Celanese(CE) - 2022 Q4 - Annual Report

PART I Business Celanese is a global chemical and specialty materials company, expanded by the 2022 M&M acquisition, operating through two core segments Business Segment Overview Celanese operates through Engineered Materials and Acetyl Chain segments, with Acetate Tow integrated into Acetyl Chain effective December 31, 2022 - The company's operations are organized into two principal business segments: Engineered Materials and the Acetyl Chain[60] - Effective December 31, 2022, the company resegmented its operations, moving the former Acetate Tow segment into the Acetyl Chain segment to better align with its integrated operational strategy[86] Engineered Materials The Engineered Materials segment supplies high-performance polymers for diverse applications, significantly expanded by the $11.0 billion M&M acquisition on November 1, 2022 - On November 1, 2022, the company acquired a majority of DuPont's Mobility & Materials (M&M) business for a purchase price of $11.0 billion, adding a portfolio of engineering thermoplastics and elastomers[46] - The segment's key products include a wide range of polymers such as Nylon, Polyoxymethylene (POM), Polyesters (PBT, PET), Long-fiber reinforced thermoplastics (LFRT), and Thermoplastic elastomers (TPE)[92][49][68] - Principal customers are original equipment manufacturers (OEMs) and their suppliers in the automotive, medical, industrial, and consumer sectors[97] Acetyl Chain The Acetyl Chain segment produces acetyl intermediates and downstream products for diverse end-uses, accounting for 30% of consolidated net sales in 2022 - The segment's product portfolio includes acetic acid, vinyl acetate monomer (VAM), vinyl acetate ethylene (VAE) emulsions, ethylene vinyl acetate (EVA) resins, and acetate tow[99] - Sales from acetyl products accounted for 30%, 36%, and 27% of consolidated net sales for the years ended December 31, 2022, 2021, and 2020, respectively[130] - The company operates Fairway Methanol LLC, a 50% joint venture with Mitsui & Co., Ltd., for methanol production, a key raw material[79] Strategic Affiliates Strategic affiliates complement technology and market reach, generating $2.3 billion in sales, $181 million in equity earnings, and $187 million in dividends in 2022 - During 2022, the company's equity method strategic affiliates generated combined sales of $2.3 billion, contributing $181 million in equity earnings and $187 million in dividends[137] Key Strategic Affiliates | Affiliate Name | Location | Ownership % | Partner(s) | | :--- | :--- | :--- | :--- | | National Methanol Company | Saudi Arabia | 25% | SABIC (50%); Duke Energy (25%) | | Korea Engineering Plastics Co., Ltd. | South Korea | 50% | Mitsubishi Gas Chemical (40%); Mitsubishi Corp (10%) | | Fortron Industries, LLC | U.S. | 50% | Kureha America Inc. (50%) | | Fairway Methanol LLC | U.S. | 50% | Mitsui & Co., Ltd. (50%) | Human Capital and Sustainability Celanese focuses on sustainability, including energy efficiency and GHG reduction, employing 13,263 diverse global staff, and reporting a TRIR of 0.24 and LTIR of 0.04 in 2022 Global Workforce by Geography (as of Dec 31, 2022) | Region | Number of Employees | | :--- | :--- | | North America | 5,410 | | Europe | 4,750 | | Asia | 2,912 | | Rest of World | 191 | | Total | 13,263 | - As of December 31, 2022, women represented approximately 25% of the global workforce, and in the U.S., people of color represented approximately 30% of the overall workforce[151][4] - For the year ended December 31, 2022, the company reported a Total Recordable Incident Rate (TRIR) of 0.24 and a Lost Time Incident Rate (LTIR) of 0.04[179] Risk Factors The company faces diverse risks including global economic volatility, raw material prices, operational disruptions, M&M acquisition integration, and increased indebtedness Business and Industry Risks Celanese is exposed to risks from global economic, political, and regulatory conditions, and significant volatility in raw material and energy prices impacting product margins - The company is exposed to general economic, political, and regulatory conditions and risks in the countries in which it has operations and customers[8] - The business is subject to risks from increased volatility in the prices and availability of key raw materials (like ethylene, methanol, natural gas) and energy, which can adversely affect product margins[158][12] Operational and Strategic Risks Key operational risks include manufacturing disruptions, intellectual property protection, foreign currency fluctuations from non-U.S. operations, and cybersecurity threats - Production at manufacturing facilities could be disrupted for various reasons, including natural disasters, accidents, or supply interruptions, potentially preventing the company from satisfying customer demands[15][189] - The inability to protect intellectual property rights, including patents, trademarks, and trade secrets, could reduce the company's ability to maintain its competitive position and profit margins[167][20] - Significant non-U.S. operations expose the company to global exchange rate fluctuations, which could adversely impact profitability[197][171] - The company is subject to information or operational technology cybersecurity threats that could materially affect the business[31] M&M Acquisition Risks The M&M acquisition presents significant risks, including failure to realize anticipated benefits, underperformance of the acquired business, and substantial non-recurring integration costs - The company may fail to realize all of the anticipated benefits of the M&M Acquisition, as certain assumptions may prove to be inaccurate[32][174] - Through 2022, the M&M Business underperformed prior expectations, with financial performance from signing to closing being lower than anticipated[34] - The company has incurred and expects to continue to incur substantial non-recurring costs associated with completing the M&M Acquisition and combining operations[35] Regulatory, Legal, Environmental and Tax Risks The company faces risks from extensive international and domestic regulations, potential fines, increased costs from climate change legislation, product liability claims, and changes in tax laws - The company is subject to extensive international, national, state, and local laws and regulations, and failure to comply could result in fines and penalties[517] - The company faces financial, regulatory, physical, and transition risks associated with climate change, including potential legislation and international accords that could increase operating costs[562][563][567] - Changes in tax legislation or the resolution of tax examinations could materially impact financial results. The company is currently under audit by authorities in the U.S., the Netherlands, and Germany for tax years 2013-2015[573][581] Indebtedness Risks The company incurred $11.0 billion new debt for the M&M acquisition, increasing total indebtedness to $14.7 billion by 2022, raising financial risk and limiting flexibility - The company incurred approximately $11.0 billion of indebtedness to finance the M&M Acquisition, increasing total outstanding indebtedness to $14.7 billion at December 31, 2022[593] - The higher level of indebtedness increases vulnerability to adverse economic conditions, requires a substantial portion of cash flow for debt service, and reduces flexibility to respond to changing business conditions[595] - Restrictive covenants in debt agreements limit the company's ability to incur additional debt, incur liens, and merge or sell assets, and require maintenance of certain financial ratios[629] PART II Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales grew 13% to $9.7 billion, but operating profit fell 29% to $1.4 billion due to higher costs and M&M acquisition impact, increasing total debt to $14.7 billion Results of Operations For 2022, consolidated net sales increased 13% to $9.7 billion, driven by Engineered Materials, but operating profit decreased 29% to $1.4 billion due to higher costs and acquisition expenses Consolidated Results Summary (2022 vs. 2021) | Metric | 2022 ($M) | 2021 ($M) | Change ($M) | | :--- | :--- | :--- | :--- | | Net sales | 9,673 | 8,537 | 1,136 | | Gross profit | 2,380 | 2,682 | (302) | | Operating profit | 1,378 | 1,946 | (568) | | Net earnings | 1,902 | 1,896 | 6 | - Net sales increased primarily due to higher pricing in both segments and higher volume in Engineered Materials from acquisitions, partially offset by lower volume in Acetyl Chain and unfavorable currency impacts[731] - Operating profit decreased mainly due to higher raw material and energy costs, and increased spending related to the M&M and Santoprene acquisitions[732] Business Segment Performance In 2022, Engineered Materials net sales grew 48% to $4.0 billion, while Acetyl Chain net sales decreased 3% to $5.7 billion, both impacted by cost increases Engineered Materials Performance (2022 vs. 2021) | Metric | 2022 ($M) | 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Net sales | 4,024 | 2,718 | 48.1% | | Operating profit | 429 | 411 | 4.4% | Acetyl Chain Performance (2022 vs. 2021) | Metric | 2022 ($M) | 2021 ($M) | % Change | | :--- | :--- | :--- | :--- | | Net sales | 5,743 | 5,894 | (2.6)% | | Operating profit | 1,447 | 1,875 | (22.8)% | Liquidity and Capital Resources Liquidity significantly changed in 2022 due to M&M acquisition financing, with cash increasing by $972 million to $1.5 billion, and total debt rising to $14.7 billion Cash Flow Summary (2022 vs. 2021) | Cash Flow Activity | 2022 ($M) | 2021 ($M) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 1,819 | 1,757 | | Net Cash from Investing Activities | (11,141) | (1,119) | | Net Cash from Financing Activities | 10,290 | (1,042) | | Net Increase in Cash | 972 | (419) | - The company issued a total of $7.5 billion in USD-denominated senior notes and €1.5 billion in Euro-denominated senior notes in July 2022 to fund the M&M acquisition[241][233] - As of December 31, 2022, the company had $1.45 billion available for borrowing under its senior unsecured revolving credit facility[501] Critical Accounting Policies and Estimates Management highlights critical accounting policies including purchase accounting for acquisitions, goodwill impairment assessment, and determination of pension and income tax obligations - Purchase accounting for acquisitions requires estimating the fair values of identifiable tangible and intangible assets (like customer relationships and trade names) and liabilities assumed, with the excess purchase price recorded as goodwill[317] - The recoverability of goodwill and other indefinite-lived intangible assets is assessed annually, using discounted cash flow models that rely on key assumptions such as discount rates, growth rates, and cash flow projections[318][320] - Benefit obligations for pension plans are calculated using key actuarial assumptions, including the discount rate and the expected long-term rate of return on plan assets, which are subject to change based on market conditions[324] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2022, including Statements of Operations, Balance Sheets, and Cash Flows, reflecting the M&M acquisition's significant impact Consolidated Statements of Operations For 2022, Celanese reported net sales of $9.7 billion, gross profit of $2.4 billion, operating profit of $1.4 billion, and net earnings of $1.9 billion Key Financial Results (Year Ended Dec 31, 2022) | Metric | Amount ($ millions) | | :--- | :--- | | Net sales | 9,673 | | Gross profit | 2,380 | | Operating profit | 1,378 | | Net earnings attributable to Celanese | 1,894 | | Diluted earnings per share | $17.34 | Consolidated Balance Sheets As of December 31, 2022, total assets increased to $26.3 billion from $12.0 billion in 2021 due to the M&M acquisition, with total liabilities rising to $20.2 billion Key Balance Sheet Items (as of Dec 31) | Metric | 2022 ($ millions) | 2021 ($ millions) | | :--- | :--- | :--- | | Total Assets | 26,272 | 11,975 | | Goodwill | 7,142 | 1,412 | | Total Liabilities | 20,167 | 7,438 | | Long-Term Debt | 13,373 | 3,176 | | Total Equity | 6,105 | 4,537 | Consolidated Statements of Cash Flows For 2022, cash from operations was $1.8 billion, investing activities used $11.1 billion (mainly acquisitions), and financing provided $10.3 billion, resulting in a $972 million cash increase Cash Flow Summary (Year Ended Dec 31, 2022) | Metric | Amount ($ millions) | | :--- | :--- | | Net cash from operating activities | 1,819 | | Net cash used in investing activities | (11,141) | | Net cash provided by financing activities | 10,290 | | Net increase in cash | 972 | Notes to Consolidated Financial Statements The notes provide detailed information on the M&M acquisition (Note 4), debt (Note 11), pension obligations (Note 12), income taxes (Note 15), and segment information (Note 21) Note 4 - Acquisitions, Dispositions and Plant Closures This note details the $11.0 billion M&M acquisition on November 1, 2022, including its preliminary purchase price allocation, and the KEPCO joint venture restructuring - On November 1, 2022, the company acquired a majority of DuPont's M&M business for a purchase price of $11.0 billion[754] Preliminary M&M Purchase Price Allocation | Asset/Liability | Amount ($ millions) | | :--- | :--- | | Goodwill | 5,788 | | Customer-related intangible assets | 1,500 | | Trade names | 1,400 | | Developed technology | 550 | | Property, plant and equipment, net | 1,281 | | Net assets acquired | 11,049 | - The company completed the restructuring of its KEPCO joint venture on April 1, 2022, resulting in an increase to its investment in KEPCO of $134 million[387] Note 11 - Debt Total debt increased to $14.7 billion by 2022 from $4.0 billion in 2021 to finance the M&M acquisition, including $7.5 billion USD and €1.5 billion Euro notes Total Debt Summary | Debt Category | Dec 31, 2022 ($M) | Dec 31, 2021 ($M) | | :--- | :--- | :--- | | Short-Term Borrowings & Current Installments | 1,306 | 791 | | Long-Term Debt, net | 13,373 | 3,176 | | Total Debt | 14,679 | 3,967 | - In July 2022, the company issued $7.5 billion in USD notes and €1.5 billion in Euro notes with various maturities to fund the M&M acquisition[260] - The company has a $1.75 billion senior unsecured revolving credit facility maturing in 2027, with $300 million outstanding as of December 31, 2022[254][257] Note 12 - Benefit Obligations As of December 31, 2022, pension plans had a $233 million deficit, an improvement from 2021, with $27 million expected contributions in 2023 Pension Plan Funded Status (as of Dec 31) | Metric | 2022 ($ millions) | 2021 ($ millions) | | :--- | :--- | :--- | | Projected Benefit Obligation | (2,858) | (3,488) | | Fair Value of Plan Assets | 2,625 | 3,183 | | Funded Status | (233) | (305) | - The company expects to make cash contributions of $27 million to its defined benefit pension plans in 2023[382]