizes interest and penalties related to uncertain tax positions in Income tax (provision) benefit in the consolidated statements of operations.
Other Accounting Policies
Consolidation Principles
The consolidated financial statements have been prepared in accordance with US GAAP for all periods presented and include the accounts of the Company and its majority owned subsidiaries over which the Company exercises control. All intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales, expenses and allocated charges during the reporting period. Significant estimates pertain to impairments of goodwill, intangible assets and other long-lived assets, purchase price allocations, restructuring costs and other (charges) gains, net, income taxes, pension and other postretirement benefits, asset retirement obligations, environmental liabilities and loss contingencies, among others. Actual results could differ from those estimates.
Purchase Accounting
The Company recognizes the identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of purchase price over the aggregate fair values is recorded as goodwill. Intangible assets are valued using the relief from royalty, multi-period excess earnings and discounted cash flow methodologies, which are considered Level 3 measurements. The relief from royalty method estimates the Company's theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this method include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Key assumptions used in the multi-period excess earnings method include discount rates, retention rates, growth rates, sales projections, expense projections and contributory asset charges. Key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. All of these methodologies require significant management judgment and, therefore, are susceptible to change. The Company calculates the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed to allocate the purchase price at the acquisition date. The Company may use the assistance of third-party valuation consultants.
Fair Value Measurements
The Company determines fair value based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers assumptions that market participants would use when pricing the asset or liability. Market participant assumptions are categorized by a three-tiered fair value hierarchy which prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. Valuations for fund investments, such as common/collective trusts, registered investment companies and short-term investment funds, which do not have readily determinable fair values, are typically estimated using a net asset value provided by a third party as a practical expedient.
75
The levels of inputs used to measure fair value are as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company
Level 2 - inputs that are observable in the marketplace other than those inputs classified as Level 1
Level 3 - inputs that are unobservable in the marketplace and significant to the valuation
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered cash equivalents.
Inventories
Inventories, including stores and supplies, are stated at the lower of cost and net realizable value. Cost for inventories is determined using the first-in, first-out ("FIFO") method. Cost includes raw materials, direct labor and manufacturing overhead. Cost for stores and supplies is primarily determined by the average cost method.
Investments in Affiliates
Investments in equity securities where the Company can exercise significant influence over operating and financial policies of an investee, which is generally considered when an investor owns 20% or more of the voting stock of an investee, are accounted for under the equity method of accounting. Investments in equity securities where the Company does not exercise significant influence are accounted for at fair value or, if such investments do not have a readily determinable fair value, an election may be made to measure them at cost after considering observable price changes for similar instruments, minus impairment, if any. The Company determined it cannot exercise significant influence over certain investments where the Company owns greater than a 20% interest due to local government investment in and influence over these entities, limitations on the Company's involvement in the day-to-day operations and the present inability of the entities to provide timely financial information prepared in accordance with US GAAP. Further, these investments were determined not to have a readily determinable fair value. Accordingly, these investments are accounted for using the alternative measure described above.
In certain instances, the financial information of the Company's equity investees is not available on a timely basis. Accordingly, the Company records its proportional share of the investee's earnings or losses on a consistent lag of no more than one quarter.
When required to assess the recoverability of its investments in affiliates, the Company estimates fair value using a discounted cash flow model. The Company may engage third-party valuation consultants to assist with this process.
Property, Plant and Equipment, Net
Land is recorded at historical cost. Buildings, machinery and equipment, including capitalized interest, and property under finance lease agreements, are recorded at cost less accumulated depreciation. The Company records depreciation and amortization in its consolidated statements of operations as either Cost of sales, Selling, general and administrative expenses or Research and development expenses consistent with the utilization of the underlying assets. Depreciation is calculated on a straight-line basis over the following estimated useful lives of depreciable assets:
Land improvements | 20 years |
Buildings and improvements | 30 years |
Machinery and equipment | 20 years |
Leasehold improvements are amortized over 10 years or the remaining life of the respective lease, whichever is shorter.
Accelerated depreciation is recorded when the estimated useful life is shortened. Ordinary repair and maintenance costs, including costs for planned maintenance turnarounds, that do not extend the useful life of the asset are charged to earnings as incurred. Fully depreciated assets are retained in property and depreciation accounts until sold or otherwise disposed. In the case of disposals, assets and related depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in earnings.
The Company assesses the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. An impairment
76
loss would be assessed when estimated undiscounted future cash flows from the operation and disposition of the asset group are less than the carrying amount of the asset group. Asset groups have identifiable cash flows and are largely independent of other asset groups. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. The Company calculates the fair value using a discounted cash flow model incorporating discount rates commensurate with the risks involved for the asset group, which is classified as a Level 3 fair value measurement. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, tax rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections involve significant judgment and are based on management's estimate of current and forecasted market conditions and cost structure. Impairment losses are generally recorded in Other (charges) gains, net in the consolidated statements of operations.
Definite-lived Intangible Assets
Customer-related intangible assets and other intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from three to 30 years.
Derivative and Hedging Instruments
The Company manages its exposures to interest rates, foreign exchange rates and commodity prices through a risk management program that includes the use of derivative financial instruments. The Company does not use derivative financial instruments for speculative trading purposes. The fair value of derivative instruments other than foreign currency forwards and swaps is recorded as an asset or liability on a net basis at the balance sheet date.
• | Interest Rate Risk Management |
The Company entered into a forward-starting interest rate swap to mitigate the risk of variability in the benchmark interest rate for an expected debt issuance in 2021. The interest rate swap agreement is designated as a cash flow hedge. Accordingly, to the extent the cash flow hedge is effective, changes in the fair value of the interest rate swap are included in gain (loss) from cash flow hedges within Accumulated other comprehensive income (loss), net in the consolidated balance sheets. Hedge accounting is discontinued when the interest rate swap is no longer effective in offsetting cash flows attributable to the hedged risk, the interest rate swap expires or the cash flow hedge is dedesignated because it is no longer probable that the forecasted transaction will occur according to the original strategy.
• | Foreign Exchange Risk Management |
Certain subsidiaries of the Company have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company also is exposed to foreign currency fluctuations on transactions with third-party entities as well as intercompany transactions. The Company minimizes its exposure to foreign currency fluctuations by entering into foreign currency forwards and swaps. These foreign currency forwards and swaps are not designated as hedges. Gains and losses on foreign currency forwards and swaps entered into to offset foreign exchange impacts on intercompany balances are included in Other income (expense), net in the consolidated statements of operations. Gains and losses on foreign currency forwards and swaps entered into to offset foreign exchange impacts on all other assets and liabilities are included in Foreign exchange gain (loss), net in the consolidated statements of operations.
The Company uses non-derivative financial instruments that may give rise to foreign currency transaction gains or losses to hedge the foreign currency exposure of net investments in foreign operations. Accordingly, the effective portion of gains and losses from remeasurement of the non-derivative financial instrument is included in foreign currency translation within Accumulated other comprehensive income (loss), net in the consolidated balance sheets. Gains and losses are reclassified to earnings in the period the hedged investment is sold or liquidated.
The Company entered into a cross-currency swap to synthetically convert its USD borrowing to EUR borrowing in 2019. The cross-currency swap agreement is designated as a net investment hedge. Accordingly, to the extent the net investment hedge is effective, changes in the fair value of the cross-currency swap are included in foreign currency translation within Accumulated other comprehensive income (loss), net in the consolidated balance sheets. Gains and losses are reclassified to earnings in the period the hedged investment is sold or liquidated.
• | Commodity Risk Management |
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The Company manages its exposure to commodity risk primarily through the use of long-term supply agreements, multi-year purchasing and sales agreements and forward purchase contracts. The Company regularly assesses its practice of using forward purchase contracts
77
and other raw material hedging instruments in accordance with changes in economic conditions. Forward purchases and swap contracts for raw materials are principally settled through physical delivery of the commodity. For qualifying contracts, the Company has elected to apply the normal purchases and normal sales exception based on the probability at the inception and throughout the term of the contract that the Company would not net settle and the transaction would result in the physical delivery of the commodity. Accordingly, realized gains and losses on these contracts are included in the cost of the commodity upon the settlement of the contract.
The Company also uses commodity swaps to hedge the risk of fluctuating price changes in certain raw materials and in which physical settlement does not occur. These commodity swaps fix the variable fee component of the price of certain commodities. All or a portion of these commodity swap agreements may be designated as cash flow hedges. Accordingly, to the extent the cash flow hedge was effective, changes in the fair value of commodity swaps are included in gain (loss) from cash flow hedges within Accumulated other comprehensive income (loss), net in the consolidated balance sheets. Gains and losses are reclassified to earnings in the period that the hedged item affected earnings.
Insurance Loss Liabilities
The Company has two wholly-owned insurance companies (the "Captives") that are used as a form of self-insurance for liability and workers compensation risks. Capitalization of the Captives is determined by regulatory guidelines. Premiums written are recognized as revenue based on policy periods. One of the Captives also insures certain third-party risks. The Captives use reinsurance arrangements to reduce their risks, however these arrangements do not relieve the Captives from their obligations to policyholders. The financial condition of the Captives' reinsurers are monitored to minimize exposure to insolvencies. However, failure of the reinsurers to honor their obligations could result in losses to the Captives.
Claim liabilities are established when sufficient information is available to indicate a specific policy is involved and the Company can reasonably estimate its liability. These liabilities are based on management estimates and periodic actuarial valuations. In addition, liabilities have been established to cover exposures for both known and unreported claims. Estimates of these liabilities are reviewed and updated regularly, however it is possible that actual results could differ significantly from the recorded liabilities.
Asset Retirement Obligations
Periodically, the Company will conclude a site no longer has an indeterminate life based on long-lived asset impairment triggering events and decisions made by the Company. Accordingly, the Company will record asset retirement obligations associated with such sites. To measure the fair value of the asset retirement obligations, the Company will use the expected present value technique, which is classified as a Level 3 fair value measurement. The expected present value technique uses a set of cash flows that represent the probability-weighted average of all possible cash flows based on the Company's judgment. The Company uses the following inputs to determine the fair value of the asset retirement obligations based on the Company's experience with fulfilling obligations of this type and the Company's knowledge of market conditions: (a) labor costs; (b) allocation of overhead costs; (c) profit on labor and overhead costs; (d) effect of inflation on estimated costs and profits; (e) risk premium for bearing the uncertainty inherent in cash flows, other than inflation; (f) time value of money represented by the risk-free interest rate commensurate with the timing of the associated cash flows; and (g) nonperformance risk relating to the liability, which includes the Company's own credit risk. The asset retirement obligations are accreted to their undiscounted values until the time at which they are expected to be settled.
The Company has identified but not recognized asset retirement obligations related to certain of its existing operating facilities. Examples of these types of obligations include demolition, decommissioning, disposal and restoration activities. Legal obligations exist in connection with the retirement of these assets upon closure of the facilities or abandonment of the existing operations. However, the Company currently plans on continuing operations at these facilities indefinitely and therefore, a reasonable estimate of fair value cannot be determined at this time. In the event the Company considers plans to abandon or cease operations at these sites, an asset retirement obligation will be reassessed at that time. If certain operating facilities were to close, the related asset retirement obligations could significantly affect the Company's results of operations and cash flows.
Deferred Financing Costs
Deferred financing costs are amortized using a method that approximates the effective interest rate method over the term of the related debt into Interest expense in the consolidated statements of operations. Upon the extinguishment of the related debt, any unamortized deferred financing costs are immediately expensed and included in Refinancing expense in the consolidated statements of operations. Upon the modification of the related debt, a portion of unamortized deferred financing costs may be immediately expensed and included in Refinancing expense in the consolidated statements of operations. Direct costs of refinancing activities are generally expensed and included in Refinancing expense in the consolidated statements of operations.
78
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company's contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated, formula, list or fixed price. The Company sells its products both directly to customers and through distributors generally under agreements with payment terms typically less than 90 days.
The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in Net sales and shipping and handling costs incurred are recorded in Cost of sales. The Company has elected to exclude from Net sales any value add, sales and other taxes which it collects concurrent with revenue-producing activities.
• | Contract Estimates |
The nature of certain of the Company's contracts gives rise to variable consideration, which may be constrained, including retrospective volume-based rebates to certain customers. The Company issues retrospective volume-based rebates to customers when they purchase a certain volume level, and the rebates are applied retroactively to prior purchases. The Company also issues prospective volume-based rebates to customers when they purchase a certain volume level, and the rebates are applied to future purchases. Prospective volume-based rebates represent a material right within the contract and therefore are considered to be separate performance obligations. For both retrospective and prospective volume-based rebates, the Company estimates the level of volumes based on anticipated purchases at the beginning of the period and records a rebate accrual for each purchase toward the requisite rebate volume. These estimated rebates are included in the transaction price of the Company's contracts with customers as a reduction to Net sales and are included in Current Other liabilities in the consolidated balance sheets (Note 12). This methodology is consistent with the manner in which the Company historically estimated and recorded volume-based rebates.
The majority of the Company's revenue is derived from contracts (i) with an original expected length of one year or less and (ii) contracts for which it recognizes revenue at the amount in which it has the right to invoice as product is delivered. The Company has elected the practical expedient not to disclose the value of remaining performance obligations associated with these types of contracts. However, the Company has certain contracts that represent take-or-pay revenue arrangements in which the Company's performance obligations extend over multiple years. As of December 31, 2019, the Company had $585 million of remaining performance obligations related to take-or-pay contracts. The Company expects to recognize approximately $167 million of its remaining performance obligations as Net sales in 2020, $160 million in 2021, $88 million in 2022 and the balance thereafter.
The Company has certain contracts which contain performance obligations which are immaterial in the context of the contract with the customer. The Company has elected the practical expedient not to assess whether these promised goods or services are performance obligations.
• | Contract Balances |
Contract liabilities primarily relate to advances or deposits received from the Company's customers before revenue is recognized. These amounts are recorded as deferred revenue and are included in Noncurrent Other liabilities in the consolidated balance sheets (Note 13).
The Company does not have any material contract assets as of December 31, 2019.
Research and Development
The costs of research and development are charged as an expense in the period in which they are incurred.
79
Management Compensation Plans
Share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized over the participant's requisite service period. Upon termination of a participant's employment with the Company by reason of death or disability, retirement or by the Company without cause (as defined in the respective award agreements), a prorated award will generally vest on the original vesting date(s). The prorated award is calculated based on the time lapsed between the grant date and the date of termination, reduced by awards previously vested. Upon the termination of a Participant's employment with the Company for any other reason, any unvested portion of the award shall be forfeited and canceled without consideration.
• | Restricted Stock Units ("RSUs") |
Performance-based RSUs. The Company generally grants performance-based RSUs to the Company's executive officers and certain employees annually in February. The Company may also grant performance-based RSUs to certain new employees or to employees who assume positions of increasing responsibility at the time those events occur. The fair value of the Company's performance-based RSUs with a performance condition is equal to the average of the high and low price of the Company's common stock, par value $0.0001 per share ("Common Stock"), on the grant date less the present value of the expected dividends not received during the vesting period. Outstanding performance-based RSUs generally cliff-vest three years from the date of grant. Compensation expense for performance-based RSUs is recognized over the vesting period of the respective grant on a straight-line basis. Historically, the Company recognized share-based compensation net of estimated forfeitures over the vesting period of the respective grant. Effective January 1, 2017, the Company elected to change its accounting policy to recognize forfeitures as they occur. The new forfeiture policy election was adopted using a modified retrospective approach with a cumulative effect adjustment of $1 million to Retained earnings as of January 1, 2017.
The number of performance-based RSUs that ultimately vest is dependent on one or both of the following according to the terms of the specific award agreement: the achievement of (a) internal profitability targets (performance condition) and (b) market performance targets measured by the comparison of the Company's stock performance versus a defined peer group (market condition). Based on the achievement of internal profitability targets, the ultimate number of shares of the Company's Common Stock issued will range from zero to stretch, with stretch typically defined as 200% of target. Performance-based RSUs are canceled to the extent actual results do not meet minimum internal profitability measures, as defined individually under each award.
Time-based RSUs. The Company grants non-employee Directors time-based RSUs annually that generally vest one year from the grant date. The Company also grants time-based RSUs to the Company's executives and certain employees that generally vest ratably over three years. The fair value of the time-based RSUs is equal to the average of the high and low price of the Company's Common Stock on the grant date less the present value of the expected dividends not received during the vesting period. Compensation expense for time-based RSUs is recognized over the vesting period of the respective grant on a straight-line basis.
Upon the vesting of RSUs, the Company withholds a portion of the earned units to cover minimum statutory income and employment taxes and remits the net shares to an individual brokerage account. Authorized shares of the Company's Common Stock, or shares held in treasury from repurchases, are used to settle the RSUs.
Under the 2009 Global Incentive Plan, as amended ("2009 GIP") and the 2018 Global Incentive Plan ("2018 GIP"), the Company may not grant RSUs with the right to participate in dividends or dividend equivalents prior to vesting.
Leases
The Company leases certain real estate, fleet assets, warehouses and equipment. Leases with an initial term of 12 months or less ("short-term leases") are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company determines if an arrangement is a lease at inception.
Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company's leases do not provide an implicit rate of return, the Company uses its imputed collateralized rate based on the information available at commencement date in determining the present value of lease payments. The estimated rate is based on a risk-free rate plus a risk-adjusted margin. Operating lease ROU assets are comprised of the lease liability plus prepaid rents and are reduced by lease incentives or deferred rents. The Company has lease agreements with non-lease components which are not bifurcated.
80
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 30 years. The exercise of a lease renewal option typically occurs at the discretion of both parties. Certain leases also include options to purchase the leased property. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. Certain of the Company's lease agreements include payments adjusted periodically for inflation based on the consumer price index. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
See Note 3 for additional information regarding the adoption of Accounting Standards Update ("ASU") 2016-02, Leases.
Functional and Reporting Currencies
For the Company's international operations where the functional currency is other than the US dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Differences arising from the translation of assets and liabilities in comparison with the translation of the previous periods or from initial recognition during the period are included as a separate component of Accumulated other comprehensive income (loss), net.
81
3. Recent Accounting Pronouncements
The following table provides a brief description of recent ASUs issued by the Financial Accounting Standards Board ("FASB"):
Standard | Description | Effective Date | Effect on the Financial Statements or Other Significant Matters | |||
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. | The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("Topic 740"). The guidance also clarifies and amends existing guidance under Topic 740. | January 1, 2021. Early adoption is permitted. | The Company has completed its assessment and will adopt the new guidance effective January 1, 2021. The adoption of the new guidance will not have a material impact to the Company. | |||
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. | The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant. | January 1, 2020. Early adoption is permitted. | The Company adopted the new guidance effective January 1, 2019. The adoption of the new guidance did not have a material impact to the Company's disclosures. | |||
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. | The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. | January 1, 2019. | The Company adopted the new guidance effective January 1, 2019. The adoption of the new guidance did not have a material impact to the Company. | |||
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. | The new guidance requires financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected through application of the current expected credit losses model. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. | January 1, 2020. Early adoption is permitted. | The Company has completed its assessment and will adopt the new guidance effective January 1, 2020. The adoption of the new guidance will not have a material impact to the Company. | |||
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02. | The new guidance supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02. | January 1, 2019. | The Company adopted the new guidance effective January 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See the Adoption of ASU 2016-02 section below for additional information. | |||
82
Adoption of ASU 2016-02, Leases
The Company adopted ASU 2016-02 as of January 1, 2019, using the modified retrospective approach. Prior period amounts have not been adjusted. In addition, the Company elected the following practical expedients:
• | the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification; |
• | the land easements practical expedient, which allowed the Company to carry forward the accounting treatment for land easements on existing agreements; |
• | the short-term lease practical expedient, which allowed the Company to exclude short-term leases from recognition in the consolidated balance sheets; and |
• | the bifurcation of lease and non-lease components practical expedient, which did not require the Company to bifurcate lease and non-lease components for all classes of assets. |
The adoption of this accounting standard resulted in the recording of Operating lease ROU assets and Operating lease liabilities of $223 million and $240 million, respectively, as of January 1, 2019. The difference between the operating lease assets and liabilities was recorded as an adjustment to Other liabilities, primarily related to deferred rent (lease incentives). The adoption of ASU 2016-02 had no impact on Retained earnings.
4. Acquisitions, Dispositions and Plant Closures
Plant Closures
• | Ocotlán, Mexico |
On June 28, 2019, the Company announced it was consolidating its global acetate manufacturing capabilities with the closure of its acetate flake manufacturing operations in Ocotlán, Mexico. In June 2018, the Company initiated the closure of its acetate tow manufacturing unit at the same location. The Ocotlán, Mexico operations are included in the Company's Acetate Tow segment.
The exit and shutdown costs related to the Ocotlán, Mexico closure were as follows:
______________________________
Year Ended December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Asset impairments(1) | 83 | — | |||
Restructuring(1) | 4 | 2 | |||
Accelerated depreciation expense | 9 | 15 | |||
Loss on disposition of assets, net | 1 | 1 | |||
Other | 7 | (2) | 1 | ||
Total | 104 | 19 | |||
(1) |
(2) | Primarily related to inventory write-offs. |
The Company expects to incur additional exit and shutdown costs related to Ocotlán, Mexico of approximately $12 million through the first quarter of 2021.
83
5. Ventures and Variable Interest Entities
Consolidated Variable Interest Entities
The Company has a joint venture, Fairway Methanol LLC ("Fairway"), with Mitsui & Co., Ltd., of Tokyo, Japan ("Mitsui"), in which the Company owns 50% of Fairway, for the production of methanol at the Company's integrated chemical plant in Clear Lake, Texas. The methanol unit utilizes natural gas in the US Gulf Coast region as a feedstock and benefits from the existing infrastructure at the Company's Clear Lake facility. Both Mitsui and the Company supply their own natural gas to Fairway in exchange for methanol tolling under a cost-plus off-take arrangement.
Fairway is a variable interest entity ("VIE") in which the Company is the primary beneficiary. Under the terms of the joint venture agreements, the Company provides site services and day-to-day operations for the methanol facility. In addition, the joint venture agreements provide that the Company indemnifies Mitsui for environmental obligations that exceed a specified threshold, as well as an equity option between the partners. Accordingly, the Company consolidates the venture and records a noncontrolling interest for the share of the venture owned by Mitsui. Fairway is included in the Company's Acetyl Chain segment.
The carrying amount of the assets and liabilities associated with Fairway included in the consolidated balance sheets are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Cash and cash equivalents | 57 | 24 | |||
Trade receivables, net - third party and affiliates | 12 | 11 | |||
Property, plant and equipment (net of accumulated depreciation - 2019: $174; 2018: $130) | 622 | 659 | |||
Intangible assets (net of accumulated amortization - 2019: $4; 2018: $3) | 22 | 23 | |||
Other assets | 9 | 5 | |||
Total assets(1) | 722 | 722 | |||
Trade payables | 24 | 16 | |||
Other liabilities(2) | 5 | 4 | |||
Total debt | 4 | 5 | |||
Deferred income taxes | 4 | 3 | |||
Total liabilities | 37 | 28 | |||
______________________________
(1) | Joint venture assets can only be used to settle the obligations of Fairway. |
(2) | Primarily represents amounts owed by Fairway to the Company for reimbursement of expenditures. |
Nonconsolidated Variable Interest Entities
The Company holds variable interests in entities that supply certain raw materials and services to the Company. The variable interests primarily relate to cost-plus contractual arrangements with the suppliers and recovery of capital expenditures for certain plant assets plus a rate of return on such assets. Liabilities for such supplier recoveries of capital expenditures have been recorded as finance lease obligations. The entities are not consolidated because the Company is not the primary beneficiary of the entities as it does not have the power to direct the activities of the entities that most significantly impact the entities' economic performance. The Company's maximum exposure to loss as a result of its involvement with these VIEs as of December 31, 2019 relates primarily to the recovery of capital expenditures for certain property, plant and equipment.
84
The carrying amount of the assets and liabilities associated with the obligations to nonconsolidated VIEs, as well as the maximum exposure to loss relating to these nonconsolidated VIEs are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Property, plant and equipment, net | 31 | 42 | |||
Trade payables | 30 | 27 | |||
Current installments of long-term debt | 16 | 14 | |||
Long-term debt | 41 | 58 | |||
Total liabilities | 87 | 99 | |||
Maximum exposure to loss | 113 | 134 | |||
The difference between the total liabilities associated with obligations to nonconsolidated VIEs and the maximum exposure to loss primarily represents take-or-pay obligations for services included in the Company's unconditional purchase obligations (Note 24).
6. Marketable Securities
The Company holds securities as of December 31, 2019 and 2018 of $40 million and $31 million, respectively, that were recorded at fair value.
7. Receivables, Net
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Trade receivables - third party and affiliates | 859 | 1,027 | |||
Allowance for doubtful accounts - third party and affiliates | (9 | ) | (10 | ) | |
Trade receivables - third party and affiliates, net | 850 | 1,017 | |||
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Non-income taxes receivable | 203 | 176 | |||
Reinsurance receivables | 16 | 14 | |||
Income taxes receivable | 27 | 26 | |||
Other | 85 | 85 | |||
Non-trade receivables, net | 331 | 301 | |||
8. Inventories
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Finished goods | 718 | 697 | |||
Work-in-process | 76 | 70 | |||
Raw materials and supplies | 244 | 279 | |||
Total | 1,038 | 1,046 | |||
85
9. Investments in Affiliates
Entities in which the Company has an investment accounted for under the equity method of accounting or equity investments without readily determinable fair values are considered affiliates; any transactions or balances with such companies are considered affiliate transactions.
Equity Method
Equity method investments and ownership interests by business segment are as follows:
______________________________
Ownership as of December 31, | Carrying Value as of December 31, | Share of Earnings (Loss) Year Ended December 31, | Dividends and Other Distributions Year Ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
(In percentages) | (In $ millions) | ||||||||||||||||||||||||||
Engineered Materials | |||||||||||||||||||||||||||
Ibn Sina | 25 | 25 | 164 | 164 | 68 | 96 | 58 | (69 | ) | (112 | ) | (1 | ) | ||||||||||||||
InfraServ GmbH & Co. Hoechst KG(1)(3) | 32 | 32 | 116 | 129 | 14 | 20 | 19 | (17 | ) | (25 | ) | (26 | ) | ||||||||||||||
Fortron Industries LLC | 50 | 50 | 133 | 122 | 18 | 14 | 17 | (7 | ) | (3 | ) | (6 | ) | ||||||||||||||
Korea Engineering Plastics Co., Ltd. | 50 | 50 | 146 | 150 | 27 | 29 | 25 | (28 | ) | (27 | ) | (25 | ) | ||||||||||||||
Polyplastics Co., Ltd. | 45 | 45 | 192 | 196 | 44 | 64 | 57 | (39 | ) | (45 | ) | (64 | ) | ||||||||||||||
Sherbrooke Capital Health and Wellness, L.P.(2) | — | 10 | — | 2 | — | — | 1 | — | — | — | |||||||||||||||||
Other Activities(3) | |||||||||||||||||||||||||||
InfraServ GmbH & Co. Gendorf KG(4) | 30 | 30 | 38 | 36 | 8 | 7 | 4 | (5 | ) | (5 | ) | (5 | ) | ||||||||||||||
YNCORIS GmbH & Co. KG(4)(5) | 22 | 22 | 16 | 16 | 3 | 3 | 2 | (3 | ) | (4 | ) | (4 | ) | ||||||||||||||
Total | 805 | 815 | 182 | 233 | 183 | (168 | ) | (221 | ) | (131 | ) | ||||||||||||||||
(1) | InfraServ GmbH & Co. Hoechst KG is owned primarily by an entity included in the Company's Engineered Materials segment. The Company's Acetyl Chain segment also holds an ownership percentage. |
(2) | The Company accounted for its ownership interest in Sherbrooke Capital Health and Wellness, L.P. ("Sherbrooke") under the equity method of accounting because the Company was able to exercise significant influence. |
(3) | InfraServ real estate service companies ("InfraServ Entities") own and operate sites in Frankfurt am Main-Hoechst, Gendorf and Knapsack, Germany. The InfraServ Entities were created to own land and property and to provide various technical and administrative services at these manufacturing locations. |
(4) |
(5) | Formerly known as InfraServ GmbH & Co. Knapsack KG. |
Because financial information for Ibn Sina is not available to the Company on a timely basis, the Company's proportional share is reported on a one quarter lag. Accordingly, summarized financial information for Ibn Sina is as follows:
As of September 30, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Current assets | 253 | 448 | |||
Noncurrent assets | 871 | 825 | |||
Current liabilities | 148 | 200 | |||
Noncurrent liabilities | 433 | 450 | |||
86
Twelve Months Ended September 30, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Revenues | 726 | 913 | 759 | |||||
Gross profit | 299 | 396 | 306 | |||||
Net income | 227 | 322 | 256 | |||||
Equity Investments Without Readily Determinable Fair Values
Equity investments without readily determinable fair values and ownership interests by business segment are as follows:
Ownership as of December 31, | Carrying Value as of December 31, | Dividend Income for the Year Ended December 31, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2017 | ||||||||||||
(In percentages) | (In $ millions) | |||||||||||||||||
Acetate Tow | ||||||||||||||||||
Kunming Cellulose Fibers Co. Ltd. | 30 | 30 | 14 | 14 | 11 | 12 | 12 | |||||||||||
Nantong Cellulose Fibers Co. Ltd. | 31 | 31 | 121 | 115 | 79 | 87 | 81 | |||||||||||
Zhuhai Cellulose Fibers Co. Ltd. | 30 | 30 | 30 | 30 | 22 | 13 | 14 | |||||||||||
Other Activities | ||||||||||||||||||
InfraServ GmbH & Co. Wiesbaden KG | 8 | 8 | 5 | 5 | 1 | 1 | 1 | |||||||||||
Other | — | — | — | 4 | — | |||||||||||||
Total | 170 | 164 | 113 | 117 | 108 | |||||||||||||
Transactions with Affiliates
The Company owns manufacturing facilities at the InfraServ location in Frankfurt am Main-Hoechst, Germany and has contractual agreements with the InfraServ Entities and certain other equity affiliates and investees accounted for at cost less impairment, adjusted for observable price changes for an identical or similar investment of the same issuer. These contractual agreements primarily relate to energy purchases, site services and purchases of product for consumption and resale.
Transactions and balances with affiliates are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Purchases | 291 | 305 | 250 | |||||
Sales and other credits | 102 | 117 | 77 | |||||
Interest expense | 1 | 1 | — | |||||
87
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Trade receivables | 1 | — | |||
Non-trade receivables | 35 | 29 | |||
Total due from affiliates | 36 | 29 | |||
Short-term borrowings(1) | 67 | 50 | |||
Trade payables | 43 | 46 | |||
Current Other liabilities | 10 | 11 | |||
Total due to affiliates | 120 | 107 | |||
______________________________
(1) | The Company has agreements with certain affiliates whereby excess affiliate cash is lent to and managed by the Company at variable interest rates governed by those agreements. |
10. Property, Plant and Equipment, Net
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Land | 46 | 46 | |||
Land improvements | 78 | 77 | |||
Buildings and building improvements | 775 | 760 | |||
Machinery and equipment | 5,316 | 5,223 | |||
Construction in progress | 455 | 416 | |||
Gross asset value | 6,670 | 6,522 | |||
Accumulated depreciation | (2,957 | ) | (2,803 | ) | |
Net book value | 3,713 | 3,719 | |||
Assets under finance leases, net, included in the amounts above are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Buildings | 13 | 14 | |||
Machinery and equipment | 272 | 279 | |||
Accumulated depreciation | (202 | ) | (188 | ) | |
Net book value | 83 | 105 | |||
Capitalized interest costs and depreciation expense are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Capitalized interest | 8 | 10 | 6 | |||||
Depreciation expense | 327 | 319 | 285 | |||||
During 2019 and 2017, certain long-lived assets were impaired (Note 18). No long-lived assets were impaired during 2018.
88
11. Goodwill and Intangible Assets, Net
Goodwill
______________________________
Engineered Materials | Acetate Tow | Acetyl Chain | Total | ||||||||
(In $ millions) | |||||||||||
As of December 31, 2017 | 643 | 149 | 211 | 1,003 | |||||||
Acquisitions | 84 | (1) | — | — | 84 | ||||||
Exchange rate changes | (20 | ) | (1 | ) | (9 | ) | (30 | ) | |||
As of December 31, 2018 | 707 | 148 | 202 | 1,057 | |||||||
Acquisitions | 29 | (2) | — | — | 29 | ||||||
Exchange rate changes | (9 | ) | — | (3 | ) | (12 | ) | ||||
As of December 31, 2019(3) | 727 | 148 | 199 | 1,074 | |||||||
(1) | Represents goodwill related to the acquisition of Omni Plastics, L.L.C. ("Omni Plastics"). |
(2) | Represents goodwill related to the acquisition of Next Polymers Ltd. ("Next Polymers"). |
(3) | There were $0 million of accumulated impairment losses as of December 31, 2019. |
In connection with the Company's annual goodwill impairment assessment, the Company did not record an impairment loss to goodwill during the nine months ended September 30, 2019, as the estimated fair value for each of the Company's reporting units exceeded the carrying amount of the underlying assets by a substantial margin (Note 2). No events or changes in circumstances occurred during the three months ended December 31, 2019 that indicated the carrying amount of the assets may not be fully recoverable. Accordingly, no additional impairment analysis was performed during that period.
89
Intangible Assets, Net
Finite-lived intangible assets are as follows:
______________________________
Licenses | Customer- Related Intangible Assets | Developed Technology | Covenants Not to Compete and Other | Total | |||||||||||
(In $ millions) | |||||||||||||||
Gross Asset Value | |||||||||||||||
As of December 31, 2017 | 38 | 640 | 45 | 54 | 777 | ||||||||||
Acquisitions | — | 32 | — | 3 | 35 | (1) | |||||||||
Renewals | 6 | (2) | — | — | — | 6 | |||||||||
Exchange rate changes | (2 | ) | (21 | ) | (1 | ) | (1 | ) | (25 | ) | |||||
As of December 31, 2018 | 42 | 651 | 44 | 56 | 793 | ||||||||||
Acquisitions | — | 25 | — | — | 25 | (3) | |||||||||
Exchange rate changes | — | (9 | ) | — | — | (9 | ) | ||||||||
As of December 31, 2019 | 42 | 667 | 44 | 56 | 809 | ||||||||||
Accumulated Amortization | |||||||||||||||
As of December 31, 2017 | (33 | ) | (496 | ) | (30 | ) | (32 | ) | (591 | ) | |||||
Amortization | (2 | ) | (16 | ) | (3 | ) | (3 | ) | (24 | ) | |||||
Exchange rate changes | 2 | 17 | 1 | — | 20 | ||||||||||
As of December 31, 2018 | (33 | ) | (495 | ) | (32 | ) | (35 | ) | (595 | ) | |||||
Amortization | (2 | ) | (16 | ) | (3 | ) | (3 | ) | (24 | ) | |||||
Exchange rate changes | — | 7 | — | — | 7 | ||||||||||
As of December 31, 2019 | (35 | ) | (504 | ) | (35 | ) | (38 | ) | (612 | ) | |||||
Net book value | 7 | 163 | 9 | 18 | 197 | ||||||||||
(1) | Primarily related to intangible assets acquired from Omni Plastics during the year ended December 31, 2018, with a weighted average amortization period of 11 years. |
(2) | During the year ended December 31, 2018, the Company extended a research and development technology agreement license, which is being amortized over a period of 5 years. |
(3) | Related to intangible assets acquired from Next Polymers during the year ended December 31, 2019, with a weighted average amortization period of 13 years. |
Indefinite-lived intangible assets are as follows:
______________________________
Trademarks and Trade Names | |||
(In $ millions) | |||
As of December 31, 2017 | 115 | ||
Acquisitions | — | ||
Exchange rate changes | (3 | ) | |
As of December 31, 2018 | 112 | ||
Acquisitions | 4 | (1) | |
— | |||
Exchange rate changes | (1 | ) | |
As of December 31, 2019 | 115 | ||
(1) | Related to indefinite-lived intangible assets acquired from Next Polymers. |
90
In connection with the Company's annual indefinite-lived intangible assets impairment assessment, the Company did not record an impairment loss to indefinite-lived intangible assets during the nine months ended September 30, 2019, as the estimated fair value for each of the Company's indefinite-lived intangible assets exceeded the carrying amount of the underlying asset by a substantial margin (Note 2). No events or changes in circumstances occurred during the three months ended December 31, 2019 that indicated the carrying amount of the assets may not be fully recoverable. Accordingly, no additional impairment analysis was performed during that period.
During the year ended December 31, 2019, the Company did not renew or extend any intangible assets.
Estimated amortization expense for the succeeding five fiscal years is as follows:
(In $ millions) | ||
2020 | 21 | |
2021 | 21 | |
2022 | 19 | |
2023 | 17 | |
2024 | 16 | |
12. Current Other Liabilities
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Asset retirement obligations | 6 | 3 | |||
28 | 30 | ||||
Customer rebates | 63 | 76 | |||
8 | 7 | ||||
12 | 20 | ||||
Insurance | 6 | 4 | |||
Interest | 29 | 21 | |||
105 | 4 | ||||
29 | — | ||||
13 | 4 | ||||
Salaries and benefits | 89 | 119 | |||
Sales and use tax/foreign withholding tax payable | 35 | 22 | |||
Other | 38 | 33 | |||
Total | 461 | 343 | |||
13. Noncurrent Other Liabilities
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Asset retirement obligations | 13 | 13 | |||
Deferred proceeds | 43 | 44 | |||
Deferred revenue | 6 | 7 | |||
50 | 11 | ||||
49 | 49 | ||||
Insurance | 34 | 37 | |||
Other | 28 | 47 | |||
Total | 223 | 208 | |||
91
Changes in asset retirement obligations are as follows:
______________________________
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Balance at beginning of year | 16 | 26 | 29 | |||||
Additions(1) | 5 | 2 | — | |||||
Accretion | — | — | 1 | |||||
Payments | (3 | ) | (4 | ) | (5 | ) | ||
Revisions to cash flow estimates(2) | 1 | (8 | ) | 1 | ||||
Balance at end of year | 19 | 16 | 26 | |||||
(1) | Primarily relates to sites which management no longer considers to have an indeterminate life. |
(2) | Primarily relates to revisions to the estimated cost and timing of future obligations. |
Included in the asset retirement obligations for the year ended December 31, 2017 was $10 million related to indemnifications received for a business acquired in 2005. The asset retirement obligation related to the indemnifications was completed during 2018.
14. Debt
______________________________
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Short-Term Borrowings and Current Installments of Long-Term Debt - Third Party and Affiliates | |||||
Current installments of long-term debt | 28 | 367 | |||
Short-term borrowings, including amounts due to affiliates(1) | 81 | 77 | |||
Revolving credit facility(2) | 272 | 40 | |||
Accounts receivable securitization facility(3) | 115 | 77 | |||
Total | 496 | 561 | |||
(1) | The weighted average interest rate was 2.3% and 3.2% as of December 31, 2019 and 2018, respectively. |
(2) | The weighted average interest rate was 1.6% and 6.0% as of December 31, 2019 and 2018, respectively. |
(3) | The weighted average interest rate was 2.4% and 3.1% as of December 31, 2019 and 2018, respectively. |
92
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Long-Term Debt | |||||
Senior unsecured notes due 2019, interest rate of 3.250% | — | 343 | |||
Senior unsecured notes due 2021, interest rate of 5.875% | 400 | 400 | |||
Senior unsecured notes due 2022, interest rate of 4.625% | 500 | 500 | |||
Senior unsecured notes due 2023, interest rate of 1.125% | 841 | 857 | |||
Senior unsecured notes due 2024, interest rate of 3.500% | 499 | — | |||
Senior unsecured notes due 2025, interest rate of 1.250% | 337 | 343 | |||
Senior unsecured notes due 2027, interest rate of 2.125% | 558 | 568 | |||
Pollution control and industrial revenue bonds due at various dates through 2030, interest rates ranging from 4.05% to 5.00% | 167 | 167 | |||
Nilit Group ("Nilit") bank loans due at various dates through 2026(1) | 9 | 10 | |||
Obligations under finance leases due at various dates through 2054 | 144 | 167 | |||
Subtotal | 3,455 | 3,355 | |||
Unamortized debt issuance costs(2) | (18 | ) | (18 | ) | |
Current installments of long-term debt | (28 | ) | (367 | ) | |
Total | 3,409 | 2,970 | |||
(1) | The weighted average interest rate was 1.3% and 1.3% as of December 31, 2019 and 2018, respectively. |
(2) | Related to the Company's long-term debt, excluding obligations under finance leases. |
Senior Credit Facilities
On January 7, 2019, Celanese, Celanese US and certain subsidiary borrowers entered into a new senior credit agreement (the "Credit Agreement") consisting of a $1.25 billion senior unsecured revolving credit facility (with a letter of credit sublimit), maturing in 2024. The Credit Agreement is guaranteed by Celanese, Celanese US and substantially all of its domestic subsidiaries ("the Subsidiary Guarantors").
The Company's debt balances and amounts available for borrowing under its senior unsecured revolving credit facility are as follows:
______________________________
As of December 31, 2019 | ||
(In $ millions) | ||
Revolving Credit Facility | ||
Borrowings outstanding(1) | 272 | |
Letters of credit issued | — | |
Available for borrowing(2) | 978 | |
(1) | The Company borrowed $1.3 billion and repaid $1.1 billion under its senior unsecured revolving credit facility during the year ended December 31, 2019. |
(2) | The margin for borrowings under the senior unsecured revolving credit facility was 1.25% above LIBOR or EURIBOR at current Company credit ratings. |
Senior Notes
The Company has outstanding senior unsecured notes, issued in public offerings registered under the Securities Act of 1933 ("Securities Act"), as amended (collectively, the "Senior Notes"). The Senior Notes were issued by Celanese US and are guaranteed on a senior unsecured basis by Celanese and the Subsidiary Guarantors. Celanese US may redeem some or all of each of the Senior Notes, prior to their respective maturity dates, at a redemption price of 100% of the principal amount, plus a
93
"make-whole" premium as specified in the applicable indenture, plus accrued and unpaid interest, if any, to the redemption date.
On May 8, 2019, Celanese US completed an offering of $500 million in principal amount of 3.500% senior unsecured notes due May 8, 2024 (the "3.500% Notes") in a public offering registered under the Securities Act. The 3.500% Notes were issued at a discount to par at a price of 99.895%, which is being amortized to Interest expense in the consolidated statement of operations over the term of the 3.500% Notes. Net proceeds from the sale of the 3.500% Notes were used to redeem in full the 3.250% senior unsecured notes due October 15, 2019 (the "3.250 Notes"), to repay $156 million of outstanding borrowings under the senior unsecured revolving credit facility and for general corporate purposes. In connection with the issuance of the 3.500% Notes, the Company entered into a cross-currency swap to effectively convert its fixed-rate US dollar denominated debt under the 3.500% Notes, including annual interest payments and the payment of principal at maturity, to fixed-rate Euro denominated debt. See Note 22 for additional information.
In November 2018, Celanese US completed an offering of €500 million in principal amount of 2.125% senior unsecured notes due March 1, 2027 (the "2.125% Notes") in a public offering registered under the Securities Act. The 2.125% Notes were issued under a base indenture dated May 6, 2011. The 2.125% Notes were issued at a discount to par at a price of 99.231%, which is being amortized to Interest expense in the consolidated statements of operations over the term of the 2.125% Notes. Net proceeds from the sale of the 2.125% Notes were used to repay $463 million of the senior unsecured term loan and for general corporate purposes.
Principal payments scheduled to be made on the Company's debt, including short-term borrowings, are as follows:
(In $ millions) | ||
2020 | 496 | |
2021 | 429 | |
2022 | 525 | |
2023 | 859 | |
2024 | 533 | |
Thereafter | 1,081 | |
Total | 3,923 | |
Accounts Receivable Securitization Facility
The Company has a US accounts receivable securitization facility involving receivables of certain of its domestic subsidiaries of the Company transferred to a wholly-owned, "bankruptcy remote" special purpose subsidiary of the Company ("SPE"). The facility, which permits cash borrowings and letters of credit, was amended on July 8, 2019 to extend the maturity date to July 6, 2020 and modify certain events of default, limitations on concentrations of obligors and certain of the components used to calculate the SPE reserves. All of the SPE's assets have been pledged to the administrative agent in support of the SPE's obligations under the facility.
94
The Company's debt balances and amounts available for borrowing under its securitization facility are as follows:
______________________________
As of December 31, 2019 | ||
(In $ millions) | ||
Accounts Receivable Securitization Facility | ||
Borrowings outstanding(1) | 115 | |
Letters of credit issued | — | |
Available for borrowing | 5 | |
Total borrowing base | 120 | |
Maximum borrowing base(2) | 120 | |
(1) | The Company borrowed $112 million and repaid $74 million under this facility during the year ended December 31, 2019. |
(2) | Outstanding accounts receivable transferred to the SPE was $161 million. |
Other Financing Arrangements
In June 2018, the Company entered into a factoring agreement with a global financial institution to sell certain accounts receivable on a non-recourse basis. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreement transfers effective control over and risk related to the receivables to the buyer. The Company has no continuing involvement in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. The Company de-recognized $257 million and $117 million of accounts receivable under this factoring agreement as of December 31, 2019 and 2018, respectively.
Covenants
The Company's material financing arrangements contain customary covenants, including the maintenance of certain financial ratios, events of default and change of control provisions. Failure to comply with these covenants, or the occurrence of any other event of default, could result in acceleration of the borrowings and other financial obligations. The Company is in compliance with all of the covenants related to its debt agreements as of December 31, 2019.
15. Benefit Obligations
Pension Obligations
The Company sponsors defined benefit pension plans in North America, Europe and Asia. Independent trusts or insurance companies administer the majority of these plans. Pension obligations are established for benefits payable in the form of retirement, disability and surviving dependent pensions. The commitments result from participation in defined contribution and defined benefit plans, primarily in the US. Benefits are dependent on years of service and the employee's compensation. Supplemental retirement benefits provided to certain employees are nonqualified for US tax purposes. Separate nonqualified trusts have been established for certain US nonqualified plan obligations. Pension costs under the Company's retirement plans are actuarially determined.
The Company participates in a multiemployer defined benefit plan and a multiemployer defined contribution plan in Germany covering certain employees. The Company's contributions to the multiemployer defined benefit plan are based on specified percentages of employee contributions as outlined in a works council agreement, covering all German entity employees hired prior to January 1, 2012. As of January 1, 2012, the multiemployer defined benefit pension plan described above was closed to new employees. Qualifying employees hired in Germany after December 31, 2011 are covered by a multiemployer defined contribution plan. The Company's contributions to the multiemployer defined contribution plan are based on specified percentages of employee contributions, similar to the multiemployer defined benefit plan, but at a lower rate.
Statutory regulations and the works council agreement require the contributions to fully fund the multiemployer plans. The risks of participating in the multiemployer plans are different from single-employer plans in the following aspects:
95
• | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
• | If a participating employer stops contributing to the plan, any underfunding may be borne by the remaining participants, especially since regulations strictly enforce funding requirements. |
• | If the Company chooses to stop participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as the withdrawal liability. |
Based on the 2019 unaudited and 2018 audited multiemployer defined benefit plan's financial statements, the plan is 100% funded in 2019, 2018 and 2017. The number of employees covered by the Company's multiemployer defined benefit plan remained relatively stable year over year from 2017 to 2019, resulting in minimal changes to employer contributions. Participation in the German multiemployer defined benefit plan is not considered individually significant to the Company.
Contributions made by the Company to the German multiemployer plan are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Multiemployer defined benefit plan | 8 | 8 | 7 | |||||
Other Postretirement Obligations
Certain retired employees receive postretirement health care and life insurance benefits under plans sponsored by the Company, which has the right to modify or terminate these plans at any time. The cost for coverage is shared between the Company and the retiree. The cost of providing retiree health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. The Company's policy is to fund benefits as claims and premiums are paid. The US postretirement health care plan was closed to new participants effective January 1, 2006.
Postemployment Obligations
The Company provides benefits to certain employees after employment but prior to retirement, including severance and disability-related benefits offered pursuant to ongoing benefit arrangements. The cost of providing postemployment benefits is actuarially determined and recorded when the obligation is probable of occurring and can be reasonably estimated.
Postemployment obligations are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Postemployment benefits | 7 | 8 | |||
Defined Contribution Plans
The Company sponsors various defined contribution plans in North America, Europe and Asia covering certain employees. Employees may contribute to these plans and the Company will match these contributions in varying amounts. The Company's matching contribution to the defined contribution plans are based on specified percentages of employee contributions.
The amount of costs recognized for the Company's defined contribution plans are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Defined contribution plans | 42 | 40 | 40 | |||||
96
Summarized information on the Company's pension and postretirement benefit plans is as follows:
______________________________
Pension Benefits As of December 31, | Postretirement Benefits As of December 31, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
(In $ millions) | |||||||||||
Change in Projected Benefit Obligation | |||||||||||
Projected benefit obligation as of beginning of period | 3,412 | 3,728 | 59 | 66 | |||||||
Service cost | 9 | 9 | — | 1 | |||||||
Interest cost | 115 | 104 | 2 | 2 | |||||||
Net actuarial (gain) loss(1) | 377 | (163 | ) | 8 | (4 | ) | |||||
Settlements | (3 | ) | — | — | — | ||||||
Benefits paid | (230 | ) | (235 | ) | (5 | ) | (4 | ) | |||
Curtailments | — | (1 | ) | — | — | ||||||
Special termination benefits | 1 | 2 | — | — | |||||||
Exchange rate changes | (3 | ) | (32 | ) | — | (2 | ) | ||||
Other(2) | (68 | ) | — | — | — | ||||||
Projected benefit obligation as of end of period | 3,610 | 3,412 | 64 | 59 | |||||||
Change in Plan Assets | |||||||||||
Fair value of plan assets as of beginning of period | 2,915 | 3,251 | — | — | |||||||
Actual return on plan assets | 467 | (124 | ) | — | — | ||||||
Employer contributions | 42 | 43 | 5 | 4 | |||||||
Settlements | (3 | ) | — | — | — | ||||||
Benefits paid(3) | (230 | ) | (235 | ) | (5 | ) | (4 | ) | |||
Other(2) | (52 | ) | — | — | — | ||||||
Exchange rate changes | 2 | (20 | ) | — | — | ||||||
Fair value of plan assets as of end of period | 3,141 | 2,915 | — | — | |||||||
Funded status as of end of period | (469 | ) | (497 | ) | (64 | ) | (59 | ) | |||
Amounts Recognized in the Consolidated Balance Sheets Consist of: | |||||||||||
Noncurrent Other assets | 77 | 30 | — | — | |||||||
Current Other liabilities | (23 | ) | (24 | ) | (4 | ) | (5 | ) | |||
Benefit obligations | (523 | ) | (503 | ) | (60 | ) | (54 | ) | |||
Net amount recognized | (469 | ) | (497 | ) | (64 | ) | (59 | ) | |||
Amounts Recognized in Accumulated Other Comprehensive Income Consist of: | |||||||||||
Net actuarial (gain) loss(4) | 15 | 8 | — | — | |||||||
Prior service (benefit) cost | — | — | (1 | ) | — | ||||||
Net amount recognized(5) | 15 | 8 | (1 | ) | — | ||||||
(1) | Primarily relates to changes in discount rates. |
(2) | Primarily relates to lump sum offers for certain participants of the US qualified defined benefit pension plan. |
(3) | Includes benefit payments to nonqualified pension plans of $21 million and $22 million as of December 31, 2019 and 2018, respectively. |
(4) | Relates to the pension plans of the Company's equity method investments. |
(5) | Amount shown net of an income tax benefit of $4 million and $5 million as of December 31, 2019 and 2018, respectively, in the consolidated statements of equity (Note 17). |
97
The percentage of US and international projected benefit obligation at the end of the period is as follows:
Pension Benefits As of December 31, | Postretirement Benefits As of December 31, | ||||||
2019 | 2018 | 2019 | 2018 | ||||
(In percentages) | |||||||
US plans | 81 | 82 | 55 | 57 | |||
International plans | 19 | 18 | 45 | 43 | |||
Total | 100 | 100 | 100 | 100 | |||
The percentage of US and international fair value of plan assets at the end of the period is as follows:
Pension Benefits As of December 31, | |||
2019 | 2018 | ||
(In percentages) | |||
US plans | 87 | 88 | |
International plans | 13 | 12 | |
Total | 100 | 100 | |
Pension plans with projected benefit obligations in excess of plan assets are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Projected benefit obligation | 881 | 840 | |||
Fair value of plan assets | 337 | 314 | |||
Pension plans with accumulated benefit obligations in excess of plan assets are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Accumulated benefit obligation | 776 | 749 | |||
Fair value of plan assets | 255 | 243 | |||
Other postretirement plans with accumulated postretirement benefit obligations in excess of plan assets are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Accumulated postretirement benefit obligation | 64 | 58 | |||
Fair value of plan assets | — | — | |||
The accumulated benefit obligation for all defined benefit pension plans is as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Accumulated benefit obligation | 3,584 | 3,390 | |||
98
The components of net periodic benefit cost are as follows:
Pension Benefits Year Ended December 31, | Postretirement Benefits Year Ended December 31, | ||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
(In $ millions) | |||||||||||||||||
Service cost | 9 | 9 | 9 | — | 1 | 1 | |||||||||||
Interest cost | 115 | 104 | 107 | 2 | 2 | 1 | |||||||||||
Expected return on plan assets | (185 | ) | (210 | ) | (198 | ) | — | — | — | ||||||||
Amortization of prior service cost / (credit) | — | — | — | — | — | (1 | ) | ||||||||||
Recognized actuarial (gain) loss | 79 | 169 | 48 | 8 | (4 | ) | (2 | ) | |||||||||
Curtailment (gain) loss | — | (1 | ) | — | — | — | — | ||||||||||
Special termination benefit | 1 | 2 | 1 | — | — | — | |||||||||||
Total | 19 | 73 | (33 | ) | 10 | (1 | ) | (1 | ) | ||||||||
The Company maintains nonqualified pension plans funded with nonqualified trusts for certain US employees as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Nonqualified Trust Assets | |||||
Marketable securities | 24 | 31 | |||
Noncurrent Other assets, consisting of insurance contracts | 35 | 37 | |||
Nonqualified Pension Obligations | |||||
Current Other liabilities | 20 | 21 | |||
Benefit obligations | 219 | 213 | |||
(Income) expense relating to the nonqualified pension plans included in net periodic benefit cost, excluding returns on the assets held by the nonqualified trusts, is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Total | 26 | (3 | ) | 18 | ||||
Valuation
The principal weighted average assumptions used to determine benefit obligation are as follows:
Pension Benefits As of December 31, | Postretirement Benefits As of December 31, | ||||||
2019 | 2018 | 2019 | 2018 | ||||
(In percentages) | |||||||
Discount Rate Obligations | |||||||
US plans | 3.2 | 4.2 | 3.1 | 4.1 | |||
International plans | 1.4 | 2.1 | 2.7 | 3.4 | |||
Combined | 2.8 | 3.8 | 2.9 | 3.8 | |||
Rate of Compensation Increase | |||||||
US plans | N/A | N/A | |||||
International plans | 2.6 | 2.8 | |||||
Combined | 2.6 | 2.8 | |||||
99
The principal weighted average assumptions used to determine net periodic benefit cost are as follows:
Pension Benefits Year Ended December 31, | Postretirement Benefits Year Ended December 31, | ||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||
(In percentages) | |||||||||||
Discount Rate Obligations | |||||||||||
US plans | 4.2 | 3.5 | 3.9 | 4.1 | 3.4 | 3.8 | |||||
International plans | 2.1 | 2.1 | 2.1 | 3.4 | 3.2 | 3.3 | |||||
Combined | 3.8 | 3.3 | 3.7 | 3.8 | 3.2 | 3.4 | |||||
Discount Rate Service Cost | |||||||||||
US plans | 3.1 | 1.9 | 1.2 | 4.6 | 3.7 | 4.0 | |||||
International plans | 2.5 | 2.3 | 2.5 | 3.4 | 3.3 | 3.4 | |||||
Combined | 2.5 | 2.2 | 2.5 | 3.4 | 2.9 | 2.9 | |||||
Discount Rate Interest Cost | |||||||||||
US plans | 3.9 | 3.1 | 3.3 | 3.8 | 3.0 | 3.1 | |||||
International plans | 1.8 | 1.7 | 1.7 | 3.2 | 2.9 | 2.9 | |||||
Combined | 3.5 | 2.9 | 3.1 | 3.5 | 2.9 | 2.9 | |||||
Expected Return on Plan Assets | |||||||||||
US plans | 6.7 | 6.8 | 7.5 | ||||||||
International plans | 5.6 | 5.9 | 5.9 | ||||||||
Combined | 6.5 | 6.7 | 7.3 | ||||||||
Rate of Compensation Increase | |||||||||||
US plans | N/A | N/A | N/A | ||||||||
International plans | 2.8 | 2.8 | 2.8 | ||||||||
Combined | 2.8 | 2.8 | 2.8 | ||||||||
Interest Crediting Rate | |||||||||||
US plans | 3.0 | 2.8 | 2.3 | ||||||||
International plans | N/A | N/A | N/A | ||||||||
Combined | 3.0 | 2.8 | 2.3 | ||||||||
The Company's health care cost trend assumptions for US postretirement medical plan's net periodic benefit cost are as follows:
As of December 31, | |||||
2019 | 2018 | 2017 | |||
(In percentages, except year) | |||||
Health care cost trend rate assumed for next year | 8.0 | 8.5 | 9.0 | ||
Health care cost trend ultimate rate | 5.0 | 5.0 | 5.0 | ||
Health care cost trend ultimate rate year | 2026 | 2026 | 2026 | ||
100
Plan Assets
The weighted average target asset allocations for the Company's pension plans in 2019 are as follows:
US Plans | International Plans | ||
(In percentages) | |||
Bonds - domestic to plans | 80 | 58 | |
Equities - domestic to plans | 10 | 15 | |
Equities - international to plans | 10 | — | |
Other | — | 27 | |
Total | 100 | 100 | |
On average, the actual return on the US qualified defined pension plans' assets over the long-term (20 years) has exceeded the expected long-term rate of asset return assumption. The US qualified defined benefit plans' actual return on assets for the year ended December 31, 2019 was 16.6% versus an expected long-term rate of asset return assumption of 6.7%. The expected long-term rate of asset return assumption used to determine 2020 net periodic benefit cost is 6.7% for the US qualified defined benefit plans.
The Company's defined benefit plan assets are measured at fair value on a recurring basis (Note 2) as follows:
Cash and Cash Equivalents: Foreign and domestic currencies as well as short term securities are valued at cost plus accrued interest, which approximates fair value.
Equity securities, treasuries and corporate debt: Valued at the closing price reported on the active market in which the individual securities are traded. Automated quotes are provided by multiple pricing services and validated by the plan custodian. These securities are traded on exchanges as well as in the over the counter market.
Registered Investment Companies: Composed of various mutual funds and other investment companies whose diversified portfolio is comprised of foreign and domestic equities, fixed income securities, and short-term investments. Investments are valued at the net asset value of units held by the plan at year-end.
Common/Collective Trusts: Composed of various funds whose diversified portfolio is comprised of foreign and domestic equities, fixed income securities, and short-term investments. Investments are valued at the net asset value of units held by the plan at year-end.
Derivatives: Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 fair value measurement inputs such as interest rates and foreign currency exchange rates. These market inputs are utilized in the discounted cash flow calculation considering the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps, foreign currency forwards and swaps, and options are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.
Mortgage backed securities: Fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets. Mortgage Backed Securities are traded in the over the counter broker/dealer market.
Insurance contracts: Valued at contributions made, plus earnings, less participant withdrawals and administrative expenses, which approximates fair value.
Short-term investment funds: Composed of various funds whose portfolio is comprised of foreign and domestic currencies as well as short-term securities. Investments are valued at the net asset value of units held by the plan at year-end.
Other: Composed of real estate investment trust common stock valued at closing price as reported on the active market in which the individual securities are traded.
101
Fair Value Measurement | |||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Total | |||||||||||||||
As of December 31, | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||
(In $ millions) | |||||||||||||||||
Assets | |||||||||||||||||
Cash and cash equivalents | 8 | 2 | — | — | 8 | 2 | |||||||||||
Derivatives | |||||||||||||||||
Swaps | — | — | 7 | 3 | 7 | 3 | |||||||||||
Equity securities | |||||||||||||||||
International companies | 77 | 59 | — | — | 77 | 59 | |||||||||||
Fixed income | |||||||||||||||||
Corporate debt | — | — | 762 | 691 | 762 | 691 | |||||||||||
Treasuries, other debt | 35 | 127 | 1,403 | 1,293 | 1,438 | 1,420 | |||||||||||
Mortgage backed securities | — | — | 15 | 8 | 15 | 8 | |||||||||||
Insurance contracts | — | — | 47 | 35 | 47 | 35 | |||||||||||
Other | 4 | 4 | 1 | 1 | 5 | 5 | |||||||||||
Total investments, at fair value(1) | 124 | 192 | 2,235 | 2,031 | 2,359 | 2,223 | |||||||||||
Liabilities | |||||||||||||||||
Derivatives | |||||||||||||||||
Swaps | — | — | 7 | 3 | 7 | 3 | |||||||||||
Total liabilities | — | — | 7 | 3 | 7 | 3 | |||||||||||
Total net assets(2) | 124 | 192 | 2,228 | 2,028 | 2,352 | 2,220 | |||||||||||
(1) | Certain investments that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy. Total investments, at fair value, for the year ended December 31, 2019 excludes investments in common/collective trusts, registered investment companies and short-term investment funds with fair values of $689 million, $62 million and $35 million, respectively. Total investments, at fair value, for the year ended December 31, 2018 excludes investments in common/collective trusts, registered investment companies and short-term investment funds with fair values of $595 million, $54 million and $29 million, respectively. |
(2) | Total net assets excludes non-financial plan receivables and payables of $29 million and $26 million, respectively, as of December 31, 2019 and $36 million and $19 million, respectively, as of December 31, 2018. Non-financial items include due to/from broker, interest receivables and accrued expenses. |
102
Benefit obligation funding is as follows:
Total Expected 2020 | ||
(In $ millions) | ||
Cash contributions to defined benefit pension plans | 23 | |
Benefit payments to nonqualified pension plans | 20 | |
Benefit payments to other postretirement benefit plans | 5 | |
The Company's estimates of its US defined benefit pension plan contributions reflect the provisions of the Pension Protection Act of 2006.
Pension and postretirement benefits expected to be paid are as follows:
______________________________
Pension Benefit Payments(1) | Company Portion of Postretirement Benefit Cost(2) | ||||
(In $ millions) | |||||
2020 | 238 | 5 | |||
2021 | 228 | 4 | |||
2022 | 225 | 4 | |||
2023 | 223 | 4 | |||
2024 | 219 | 4 | |||
2025-2029 | 1,038 | 17 | |||
(1) | Payments are expected to be made primarily from plan assets. |
(2) | Payments are expected to be made primarily from Company assets. |
16. Environmental
The Company is subject to environmental laws and regulations worldwide that impose limitations on the discharge of pollutants into the air and water, establish standards for the treatment, storage and disposal of solid and hazardous wastes, and impose record keeping and notification requirements. Failure to timely comply with these laws and regulations may expose the Company to penalties. The Company believes that it is in substantial compliance with all applicable environmental laws and regulations and engages in an ongoing process of updating its controls to mitigate compliance risks. The Company is also subject to retained environmental obligations specified in various contractual agreements arising from the divestiture of certain businesses by the Company or one of its predecessor companies.
The components of environmental remediation liabilities are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
23 | 26 | ||||
12 | 16 | ||||
Active sites | 13 | 14 | |||
US Superfund sites | 11 | 11 | |||
Other environmental remediation liabilities | 2 | 2 | |||
Total | 61 | 69 | |||
103
Remediation
Due to its industrial history and through retained contractual and legal obligations, the Company has the obligation to remediate specific areas on its own sites as well as on divested, demerger, orphan or US Superfund sites (as defined below). In addition, as part of the demerger agreement between the Company and Hoechst AG ("Hoechst"), a specified portion of the responsibility for environmental liabilities from a number of Hoechst divestitures was transferred to the Company (Note 24). Certain of these sites, at which the Company maintains continuing involvement, were and continue to be designated as discontinued operations when closed. The Company provides for such obligations when the event of loss is probable and reasonably estimable. The Company believes that environmental remediation costs will not have a material adverse effect on the financial position of the Company, but may have a material adverse effect on the results of operations or cash flows in any given period.
The Company did not record any insurance recoveries during 2019 or have any receivables for insurance recoveries related to these matters as of December 31, 2019.
German InfraServ Entities
The Company's InfraServ Entities (Note 9) are liable for any residual contamination and other pollution because they own the real estate on which the individual facilities operate. In addition, Hoechst, and its legal successors, as the responsible party under German public law, is liable to third parties for all environmental damage that occurred while it was still the owner of the plants and real estate (Note 24). The contribution agreements entered into in 1997 between Hoechst and the respective operating companies, as part of the divestiture of these companies, provide that the operating companies will indemnify Hoechst, and its legal successors, against environmental liabilities resulting from the transferred businesses. Additionally, the InfraServ Entities have agreed to indemnify Hoechst, and its legal successors, against any environmental liability arising out of or in connection with environmental pollution of any site.
The InfraServ partnership agreements provide that, as between the partners, each partner is responsible for any contamination caused predominantly by such partner. Any liability, which cannot be attributed to an InfraServ partner and for which no third party is responsible, is required to be borne by the InfraServ partnership. Also, under lease agreements entered into by an InfraServ partner as landlord, the tenants agreed to pay certain remediation costs on a pro rata basis.
If an InfraServ partner defaults on its respective indemnification obligations to eliminate residual contamination, the owners of the remaining participation in the InfraServ companies have agreed to fund such liabilities, subject to a number of limitations. To the extent that any liabilities are not satisfied by either the InfraServ Entities or their owners, these liabilities are to be borne by the Company in accordance with the demerger agreement. However, Hoechst, and its legal successors, will reimburse the Company for two-thirds of any such costs. Likewise, in certain circumstances the Company could be responsible for the elimination of residual contamination on several sites that were not transferred to InfraServ companies, in which case Hoechst, and its legal successors, must also reimburse the Company for two-thirds of any costs so incurred.
The Company's ownership interest and environmental liability participation percentages for such liabilities, which cannot be attributed to an InfraServ partner are as follows:
______________________________
As of December 31, 2019 | ||||||
Ownership | Liability | Reserves(1) | ||||
(In percentages) | (In $ millions) | |||||
InfraServ GmbH & Co. Gendorf KG | 30 | 10 | 9 | |||
InfraServ GmbH & Co. Hoechst KG | 32 | 40 | 68 | |||
YNCORIS GmbH & Co. KG(2) | 22 | 22 | 1 | |||
(1) | Gross reserves maintained by the respective entity. |
(2) | Formerly known as InfraServ GmbH & Co. Knapsack KG. |
104
US Superfund Sites
In the US, the Company may be subject to substantial claims brought by US federal or state regulatory agencies or private individuals pursuant to statutory authority or common law. In particular, the Company has a potential liability under the US Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and related state laws (collectively referred to as "Superfund") for investigation and cleanup costs at certain sites. At most of these sites, numerous companies, including the Company, or one of its predecessor companies, have been notified that the US Environmental Protection Agency ("EPA"), state governing bodies or private individuals consider such companies to be potentially responsible parties ("PRP") under Superfund or related laws. The proceedings relating to these sites are in various stages. The cleanup process has not been completed at most sites, and the status of the insurance coverage for some of these proceedings is uncertain. Consequently, the Company cannot accurately determine its ultimate liability for investigation or cleanup costs at these sites.
As events progress at each site for which it has been named a PRP, the Company accrues any probable and reasonably estimable liabilities. In establishing these liabilities, the Company considers the contaminants of concern, the potential impact thereof, the relationship of the contaminants of concern to its current and historic operations, its shipment of waste to a site, its percentage of total waste shipped to the site, the types of wastes involved, the conclusions of any studies, the magnitude of any remedial actions that may be necessary and the number and viability of other PRPs. Often the Company joins with other PRPs to sign joint defense agreements that settle, among PRPs, each party's percentage allocation of costs at the site. Although the ultimate liability may differ from the estimate, the Company routinely reviews the liabilities and revises the estimate, as appropriate, based on the most current information available.
One such site is the Diamond Alkali Superfund Site, which is comprised of a number of sub-sites, including the Lower Passaic River Study Area ("LPRSA"), which is the lower 17-mile stretch of the Passaic River ("Lower Passaic River Site"), and the Newark Bay Area. The Company and 70 other companies are parties to a May 2007 Administrative Order on Consent with the EPA to perform a Remedial Investigation/Feasibility Study ("RI/FS") at the Lower Passaic River Site in order to identify the levels of contaminants and potential cleanup actions, including the potential migration of contaminants between the Lower Passaic River Site and the Newark Bay Area. Work on the RI/FS is ongoing.
In March 2016, the EPA issued its final Record of Decision concerning the remediation of the lower 8.3 miles of the Lower Passaic River Site ("Lower 8.3 Miles"). Pursuant to the EPA's Record of Decision, the Lower 8.3 Miles must be dredged bank to bank and an engineered cap must be installed at an EPA estimated cost of approximately $1.4 billion. The Company owned and/or operated facilities in the vicinity of the Lower 8.3 Miles, but has found no evidence that it contributed any of the contaminants of concern to the Passaic River. On June 30, 2018, Occidental Chemical Corporation ("OCC"), the successor to the Diamond Alkali Company, sued a subsidiary of the Company and 119 other parties alleging claims for joint and several damages, contribution and declaratory relief under Section 107 and 113 of Superfund for costs to clean up the LPRSA portion of the Diamond Alkali Superfund Site, Occidental Chemical Corporation v. 21st Century Fox America, Inc., et al, No. 2:18-CV-11273-JLL-JAD (U.S. District Court New Jersey), alleging that each of the defendants owned or operated a facility that contributed contamination to the LPRSA. With respect to the Company, the OCC lawsuit is limited to the former Celanese facility that Essex County, New Jersey has agreed to indemnify the Company for and does not change the Company's estimated liability for LPRSA cleanup costs. The Company is vigorously defending these matters and currently believes that its ultimate allocable share of the cleanup costs with respect to the Lower Passaic River Site, estimated at less than 1%, will not be material to the Company's results of operations, cash flows or financial position.
17. Stockholders' Equity
Common Stock
The Company's Board of Directors follows a policy of declaring, subject to legally available funds, a quarterly cash dividend on each share of the Company's Common Stock, unless the Company's Board of Directors, in its sole discretion, determines otherwise. The amount available to the Company to pay cash dividends is not currently restricted by its existing senior credit facility and its indentures governing its senior unsecured notes. Any decision to declare and pay dividends in the future will be made at the discretion of the Company's Board of Directors and will depend on, among other things, the results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Company's Board of Directors may deem relevant.
105
The Company's Board of Directors approved increases in the Company's Common Stock cash dividend rates as follows:
Increase | Quarterly Common Stock Cash Dividend | Annual Common Stock Cash Dividend | Effective Date | ||||||
(In percentages) | (In $ per share) | ||||||||
April 2017 | 28 | 0.46 | 1.84 | May 2017 | |||||
April 2018 | 17 | 0.54 | 2.16 | May 2018 | |||||
April 2019 | 15 | 0.62 | 2.48 | May 2019 | |||||
On February 5, 2020, the Company declared a quarterly cash dividend of $0.62 per share on its Common Stock amounting to $74 million. The cash dividend will be paid on February 28, 2020 to holders of record as of February 18, 2020.
Treasury Stock
The Company's Board of Directors authorizes repurchases of Common Stock from time to time. These authorizations give management discretion in determining the timing and conditions under which shares may be repurchased. This repurchase program does not have an expiration date.
The share repurchase activity pursuant to this authorization is as follows:
______________________________
Year Ended December 31, | Total From February 2008 Through December 31, 2019 | ||||||||||||||
2019 | 2018 | 2017 | |||||||||||||
Shares repurchased | 9,166,267 | 7,933,692 | (1) | 5,436,803 | 56,878,978 | ||||||||||
Average purchase price per share | $ | 109.10 | $ | 103.01 | $ | 91.97 | $ | 73.01 | |||||||
Amount spent on repurchased shares (in millions) | $ | 1,000 | $ | 817 | $ | 500 | $ | 4,153 | |||||||
Aggregate Board of Directors repurchase authorizations during the period (in millions) | $ | 1,500 | $ | — | $ | 1,500 | $ | 5,366 | |||||||
(1) | Excludes 1,700 common shares reacquired pursuant to an employee clawback agreement. |
The purchase of treasury stock reduces the number of shares outstanding. The repurchased shares may be used by the Company for compensation programs utilizing the Company's stock and other corporate purposes. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of stockholders' equity.
Other Comprehensive Income (Loss), Net
Year Ended December 31, | ||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||
Gross Amount | Income Tax (Provision) Benefit | Net Amount | Gross Amount | Income Tax (Provision) Benefit | Net Amount | Gross Amount | Income Tax (Provision) Benefit | Net Amount | ||||||||||||||||||
(In $ millions) | ||||||||||||||||||||||||||
Unrealized gain (loss) on marketable securities | — | — | — | — | — | — | — | (1 | ) | (1 | ) | |||||||||||||||
Foreign currency translation | (10 | ) | (6 | ) | (16 | ) | (65 | ) | 5 | (60 | ) | 162 | 12 | 174 | ||||||||||||
Gain (loss) on cash flow hedges | (38 | ) | 8 | (30 | ) | (12 | ) | 2 | (10 | ) | — | (1 | ) | (1 | ) | |||||||||||
Pension and postretirement benefits | (6 | ) | (1 | ) | (7 | ) | 1 | (1 | ) | — | 7 | 2 | 9 | |||||||||||||
Total | (54 | ) | 1 | (53 | ) | (76 | ) | 6 | (70 | ) | 169 | 12 | 181 | |||||||||||||
106
Adjustments to Accumulated other comprehensive income (loss), net, are as follows:
Unrealized Gain (Loss) on Marketable Securities | Foreign Currency Translation | Gain (Loss) from Cash Flow Hedges | Pension and Postretirement Benefits | Accumulated Other Comprehensive Income (Loss), Net | ||||||||||
(In $ millions) | ||||||||||||||
As of December 31, 2016 | 1 | (350 | ) | 3 | (12 | ) | (358 | ) | ||||||
Other comprehensive income (loss) before reclassifications | — | 162 | 4 | 8 | 174 | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | — | (4 | ) | (1 | ) | (5 | ) | ||||||
Income tax (provision) benefit | (1 | ) | 12 | (1 | ) | 2 | 12 | |||||||
As of December 31, 2017 | — | (176 | ) | 2 | (3 | ) | (177 | ) | ||||||
Other comprehensive income (loss) before reclassifications | — | (65 | ) | (11 | ) | 1 | (75 | ) | ||||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | — | (1 | ) | — | (1 | ) | |||||||
Income tax (provision) benefit | — | 5 | 2 | (1 | ) | 6 | ||||||||
As of December 31, 2018 | — | (236 | ) | (8 | ) | (3 | ) | (247 | ) | |||||
Other comprehensive income (loss) before reclassifications | — | (10 | ) | (36 | ) | (6 | ) | (52 | ) | |||||
Amounts reclassified from accumulated other comprehensive income (loss) | — | — | (2 | ) | — | (2 | ) | |||||||
Income tax (provision) benefit | — | (6 | ) | 8 | (1 | ) | 1 | |||||||
As of December 31, 2019 | — | (252 | ) | (38 | ) | (10 | ) | (300 | ) | |||||
18. Other (Charges) Gains, Net
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
(23 | ) | (4 | ) | (3 | ) | |||
InfraServ ownership change | — | — | (4 | ) | ||||
(83 | ) | — | — | |||||
Plant/office closures | (4 | ) | 13 | (52 | ) | |||
Commercial disputes | (4 | ) | — | — | ||||
European Commission investigation | (89 | ) | — | — | ||||
Total | (203 | ) | 9 | (59 | ) | |||
2019
During the year ended December 31, 2019, the Company recorded an $83 million long-lived asset impairment loss related to the closure of its acetate flake manufacturing operations in Ocotlán, Mexico (Note 4). The long-lived asset impairment loss was measured at the date of impairment to write-off the related property, plant and equipment and was included in the Company's Acetate Tow segment.
During the year ended December 31, 2019, the Company recorded a $4 million loss within commercial disputes, which included $19 million in losses related to settlements with former third-party customers that were included within the Other Activities segment, partially offset by a $15 million gain related to a settlement from a previous acquisition that was included within the Engineered Materials segment.
In May 2017, the Company learned that the European Commission opened a competition law investigation involving certain subsidiaries of the Company with respect to certain past ethylene purchases. During the year ended December 31, 2019, the
107
Company recorded a reserve of $89 million as a result of information learned from the European Commission's investigation, which was included within the Other Activities segment.
During the year ended December 31, 2019, the Company recorded $23 million of employee termination benefits primarily related to Company-wide business optimization projects.
2018
During the year ended December 31, 2018, the Company recorded a $13 million gain within plant/office closures related to a non-income tax receivable refund from Nanjing, China, in its Acetyl Chain segment.
During the year ended December 31, 2018, the Company recorded $4 million of employee termination benefits primarily related to the Company's ongoing efforts to align its businesses around its core value drivers.
2017
During the year ended December 31, 2017, the Company recorded $3 million of employee termination benefits primarily related to the Company's ongoing efforts to align its businesses around its core value drivers.
A partner in the Company's InfraServ equity affiliate investments exercised an option right to purchase additional ownership interests in the InfraServ entities from the Company. The purchase of these interests reduced the Company's ownership interests in InfraServ GmbH & Co. Gendorf KG and YNCORIS GmbH & Co. KG (formerly known as InfraServ GmbH & Co. Knapsack KG) from 39% and 27%, to 30% and 22%, respectively. Accordingly, during the year ended December 31, 2017, the Company reduced the carrying value of these investments by $4 million. These InfraServ investments are primarily owned by entities included in the Other Activities segment.
During the year ended December 31, 2017, the Company provided notice of termination of a contract with a key raw materials supplier at its ethanol production unit in Nanjing, China. As a result, the Company recorded $52 million of plant/office closure costs primarily consisting of a $22 million contract termination charge and a $21 million reduction to its non-income tax receivable. The Nanjing, China ethanol production unit is included in the Company's Acetyl Chain segment.
108
The changes in the restructuring liabilities by business segment are as follows:
Engineered Materials | Acetate Tow | Acetyl Chain | Other | Total | ||||||||||
(In $ millions) | ||||||||||||||
Employee Termination Benefits | ||||||||||||||
As of December 31, 2017 | 1 | — | 1 | 1 | 3 | |||||||||
Additions | — | 2 | 2 | — | 4 | |||||||||
Cash payments | (1 | ) | — | (1 | ) | (1 | ) | (3 | ) | |||||
Other changes | — | — | — | — | — | |||||||||
Exchange rate changes | — | — | — | — | — | |||||||||
As of December 31, 2018 | — | 2 | 2 | — | 4 | |||||||||
Additions | 10 | 4 | 1 | 9 | 24 | |||||||||
Cash payments | (5 | ) | (3 | ) | (2 | ) | (4 | ) | (14 | ) | ||||
Other changes | — | — | (1 | ) | — | (1 | ) | |||||||
Exchange rate changes | — | — | — | — | — | |||||||||
As of December 31, 2019 | 5 | 3 | — | 5 | 13 | |||||||||
Other Plant/Office Closures | ||||||||||||||
As of December 31, 2017 | — | — | 2 | — | 2 | |||||||||
Additions | — | — | — | — | — | |||||||||
Cash payments | — | — | (2 | ) | — | (2 | ) | |||||||
Other changes | — | — | — | — | — | |||||||||
Exchange rate changes | — | — | — | — | — | |||||||||
As of December 31, 2018 | — | — | — | — | — | |||||||||
Additions | — | 1 | — | — | 1 | |||||||||
Cash payments | — | (1 | ) | — | — | (1 | ) | |||||||
Other changes | — | — | — | — | — | |||||||||
Exchange rate changes | — | — | — | — | — | |||||||||
As of December 31, 2019 | — | — | — | — | — | |||||||||
Total | 5 | 3 | — | 5 | 13 | |||||||||
19. Income Taxes
On December 31, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted and was effective January 1, 2018. In accordance with ASC 740, Accounting for Income Taxes, which requires companies to recognize the effects of tax law changes in the period of enactment, the Company recorded the initial impacts of the TCJA in 2017. This overhaul of the US tax law made a number of substantial changes, including the reduction of the corporate tax rate from 35% to 21%, establishing a dividends received deduction for dividends paid by foreign subsidiaries to the US, elimination or limitation of certain deductions (interest, domestic production activities and executive compensation), imposing a mandatory tax on previously unrepatriated earnings accumulated offshore since 1986 and establishing global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments.
The deemed repatriation of previously unremitted foreign earnings, of which the Company had accumulated approximately $3.0 billion as of December 31, 2017, was taxed at 8% to the extent those earnings were reinvested in non-cash foreign assets, while previously unremitted earnings that had not been reinvested, computed based upon a two-year historical average of foreign cash and cash equivalents balances, were taxed at 15.5%. The Company recorded a net charge of $197 million for this deemed repatriation in 2017, for which it does not expect a material cash outlay due to available foreign tax credit carryforwards.
The Company was also required to adjust the recorded amounts of its US deferred tax assets and liabilities resulting from the reduction in the US corporate tax rate and the impact of the dividends received deduction provisions on its deferred tax liabilities related to outside basis differences in certain joint venture investments. As a result of these changes, the Company recognized a tax benefit of approximately $107 million in 2017.
109
At the time the TCJA was enacted, the global minimum income tax and base erosion provisions would not be effective until the tax years beginning after December 31, 2017. Based on available elections, the Company chose to not record deferred taxes related to the estimated future income tax effects of the global minimum income tax provision.
The US Treasury issued proposed regulations in 2018 that sought to clarify the application of the TCJA provisions for the limitation of interest expense, including treatment of depreciation and other deductions in arriving at adjusted taxable income and application of the rules to controlled foreign affiliates.
In 2019, the US Treasury issued additional final and proposed regulations supplementing the TCJA provisions around base erosion payments, expense and foreign tax apportionment for foreign tax credit purposes and dividends received deductions at the foreign affiliate level. These proposed regulations are generally effective for years ending after the date they are published in the federal register. For guidance provided in both 2018 and 2019, the Company does not expect the final or proposed regulations, in current form, to have a material impact on current or future income tax expense. As a result, the Company will continue to monitor their expected impacts on the Company's filing positions and will record the impacts as discrete income tax expense adjustments in the period that the guidance is finalized.
Income Tax Provision
Earnings (loss) from continuing operations before tax by jurisdiction are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
US | 252 | 480 | 262 | |||||
International | 736 | 1,030 | 813 | |||||
Total | 988 | 1,510 | 1,075 | |||||
The income tax provision (benefit) consists of the following:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Current | ||||||||
US | (8 | ) | (184 | ) | 201 | |||
International | 149 | 143 | 158 | |||||
Total | 141 | (41 | ) | 359 | ||||
Deferred | ||||||||
US | 1 | 314 | (110 | ) | ||||
International | (18 | ) | 19 | (36 | ) | |||
Total | (17 | ) | 333 | (146 | ) | |||
Total | 124 | 292 | 213 | |||||
110
A reconciliation of the significant differences between the US federal statutory tax rate of 21% (35% for 2017) and the effective income tax rate on income from continuing operations is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions, except percentages) | ||||||||
Income tax provision computed at US federal statutory tax rate | 208 | 317 | 376 | |||||
Change in valuation allowance | (47 | ) | 94 | 218 | ||||
Equity income and dividends | (38 | ) | (48 | ) | (87 | ) | ||
(Income) expense not resulting in tax impact, net | (9 | ) | (51 | ) | (157 | ) | ||
US tax effect of foreign earnings and dividends | 85 | 25 | 521 | |||||
Foreign tax credits | (76 | ) | (20 | ) | (759 | ) | ||
Other foreign tax rate differentials | 4 | 17 | (38 | ) | ||||
Legislative changes | (3 | ) | (59 | ) | 116 | |||
State income taxes, net of federal benefit | 6 | 4 | 12 | |||||
Other, net | (6 | ) | 13 | 11 | ||||
Income tax provision (benefit) | 124 | 292 | 213 | |||||
Effective income tax rate | 13 | % | 19 | % | 20 | % | ||
As a result of the TCJA, US federal and state income taxes have been recorded on undistributed foreign earnings accumulated from 1986 through December 31, 2017. Based on the provisions of the law, the Company's previously taxed income for its foreign subsidiaries significantly exceeds its offshore cash balances. The Company has not recorded a deferred tax liability for foreign withholding or other foreign local tax that would be due when cash is actually repatriated to the US because those foreign earnings are considered permanently reinvested in the business or may be remitted substantially free of any additional local taxes. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.
The effective income tax rate for the year ended December 31, 2019 was significantly lower than the effective income tax rate for the year ended December 31, 2018. This variation was primarily due to a valuation allowance provided against Luxembourg net operating loss carryforwards in 2018. In addition, the 2019 effective income tax rate benefited from the favorable impact of a 2019 release of valuation allowances due to higher projected utilization of foreign tax credit carryforwards. The higher projected utilization resulted from (1) a shift in the expected sourcing of forecasted US taxable income (domestic vs. foreign sourced) and (2) new regulatory guidance issued in 2019.
The effective tax rate for the year ended December 31, 2018 was comparable to the effective tax rate for the year ended December 31, 2017. The effective tax rate for 2018 was slightly less than the statutory US tax rate primarily due to the positive impact from the jurisdictional mix of earnings, largely offset by increased valuation allowances established on certain deferred tax assets, particularly related to increases in provisionally recorded estimates of valuation allowances on foreign tax credits in the US and net operating loss carryforwards in Luxembourg, due to certain restructuring transactions completed to facilitate future repatriation of cash to the US.
During 2017, the Company undertook various reorganization transactions to separate certain Acetate Tow assets to reorganize the holdings of its various foreign subsidiaries. As a result, the Company generated additional net foreign tax credit carryforwards of approximately $240 million, the gross impacts of which were reflected in the Foreign tax credits line and the US tax effect of foreign earnings lines above, that will be carried forward to future tax periods. These new credit carryforwards, as well as other credits carried forward into 2017, were evaluated for realizability under the provisions of the TCJA. Due to the TCJA and uncertainty as to future sources of general limitation foreign source income to allow for utilization of these credits, the Company recorded a valuation allowance on these foreign tax credits in the amount of $164 million, which was reflected in the Change in valuation allowance line in the effective tax rate reconciliation above.
111
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities are as follows:
______________________________
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Deferred Tax Assets | |||||
Pension and postretirement obligations | 140 | 138 | |||
Accrued expenses | 57 | 61 | |||
Inventory | 11 | 13 | |||
Net operating loss carryforwards | 506 | 616 | |||
Tax credit carryforwards | 273 | 330 | |||
Other | 227 | 195 | |||
Subtotal | 1,214 | 1,353 | |||
Valuation allowance(1) | (714 | ) | (899 | ) | |
Total | 500 | 454 | |||
Deferred Tax Liabilities | |||||
Depreciation and amortization | 411 | 375 | |||
Investments in affiliates | 192 | 203 | |||
Other | 58 | 47 | |||
Total | 661 | 625 | |||
Net deferred tax assets (liabilities) | (161 | ) | (171 | ) | |
(1) | Includes deferred tax asset valuation allowances for the Company's deferred tax assets in the US, Luxembourg, Spain, China, the United Kingdom, Mexico, Canada and France. These valuation allowances relate primarily to net operating loss carryforward benefits and other net deferred tax assets, all of which may not be realizable. |
Tax Carryforwards
• | Net Operating Loss Carryforwards |
As of December 31, 2019, the Company had available US federal net operating loss carryforwards of $31 million that are subject to limitation. These net operating loss carryforwards begin to expire in 2022. As of December 31, 2019, the Company also had available state net operating loss carryforwards, net of federal tax impact, of $35 million, $28 million of which are offset by a valuation allowance due to uncertain recoverability. The Company also has foreign net operating loss carryforwards available as of December 31, 2019 of $1.8 billion primarily for Luxembourg, China, Mexico and Spain, with various expiration dates. Net operating loss carryforwards of $167 million in China are scheduled to expire beginning in 2020 through 2024. Net operating losses in most other foreign jurisdictions do not have an expiration date.
• | Tax Credit Carryforwards |
The Company had available $243 million of foreign tax credit carryforwards, which are mostly offset by a valuation allowance of $207 million due to uncertain recoverability and $18 million of alternative minimum tax credit carryforwards in the US. The foreign tax credit carryforwards are subject to a ten-year carryforward period and expire beginning in 2027. The alternative minimum tax credits are subject to annual limitation due to prior ownership changes, but have an unlimited carryforward period and can be used to offset federal tax liability in future years. The Company also has $8 million of research and development tax credit carryforwards as of December 31, 2019, which it expects to utilize prior to expiration beginning in 2037.
112
The Company evaluates its deferred tax assets on a quarterly basis to determine whether a valuation allowance is necessary. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. Changes in the Company's estimates of future taxable income and prudent and feasible tax planning strategies will affect the estimate of the realization of the tax benefits of these foreign tax credit carryforwards. As such, the Company is currently evaluating tax planning strategies to enable use of the foreign tax credit carryforwards that may decrease the Company's effective tax rate in future periods as the valuation allowance is reversed.
Uncertain Tax Positions
Activity related to uncertain tax positions is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
As of the beginning of the year | 162 | 119 | 114 | |||||
Increases in tax positions for the current year | 1 | 61 | 14 | |||||
Increases in tax positions for prior years(1) | 37 | 4 | 4 | |||||
Decreases in tax positions for prior years | (41 | ) | (21 | ) | (7 | ) | ||
Decreases due to settlements | (25 | ) | (1 | ) | (6 | ) | ||
As of the end of the year | 134 | 162 | 119 | |||||
Total uncertain tax positions that if recognized would impact the effective tax rate | 132 | 154 | 100 | |||||
Total amount of interest expense (benefit) and penalties recognized in the consolidated statements of operations(2) | 5 | 1 | 6 | |||||
Total amount of interest expense and penalties recognized in the consolidated balance sheets | 45 | 38 | 38 | |||||
______________________________
(1) | Includes the impact on uncertain tax positions for the year ended December 31, 2019 due to the closure of federal income tax audits for the years 2009 through 2012 and uncertain tax positions related to the Nilit acquisition of $4 million for the year ended December 31, 2017. |
(2) | This amount reflects interest on uncertain tax positions and release of certain tax positions as a result of an audit closure that was reflected in the consolidated statements of operations. |
The Company primarily operates in the US, Germany, Belgium, Canada, China, Italy, Mexico and Singapore. Examinations are ongoing in a number of these jurisdictions. The Company's US tax returns for the years 2013 through 2015 are currently under audit by the US Internal Revenue Service ("IRS"). Outside of the US, the Company's German tax returns for the years 2008 through 2015 are under audit as well as certain of the Company's other subsidiaries within their respective jurisdictions.
The decrease in uncertain tax positions for the year ended December 31, 2019 was primarily due to progress of tax examinations. While it is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of one or more of these audits, the Company is unable to estimate the amount of any such change.
During the year ended December 31, 2019, the IRS concluded federal income tax audits of the Company's tax returns for the years 2009 through 2012. The examinations did not result in a material impact to income tax expense. The Company's 2013 through 2015 tax years are under joint examination by the US, German and Dutch taxing authorities. The examinations are in the preliminary data gathering phase.
113
20. Management Compensation Plans
General Plan Description
The 2018 GIP enables the compensation committee of the Board of Directors (and the Board of Directors as to non-management directors) to award incentive and nonqualified stock options, stock appreciation rights, shares of Common Stock, restricted stock awards, RSUs and incentive bonuses (which may be paid in cash or stock or a combination thereof), any of which may be performance-based, with vesting and other award provisions that provide effective incentive to Company employees (including officers), non-management directors and other service providers.
Total shares available for awards and total shares subject to outstanding awards are as follows:
As of December 31, 2019 | |||||
Shares Available for Awards | Shares Subject to Outstanding Awards | ||||
2018 GIP | 6,244,945 | 473,903 | |||
2009 GIP | — | 959,696 | |||
Restricted Stock Units
A summary of changes in nonvested performance-based RSUs outstanding is as follows:
______________________________
Number of Units | Weighted Average Grant Date Fair Value | ||||
(In thousands) | (In $) | ||||
As of December 31, 2018 | 812 | 75.25 | |||
Granted | 259 | 92.61 | |||
Additional performance-based RSUs granted(1) | 330 | 56.14 | |||
Vested | (663 | ) | 56.14 | ||
Forfeited | (88 | ) | 90.70 | ||
As of December 31, 2019 | 650 | 89.86 | |||
(1) | Represents additional 2016 performance-based RSU grants that were awarded in 2019 as a result of achieving internal profitability targets. |
The fair value of shares vested for performance-based RSUs is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Total | 66 | 8 | 42 | |||||
114
A summary of changes in nonvested time-based RSUs outstanding is as follows:
Number of Units | Weighted Average Grant Date Fair Value | ||||
(In thousands) | (In $) | ||||
As of December 31, 2018 | 386 | 86.69 | |||
Granted | 228 | 96.22 | |||
Vested | (188 | ) | 80.95 | ||
Forfeited | (25 | ) | 90.42 | ||
As of December 31, 2019 | 401 | 94.56 | |||
The fair value of shares vested for time-based RSUs is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Total | 20 | 21 | 12 | |||||
The weighted average grant date fair value of RSUs granted is as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Total | 46 | 48 | 59 | |||||
As of December 31, 2019, there was $42 million of unrecognized compensation cost related to RSUs, excluding actual forfeitures, which is expected to be recognized over a weighted average period of 2 years.
The Company realized income tax benefits from RSU vestings as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Income tax benefit realized | 6 | 7 | 9 | |||||
115
21. Leases
The components of lease expense are as follows:
Year Ended December 31, 2019 | Statement of Operations Classification | |||
(In $ millions) | ||||
Lease Cost | ||||
Operating lease cost | 39 | Cost of sales / Selling, general and administrative expenses | ||
Short-term lease cost | 23 | Cost of sales / Selling, general and administrative expenses | ||
Variable lease cost | 8 | Cost of sales / Selling, general and administrative expenses | ||
Finance lease cost | ||||
Amortization of leased assets | 19 | Cost of sales | ||
Interest on lease liabilities | 18 | Interest expense | ||
Total net lease cost | 107 | |||
Supplemental consolidated balance sheet information related to leases is as follows:
As of December 31, 2019 | Balance Sheet Classification | |||
(In $ millions) | ||||
Leases | ||||
Assets | ||||
Operating lease assets | 203 | Operating lease ROU assets | ||
Finance lease assets | 83 | Property, plant and equipment, net | ||
Total leased assets | 286 | |||
Liabilities | ||||
Current | ||||
Operating | 29 | Current Other liabilities | ||
Finance | 26 | Short-term borrowings and current installments of long-term debt | ||
Noncurrent | ||||
Operating | 181 | Operating lease liabilities | ||
Finance | 118 | Long-term debt | ||
Total lease liabilities | 354 | |||
As of December 31, 2019 | ||
Weighted-Average Remaining Lease Term (years) | ||
Operating leases | 15.0 | |
Finance leases | 6.9 | |
Weighted-Average Discount Rate | ||
Operating leases | 2.7 | % |
Finance leases | 11.5 | % |
116
Supplemental consolidated cash flow information related to leases is as follows:
Year Ended December 31, 2019 | ||
(In $ millions) | ||
Cash paid for amounts included in the measurement of lease liabilities | ||
Operating cash flows from operating leases | 36 | |
Operating cash flows from finance leases | 19 | |
Financing cash flows from finance leases | 23 | |
ROU assets obtained in exchange for finance lease liabilities | — | |
ROU assets obtained in exchange for operating lease liabilities | 11 | |
Maturities of lease liabilities are as follows:
As of December 31, 2019 | |||||
Operating Leases | Finance Leases | ||||
(In $ millions) | |||||
2020 | 35 | 42 | |||
2021 | 27 | 40 | |||
2022 | 23 | 31 | |||
2023 | 21 | 23 | |||
2024 | 18 | 18 | |||
Later years | 132 | 70 | |||
Total lease payments | 256 | 224 | |||
Less amounts representing interest | (46 | ) | (80 | ) | |
Total lease obligations | 210 | 144 | |||
Disclosures related to periods prior to adoption of ASU 2016-02
Operating lease rent expense was approximately $96 million for the year ended December 31, 2018. Future minimum lease payments under non-cancelable rental and lease agreements which had initial or remaining terms in excess of one year are as follows:
As of December 31, 2018 | |||||
Operating Leases | Capital Leases | ||||
(In $ millions) | |||||
2019 | 43 | 42 | |||
2020 | 34 | 42 | |||
2021 | 25 | 40 | |||
2022 | 23 | 32 | |||
2023 | 21 | 23 | |||
Later years | 130 | 88 | |||
Minimum lease commitments | 276 | 267 | |||
Less amounts representing interest | (100 | ) | |||
Present value of net minimum lease obligations | 167 | ||||
117
22. Derivative Financial Instruments
Derivatives Designated As Hedges
Cash Flow Hedges
The total notional amount of the forward-starting interest rate swap designated as a cash flow hedge is as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Total | 400 | 400 | |||
Net Investment Hedges
The total notional amount of foreign currency denominated debt designated as a net investment hedge of net investments in foreign operations are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In € millions) | |||||
Total | 1,578 | 1,550 | |||
Derivatives Not Designated As Hedges
Foreign Currency Forwards and Swaps
Each of the contracts included in the table below will have approximately offsetting effects from actual underlying payables, receivables, intercompany loans or other assets or liabilities subject to foreign exchange remeasurement. The total US dollar equivalents of net foreign exchange exposure related to (short) long foreign exchange forward contracts outstanding by currency are as follows:
2020 Maturity | ||
(In $ millions) | ||
Currency | ||
Brazilian real | (10 | ) |
British pound sterling | (88 | ) |
Canadian dollar | (8 | ) |
Chinese yuan | (46 | ) |
Euro | (170 | ) |
Hungarian forint | 13 | |
Indonesian rupiah | (11 | ) |
Korean won | 16 | |
Mexican peso | (27 | ) |
Singapore dollar | 30 | |
Swedish krona | (4 | ) |
Total | (305 | ) |
Gross notional values of the foreign currency forwards and swaps are as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Total | 692 | 1,071 | |||
118
Hedging activity for foreign currency forwards, commodity swaps and interest rate swaps is as follows:
Year Ended December 31, | Statement of Operations Classification | |||||||||
2019 | 2018 | 2017 | ||||||||
(In $ millions) | ||||||||||
Hedging activities | 2 | 1 | 4 | Cost of sales; Interest expense | ||||||
Information regarding changes in the fair value of the Company's derivative and non-derivative instruments is as follows:
Gain (Loss) Recognized in Other Comprehensive Income (Loss) | Gain (Loss) Recognized in Earnings (Loss) | Statement of Operations Classification | |||||||||||||||||
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||
(In $ millions) | |||||||||||||||||||
Designated as Cash Flow Hedges | |||||||||||||||||||
Commodity swaps | (5 | ) | (2 | ) | 4 | 2 | 1 | 5 | Cost of sales | ||||||||||
Interest rate swaps | (30 | ) | (10 | ) | — | — | — | — | Interest expense | ||||||||||
Foreign currency forwards | — | 1 | (1 | ) | — | — | (1 | ) | Cost of sales | ||||||||||
Total | (35 | ) | (11 | ) | 3 | 2 | 1 | 4 | |||||||||||
Designated as Net Investment Hedges | |||||||||||||||||||
37 | 51 | (119 | ) | — | — | — | N/A | ||||||||||||
3 | — | — | — | — | — | N/A | |||||||||||||
Foreign currency forwards | — | — | 2 | — | — | — | N/A | ||||||||||||
Total | 40 | 51 | (117 | ) | — | — | — | ||||||||||||
Not Designated as Hedges | |||||||||||||||||||
Foreign currency forwards and swaps | — | — | — | (3 | ) | 13 | 2 | Foreign exchange gain (loss), net; Other income (expense), net | |||||||||||
Total | — | — | — | (3 | ) | 13 | 2 | ||||||||||||
See Note 23 for additional information regarding the fair value of the Company's derivative instruments.
Certain of the Company's commodity swaps, interest rate swaps, cross-currency swaps and foreign currency forwards and swaps permit the Company to net settle all contracts with the counterparty through a single payment in an agreed upon currency in the event of default or early termination of the contract, similar to a master netting arrangement.
Information regarding the gross amounts of the Company's derivative instruments and the amounts offset in the consolidated balance sheets is as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Derivative Assets | |||||
Gross amount recognized | 16 | 11 | |||
Gross amount offset in the consolidated balance sheets | 1 | 2 | |||
Net amount presented in the consolidated balance sheets | 15 | 9 | |||
Gross amount not offset in the consolidated balance sheets | 8 | 3 | |||
Net amount | 7 | 6 | |||
119
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Derivative Liabilities | |||||
Gross amount recognized | 59 | 20 | |||
Gross amount offset in the consolidated balance sheets | 1 | 2 | |||
Net amount presented in the consolidated balance sheets | 58 | 18 | |||
Gross amount not offset in the consolidated balance sheets | 8 | 3 | |||
Net amount | 50 | 15 | |||
23. Fair Value Measurements
The Company's financial assets and liabilities are measured at fair value on a recurring basis (Note 2) as follows:
Derivatives. Derivative financial instruments include interest rate swaps, commodity swaps, cross-currency swaps and foreign currency forwards and swaps and are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 fair value measurement inputs such as interest rates and foreign currency exchange rates. These market inputs are utilized in the discounted cash flow calculation considering the instrument's term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps, commodity swaps, cross-currency swaps and foreign currency forwards and swaps are observable in the active markets and are classified as Level 2 in the fair value measurement hierarchy.
Fair Value Measurement | Balance Sheet Classification | ||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Total | |||||||||||||||||
As of December 31, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||
(In $ millions) | |||||||||||||||||||
Derivatives Designated as Cash Flow Hedges | |||||||||||||||||||
Commodity swaps | — | — | — | 1 | — | 1 | Current Other assets | ||||||||||||
Designated as Net Investment Hedges | |||||||||||||||||||
Cross-currency swaps | — | — | 13 | — | 13 | — | Current Other assets | ||||||||||||
Derivatives Not Designated as Hedges | |||||||||||||||||||
Foreign currency forwards and swaps | — | — | 2 | 8 | 2 | 8 | Current Other assets | ||||||||||||
Total assets | — | — | 15 | 9 | 15 | 9 | |||||||||||||
Derivatives Designated as Cash Flow Hedges | |||||||||||||||||||
Commodity swaps | — | — | (4 | ) | — | (4 | ) | — | Current Other liabilities | ||||||||||
Commodity swaps | — | — | (3 | ) | (1 | ) | (3 | ) | (1 | ) | Noncurrent Other liabilities | ||||||||
Interest rate swaps | — | — | (40 | ) | (10 | ) | (40 | ) | (10 | ) | Noncurrent Other liabilities | ||||||||
Derivatives Designated as a Net Investment Hedges | |||||||||||||||||||
Cross-currency swaps | — | — | (1 | ) | — | (1 | ) | — | Current Other liabilities | ||||||||||
Cross-currency swaps | — | — | (7 | ) | — | (7 | ) | — | Noncurrent Other liabilities | ||||||||||
Derivatives Not Designated as Hedges | |||||||||||||||||||
Foreign currency forwards and swaps | — | — | (3 | ) | (7 | ) | (3 | ) | (7 | ) | Current Other liabilities | ||||||||
Total liabilities | — | — | (58 | ) | (18 | ) | (58 | ) | (18 | ) | |||||||||
120
Carrying values and fair values of financial instruments that are not carried at fair value are as follows:
Fair Value Measurement | |||||||||||||||||||||||
Carrying Amount | Significant Other Observable Inputs (Level 2) | Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
As of December 31, | |||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
(In $ millions) | |||||||||||||||||||||||
Equity investments without readily determinable fair values | 170 | 164 | — | — | — | — | — | — | |||||||||||||||
Insurance contracts in nonqualified trusts | 35 | 37 | 35 | 37 | — | — | 35 | 37 | |||||||||||||||
Long-term debt, including current installments of long-term debt | 3,455 | 3,355 | 3,456 | 3,204 | 143 | 168 | 3,599 | 3,372 | |||||||||||||||
In general, the equity investments included in the table above are not publicly traded and their fair values are not readily determinable. The Company believes the carrying values approximate fair value. Insurance contracts in nonqualified trusts consist of long-term fixed income securities, which are valued using independent vendor pricing models with observable inputs in the active market and therefore represent a Level 2 fair value measurement. The fair value of long-term debt is based on valuations from third-party banks and market quotations and is classified as Level 2 in the fair value measurement hierarchy. The fair value of obligations under finance leases, which are included in long-term debt, is based on lease payments and discount rates, which are not observable in the market and therefore represents a Level 3 fair value measurement.
As of December 31, 2019 and 2018, the fair values of cash and cash equivalents, receivables, trade payables, short-term borrowings and the current installments of long-term debt approximate carrying values due to the short-term nature of these instruments. These items have been excluded from the table with the exception of the current installments of long-term debt.
24. Commitments and Contingencies
Commitments
Guarantees
The Company has agreed to guarantee or indemnify third parties for environmental and other liabilities pursuant to a variety of agreements, including asset and business divestiture agreements, leases, settlement agreements and various agreements with affiliated companies. Although many of these obligations contain monetary and/or time limitations, others do not provide such limitations.
As indemnification obligations often depend on the occurrence of unpredictable future events, the future costs associated with them cannot be determined at this time.
The Company has accrued for all probable and reasonably estimable losses associated with all known matters or claims. These known obligations include the following:
• | Demerger Obligations |
In connection with the Hoechst demerger, the Company agreed to indemnify Hoechst, and its legal successors, for various liabilities under the demerger agreement, including for environmental liabilities associated with contamination arising either from environmental damage in general ("Category A") or under 19 divestiture agreements entered into by Hoechst prior to the demerger ("Category B") (Note 16).
The Company's obligation to indemnify Hoechst, and its legal successors, is capped under Category B at €250 million. If and to the extent the environmental damage should exceed €750 million in aggregate, the Company's obligation to indemnify Hoechst and its legal successors applies, but is then limited to 33.33% of the remediation cost without further limitations. Cumulative payments under the divestiture agreements as of December 31, 2019 are $92 million. Though the Company is significantly under its obligation cap under Category B, most of the divestiture agreements have become time barred and/or any notified environmental damage claims have been partially settled.
121
The Company has also undertaken in the demerger agreement to indemnify Hoechst and its legal successors for (i) 33.33% of any and all Category A liabilities that result from Hoechst being held as the responsible party pursuant to public law or current or future environmental law or by third parties pursuant to private or public law related to contamination and (ii) liabilities that Hoechst is required to discharge, including tax liabilities, which are associated with businesses that were included in the demerger but were not demerged due to legal restrictions on the transfers of such items. These indemnities do not provide for any monetary or time limitations. The Company has not been requested by Hoechst to make any payments in connection with this indemnification. Accordingly, the Company has not made any payments to Hoechst and its legal successors.
Based on the Company's evaluation of currently available information, including the lack of requests for indemnification, the Company cannot estimate the remaining demerger obligations, if any, in excess of amounts accrued.
• | Divestiture Obligations |
The Company and its predecessor companies agreed to indemnify third-party purchasers of former businesses and assets for various pre-closing conditions, as well as for breaches of representations, warranties and covenants. Such liabilities also include environmental liability, product liability, antitrust and other liabilities. These indemnifications and guarantees represent standard contractual terms associated with typical divestiture agreements and, other than environmental liabilities, the Company does not believe that they expose the Company to significant risk (Note 16).
The Company has divested numerous businesses, investments and facilities through agreements containing indemnifications or guarantees to the purchasers. Many of the obligations contain monetary and/or time limitations, which extend through 2037. The aggregate amount of outstanding indemnifications and guarantees provided for under these agreements is $116 million as of December 31, 2019. Other agreements do not provide for any monetary or time limitations.
Based on the Company's evaluation of currently available information, including the number of requests for indemnification or other payment received by the Company, the Company cannot estimate the remaining divestiture obligations, if any, in excess of amounts accrued.
Purchase Obligations
In the normal course of business, the Company enters into various purchase commitments for goods and services. The Company maintains a number of "take-or-pay" contracts for purchases of raw materials, utilities and other services. Certain of the contracts contain a contract termination buy-out provision that allows for the Company to exit the contracts for amounts less than the remaining take-or-pay obligations. Additionally, the Company has other outstanding commitments representing maintenance and service agreements, energy and utility agreements, consulting contracts and software agreements. As of December 31, 2019, the Company had unconditional purchase obligations of $1.2 billion, which extend through 2036.
Contingencies
The Company is involved in legal and regulatory proceedings, lawsuits, claims and investigations incidental to the normal conduct of business, relating to such matters as product liability, land disputes, insurance coverage disputes, contracts, employment, antitrust or competition compliance, intellectual property, personal injury and other actions in tort, workers' compensation, chemical exposure, asbestos exposure, taxes, trade compliance, acquisitions and divestitures, claims of legacy stockholders, past waste disposal practices and release of chemicals into the environment. The Company is actively defending those matters where the Company is named as a defendant and, based on the current facts, does not believe the outcomes from these matters would be material to the Company's results of operations, cash flows or financial position.
European Commission Investigation
In May 2017, the Company learned that the European Commission opened a competition law investigation involving certain subsidiaries of the Company with respect to certain past ethylene purchases. Based on information learned from the European Commission regarding its investigation, Celanese recorded a reserve of $89 million during the year ended December 31, 2019. The Company is continuing to cooperate with the European Commission. See Note 18 for additional information.
122
25. Supplemental Cash Flow Information
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Interest paid, net of amounts capitalized | 118 | 133 | 130 | |||||
Taxes paid, net of refunds | 157 | 100 | 123 | |||||
Noncash Investing and Financing Activities | ||||||||
Accrued treasury stock repurchases | 4 | 13 | — | |||||
Accrued capital expenditures | 20 | (4 | ) | 14 | ||||
Asset retirement obligations | 6 | (7 | ) | 2 | ||||
Fair value adjustment to securities available for sale, net of tax | — | — | (1 | ) | ||||
26. Segment Information
Business Segments
The Company operates through business segments according to the nature and economic characteristics of its products and customer relationships, as well as the manner in which the information is used internally by the Company's key decision maker, who is the Company's Chief Executive Officer.
The Company's business segments are as follows:
• | Engineered Materials |
The Company's Engineered Materials segment includes the engineered materials business, our food ingredients business and certain strategic affiliates. The engineered materials business develops, produces and supplies a broad portfolio of high performance specialty polymers for automotive and medical applications, as well as industrial products and consumer electronics. Together with its strategic affiliates, the Company's engineered materials business is a leading participant in the global specialty polymers industry. The primary products of Engineered Materials are used in a broad range of end-use products including fuel system components, automotive safety systems, medical applications, electronics, appliances, industrial products, battery separators, conveyor belts, filtration equipment, coatings, and electrical applications and products. It is also a leading global supplier of acesulfame potassium for the food and beverage industry and is a leading producer of food protection ingredients, such as potassium sorbate and sorbic acid.
• | Acetate Tow |
The Company's Acetate Tow segment serves consumer-driven applications and is a leading global producer and supplier of acetate tow and acetate flake, primarily used in filter products applications.
• | Acetyl Chain |
The Company's Acetyl Chain segment includes the integrated chain of intermediate chemistry, emulsion polymers and ethylene vinyl acetate ("EVA") polymers businesses. The Company's intermediate chemistry business produces and supplies acetyl products, including acetic acid, vinyl acetate monomer, acetic anhydride and acetate esters. These products are generally used as starting materials for colorants, paints, adhesives, coatings and pharmaceuticals. It also produces organic solvents and intermediates for pharmaceutical, agricultural and chemical products. The Company's emulsion polymers business is a leading global producer of vinyl acetate-based emulsions and develops products and application technologies to improve performance, create value and drive innovation in applications such as paints and coatings, adhesives, construction, glass fiber, textiles and paper. The Company's EVA polymers business is a leading North American manufacturer of a full range of specialty EVA resins and compounds, as well as select grades of low-density polyethylene. The Company's EVA polymers products are used in many applications, including flexible packaging films, lamination film products, hot melt adhesives, automotive parts and carpeting.
123
• | Other Activities |
Other Activities primarily consists of corporate center costs, including administrative activities such as finance, information technology and human resource functions, interest income and expense associated with financing activities and results of the Company's captive insurance companies. Other Activities also includes the components of net periodic benefit cost (interest cost, expected return on assets and net actuarial gains and losses) for the Company's defined benefit pension plans and other postretirement plans not allocated to the Company's business segments.
The business segment management reporting and controlling systems are based on the same accounting policies as those described in the summary of significant accounting policies (Note 2).
Sales transactions between business segments are generally recorded at values that approximate third-party selling prices.
______________________________
Engineered Materials | Acetate Tow | Acetyl Chain | Other Activities | Eliminations | Consolidated | |||||||||||||
(In $ millions) | ||||||||||||||||||
Year Ended December 31, 2019 | ||||||||||||||||||
Net sales | 2,386 | 636 | (1) | 3,392 | (2) | — | (117 | ) | 6,297 | |||||||||
5 | (88 | ) | (3 | ) | (117 | ) | — | (203 | ) | |||||||||
Operating profit (loss) | 446 | 52 | 678 | (342 | ) | — | 834 | |||||||||||
Equity in net earnings (loss) of affiliates | 168 | — | 4 | 10 | — | 182 | ||||||||||||
Depreciation and amortization | 131 | 45 | 161 | 15 | — | 352 | ||||||||||||
Capital expenditures | 104 | 43 | 208 | 35 | — | 390 | (3) | |||||||||||
As of December 31, 2019 | ||||||||||||||||||
Goodwill and intangible assets, net | 999 | 153 | 234 | — | — | 1,386 | ||||||||||||
Total assets | 4,125 | 977 | 3,489 | 885 | — | 9,476 | ||||||||||||
Year Ended December 31, 2018 | ||||||||||||||||||
Net sales | 2,593 | 649 | (1) | 4,042 | (2) | — | (129 | ) | 7,155 | |||||||||
— | (2 | ) | 11 | — | — | 9 | ||||||||||||
Operating profit (loss) | 460 | 130 | 1,024 | (280 | ) | — | 1,334 | |||||||||||
Equity in net earnings (loss) of affiliates | 218 | — | 6 | 9 | — | 233 | ||||||||||||
Depreciation and amortization | 126 | 58 | 148 | 11 | — | 343 | ||||||||||||
Capital expenditures | 105 | 29 | 182 | 17 | — | 333 | (3) | |||||||||||
As of December 31, 2018 | ||||||||||||||||||
Goodwill and intangible assets, net | 974 | 153 | 240 | — | — | 1,367 | ||||||||||||
Total assets | 4,012 | 1,032 | 3,471 | 798 | — | 9,313 | ||||||||||||
Year Ended December 31, 2017 | ||||||||||||||||||
Net sales | 2,213 | 668 | (1) | 3,371 | (2) | — | (112 | ) | 6,140 | |||||||||
(2 | ) | (2 | ) | (52 | ) | (3 | ) | — | (59 | ) | ||||||||
Operating profit (loss) | 412 | 189 | 509 | (253 | ) | — | 857 | |||||||||||
Equity in net earnings (loss) of affiliates | 171 | — | 6 | 6 | — | 183 | ||||||||||||
Depreciation and amortization | 111 | 41 | 143 | 10 | — | 305 | ||||||||||||
Capital expenditures | 78 | 39 | 150 | 14 | — | 281 | (3) | |||||||||||
(1) | Includes intersegment sales of $0 million, $0 million, $2 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
(2) | Includes intersegment sales of $117 million, $129 million and $110 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
(3) | Includes an increase in accrued capital expenditures of $20 million, a decrease in accrued capital expenditures of $4 million and an increase in accrued capital expenditures of $14 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
124
Geographical Area Information
The net sales to external customers based on geographic location are as follows:
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions) | ||||||||
Belgium | 259 | 261 | 295 | |||||
Canada | 75 | 115 | 92 | |||||
China | 859 | 1,070 | 833 | |||||
Germany | 2,132 | 2,335 | 1,776 | |||||
Mexico | 244 | 307 | 257 | |||||
Singapore | 787 | 997 | 867 | |||||
US | 1,713 | 1,769 | 1,572 | |||||
Other | 228 | 301 | 448 | |||||
Total | 6,297 | 7,155 | 6,140 | |||||
Property, plant and equipment, net based on the geographic location of the Company's facilities is as follows:
As of December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Belgium | 55 | 54 | |||
Canada | 105 | 114 | |||
China | 316 | 331 | |||
Germany | 866 | 903 | |||
Mexico | 57 | 144 | |||
Singapore | 80 | 83 | |||
US | 2,095 | 1,961 | |||
Other | 139 | 129 | |||
Total | 3,713 | 3,719 | |||
27. Revenue Recognition
Disaggregated Revenue
In general, the Company's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
The Company manages its Engineered Materials business segment through its project management pipeline, which is comprised of a broad range of projects which are solutions-based and are tailored to each customers' unique needs. Projects are identified and selected based on success rate and may involve a number of different polymers per project for use in multiple end-use applications. Therefore, the Company is agnostic toward products and end-use markets for the Engineered Materials business segment.
Within the Acetate Tow business segment, the Company's primary product is acetate tow, which is managed through contracts with a few major tobacco companies and accounts for a significant amount of filters used in cigarette production worldwide.
The Company manages its Acetyl Chain business segment by leveraging its ability to sell chemicals externally to end-use markets or downstream to its emulsion polymers business. Decisions to sell externally and geographically or downstream and along the Acetyl Chain are based on market demand, trade flows and maximizing the value of its chemicals. Therefore, the Company's strategic focus is on executing within this integrated chain model and less on driving product-specific revenue.
125
Further disaggregation of Net sales by business segment and geographic destination is as follows:
______________________________
Year Ended December 31, | |||||
2019 | 2018 | ||||
(In $ millions) | |||||
Engineered Materials | |||||
North America | 735 | 770 | |||
Europe and Africa | 1,047 | 1,216 | |||
Asia-Pacific | 533 | 532 | |||
South America | 71 | 75 | |||
Total | 2,386 | 2,593 | |||
Acetate Tow | |||||
North America | 125 | 133 | |||
Europe and Africa | 258 | 260 | |||
Asia-Pacific | 224 | 217 | |||
South America | 29 | 39 | |||
Total | 636 | 649 | |||
Acetyl Chain | |||||
North America | 1,079 | 1,145 | |||
Europe and Africa | 1,098 | 1,236 | |||
Asia-Pacific | 1,013 | 1,411 | |||
South America | 85 | 121 | |||
Total(1) | 3,275 | 3,913 | |||
(1) | Excludes intersegment sales of $117 million and $129 million for the years ended December 31, 2019 and 2018, respectively. |
28. Earnings (Loss) Per Share
______________________________
Year Ended December 31, | ||||||||
2019 | 2018 | 2017 | ||||||
(In $ millions, except share data) | ||||||||
Amounts attributable to Celanese Corporation | ||||||||
Earnings (loss) from continuing operations | 858 | 1,212 | 856 | |||||
Earnings (loss) from discontinued operations | (6 | ) | (5 | ) | (13 | ) | ||
Net earnings (loss) | 852 | 1,207 | 843 | |||||
Weighted average shares - basic | 123,925,697 | 134,305,269 | 137,902,667 | |||||
Incremental shares attributable to equity awards(1) | 726,062 | 1,111,589 | 414,728 | |||||
Weighted average shares - diluted | 124,651,759 | 135,416,858 | 138,317,395 | |||||
(1) | Excludes 45, 0 and 29 equity award shares for the years ended December 31, 2019, 2018 and 2017, respectively, as their effect would have been antidilutive. |
126
29. Consolidating Guarantor Financial Information
The Senior Notes were issued by Celanese US ("Issuer") and are guaranteed by Celanese Corporation ("Parent Guarantor") and the Subsidiary Guarantors (Note 14). The Issuer and Subsidiary Guarantors are 100% owned subsidiaries of the Parent Guarantor. The Parent Guarantor and Subsidiary Guarantors have guaranteed the Notes fully and unconditionally and jointly and severally.
For cash management purposes, the Company transfers cash between the Parent Guarantor, Issuer, Subsidiary Guarantors and non-guarantors through intercompany financing arrangements, contributions or declaration of dividends between the respective parent and its subsidiaries. The transfer of cash under these activities facilitates the ability of the recipient to make specified third-party payments for principal and interest on the Company's outstanding debt, Common Stock dividends and Common Stock repurchases. The consolidating statements of cash flows present such intercompany financing activities, contributions and dividends consistent with how such activity would be presented in a stand-alone statement of cash flows.
The Company has not presented separate financial information and other disclosures for each of its Subsidiary Guarantors because it believes such financial information and other disclosures would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.
The consolidating financial statements for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and the non-guarantors are as follows:
127
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Year Ended December 31, 2019 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net sales | — | — | 2,298 | 5,137 | (1,138 | ) | 6,297 | ||||||||||
Cost of sales | — | — | (1,795 | ) | (4,036 | ) | 1,140 | (4,691 | ) | ||||||||
Gross profit | — | — | 503 | 1,101 | 2 | 1,606 | |||||||||||
Selling, general and administrative expenses | — | — | (179 | ) | (304 | ) | — | (483 | ) | ||||||||
Amortization of intangible assets | — | — | (8 | ) | (16 | ) | — | (24 | ) | ||||||||
Research and development expenses | — | — | (27 | ) | (40 | ) | — | (67 | ) | ||||||||
Other (charges) gains, net | — | — | (8 | ) | (195 | ) | — | (203 | ) | ||||||||
Foreign exchange gain (loss), net | — | — | — | 7 | — | 7 | |||||||||||
Gain (loss) on disposition of businesses and assets, net | — | — | (9 | ) | 7 | — | (2 | ) | |||||||||
Operating profit (loss) | — | — | 272 | 560 | 2 | 834 | |||||||||||
Equity in net earnings (loss) of affiliates | 881 | 856 | 551 | 165 | (2,271 | ) | 182 | ||||||||||
Non-operating pension and other postretirement employee benefit (expense) income | — | — | 13 | (33 | ) | — | (20 | ) | |||||||||
Interest expense | (29 | ) | (39 | ) | (127 | ) | (37 | ) | 117 | (115 | ) | ||||||
Refinancing expense | — | (4 | ) | — | — | — | (4 | ) | |||||||||
Interest income | — | 63 | 49 | 11 | (117 | ) | 6 | ||||||||||
Dividend income - equity investments | — | — | — | 113 | — | 113 | |||||||||||
Other income (expense), net | — | (7 | ) | 1 | (2 | ) | — | (8 | ) | ||||||||
Earnings (loss) from continuing operations before tax | 852 | 869 | 759 | 777 | (2,269 | ) | 988 | ||||||||||
Income tax (provision) benefit | — | 12 | 23 | (158 | ) | (1 | ) | (124 | ) | ||||||||
Earnings (loss) from continuing operations | 852 | 881 | 782 | 619 | (2,270 | ) | 864 | ||||||||||
Earnings (loss) from operation of discontinued operations | — | — | (8 | ) | — | — | (8 | ) | |||||||||
Income tax (provision) benefit from discontinued operations | — | — | 2 | — | — | 2 | |||||||||||
Earnings (loss) from discontinued operations | — | — | (6 | ) | — | — | (6 | ) | |||||||||
Net earnings (loss) | 852 | 881 | 776 | 619 | (2,270 | ) | 858 | ||||||||||
Net (earnings) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Net earnings (loss) attributable to Celanese Corporation | 852 | 881 | 776 | 613 | (2,270 | ) | 852 | ||||||||||
128
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Year Ended December 31, 2018 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net sales | — | — | 2,387 | 5,954 | (1,186 | ) | 7,155 | ||||||||||
Cost of sales | — | — | (1,898 | ) | (4,471 | ) | 1,186 | (5,183 | ) | ||||||||
Gross profit | — | — | 489 | 1,483 | — | 1,972 | |||||||||||
Selling, general and administrative expenses | — | — | (213 | ) | (333 | ) | — | (546 | ) | ||||||||
Amortization of intangible assets | — | — | (8 | ) | (16 | ) | — | (24 | ) | ||||||||
Research and development expenses | — | — | (30 | ) | (42 | ) | — | (72 | ) | ||||||||
Other (charges) gains, net | — | — | — | 9 | — | 9 | |||||||||||
Foreign exchange gain (loss), net | — | (3 | ) | — | 3 | — | — | ||||||||||
Gain (loss) on disposition of businesses and assets, net | — | — | (10 | ) | 5 | — | (5 | ) | |||||||||
Operating profit (loss) | — | (3 | ) | 228 | 1,109 | — | 1,334 | ||||||||||
Equity in net earnings (loss) of affiliates | 1,207 | 1,202 | 1,033 | 220 | (3,429 | ) | 233 | ||||||||||
Non-operating pension and other postretirement employee benefit (expense) income | — | — | (28 | ) | (34 | ) | — | (62 | ) | ||||||||
Interest expense | — | (30 | ) | (118 | ) | (33 | ) | 56 | (125 | ) | |||||||
Refinancing expense | — | (1 | ) | — | — | — | (1 | ) | |||||||||
Interest income | — | 45 | 7 | 10 | (56 | ) | 6 | ||||||||||
Dividend income - equity investments | — | — | — | 113 | 4 | 117 | |||||||||||
Other income (expense), net | — | 5 | 1 | 3 | (1 | ) | 8 | ||||||||||
Earnings (loss) from continuing operations before tax | 1,207 | 1,218 | 1,123 | 1,388 | (3,426 | ) | 1,510 | ||||||||||
Income tax (provision) benefit | — | (11 | ) | (106 | ) | (176 | ) | 1 | (292 | ) | |||||||
Earnings (loss) from continuing operations | 1,207 | 1,207 | 1,017 | 1,212 | (3,425 | ) | 1,218 | ||||||||||
Earnings (loss) from operation of discontinued operations | — | — | 3 | (8 | ) | — | (5 | ) | |||||||||
Income tax (provision) benefit from discontinued operations | — | — | (1 | ) | 1 | — | — | ||||||||||
Earnings (loss) from discontinued operations | — | — | 2 | (7 | ) | — | (5 | ) | |||||||||
Net earnings (loss) | 1,207 | 1,207 | 1,019 | 1,205 | (3,425 | ) | 1,213 | ||||||||||
Net (earnings) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Net earnings (loss) attributable to Celanese Corporation | 1,207 | 1,207 | 1,019 | 1,199 | (3,425 | ) | 1,207 | ||||||||||
129
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
Year Ended December 31, 2017 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net sales | — | — | 2,240 | 5,013 | (1,113 | ) | 6,140 | ||||||||||
Cost of sales | — | — | (1,723 | ) | (4,014 | ) | 1,108 | (4,629 | ) | ||||||||
Gross profit | — | — | 517 | 999 | (5 | ) | 1,511 | ||||||||||
Selling, general and administrative expenses | — | — | (189 | ) | (307 | ) | — | (496 | ) | ||||||||
Amortization of intangible assets | — | — | (4 | ) | (16 | ) | — | (20 | ) | ||||||||
Research and development expenses | — | — | (32 | ) | (41 | ) | — | (73 | ) | ||||||||
Other (charges) gains, net | — | — | (6 | ) | (53 | ) | — | (59 | ) | ||||||||
Foreign exchange gain (loss), net | — | — | — | (1 | ) | — | (1 | ) | |||||||||
Gain (loss) on disposition of businesses and assets, net | — | — | (8 | ) | 3 | — | (5 | ) | |||||||||
Operating profit (loss) | — | — | 278 | 584 | (5 | ) | 857 | ||||||||||
Equity in net earnings (loss) of affiliates | 843 | 867 | 591 | 166 | (2,284 | ) | 183 | ||||||||||
Non-operating pension and other postretirement employee benefit (expense) income | — | — | 60 | (16 | ) | — | 44 | ||||||||||
Interest expense | — | (20 | ) | (104 | ) | (30 | ) | 32 | (122 | ) | |||||||
Interest income | — | 25 | 4 | 5 | (32 | ) | 2 | ||||||||||
Dividend income - equity investments | — | — | — | 111 | (3 | ) | 108 | ||||||||||
Other income (expense), net | — | (3 | ) | 2 | 4 | — | 3 | ||||||||||
Earnings (loss) from continuing operations before tax | 843 | 869 | 831 | 824 | (2,292 | ) | 1,075 | ||||||||||
Income tax (provision) benefit | — | (26 | ) | (62 | ) | (125 | ) | — | (213 | ) | |||||||
Earnings (loss) from continuing operations | 843 | 843 | 769 | 699 | (2,292 | ) | 862 | ||||||||||
Earnings (loss) from operation of discontinued operations | — | — | (2 | ) | (14 | ) | — | (16 | ) | ||||||||
Income tax (provision) benefit from discontinued operations | — | — | 1 | 2 | — | 3 | |||||||||||
Earnings (loss) from discontinued operations | — | — | (1 | ) | (12 | ) | — | (13 | ) | ||||||||
Net earnings (loss) | 843 | 843 | 768 | 687 | (2,292 | ) | 849 | ||||||||||
Net (earnings) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Net earnings (loss) attributable to Celanese Corporation | 843 | 843 | 768 | 681 | (2,292 | ) | 843 | ||||||||||
130
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2019 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net earnings (loss) | 852 | 881 | 776 | 619 | (2,270 | ) | 858 | ||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||
Foreign currency translation | (16 | ) | (16 | ) | (39 | ) | (48 | ) | 103 | (16 | ) | ||||||
Gain (loss) from cash flow hedges | (30 | ) | (30 | ) | (6 | ) | (4 | ) | 40 | (30 | ) | ||||||
Pension and postretirement benefits | (7 | ) | (7 | ) | (6 | ) | (7 | ) | 20 | (7 | ) | ||||||
Total other comprehensive income (loss), net of tax | (53 | ) | (53 | ) | (51 | ) | (59 | ) | 163 | (53 | ) | ||||||
Total comprehensive income (loss), net of tax | 799 | 828 | 725 | 560 | (2,107 | ) | 805 | ||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Comprehensive income (loss) attributable to Celanese Corporation | 799 | 828 | 725 | 554 | (2,107 | ) | 799 | ||||||||||
131
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2018 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net earnings (loss) | 1,207 | 1,207 | 1,019 | 1,205 | (3,425 | ) | 1,213 | ||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||
Unrealized gain (loss) on marketable securities | — | — | 6 | 13 | (19 | ) | — | ||||||||||
Foreign currency translation | (60 | ) | (60 | ) | (90 | ) | (109 | ) | 259 | (60 | ) | ||||||
Gain (loss) from cash flow hedges | (10 | ) | (10 | ) | (2 | ) | (1 | ) | 13 | (10 | ) | ||||||
Total other comprehensive income (loss), net of tax | (70 | ) | (70 | ) | (86 | ) | (97 | ) | 253 | (70 | ) | ||||||
Total comprehensive income (loss), net of tax | 1,137 | 1,137 | 933 | 1,108 | (3,172 | ) | 1,143 | ||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Comprehensive income (loss) attributable to Celanese Corporation | 1,137 | 1,137 | 933 | 1,102 | (3,172 | ) | 1,137 | ||||||||||
132
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2017 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net earnings (loss) | 843 | 843 | 768 | 687 | (2,292 | ) | 849 | ||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||
Unrealized gain (loss) on marketable securities | (1 | ) | (1 | ) | (1 | ) | (1 | ) | 3 | (1 | ) | ||||||
Foreign currency translation | 174 | 174 | 226 | 268 | (668 | ) | 174 | ||||||||||
Gain (loss) from cash flow hedges | (1 | ) | (1 | ) | (1 | ) | (1 | ) | 3 | (1 | ) | ||||||
Pension and postretirement benefits | 9 | 9 | 7 | 10 | (26 | ) | 9 | ||||||||||
Total other comprehensive income (loss), net of tax | 181 | 181 | 231 | 276 | (688 | ) | 181 | ||||||||||
Total comprehensive income (loss), net of tax | 1,024 | 1,024 | 999 | 963 | (2,980 | ) | 1,030 | ||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | — | — | — | (6 | ) | — | (6 | ) | |||||||||
Comprehensive income (loss) attributable to Celanese Corporation | 1,024 | 1,024 | 999 | 957 | (2,980 | ) | 1,024 | ||||||||||
133
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
As of December 31, 2019 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
ASSETS | |||||||||||||||||
Current Assets | |||||||||||||||||
Cash and cash equivalents | — | — | 16 | 447 | — | 463 | |||||||||||
Trade receivables - third party and affiliates | — | — | 122 | 851 | (123 | ) | 850 | ||||||||||
Non-trade receivables, net | 56 | 1,188 | 1,925 | 743 | (3,581 | ) | 331 | ||||||||||
Inventories, net | — | — | 360 | 725 | (47 | ) | 1,038 | ||||||||||
Marketable securities | — | — | 24 | 16 | — | 40 | |||||||||||
Other assets | — | 36 | 11 | 38 | (42 | ) | 43 | ||||||||||
Total current assets | 56 | 1,224 | 2,458 | 2,820 | (3,793 | ) | 2,765 | ||||||||||
Investments in affiliates | 4,064 | 5,217 | 4,206 | 841 | (13,353 | ) | 975 | ||||||||||
Property, plant and equipment, net | — | — | 1,461 | 2,252 | — | 3,713 | |||||||||||
Operating lease right-of-use assets | — | — | 50 | 153 | — | 203 | |||||||||||
Deferred income taxes | — | — | — | 101 | (5 | ) | 96 | ||||||||||
Other assets | — | 1,661 | 195 | 445 | (1,963 | ) | 338 | ||||||||||
Goodwill | — | — | 399 | 675 | — | 1,074 | |||||||||||
Intangible assets, net | — | — | 125 | 187 | — | 312 | |||||||||||
Total assets | 4,120 | 8,102 | 8,894 | 7,474 | (19,114 | ) | 9,476 | ||||||||||
LIABILITIES AND EQUITY | |||||||||||||||||
Current Liabilities | |||||||||||||||||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 1,596 | 374 | 1,089 | 385 | (2,948 | ) | 496 | ||||||||||
Trade payables - third party and affiliates | 17 | — | 333 | 553 | (123 | ) | 780 | ||||||||||
Other liabilities | — | 49 | 188 | 397 | (173 | ) | 461 | ||||||||||
Income taxes payable | — | — | 439 | 80 | (502 | ) | 17 | ||||||||||
Total current liabilities | 1,613 | 423 | 2,049 | 1,415 | (3,746 | ) | 1,754 | ||||||||||
Noncurrent Liabilities | |||||||||||||||||
Long-term debt, net of unamortized deferred financing costs | — | 3,565 | 1,677 | 101 | (1,934 | ) | 3,409 | ||||||||||
Deferred income taxes | — | 3 | 101 | 158 | (5 | ) | 257 | ||||||||||
Uncertain tax positions | — | — | — | 169 | (4 | ) | 165 | ||||||||||
Benefit obligations | — | — | 257 | 332 | — | 589 | |||||||||||
Operating lease liabilities | — | — | 40 | 140 | 1 | 181 | |||||||||||
Other liabilities | — | 47 | 93 | 118 | (35 | ) | 223 | ||||||||||
Total noncurrent liabilities | — | 3,615 | 2,168 | 1,018 | (1,977 | ) | 4,824 | ||||||||||
Total Celanese Corporation stockholders' equity | 2,507 | 4,064 | 4,677 | 4,650 | (13,391 | ) | 2,507 | ||||||||||
Noncontrolling interests | — | — | — | 391 | — | 391 | |||||||||||
Total equity | 2,507 | 4,064 | 4,677 | 5,041 | (13,391 | ) | 2,898 | ||||||||||
Total liabilities and equity | 4,120 | 8,102 | 8,894 | 7,474 | (19,114 | ) | 9,476 | ||||||||||
134
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
As of December 31, 2018 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
ASSETS | |||||||||||||||||
Current Assets | |||||||||||||||||
Cash and cash equivalents | — | — | 30 | 409 | — | 439 | |||||||||||
Trade receivables - third party and affiliates | — | — | 96 | 1,040 | (119 | ) | 1,017 | ||||||||||
Non-trade receivables, net | 40 | 551 | 797 | 697 | (1,784 | ) | 301 | ||||||||||
Inventories, net | — | — | 329 | 765 | (48 | ) | 1,046 | ||||||||||
Marketable securities | — | — | 31 | — | — | 31 | |||||||||||
Other assets | — | 24 | 10 | 37 | (31 | ) | 40 | ||||||||||
Total current assets | 40 | 575 | 1,293 | 2,948 | (1,982 | ) | 2,874 | ||||||||||
Investments in affiliates | 3,503 | 4,820 | 4,678 | 855 | (12,877 | ) | 979 | ||||||||||
Property, plant and equipment, net | — | — | 1,289 | 2,430 | — | 3,719 | |||||||||||
Deferred income taxes | — | — | — | 86 | (2 | ) | 84 | ||||||||||
Other assets | — | 1,658 | 142 | 461 | (1,971 | ) | 290 | ||||||||||
Goodwill | — | — | 399 | 658 | — | 1,057 | |||||||||||
Intangible assets, net | — | — | 132 | 178 | — | 310 | |||||||||||
Total assets | 3,543 | 7,053 | 7,933 | 7,616 | (16,832 | ) | 9,313 | ||||||||||
LIABILITIES AND EQUITY | |||||||||||||||||
Current Liabilities | |||||||||||||||||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 544 | 333 | 465 | 258 | (1,039 | ) | 561 | ||||||||||
Trade payables - third party and affiliates | 13 | 1 | 342 | 583 | (120 | ) | 819 | ||||||||||
Other liabilities | 1 | 87 | 267 | 258 | (270 | ) | 343 | ||||||||||
Income taxes payable | — | — | 475 | 88 | (507 | ) | 56 | ||||||||||
Total current liabilities | 558 | 421 | 1,549 | 1,187 | (1,936 | ) | 1,779 | ||||||||||
Noncurrent Liabilities | |||||||||||||||||
Long-term debt, net of unamortized deferred financing costs | — | 3,104 | 1,679 | 127 | (1,940 | ) | 2,970 | ||||||||||
Deferred income taxes | — | 15 | 85 | 157 | (2 | ) | 255 | ||||||||||
Uncertain tax positions | — | — | 6 | 152 | — | 158 | |||||||||||
Benefit obligations | — | — | 250 | 314 | — | 564 | |||||||||||
Other liabilities | 1 | 10 | 99 | 138 | (40 | ) | 208 | ||||||||||
Total noncurrent liabilities | 1 | 3,129 | 2,119 | 888 | (1,982 | ) | 4,155 | ||||||||||
Total Celanese Corporation stockholders' equity | 2,984 | 3,503 | 4,265 | 5,146 | (12,914 | ) | 2,984 | ||||||||||
Noncontrolling interests | — | — | — | 395 | — | 395 | |||||||||||
Total equity | 2,984 | 3,503 | 4,265 | 5,541 | (12,914 | ) | 3,379 | ||||||||||
Total liabilities and equity | 3,543 | 7,053 | 7,933 | 7,616 | (16,832 | ) | 9,313 | ||||||||||
135
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2019 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net cash provided by (used in) operating activities | 1,297 | (42 | ) | 1,044 | 716 | (1,561 | ) | 1,454 | |||||||||
Investing Activities | |||||||||||||||||
Capital expenditures on property, plant and equipment | — | — | (246 | ) | (124 | ) | — | (370 | ) | ||||||||
Acquisitions, net of cash acquired | — | — | (31 | ) | (60 | ) | — | (91 | ) | ||||||||
Proceeds from sale of businesses and assets, net | — | — | 9 | — | (8 | ) | 1 | ||||||||||
Return of capital from subsidiary | — | — | 10 | — | (10 | ) | — | ||||||||||
Contributions to subsidiary | — | — | (222 | ) | (218 | ) | 440 | — | |||||||||
Intercompany loan receipts (disbursements) | — | — | (536 | ) | — | 536 | — | ||||||||||
Purchases of marketable securities | — | — | — | (16 | ) | — | (16 | ) | |||||||||
Other, net | — | — | — | (25 | ) | 8 | (17 | ) | |||||||||
Net cash provided by (used in) investing activities | — | — | (1,016 | ) | (443 | ) | 966 | (493 | ) | ||||||||
Financing Activities | |||||||||||||||||
Net change in short-term borrowings with maturities of 3 months or less | — | 160 | 17 | (4 | ) | 74 | 247 | ||||||||||
Proceeds from short-term borrowings | — | — | — | 727 | (610 | ) | 117 | ||||||||||
Repayments of short-term borrowings | — | — | — | (91 | ) | — | (91 | ) | |||||||||
Proceeds from long-term debt | — | 499 | — | — | — | 499 | |||||||||||
Repayments of long-term debt | — | (335 | ) | (1 | ) | (24 | ) | — | (360 | ) | |||||||
Purchases of treasury stock, including related fees | (996 | ) | — | — | — | — | (996 | ) | |||||||||
Dividends to parent | — | (272 | ) | (251 | ) | (1,038 | ) | 1,561 | — | ||||||||
Contributions from parent | — | — | 218 | 222 | (440 | ) | — | ||||||||||
Stock option exercises | (1 | ) | — | — | — | — | (1 | ) | |||||||||
Common stock dividends | (300 | ) | — | — | — | — | (300 | ) | |||||||||
Return of capital to parent | — | — | — | (10 | ) | 10 | — | ||||||||||
(Distributions to) contributions from noncontrolling interests | — | — | — | (10 | ) | — | (10 | ) | |||||||||
Other, net | — | (10 | ) | (25 | ) | (5 | ) | — | (40 | ) | |||||||
Net cash provided by (used in) financing activities | (1,297 | ) | 42 | (42 | ) | (233 | ) | 595 | (935 | ) | |||||||
Exchange rate effects on cash and cash equivalents | — | — | — | (2 | ) | — | (2 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | — | — | (14 | ) | 38 | — | 24 | ||||||||||
Cash and cash equivalents as of beginning of period | — | — | 30 | 409 | — | 439 | |||||||||||
Cash and cash equivalents as of end of period | — | — | 16 | 447 | — | 463 | |||||||||||
136
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2018 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net cash provided by (used in) operating activities | 1,085 | 560 | 259 | 833 | (1,179 | ) | 1,558 | ||||||||||
Investing Activities | |||||||||||||||||
Capital expenditures on property, plant and equipment | — | — | (225 | ) | (112 | ) | — | (337 | ) | ||||||||
Acquisitions, net of cash acquired | — | — | (144 | ) | — | — | (144 | ) | |||||||||
Proceeds from sale of businesses and assets, net | — | — | — | 13 | — | 13 | |||||||||||
Return of capital from subsidiary | — | — | 233 | — | (233 | ) | — | ||||||||||
Contributions to subsidiary | — | — | (25 | ) | — | 25 | — | ||||||||||
Intercompany loan receipts (disbursements) | — | (427 | ) | (66 | ) | (285 | ) | 778 | — | ||||||||
Other, net | — | — | (8 | ) | (31 | ) | — | (39 | ) | ||||||||
Net cash provided by (used in) investing activities | — | (427 | ) | (235 | ) | (415 | ) | 570 | (507 | ) | |||||||
Financing Activities | |||||||||||||||||
Net change in short-term borrowings with maturities of 3 months or less | — | 61 | 18 | (51 | ) | (66 | ) | (38 | ) | ||||||||
Proceeds from short-term borrowings | — | — | — | 51 | — | 51 | |||||||||||
Repayments of short-term borrowings | — | — | — | (78 | ) | — | (78 | ) | |||||||||
Proceeds from long-term debt | — | 846 | 427 | — | (712 | ) | 561 | ||||||||||
Repayments of long-term debt | — | (494 | ) | (26 | ) | (16 | ) | — | (536 | ) | |||||||
Purchases of treasury stock, including related fees | (805 | ) | — | — | — | — | (805 | ) | |||||||||
Dividends to parent | — | (541 | ) | (633 | ) | (5 | ) | 1,179 | — | ||||||||
Contributions from parent | — | — | — | 25 | (25 | ) | — | ||||||||||
Common stock dividends | (280 | ) | — | — | — | — | (280 | ) | |||||||||
Return of capital to parent | — | — | — | (233 | ) | 233 | — | ||||||||||
(Distributions to) contributions from noncontrolling interests | — | — | — | (23 | ) | — | (23 | ) | |||||||||
Other, net | — | (5 | ) | (10 | ) | (2 | ) | — | (17 | ) | |||||||
Net cash provided by (used in) financing activities | (1,085 | ) | (133 | ) | (224 | ) | (332 | ) | 609 | (1,165 | ) | ||||||
Exchange rate effects on cash and cash equivalents | — | — | — | (23 | ) | — | (23 | ) | |||||||||
Net increase (decrease) in cash and cash equivalents | — | — | (200 | ) | 63 | — | (137 | ) | |||||||||
Cash and cash equivalents as of beginning of period | — | — | 230 | 346 | — | 576 | |||||||||||
Cash and cash equivalents as of end of period | — | — | 30 | 409 | — | 439 | |||||||||||
137
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended December 31, 2017 | |||||||||||||||||
Parent Guarantor | Issuer | Subsidiary Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||
(In $ millions) | |||||||||||||||||
Net cash provided by (used in) operating activities | 740 | 868 | 425 | 593 | (1,823 | ) | 803 | ||||||||||
Investing Activities | |||||||||||||||||
Capital expenditures on property, plant and equipment | — | — | (176 | ) | (91 | ) | — | (267 | ) | ||||||||
Acquisitions, net of cash acquired | — | (11 | ) | (12 | ) | (274 | ) | 28 | (269 | ) | |||||||
Proceeds from sale of businesses and assets, net | — | — | 9 | 20 | (28 | ) | 1 | ||||||||||
Return of capital from subsidiary | — | 16 | 241 | — | (257 | ) | — | ||||||||||
Intercompany loan receipts (disbursements) | — | (530 | ) | (25 | ) | — | 555 | — | |||||||||
Other, net | — | — | (2 | ) | (12 | ) | — | (14 | ) | ||||||||
Net cash provided by (used in) investing activities | — | (525 | ) | 35 | (357 | ) | 298 | (549 | ) | ||||||||
Financing Activities | |||||||||||||||||
Net change in short-term borrowings with maturities of 3 months or less | — | 56 | 15 | 51 | (11 | ) | 111 | ||||||||||
Proceeds from short-term borrowings | — | — | — | 182 | — | 182 | |||||||||||
Repayments of short-term borrowings | — | — | — | (124 | ) | — | (124 | ) | |||||||||
Proceeds from long-term debt | — | 351 | 530 | 14 | (544 | ) | 351 | ||||||||||
Repayments of long-term debt | — | (6 | ) | (2 | ) | (69 | ) | — | (77 | ) | |||||||
Purchases of treasury stock, including related fees | (500 | ) | — | — | — | — | (500 | ) | |||||||||
Dividends to parent | — | (741 | ) | (802 | ) | (280 | ) | 1,823 | — | ||||||||
Stock option exercises | 1 | — | — | — | — | 1 | |||||||||||
Common stock dividends | (241 | ) | — | — | — | — | (241 | ) | |||||||||
Return of capital to parent | — | — | — | (257 | ) | 257 | — | ||||||||||
(Distributions to) contributions from noncontrolling interests | — | — | — | (27 | ) | — | (27 | ) | |||||||||
Other, net | — | (3 | ) | (22 | ) | (2 | ) | — | (27 | ) | |||||||
Net cash provided by (used in) financing activities | (740 | ) | (343 | ) | (281 | ) | (512 | ) | 1,525 | (351 | ) | ||||||
Exchange rate effects on cash and cash equivalents | — | — | — | 35 | — | 35 | |||||||||||
Net increase (decrease) in cash and cash equivalents | — | — | 179 | (241 | ) | — | (62 | ) | |||||||||
Cash and cash equivalents as of beginning of period | — | — | 51 | 587 | — | 638 | |||||||||||
Cash and cash equivalents as of end of period | — | — | 230 | 346 | — | 576 | |||||||||||
138
30. Subsequent Events
On January 30, 2020, the Company signed a definitive agreement to acquire Nouryon's redispersible polymer powders business offered under the Elotex® brand, subject to regulatory approval. As part of the acquisition, the Company will acquire all of Nouryon's global production facilities for redispersible polymer powders across Europe and Asia, all products under the Elotex® portfolio, as well as all customer agreements, technology and commercial facilities globally. The acquisition will be funded from cash on hand or from borrowings under the Company's senior unsecured revolving credit facility. The acquired operations will be included in the Acetyl Chain segment. The Company expects the acquisition to close in the second quarter of 2020 and does not expect the acquisition to be material to the Company's 2020 financial position or results of operations.
139