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, 20042005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
001-32410
(Commission File Number)
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.) | |||||
1601 West LBJ Freeway, Dallas, TX | 75234-6034 | |||||
(Address of Principal Executive Offices) | (Zip Code) | |||||
(972) 443-4000
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
Title of each class | Name of each exchange on which Registered | |||||
Series A Common Stock, par value $0.0001 per share | New York Stock Exchange | |||||
4.25% Convertible Perpetual Preferred Stock, par value $0.01 per share (liquidation preference $25.00 per share) | New York Stock Exchange | |||||
Securities registered pursuant to Section 12(g) of the Act
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated filer Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Act).
Yes No
The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates as of June 30, 20042005 (the last business day of the registrants'registrants’ most recently completed second fiscal quarter) is not applicable.was $926,908,697.
The number of outstanding shares of the registrant'sregistrant’s Series A Common Stock, $ 0.0001$0.0001 par value, as of March 23, 2005February 28, 2006 was 59,113,317, and the number of outstanding shares of the registrant's Series B Common Stock, value $0.00001 par value (which was privately held) as of March 23, 2005 was 99,377,884.158,562,161.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrants'registrants’ Definitive Proxy Statement for 20052006 are incorporated by reference into PartParts II and III.
CELANESE CORPORATION
Form 10-K
For the Fiscal Year Ended December 31, 20042005
TABLE OF CONTENTS
Page | ||||||||||||||||
Basis of Presentation | 2 | |||||||||||||||
Market Industry and Data Forecasts | 3 | |||||||||||||||
Special Note Regarding Forward-Looking Statements | 4 | |||||||||||||||
Part I | Item 1. | Business | 5 | |||||||||||||
Item 1A. | Risk Factors | 27 | ||||||||||||||
Item 1B. | Unresolved Staff Comments | 43 | ||||||||||||||
Item 2. | Properties | 44 | ||||||||||||||
Item 3. | Legal Proceedings | 47 | ||||||||||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 52 | ||||||||||||||
Part II | Item 5. | Market for the Stockholder Matters and Issuer Purchases of Equity Securities | 52 | |||||||||||||
Item 6. | Selected Financial Data | 54 | ||||||||||||||
Item 7. | and Results of Operations | 57 | ||||||||||||||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 110 | ||||||||||||||
Item 8. | Financial Statements and Supplementary Data | 113 | ||||||||||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 116 | ||||||||||||||
Item 9A. | Controls and Procedures | 116 | ||||||||||||||
Item 9B. | Other Information | 118 | ||||||||||||||
Part III | Item 10. | Directors and Executive Officers of the Registrant | 119 | |||||||||||||
Item 11. | Executive Compensation | 119 | ||||||||||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 119 | ||||||||||||||
Item 13. | Certain Relationships and Related Transactions | 119 | ||||||||||||||
Item 14 | Principal Accounting Fees and Services | 119 | ||||||||||||||
Part IV | Item 15. | Exhibits and Financial | 120 | |||||||||||||
Signatures | 121 | |||||||||||||||
Basis of Presentation
In this Annual Report on Form 10-K, the term "Celanese"‘‘Celanese’’ refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The terms the "Company," "we," "our"‘‘Company,’’ ‘‘we,’’ ‘‘our’’ and "us"‘‘us’’ refer to Celanese and its subsidiaries on a consolidated basis. The term "BCP Crystal"‘‘BCP Crystal’’ refers to our subsidiary, BCP Crystal US Holdings Corp., a Delaware corporation, and not its subsidiaries. The term "Purchaser"‘‘Purchaser’’ refers to our subsidiary, Celanese Europe Holding GmbH & Co. KG, formerly known as BCP Crystal Acquisition GmbH & Co. KG, a German limited partnership (Kommanditgesellschaft, KG), and not its subsidiaries, except where otherwise indicated. The term "Original Shareholders"‘‘Original Shareholders’’ refers, collectively, to Blackstone Capital Partners (Cayman) Ltd. 1, Blackstone Capital Partners (Cayman) Ltd. 2, Blackstone Capital Partners (Cayman) Ltd. 3 and BA Capital Investors Sidecar Fund, L.P. The terms "Sponsor"‘‘Sponsor’’ and "Advisor"‘‘Advisor’’ refer to certain affiliates of The Blackstone Group.
Celanese is a recently-formed company which does not have any independent external operations other than through the indirect ownership of Celanese AG and Celanese Americas Corporation, their consolidated subsidiaries, their non-consolidated subsidiaries, ventures and other investments. For accounting purposes, Celanese and its consolidated subsidiaries are referred to as the "Successor." See Note 4 to the Consolidated Financial Statements (as defined below) for additional information on the basis of presentation and accounting policies of the ‘‘Successor.
In October 2004, Celanese and certain of its subsidiaries completed an organizational restructuring (the "Restructuring") pursuant to which the Purchaser effected, by giving a corresponding instruction under the Domination Agreement (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations – Basis of Presentation – Impact of the Acquisition of Celanese AG"), the transfer of all of the shares of Celanese Americas Corporation ("CAC") from Celanese Holding GmbH, a wholly owned subsidiary of CAG, to BCP Caylux Holdings Luxembourg S.C.A. ("BCP Caylux") owning 100% of the equity of CAC and indirectly, all of its assets, including subsidiary stock. Thereafter, BCP Caylux transferred certain assets, including its equity ownership interest in CAC to BCP Crystal.’’
Celanese AG is incorporated as a stock corporation (Aktiengesellschaft, AG) organized under the laws of the Federal Republic of Germany. As used in this document, the term "CAG"‘‘CAG’’ refers to (i) prior to the Restructuring, Celanese AG and Celanese Americas Corporation, their consolidated subsidiaries, their non-consolidated subsidiaries, ventures and other investments, and (ii) following the Restructuring, Celanese AG, its consolidated subsidiaries, its non-consolidated subsidiaries, ventures and other investments, except that with respect to shareholder and similar matters where the context indicates, "CAG"‘‘CAG’’ refers to Celanese AG. For accounting purposes, "Predecessor"‘‘Predecessor’’ refers to CAG and its subsidiaries.
In October 2004, Celanese and certain of its subsidiaries completed an organizational restructuring (the ‘‘Restructuring’’) pursuant to which the Purchaser effected, by giving a corresponding instruction under the Domination Agreement (as defined in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation—Impact of the Acquisition of Celanese AG’’), the transfer of all of the shares of Celanese Americas Corporation (‘‘CAC’’) from Celanese Holding GmbH, a wholly owned subsidiary of CAG, to Celanese Caylux Holdings Luxembourg, formerly BCP Caylux Holdings Luxembourg S.C.A. (‘‘Celanese Caylux’’), which resulted in Celanese Caylux owning 100% of the equity of CAC and indirectly, all of its assets, including subsidiary stock. Thereafter, Celanese Caylux transferred certain assets, including its equity ownership interest in CAC to BCP Crystal.
As of the date of this Annual Report, we haveCelanese has two classes of common stock, Series A common stock and Series B common stock, and convertible perpetual preferred stock. In January 2005, Celanese completed an initial public offering of 50,000,000 shares of Series A common stock. The Series A common stock is currently held by public shareholders, the Original Shareholders and certain directors, officers and employees of the Company. AllNone of the Series B common stock is held by the Original Shareholders. Except for (i) a special Series B common stock dividend which we paid to the holders of outstanding shares of Series B common stock on March 9, 2005issued and a special cash dividend to be paid to the holders of outstanding shares of Series B common stock on April 7, 2005, in each case as described under "Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividend Policy", (ii) the convertibility of Series B common stock into Series A common stock and (iii) the right of the Series B common stock to consent to any changes to our governing documents that would adversely affect the Series B common stock, shares of Series A common stock and shares of Series B common stock are identical, including with respect to voting rights. The Series B common stock will automatically convert into Series A common stock upon payment of the special Series B common stock cash dividend and may also be converted into Series A common stock at any time at the option of the holder.outstanding. As used in this Annual Report, the term "common stock"‘‘common stock’’ means collectively, the Series A common stock, and the Series B common stock, and the term "preferred stock"‘‘preferred stock’’ means the convertible perpetual preferred stock, in each case unless otherwise specified.
Concurrently with the initial public offering of its Series A common stock, Celanese offered 9,600,000 shares of its preferred stock. Holders of the preferred stock are entitled to receive, when, as and if, declared by the Celanese board of directors, out of funds legally available therefore, cash dividends at the rate of 4.25% per annum of liquidation preference, payable quarterly in arrears, commencing on May 1, 2005. Dividends on the preferred stock are cumulative from the date of initial issuance. The preferred stock is convertible, at the option of the holder, at any time, into shares of our Series A common stock at a conversion rate of 1.25 shares of Series A common stock for each share of preferred stock, subject to adjustments.
Pursuant to a voluntary tender offer commenced in February 2004, (the "Tender Offer"), the Purchaser, an indirect wholly-owned subsidiary of Celanese,the Company, in April 2004 acquired approximately 84% of the ordinary shares of Celanese AG (the ‘‘CAG (the "CAG Shares"Shares’’) outstanding. All references in this document to the outstanding ordinary shares of CAG (as defined below) exclude treasury shares. As of December 31, 2004, Celanese's indirect ownership of approximately 84% of the outstanding CAG Shares would equate to approximately 84% of the issued CAG Shares (excluding treasury shares).shares, unless expressly stated otherwise. Pursuant to a mandatory offer commenced in September 2004 and continuing as of the date of this document, the Purchaser acquired additional CAG Shares.shares. In August 2005, the Purchaser acquired approximately 5.9 million, or approximately 12%, of the outstanding CAG Shares from two shareholders. As a result of these acquisitions, partially offset by the issuance of additional CAG shares of CAG as a result of the exercise of options issued under the CAG stock option plan, as of March 23, 2005,the date of this document, we own approximately 85%98% of the outstanding CAG Shares.shares. The mandatory offer will remain open until two months following final resolution of the minority shareholder award proceedings pending in German courts.
Following the transfer of CAC to BCP Crystal, (1) BCP Crystal Holdings Ltd. 2 contributed substantially all of its assets and liabilities (including all outstanding capital stock of BCPCelanese Caylux) to BCP Crystal and (2) BCP Crystal assumed certain obligations of BCPCelanese Caylux, including all rights and obligations of BCPCelanese Caylux under the senior credit facilities, the floating rate term loan and the notes.
BCP Crystal Holdings Ltd. 2 reorganized as a Delaware limited liability company and changed its name to Celanese Holdings LLC. Blackstone Crystal Holdings Capital Partners (Cayman) IV Ltd. reorganized as a Delaware corporation and changed its name to Celanese Corporation. BCP Crystal, at its discretion, may subsequently cause the liquidation of BCPCelanese Caylux.
As a result of these transactions, BCP Crystal holds 100% of CAC'sCAC’s equity and, indirectly, all equity owned by CAC in its subsidiaries. In addition, BCP Crystal holds, indirectly, all of the outstanding common stock of CAG held by the Purchaser and all of the wholly owned subsidiaries of Celanese that guarantee BCP Caylux'sCelanese Caylux’s obligations under the senior credit facilities and guarantee the senior subordinated notes issued on June 8, 2004 and July 1, 2004 on an unsecured senior subordinated basis. See Notes 1 and 16 to the Consolidated Financial Statements (as defined below).
The term "Concurrent Financings"‘‘Concurrent Financings’’ refers, collectively, to the offering of our Series A common stock, the offering of our preferred stock, the entering into of our amended and restated senior credit facilities and the use of proceeds therefrom in each case. See "Market‘‘Market for the Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and IssuerCompany Purchases of Equity Securities—Use of Proceeds."’’ The term "Transactions"‘‘Transactions’’ refers, collectively, to the Tender Offer, the borrowing of the original $608 million term loan and the $1,565 million senior subordinated bridge loan facilities on April 6, 2004, the June and July 2004 repayment of the senior subordinated bridge loan facilities and the borrowing of the $350 million floating rate term loan and the $1,225 million and €200 million of senior subordinated notes (such June and July 2004 repayment and borrowings, the "Refinancing"‘‘Refinancing’’) and the issuance in September 2004 of $853 million aggregate principal amount at maturity (with $513 million in gross proceeds) of senior discount notes. See "Management's‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity"Operations—Liquidity’’.
The consolidated financial statements of the Successor for the year ended December 31, 2005 and for the nine months ended December 31, 2004, and the consolidated financial statements of the Predecessor for the three months ended March 31, 2004 and for each of the yearsyear ended December 31, 2003 and 2002 contained in this documentannual report (collectively, the "Consolidated‘‘Consolidated Financial Statements"Statements’’) were prepared in accordance with accounting principles generally accepted in the United States ("(‘‘U.S. GAAP"GAAP’’) for all periods presented. The Consolidated Financial Statements reflect, for the periods indicated, the financial condition, results of operations and cash flows of the businesses transferred to CAG from Hoechst Aktiengesellschaft, also referred to as "Hoechst" in this document, in a demerger that became effective on October 22, 1999,
adjusted for acquisitions and divestitures. The Consolidated Financial Statements and other financial information included in this document, unless otherwise specified, have been presented to separately show the effects of discontinued operations.
CAG is a foreign private issuer and previously filed its consolidated financial statements as of December 31, 2003 and 2002 in its Annual Report on Form 20-F. CAG changed its fiscal year to end on September 30, 2005 and also filed its consolidated financial statements as of September 30, 2004 and for the nine months then ended in its 2004 Annual Report on Form 20-F. In accordance with German law, the reporting currency of the CAG consolidated financial statements is the euro. As a result of the Purchaser'sPurchaser’s acquisition of voting control of CAG, the financial statements of CAG contained in this document are reported in U.S. dollars to be consistent with our reporting requirements. For CAG'sCAG’s reporting requirements, the euro continues to be the reporting currency.
In the preparation of other information included in this document, euro amounts have been translated into U.S. dollars at the applicable historical rate in effect on the date of the relevant event/period. For purposes of prospective information, euro amounts have been translated into U.S. dollars using the rate in effect on December 31, 2004. Our inclusion of this information is not meant to suggest that the euro amounts actually represent such dollar amounts or that such amounts could have been converted into U.S. dollars at any particular rate, if at all.
Market Industry and Data Forecasts
This document includes industry data and forecasts that Celanese has prepared based, in part, upon industry data and forecasts obtained from industry publications and surveys and internal company surveys. Third-party industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In this document, the terms "SRI‘‘SRI Handbook," "CMAI’’ ‘‘CMAI Methanol Analysis," "Nexant’’ ‘‘Nexant Chem Study 2003," "Nexant’’ ‘‘Nexant Chem Study 2002"2002’’ and "Tecnon‘‘Tecnon Orbichem Survey"Survey’’ refer to the SRI International Chemical Economics Handbook, CMAI 2002-20032004 World Methanol Analysis, Nexant Chem Systems September 2003 PERP Acetic Acid Study, Nexant Chem Systems February 2002 Vinyl Acetate Study and Tecnon Orbichem Acetic Acid and Vinyl Acetate World Survey September 2003fourth quarter 2005 report, respectively. The statements regarding Celanese'sCelanese’s market position in this document are based on information derived from the SRI Handbook, CMAI Methanol Analysis, Tecnon Orbichem Survey, Nexant Chem Study 2002 and Nexant Chem Study 2003.
AO Plus™, BuyTiconaDirect™, CelActiv®, Celanex®, Celcon®, Celstran®, Celvolit®, Compel®, GUR®, Hoecat®, Hostaform®, Impet®, Impet-HI®, Mowilith®, Nutrinova® DHA, Riteflex®, Sunett®, Topas®, Vandar®, VAntage™, Vectra®, Vectran®, Vinamul®, Elite®, Duroset® and certain other products and services named in this document are registered trademarks and service marks of CAG. Acetex® is a registered trademark of Acetex Corporation, a subsidiary of the Company. Fortron® is a registered trademark of Fortron Industries, a joint venture of Celanese.
Special Note Regarding Forward-Looking Statements
Investors are cautioned that the forward-looking statements contained in this Annual Report involve both risk and uncertainty. Many important factors could cause actual results to differ materially from those anticipated by these statements. Many of these factors are macroeconomic in nature and are, therefore, beyond our control. See "Management's‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements May Prove Inaccurate."’’
Item 1. Business
Celanese Corporation
We are an integrated global producer of value-added industrial chemicals and have #1the first or #2second market positions worldwide in products comprising the majority of our sales. We are also the world'sworld’s largest producer of acetyl products, including acetic acid and vinyl acetate monomer (VAM) and("VAM"), polyacetal products (POM) and("POM"), as well as a leading global producer of high-performance engineered polymers used in consumer and industrial products and designed to meet highly technical customer requirements. Our operations are located in North America, Europe and Asia. In addition, we have substantial ventures primarily in Asia. We believe we are one of the lowest-cost producers of key building block chemicals in the acetyls chain, such as acetic acid and VAM, due to our economies of scale, operating efficiencies and proprietary production technologies.
We have a large and diverse global customer base consisting principally of major companies in a broad array of industries. For the three monthsyear ended MarchDecember 31, 20042005, approximately 46%36% of our net sales by the Predecessor was to customers located in North America, approximately 42% to customers in Europe and approximately 12% to customers in Asia, Australia and the rest of the world. For the nine months ended December 31, 2004, approximately 47% of our net sales by the Successor waswere to customers located in North America, approximately 40% to customers in Europe and Africa and approximately 13%24% to customers in Asia, Australia, and the rest of the world.
Segment Overview
We operate principally through four business segments: Chemical Products, Technical Polymers Ticona, Acetate Products and Performance Products. The table below illustrates each segment'ssegment’s net sales to external customers for the three months ended March 31, 2004, by the Predecessor and for the nine monthsyear ended December 31, 2004, by the Successor,2005, as well as each segment'ssegment’s major products and end use markets.
Chemical Products | Technical Polymers Ticona | Acetate Products(2) | Performance Products | |||||||||||||||
$ | $ | $ | $ | |||||||||||||||
Major Products | •Acetic acid •Vinyl acetate monomer (VAM) •Polyvinyl alcohol (PVOH) •Emulsions •Acetic anhydride •Acetate esters •Carboxylic acids •Methanol | • •UHMW-PE (GUR) •Liquid crystal polymers (Vectra) •Polyphenylene sulfide | •Acetate tow | •Sunett sweetener •Sorbates | ||||||||||||||
Major End-Use Markets | •Paints •Coatings •Adhesives •Lubricants •Detergents | •Fuel system components •Conveyor belts •Electronics •Seat belt mechanisms | •Filter products | •Beverages •Confections •Baked goods •Dairy products | ||||||||||||||
(1) |
(2) | In |
Chemical Products
Our Chemical Products segment produces and supplies acetyl products, including acetic acid, acetate esters, vinyl acetate monomer,VAM, polyvinyl alcohol and emulsions. We are a leading global producer of acetic acid, the world'sworld’s largest producer of vinyl acetate monomerVAM and the largest North American producer of methanol, the major raw material used for the production of acetic acid. We are also the largest polyvinyl alcohol producer in North America. These products are generally used as building blocks for value-added products or in intermediate chemicals used in the paints, coatings, inks, adhesives, films, textiles and building products industries. Other chemicals produced in this segment are organic solvents and intermediates for pharmaceutical, agricultural and chemical products. For the three monthsyear ended MarchDecember 31, 2004,2005, net sales by the Predecessor to external customers of acetyls were $371$1,966 million, acetyl derivatives and polyols were $205$1,003 million and all other business lines combined totaled $213were $1,231 million. For the nine months ended December 31, 2004, net sales by the Successor to external customers of acetyls were $1,187 million, acetyl derivatives and polyols were $691 million and all other business lines combined totaled $613 million.
Technical Polymers Ticona
Our Technical Polymers Ticona segment (‘‘Ticona’’) develops, produces and supplies a broad portfolio of high performance technical polymers for application in automotive and electronics products and in other consumer and industrial applications, often replacing metal or glass. Together with our 45%-owned venture Polyplastics Co., Ltd. ("Polyplastics"), our 50%-owned venture Korea Engineering Plastics Company Ltd., or KEPCO, and Fortron Industries, our 50-50 venture with Kureha Chemicals Industry of Japan, we are a leading participant in the global technical polymers business. The primary products within theof Ticona segment are polyacetal products or POM, and GUR, an ultra-high molecular weight polyethylene. POM is used in a broad range of products including automotive components, electronics and appliances. GUR is used in battery separators, conveyor belts, filtration equipment, coatings and medical devices. For the three monthsyear ended MarchDecember 31, 2004,2005, sales by the Predecessor to external customers in the Technical Polymers Ticonathis segment totaled $227 million. For the nine months ended December 31, 2004, sales by the Successor to external customers in the Technical Polymers Ticona segment totaled $636were $887 million.
Acetate Products
Our Acetate Products segment primarily produces and supplies acetate tow, which is used in the production of filter products and acetate filament, which is used in the apparel and home furnishing industries. Our acetate products are sold into a diverse set of end market applications, including filter products, fashion apparel, linings and home furnishings.products. We are one of the world'sworld’s leading producers of acetate tow, and acetate filament, including production by our ventures in China. In October 2004, we announced plans to consolidate our acetate flake and tow manufacturing by early 2007 and to exit the acetate filament business, by mid-2005.which ceased production in April 2005. This restructuring is being implemented to increase efficiency, reduce over-capacities in certain manufacturing areas and to focus on products and markets that provide long-term value. For the three monthsyear ended MarchDecember 31, 2004,2005, sales by the Predecessor to external customers for the Acetate Products segmentsin this segment were $172 million. For the nine months ended December 31, 2004, sales by the Successor to external customers for the Acetate Products segments were $523$659 million.
Performance Products
The Performance Products segment operates under the trade name of Nutrinova and produces and sells Sunett high intensity sweetener and food protection ingredients, such as sorbates, for the food, beverage and pharmaceuticals industries. For the three monthsyear ended MarchDecember 31, 2004,2005, sales by the Predecessor to external customers of Performance Productsin this segment were $44$180 million. For the nine months ended December 31, 2004, sales by the Successor to external customers of Performance Products were $131 million.
Competitive Strengths
We have benefitedbenefit from a number of competitive strengths, including the following:
Leading Market Positions
We have #1the first or #2second market positions globally in products that make up a majority of our sales, according to the SRI Handbook and the Tecnon Orbichem Survey.sales. We are a leading global producer of acetic acid and the world'sworld’s largest producer of vinyl acetate monomer.VAM. Ticona and our ventures, Polyplastics and KEPCO, are leading suppliers of polyacetal productsPOM and other engineering resins in North America, Europe and the Asia/Pacific region. Our leadership positions are based on our large share of global production capacity, operating efficiencies, proprietary technology and competitive cost structures in our major products.
Proprietary Production Technology and Operating Expertise
Our production of acetyl products employs industry leading proprietary and licensed technologies, including our proprietary AO Plus acid-optimization technology for the production of acetic acid and VAntage vinyl acetate monomer technology. AO Plus enables plant capacity to be increased with minimal investment, while VAntage enables significant increases in production efficiencies, lower operating costs and increases in capacity at ten to fifteen percent of the cost of building a new plant.
Low Cost Producer
Our competitive cost structures are based on economies of scale, vertical integration, technical know-how and the use of advanced technologies.
Global Reach
We operate 29thirty-one production facilities (excluding our ventures) throughout the world, with major operationsworld. The ventures in North America, Europe and Asia. Ventures owned by us and our partnerswhich we participate operate ten additional facilities. We have a strong and growing presence in Asia (particularly in China). Our infrastructure of manufacturing plants, terminals, and sales offices provides us with a competitive advantage in anticipating and meeting the needs of our global and local customers in well-established and growing markets, while our geographic diversity reduces the potential impact of volatility in any individual country or region. We have a strong and growing presence in Asia (particularly in China) where ventures owned by us and our partners operate three additional facilities.
International Strategic Investments
Our strategic investments, including our ventures, have enabled us to gain access, minimize costs and accelerate growth in new markets, while also generating significant cash flow and earnings. Our equity investments and cost investments represent an important component of our growth strategy. During the nine monthsyear ended December 31, 2004,2005, we received $55$66 million and $89 million in dividends from our strategic investments. Duringequity and cost investments, respectively. Also, for the three monthsyear ended MarchDecember 31, 2004,2005, we received $22recorded $61 million in dividends and other distributionsof earnings from our strategicequity investments in equity in net earnings from affiliates. See Note 10 to the Consolidated Financial Statements and "Investments" commencing on page 18 of this Item 1 for additional information on our equity and cost investments.
Diversified Products and End-Use Markets
We offer our customers a broad range of products in a wide variety of end-use markets. For example, the Technical Polymers Ticona business offers customers a broad range of high-quality engineering plastics to meet the needs of customers in numerous end-use markets, such as automotive, electrical/electronics, appliance and medical. The Chemical Products segment has leading market positions in an integrated chain of basic and performance-based acetyl products, sold into diverse industrial applications. This product diversity and market exposure help us to reduce the potential impact of volatility in any individual market segment.
Business Strategies
We are focused on increasing operating cash flows, profitability, return on investment and shareholder value, which we believe can be achieved through the following business strategies:
Maintain Cost Advantage and Productivity Leadership
We continually seek to reduce our production and raw material costs. We announced inIn July 2003 that2005 we intend to purchasecommenced purchasing most of our North American internal methanol requirements from Southern
Chemical Corporation beginning in July 2005 under a multi-year agreement at a lower cost than our present cost for methanol.we could manufacture ourselves. Our advanced process control (APC)("APC") projects generate savings in energy and raw materials while increasing yields in production units. Most significantly, we intend to intensify the implementation of Six Sigma which has becomeis a pervasive and important tool in both operations and administration for achieving greater productivity and growth. We are also engaged in several projectscontinue to focus on opportunities and process technology improvements focused on energy reduction. For example, by implementing modifications and improvements in the distillation systems at our Calvert City, Kentucky polyvinyl alcohol plant, we were able to achieve a 17% reduction in steam usage. Using less energy-intense technology to more efficiently reduce acetic acid impurities at our Clear Lake Plant has also enabled reductions in steam and electricity usage. We intend towill continue using best practices to reduce costs and increase equipment reliability in maintenance and project engineering.
Focused Business Investment
We intend to continue investing strategically in growth areas, including new production capacity, to extend our global market leadership position. Historically, our strong market position has enabled us to initiate capacity growth to take advantage of projected demand growth. For example, we are building a 600,000 metric ton per year world-scale acetic acid plant in China, the world'sworld’s fastest growing market for acetic acid and its derivatives. We also increased the capacity of our GUR ultra-high molecular weight polyethyleneThe plant in Germany by 1/3 to 10,000 tons per yearis scheduled for commercial sales in the third calendarfirst quarter of 2004, and in 2004, we also increased our North American polyacetal2007. Our plans include adding the right capacity at our Bishop facility by 20% to 102,000 tons. We expect to continue to benefit from our investments and capacity expansion that enable us to meet increasesthe right time, in global demand.
Maximize Cash Flow and Reduce Debt
Despite a difficult operating environment over the past several years, we have generated a significant amount of operating cash flow. Between January 1, 2002 and March 31, 2004,right location, at the Predecessor generated over $650 million of net cash provided by operating activities. Between April 1, 2004 and December 31, 2004, the Successor consumed over $63 million of net cash used in operating activities. The cash flow used by operations was affected by the one-time payment of a $95 million obligation to a third party, $59 million associated with the exercising of stock appreciation rights, pension contributions totaling $409 million and higher interest expense due to increased debt levels. We expect improvement in our operating cash flow through increased productivity in our operations, increased cash dividends from our ventures, reduced pension contributions and pursuing additional cost reduction efforts. We believe in a focused capital expenditure plan that is dedicated to attractive investment projects. We intend to use our free cash flow to reduce indebtedness and selectively expand our businesses. The operating cash flow used by the Predecessor for the three months ended March 31, 2004 was $107 million. As of December 31, 2004, we had total debt of $3,387 million and cash and cash equivalents of $838 million.right cost.
Deliver Value-Added Solutions
We continually develop new products and industry leading production technologies that solve our customers'customers’ problems. For example, Ticona has worked closely with fuel system suppliers to develop an
acetal copolymer with the chemical and impact resistance necessary to withstand exposure to hot diesel fuels. In our emulsions business, we pioneered a technological solution that leads the industry in product offerings for ecologically friendly emulsions for solvent-free interior paints. We believe that our customers value our expertise, and we will continue to work with them to enhance the quality of their products.
Enhance Value of Portfolio
We will continue to further optimize our business portfolio through divestitures, acquisitions and strategic investments that enable us to focus on businesses in which we can achieve market, cost and technology leadership over the long term. In addition, we intend to continue to expand our product mix into higher value-added products. For example, we have begun constructionWe acquired Vinamul, the North American and European emulsion polymer business of National Starch and Chemical Company ("NSC"), a 600,000 metric ton acetic acid plantsubsidiary of Imperial Chemical Industries PLC ("Vinamul"), in China, the world's fastest growing market for acetic acid. The plant is expected to come on
streamFebruary 2005 and Acetex Corporation ("Acetex"), a producer of acetyl products and specialty polymers and films in late 2006 or early 2007.July 2005. We also divested non-core businesses, such as acrylates which we sold to Dow in February 2004. We also acquired Vinamul Polymers, the North American2004, as well as our interest in a fuel cell venture, our omega-3 DHA performance product business, and European emulsionsour cyclo-olefin copolymer business of Imperial Chemical Industries PLC(‘‘COC’’), in February 2005.
Business Segments
Chemical ProductsCHEMICAL PRODUCTS
The Chemical Products segment consists of six business lines: Acetyls, Acetyl Derivatives and Polyols, Polyvinyl Alcohol, Emulsions, Specialties, and other chemical activities. All business lines in this segment mainly conduct business using the "Celanese"‘‘Celanese’’ trade name, except Polyvinyl Alcohol, which uses the trademark Celvol, and Emulsions, which uses the trademarks Mowilith and Celvolit. In February 2005, Celanese acquired the Vinamul Polymers, the North American and European emulsion polymer business of Imperial Chemical Industries PLC, which primarily uses the trademarksCelvolit, Vinamul, Elite, Duroset, and Duroset.Acetex. The following table lists key products and their major end use markets.
Key Chemical Products | Major End Use Markets | |||||
Acetic Acid | Vinyl Acetate Monomer, Acetic Anhydride and Purified Terephtalic Acid or PTA, an Intermediate used in the production of Polyester resins, films and fibers | |||||
Acetic Anhydride | Cellulose Acetate and Pharmaceuticals | |||||
Vinyl Acetate Monomer (VAM) | Paints, Adhesives, Paper Coatings, Films and Textiles | |||||
Acetate Esters | Coatings, Inks | |||||
Oxo Alcohols | Plasticizers, Acrylates, Esters, Solvents and Inks | |||||
Polyvinyl Alcohol (PVOH) | Adhesives, Building Products, Paper Coatings, Films and Textiles | |||||
Emulsions | Water-Based Quality Surface Coatings, Adhesives, Non-Woven Textiles and Glass Fibers | |||||
Carboxylic Acids | Lubricants, Detergents and Specialties | |||||
Amines | Agricultural Products and Water Treatments | |||||
Polyvinyl Acetate | Chewing Gum | |||||
Ethylene Vinyl Alcohol | Packaging Materials | |||||
Business Lines
Acetyls. The acetyls business line produces:
• | Acetic acid, used to manufacture |
• |
• | Methanol, principally |
• | Acetic anhydride, a raw material used in the production of cellulose acetate, detergents and pharmaceuticals; and |
• | Acetaldehyde, a major feedstock for the production of polyols. Acetaldehyde is also used in other organic compounds such as pyridines, which are used in agricultural products. |
We are a leading global producer of acetic acid and the world's leading producer of vinyl acetate monomer according to the Tecnon Orbichem Survey. According to data from the CMAI Methanol Analysis, we are the largest producer of methanol in North America.
Acetic acid, methanol, and vinyl acetate monomer,VAM, like other commodity products, are characterized by cyclicality in pricing. The principal raw materials in these products are natural gas and ethylene, which we purchase from numerous sources; carbon monoxide, which we both manufacture and purchase under long-term contracts; methanol, which we both manufacture and purchase under long-term and short-term contracts; and butane, which we purchase from one supplier and can also obtain from other sources. All these raw materials, except carbon monoxide, are commodities and are available from a wide variety of sources.
Our production of acetyl products employs leading proprietary and licensed technologies, including our proprietary AO Plus acid-optimization technology for the production of acetic acid and VAntage vinyl acetate monomer technology. AO Plus enables plant capacity to be increased with minimal investment, while VAntage enables significant increases in production efficiencies, lower operating costs and increases in capacity at 10 to 15 percent15% of the cost of building a new plant.
Acetyl Derivatives and Polyols. The acetyl derivatives and polyols business line produces a variety of solvents, polyols, formaldehyde and other chemicals, which in turn are used in the manufacture of paints, coatings, adhesives, and other products.
Many acetyl derivatives products are derived from our production of acetic acid and oxo alcohols. Primary products are:
• | Ethyl acetate, an acetate ester that is a solvent used in coatings, inks and adhesives and in the manufacture of photographic films and coated papers; |
• | Butyl acetate, an acetate ester that is a solvent used in inks, pharmaceuticals and perfume; |
• | Propyl acetate, an acetate ester that is a solvent used in inks, lacquers and plastics; |
• | Methyl ethyl ketone, a solvent used in the production of printing inks and magnetic tapes; |
• | Butyric acid, an intermediate for the production of esters used in artificial flavors; |
• | Propionic acid, an organic acid used to protect and preserve grain; and |
• | Formic acid, an organic acid used in textile dyeing and leather tanning. |
Polyols and formaldehyde products are derivatives of methanol and are made up of the following products:
• | Formaldehyde, primarily used to produce adhesive resins for plywood, particle board, |
• | Polyol products such as pentaerythritol, used in coatings and synthetic lubricants; trimethylolpropane, used in synthetic lubricants; neopentyl glycol, used in powder coatings; and 1,3-butylene glycol, used in flavorings and plasticizers. |
Oxo alcohols and intermediates are produced from propylene and ethylene and include:
• | Butanol, used as a solvent for lacquers, dopes and thinners, and as an intermediate in the manufacture of chemicals, such as butyl acrylate; |
• | Propanol, used as an intermediate in the production of amines for agricultural chemicals, and as a solvent for inks, resins, insecticides and waxes; and |
• | Synthesis gas, used as an intermediate in the production of oxo alcohols and specialties. |
Acetyl derivatives and polyols are commodity products characterized by cyclicality in pricing. The principal raw materials used in the acetyl derivatives business line are acetic acid, various alcohols, methanol, acetaldehyde, propylene, ethylene and synthesis gas. We manufacture many of these raw materials for our own use as well as for sales to third parties, including our competitors in the acetyl derivatives business. We purchase propylene and ethylene from a variety of sources. We manufacture
acetaldehyde for our European production, but we purchase all acetaldehyde requirements for our North American operations from third parties. Acetaldehyde is also available from other sources.
Polyvinyl AlcoholAlcohol.. Polyvinyl alcohol, or PVOH, is sold under the Celvol trademark and is a performance chemical engineered to satisfy particular customer requirements. It is used in adhesives, building products, paper coatings, films and textiles. The primary raw material to produce polyvinyl alcoholPVOH is vinyl acetate monomer,VAM, while acetic acid is produced as a by-product. Prices vary depending on industry segment and end use application. Products are sold on a global basis, and competition is from all regions of the world. Therefore, regional economies and supply and demand balances affect the level of competition in other regions. According to Stanford Research International's December 2003 reportindustry sources on PVOH, we are the largest North American producer of polyvinyl alcoholPVOH and the third largest producer in the world.
EmulsionsEmulsions.. We purchased the The products in Celanese’s emulsions business of Clariant AG on December 31, 2002, and the Vinamul emulsions business of ICI in February 2005. The products from the Clariant AG business are sold under the Mowilith and Celvolit brands, and the products from the Vinamul emulsions business are sold under the Vinamul, Elite and Duroset brands. These products include conventional emulsions and high-pressure vinyl acetate ethylene emulsions, and powders.emulsions. Emulsions are made from vinyl acetate monomer,VAM, acrylate esters and styrene. EmulsionsThey are a key component of water-based quality surface coatings, adhesives, non-woven textiles and other applications. Emulsions are sold under the Mowilith and Celvolit brands, and, since February 2005, the Vinamul, Elite and Duroset brands.
Specialties. The specialties business line produces:
• | Carboxylic acids such as pelargonic acid, used in detergents and synthetic lubricants, and heptanoic acid, used in plasticizers and synthetic lubricants; |
• | Amines such as methyl amines, used in agrochemicals, monoisopropynol amines, used in herbicides, and butyl amines, used in the treatment of rubber and in water treatment; and |
• | Oxo derivatives and special solvents, such as crotonaldehyde, which is used by the Performance Products segment for the production of sorbates, as well as raw materials for the fragrance and food ingredients industry. |
The prices for these products are relatively stable due to long-term contracts with customers whose industries are not generally subject to the cyclical trends of commodity chemicals.
The primary raw materials for these products are olefins and ammonia, which are purchased from world market suppliers based on international prices.
In March 2002, we formed Estech, a venture with Hatco Corporation, a leading producer of synthetic lubricants, for the production and marketing of neopolyol esters or NPEs. This venture, in which we hold a 51 percent interest, built and operates a 7,000 metric ton per year NPE plant at our Oberhausen, Germany site. The plant came on stream in the fourth quarter of 2003. Neopolyol esters are used as base stocks for synthetic lubricants in refrigeration, automotive, aviation and industrial applications, as well as in hydraulic fluids. We supply Estech with carboxylic acids and polyols, the main raw materials for producing NPEs.
We contributed our commercial, technical and operational oxo business activities in Oberhausen, Germany to European Oxo GmbH, Celanese'sCelanese’s European oxo chemicals venture with Degussa AG.AG ("Degussa"). The venture began operations in October 2003.
Facilities
The Chemical Products segment has production sites in the United States, Canada, Mexico, Singapore, Spain, Sweden, Slovenia, the United Kingdom, the Netherlands, France and Germany. The emulsions business line also has tolling arrangements in the United Kingdom, France and Greece.France. We also participate in a venture in Saudi Arabia that produces methanol and Methyl Tertiary-Butyl Ether or MTBE. Over the last few years, we have continued to shift our production capacity to lower cost production facilities while expanding in growth markets, such as China. As a result, we shut down our formaldehyde unit in Edmonton, Alberta, Canada in mid-2004. We have commenced building a 600,000 metric ton acetic acid plantmid-2004 and announced in Nanjing, China, which is expectedAugust 2005 that we intend to come on streamclose this unit in late 2006 or early 2007.
Capital Expenditures
The Chemical Products segment'ssegment’s capital expenditures by the Successor for the year ended December 31, 2005 were $111 million and for the nine months ended December 31, 2004 were $64 million. The Chemical Products segment's capital expenditures by the Predecessor were $15 million for the three months ended
March 31, 2004 and $109 million and $101 million for the yearsyear ended 2003 and 2002, respectively.December 31, 2003. The capital expenditures incurred during the last three yearsthese periods related primarily to efficiency and safety improvement-related items associated with the normal operations of the business, as well as spending for a new plant for synthesis gas, and important raw material for the production of oxo alcohols and specialties, at our Oberhausen site. The new plant, which supplies European Oxo GmbH and CAG, came on stream in the third quarter of 2003 and has improved reliability and reduced production costs.business. Capital expenditures in 2003 also included the integration of a company-wide SAP system.
Markets
The following table illustrates net sales by destination of the Chemical Products segment by geographic region of the Successor for the year ended December 31, 2005 and for the nine months ended December 31, 2004, and of the Predecessor for the three months ended March 31, 2004, and for the yearsyear ended December 31, 2003 and 2002.2003.
Net Sales to External Customers by Destination—Chemical Products
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, | ||||||||||||||||||||||||||||||||
2003 | 2002 | |||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | $ | 949 | 38 | % | $ | 306 | 39 | % | 1,181 | 39 | % | 1,039 | 44 | % | ||||||||||||||||||||
Europe/Africa | 965 | 39 | % | 314 | 40 | % | 1,183 | 40 | % | 817 | 35 | % | ||||||||||||||||||||||
Asia/Australia | 484 | 19 | % | 144 | 18 | % | 522 | 18 | % | 418 | 18 | % | ||||||||||||||||||||||
Rest of World | 93 | 4 | % | 25 | 3 | % | 82 | 3 | % | 71 | 3 | % | ||||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 1,607 | 38 | % | 949 | 38 | % | 306 | 39 | % | 1,181 | 39 | % | ||||||||||||||||||||||
Europe/Africa | 1,625 | 39 | % | 965 | 39 | % | 314 | 40 | % | 1,183 | 40 | % | ||||||||||||||||||||||
Asia/Australia | 809 | 19 | % | 484 | 19 | % | 144 | 18 | % | 522 | 18 | % | ||||||||||||||||||||||
Rest of World | 159 | 4 | % | 93 | 4 | % | 25 | 3 | % | 82 | 3 | % | ||||||||||||||||||||||
The Chemical Products segment markets its products both directly to customers and through distributors. It also utilizes a number of "e-channels"‘‘e-channels’’, including its website at www.chemvip.com, as well as system to system linking through its industry portal, Elemica.
In the acetyls business line, the methanol market is global and highly dependent on the demand for products made from methanol. In addition to our own demands for methanol, our production is sold to a few regional customers who are manufacturers of chemical intermediates and to a lesser extent, by manufacturers in the wood products industry. We typically enter into short-term contracts for the sale of methanol. Acetic acid and vinyl acetate monomerVAM are global businesses which have several large customers. Generally, we supply these global customers under multi-year contracts. The customers of acetic acid and vinyl acetate monomerVAM produce polymers used in water-based paints, adhesives, paper coatings, film modifiers and textiles. We have long-standing relationships with most of these customers.
Polyvinyl alcoholPVOH is sold to a diverse group of regional and multinational customers mainly under single year contracts. The customers of the polyvinyl alcoholPVOH business line are primarily engaged in the production of adhesives, paper, films, building products, and textiles. Polyvinyl acetate and ethylene vinyl alcohol, both of which we acquired in July 2005 in the Acetex acquisition, are used in chewing gum and packaging materials, respectively.
Emulsions and emulsion powders are sold to a diverse group of regional and multinational customers. Customers for emulsions are manufacturers of water-based quality surface coatings, adhesives, and non-woven textiles. Customers for emulsion powders are primarily manufacturers of building products.
Acetyl derivatives and polyols are sold to a diverse group of regional and multinational customers both under multi-year contracts and on the basis of long-standing relationships. The customers of acetyl derivatives are primarily engaged in the production of paints, coatings and adhesives. In addition to our own demand for acetyl derivatives to produce cellulose acetate, we sell acetyl derivatives to other participants in the cellulose acetate industry. We manufacture formaldehyde for our own use as well as for sale to a few regional customers that include manufacturers in the wood products and chemical derivatives industries. The sale of formaldehyde is based on both long and short term agreements. Polyols are sold
globally to a wide variety of customers, primarily in the coatings and resins and the specialty products industries. Oxo products are sold to a wide variety of customers, primarily in the construction and automotive industries and are used internally to produce acetyl derivatives. The oxo market is characterized by oversupply and numerous competitors.
The specialties business line primarily serves global markets in the synthetic lubricant, agrochemical, rubber processing and other specialty chemical areas. Much of the specialties business line involves "one‘‘one customer, one product"product’’ relationships, where the business develops customized products with the customer, but the specialties business line also sells several chemicals which are priced more like commodity chemicals.
Competition
Our principal competitors in the Chemical Products segment include Air Products and Chemicals, Inc., Atofina S.A., BASF AG ("BASF"), Borden Chemical, Inc., BP p.l.c. ("BP"(‘‘BP’’), Chang Chun Petrochemical Co., Ltd., Daicel Chemical Industries Ltd. ("Daicel"), The Dow Chemical Company ("Dow"), Eastman Chemical Corporation ("Eastman"(‘‘Eastman’’), E. I. DuPont de Nemours and Company ("DuPont"(‘‘DuPont’’), Methanex Corporation, Lyondell Chemical Company (‘‘Lyondell’’), Nippon Goshei,Gohsei, Perstorp Inc., Rohm & Haas Company ("Rohm and Haas"), Showa Denko K.K., and Kuraray Co. Ltd.
TECHNICAL POLYMERS TICONA
The Technical Polymers Ticona
Ticona segment develops, produces and supplies a broad portfolio of high performance technical polymers. The following table lists key Ticona products, their trademarks, and their major end use markets.
Key Ticona Products | Major End Use Markets | |||||
Hostaform/ | Automotive, Electronics, Consumer Products and Medical | |||||
GUR (Ultra High Molecular Weight) Polyethylene or PE-UHMW | Profiles, Battery Separators, Industrial Specialties, Filtration, Coatings and Medical | |||||
Celanex/Vandar/Riteflex/Impet (Polyester Engineering Resins) | Electrical, Electronics, Automotive and Appliances | |||||
Vectra (Liquid Crystal Polymers) | Electronics, Telecommunications, Consumer and Medical | |||||
Fortron* (Polyphenylene Sulfide or PPS) | Electronics, Automotive and Industrial | |||||
Celstran, Compel (long fiber reinforced | Automotive and Industrial | |||||
* Fortron is a registered trademark of Fortron Industries. |
* Fortron is a registered trademark of Fortron Industries.
Ticona'sTicona technical polymers have chemical and physical properties enabling them, among other things, to withstand high temperatures, resist chemical reactions with solvents and resist fracturing or stretching. These products are used in a wide range of performance-demanding applications in the automotive and electronics sectors and in other consumer and industrial goods, often replacing metal or glass.
Ticona is a business orientedworks in concert with its customers to enable innovations for its customers while closely working together with them for aand develop new development.or enhanced products. Ticona focuses its efforts on developing new markets and applications for its product lines, often developing custom formulations to satisfy the technical and processing requirements of a customer'scustomer’s applications. For example, Ticona has worked closely with fuel system suppliers to develop an acetal copolymer with the chemical and impact resistance necessary to withstand exposure to hot diesel fuels in the new generation of common rail diesel engines. The product can also be used in automotive fuel sender units where it remains stable at the high operating temperatures present in direct-injection diesel engines.
Ticona'sTicona’s customer base consists primarily of a large number of plastic molders and component suppliers, which are often the primary suppliers to original equipment manufacturers, or OEMs. Ticona
works with these molders and component suppliers as well as directly with the OEMs to develop and improve specialized applications and systems.
Prices for most of these products, particularly specialized product grades for targeted applications, generally reflect the value added in complex polymer chemistry, precision formulation and compounding, and the extensive application development services provided. The specialized product lines are not particularly susceptible to cyclical swings in pricing. Polyacetal productsPOM pricing, mainly in standard grades, is, however, somewhat more price competitive, with many minimum-service providers competing for volume sales.
Business Lines
Polyacetal productsPOM are sold under the trademark Hostaform and Amcel in all regions but North America, where we sell them under the trademark Celcon. Polyplastics, in which we hold a 45% ownership interest, and Korea Engineering Plastics,KEPCO, in which we hold a 50% ownership interest, are leading suppliers of polyacetal productsPOM and other engineering resins in the Asia/Pacific region. Polyacetal productsPOM are used for mechanical parts, including door locks and seat belt mechanisms, in automotive applications and in electrical, consumer and medical applications such as drug delivery systems and gears for appliances.
The primary raw material for polyacetal productsPOM is formaldehyde, which is manufactured from methanol. Ticona currently purchases formaldehyde in the United States from our Chemical Products segment and, in Europe, manufactures formaldehyde from purchased methanol.
GUR, an ultra high molecular weight polyethylene or PE-UHMW, is an engineered material used in heavy-duty automotive and industrial applications such as car battery separator panels and industrial conveyor belts, as well as in specialty medical and consumer applications, such as porous tips for marker pens, sports equipment and prostheses. GUR Micromicro powder grades are used for high performance filters, membranes, diagnostic devices, coatings and additives for thermoplastics & elastomers. PE-UHMW fibers are also used in protective ballistic applications. The basic raw material for GUR is ethylene.
Celstran and Compel are long fiber reinforced thermoplastics, which impart extra strength and stiffness, making them more suitable for larger parts than conventional thermoplastics.
Polyesters such as Celanex polybutylene terephthalate, or PBT, and Vandar, a series of PBT-polyester blends, are used in a wide variety of automotive, electrical and consumer applications, including ignition system parts, radiator grilles, electrical switches, appliance housings, boat fittings and perfume bottle caps. Raw materials for polyesters vary. Base monomers, such as dimethyl terephthalate or DMT and PTA, are widely available with pricing dependent on broader polyester fiber and packaging resins market conditions. Smaller volume specialty co-monomers for these products are typically supplied by a few companies.
Liquid crystal polymers, or LCPs, such as Vectra, are used in electrical and electronics applications and for precision parts with thin walls and complex shapes.
Fortron, a polyphenylene sulfide, or PPS product, is used in a wide variety of automotive and other applications, especially those requiring heat and/or chemical resistance, including fuel system parts, radiator pipes and halogen lamp housings, and often replaces metal in these demanding applications. Fortron is manufactured by Fortron Industries, Ticona'sTicona’s 50-50 venture with Kureha Chemicals Industry Co., Ltd. ("KCI") of Japan.
In December 2004, we approved a plan to dispose of Ticona's Cyclo-olefin Copolymer ("COC")Ticona’s COC business. The sale of the COC business was completed in December 2005.
Facilities
Ticona has polymerization, compounding and research and technology centers in Germany, Brazil and the United States. Ticona'sTicona’s Kelsterbach, Germany production site is located in close proximity to one of the sites being considered for a new runway under the Frankfurt airport'sairport’s expansion plans. The construction of this particular runway could have a negative effect on the plant'splant’s current production
capacity and future development. While the state government of Hesse and the owner of the airport promote the expansion of this option, it is uncertain whether this option is in accordance with applicable laws. Although the state government of the state of Hesse expects the plan approval for the airport expansion in 2007 and the start of operations in 2009-2010, neither the final outcome of this matter nor its timing can be predicted at this time.
Capital Expenditures
Ticona'sTicona’s capital expenditures by the Successor for the year ended December 31, 2005 and the nine months ended December 31, 2004 was $54 million and $64 million. Ticona'smillion, respectively. Ticona’s capital
expenditures by the Predecessor were $20 million for the three months ended March 31, 2004 and $56 million and $61 million for the years 2003 and 2002, respectively.year ended December 31, 2003. Ticona had expenditures in each of these three yearsperiods relating primarily to efficiency and safety improvement-related itemsimprovement associated with the normal operations of the business. In 2004, Ticona completed its expansion of its Oberhausen GUR PE-UHMW capacity by 10,000 metric tons per year, and we also increased its North American POM capacity by 20% to 102,000 tons our North American POM capacity.tons. The capital expenditures for 2003 also includeincluded construction of a new administrative building in Florence, Kentucky and the integration of a company-wide SAP system. In addition, Ticona had expenditures in 2002 for significant capacity expansions at its Bishop, Texas and Shelby, North Carolina sites. Ticona doubled its U.S. capacity for GUR PE-UHMW by building a new 30,000 metric tons per year facility in Bishop, Texas, replacing the existing plant in Bayport, Texas. The new plant came on stream in the third quarter of 2002. In the fourth quarter of 2002, Ticona increased capacity by 6,000 metric tons at its polyacetal products facility in Kelsterbach, Germany and commenced a further increase of 17,000 metric tons; however, its completion is dependent upon the action of the Frankfurt Airport expansion described above.
Markets
The following table illustrates the destination of the net sales of the Technical Polymers Ticona segment by geographic region of the Successor for the year ended December 31, 2005 and the nine months ended December 31, 2004, and of the Predecessor for the three months ended March 31, 2004 and for the yearsyear ended December 31, 2003, and 2002.2003.
Net Sales to External Customers by Destination—Technical Polymers Ticona
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, | ||||||||||||||||||||||||||||||||
2003 | 2002 | |||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 247 | 39 | % | 95 | 42 | % | 350 | 45 | % | 319 | 48 | % | ||||||||||||||||||||||
Europe/Africa | 331 | 52 | % | 116 | 51 | % | 373 | 49 | % | 300 | 46 | % | ||||||||||||||||||||||
Asia/Australia | 33 | 5 | % | 9 | 4 | % | 19 | 3 | % | 18 | 3 | % | ||||||||||||||||||||||
Rest of World | 25 | 4 | % | 7 | 3 | % | 20 | 3 | % | 19 | 3 | % | ||||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 339 | 38 | % | 247 | 39 | % | 95 | 42 | % | 350 | 45 | % | ||||||||||||||||||||||
Europe/Africa | 465 | 53 | % | 331 | 52 | % | 116 | 51 | % | 373 | 49 | % | ||||||||||||||||||||||
Asia/Australia | 44 | 5 | % | 33 | 5 | % | 9 | 4 | % | 19 | 3 | % | ||||||||||||||||||||||
Rest of World | 39 | 4 | % | 25 | 4 | % | 7 | 3 | % | 20 | 3 | % | ||||||||||||||||||||||
Ticona'sTicona’s sales in the Asian market are made mainly through its ventures, Polyplastics, Korea Engineering PlasticsKEPCO and Fortron Industries, which are accounted for under the equity method and therefore not included in Ticona'sTicona’s consolidated net sales. If Ticona'sTicona’s portion of the sales made by these ventures were included in the chart above, the percentage of sales sold in Asia/Australia would be substantially higher. A number of Ticona's polyacetal productsTicona’s POM customers, particularly in the appliance, electrical components, toys and certain sections of the electronics/telecommunications fields, have moved tooling and molding operations to Asia, particularly southern China. To meet the expected increased demand in this region, we, along with Polyplastics, Mitsubishi Gas Chemical Company Inc., and Korea Engineering PlasticsKEPCO agreed on a venture to construct and operate a world-scale 60,000 metric ton polyacetal productsPOM facility in China. When completed, we willWe indirectly own an approximate 38 percent38% interest in this venture. Work on the new facility commenced in July 2003, and the new plant is expected to startcommenced operations in the second quarter ofSeptember 2005.
Ticona'sTicona’s principal customers are suppliers to the automotive industries as well as industrial suppliers. These customers primarily produce engineered products, and Ticona works closely with its customers to assist them to develop and improve specialized applications and systems. Ticona has long-standing relationships with most of its major customers, but it also uses distributors for most of its major products, as well as a number of electronic channels, such as its BuyTiconaDirect on-line ordering system, and other electronic marketplaces to reach a larger customer base. For most of Ticona'sTicona’s product lines, contracts with customers typically have a term of one to two years. A significant swing in the economic conditions of the end markets of Ticona'sTicona’s principal customers could significantly affect the demand for Ticona'sTicona’s products.
Competition
Ticona'sTicona’s principal competitors include BASF, DuPont, General Electric Company ("GE") and Solvay S.A. Smaller regional competitors include Asahi Kasei Corporation, DSM NV, Mitsubishi Plastics, Inc., Chevron Phillips Chemical Company, L.P. ("Chevron"), Braskem S.A., Teijin and Toray Industries Inc.
Acetate ProductsACETATE PRODUCTS
The Acetate Products segment consists primarily of acetate filter products or acetate tow, which uses the "Celanese"‘‘Celanese’’ brand to market its products. The segment'sacetate tow market continues to be characterized by stability and slow growth. The segment’s acetate filament business line will bewas discontinued by mid-2005.in the fourth quarter of 2005.
Business Lines
Acetate filter products are foundused primarily in cigarette filters and acetate filament is found in fashion apparel, linings and home furnishings.filters. According to the 2002 Stanford Research Institute International Chemical Economics Handbook, we are the world'sworld’s leading producer of acetate fibers,tow, including production of our ventures in Asia.
We produce acetate flake by processing wood pulp with acetic anhydride. We purchase wood pulp that is made from reforested trees from major suppliers and produce acetic anhydride internally. The acetate flake is then further processed into acetate fiber in the form of a tow band or filament.
The acetate filter products business line produces acetate tow, which is used primarily in cigarette filters. The acetate tow market continues to be characterized by stability and slow growth.band.
We have aan approximately 30% interest in three manufacturing ventures with Chinese state-owned enterprisesin China that produce cellulose acetate flake and towtow. Our partner in China. Additionally, in 2004, 21%each of our sales of acetate tow were sold tothe ventures is a Chinese state-owned tobacco enterprises,entity. In addition, 17% of our 2005 acetate tow sales were sold directly to China, the largest single market for acetate tow in the world. As demand for acetate tow in China exceeds local supply, we and our Chinese partners have agreed to expand capacity at their three manufacturing ventures. Two of the ventures completed their tow manufacturing expansions in January 2005; the expansion at2005, and the third venture completed its tow expansion in June 2005. Flake expansion is scheduledexpected to be completed by mid-year.in 2007. Although increases in manufacturing capacityour direct tow sales into China will decrease as a result of the ventures will reduce, beginning in 2005,venture expansions, the volume of our future direct sales of acetate towdividends that we expect to China, the dividends paid by thereceive from these ventures to us are projected to increase once the expansions are complete in 2007.increase.
The Acetate Products segment is continuing its cost reduction and operations improvement efforts. These efforts are directed toward reducing costs while achieving higher productivity of employees and equipment. In addition to restructuring activities previously undertaken, we outsourced the operation and maintenance of our utility operations at the Narrows, Virginia and Rock Hill, South Carolina plants in 2003. We also closed our Charlotte, North Carolina administrative and research and development facility and relocated the functions there to the Rock Hill and Narrows locations. The relocation was substantially completed during the third quarter of 2004. In MarchJuly 2005, we announced the relocation ofrelocated our Rock Hill administrative functions to our Dallas corporate headquarters. This relocation is expected to be completed in the third quarter of 2005.
In October 2004,December 2005 we announced plans to implement a strategic restructuring ofsold our acetate business to increase efficiency, reduce overcapacity in certain manufacturing areasRock Hill and focus on products and markets that provide long-term value. As part of this restructuring, we plan to discontinue acetate
filament production by mid-2005 and to consolidate our flake and tow operations at three locations instead of the current five. The restructuring resulted in $50 million of asset impairment charges and charges to depreciation related to $12 million in asset retirement obligations, of which $8 million was recorded by the Acetate Products segment and $4 million was recorded by the Chemical Products segment. In addition, Celanese recorded severance liabilities of approximately $40 million in the fourth quarter of 2004, with a corresponding increase in goodwill. Sales of acetate filament by the Predecessor for the three months ended March 31, 2004 were $25 million, and sales of acetate filament by the Successor for the nine months ended December 31, 2004 were $83 million. See Note 21 to the Consolidated Financial Statements.Charlotte sites.
Facilities
The Acetate Products segment has production sites in the United States, Canada, Mexico and Belgium, and participates in three manufacturing ventures in China. In October 2004, we announced plans to close the Rock Hill, South Carolina, production site, duringwhich occurred in April 2005, and to shutdown production of acetate products at the Edmonton, Alberta, Canada site by 2007. Additionally, filament production at Narrows and Ocotlan is expected to bewas discontinued by mid-2005 and flake production at Ocotlan is expected to bewas recommissioned in the first quarter of 2005.
Capital Expenditures
The Acetate Products segments' capital expenditures by the Successor for the year ended December 31, 2005 and the nine months ended December 31, 2004 were $35 million and $32 million.million, respectively. The Acetate Products segment'ssegment’s capital expenditures by the Predecessor were $8 million for the three months ended March 31, 2004 and $39 million and $30 million for the years 2003 and 2002, respectively.year ended December 31, 2003. The capital expenditures incurred during these years related primarily to efficiency, environmental and safety improvement-related items associated with the normal operations of the business. Capital expenditures in 2003 also included the integration of a company-wide SAP system.
Markets
The following table illustrates the destination of the net sales of the Acetate Products segment by geographic region of the Successor for the year ended December 31, 2005 and the nine months ended December 31, 2004, and of the Predecessor for the three months ended March 31, 2004 and for the yearsyear ended December 31, 2003 and 2002.2003.
Net Sales to External Customers by Destination—Acetate Products
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, | ||||||||||||||||||||||||||||||||
2003 | 2002 | |||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 145 | 28 | % | 47 | 27 | % | 189 | 29 | % | 188 | 30 | % | ||||||||||||||||||||||
Europe/Africa | 143 | 27 | % | 45 | 26 | % | 192 | 29 | % | 167 | 26 | % | ||||||||||||||||||||||
Asia/Australia | 222 | 43 | % | 75 | 44 | % | 258 | 40 | % | 256 | 41 | % | ||||||||||||||||||||||
Rest of World | 13 | 2 | % | 5 | 3 | % | 16 | 2 | % | 21 | 3 | % | ||||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 126 | 19 | % | 67 | 15 | % | 24 | 17 | % | 76 | 14 | % | ||||||||||||||||||||||
Europe/Africa | 202 | 31 | % | 139 | 32 | % | 43 | 29 | % | 187 | 35 | % | ||||||||||||||||||||||
Asia/Australia | 315 | 48 | % | 222 | 50 | % | 75 | 51 | % | 258 | 48 | % | ||||||||||||||||||||||
Rest of World | 16 | 2 | % | 13 | 3 | % | 5 | 3 | % | 16 | 3 | % | ||||||||||||||||||||||
Sales in the acetate filter products industry were principally to the major tobacco companies that account for a majority of worldwide cigarette production. Our contracts with most of our customers, including our largest customer, with whom we have a long-standing relationship, are entered into on an annual basis. In recent years, the cigarette industry has experienced consolidation.
Competition
Principal competitors in the Acetate Products segment include Acetate Products Ltd. (Acordis)("Acordis"), Daicel, Eastman Mitsubishi Rayon Company, Limited, Bambergcell and Rhodia S.A. ("Rhodia"(‘‘Rhodia’’).
Performance ProductsPERFORMANCE PRODUCTS
The Performance Products segment consists of the food ingredients business conducted by Nutrinova. This business uses its own trade names to conduct business. The following table lists key products of the Performance Products segment and their major end use markets.
Key Performance Products | Major End Use Markets | |||||
Sunett (Acesulfame-K) | Beverages, Confections, Dairy Products and Pharmaceuticals | |||||
Sorbates | Dairy Products, Baked Goods, Beverages, Animal Feeds, Spreads and Delicatessen Products | |||||
Business Lines
Nutrinova'sNutrinova’s food ingredients business consists of the production and sale of high intensity sweeteners and food protection ingredients, such as sorbic acid and sorbates worldwide, as well as the resale of other food ingredients mainly in Japan, Australia Mexico and the United States.Mexico.
Acesulfame-K, a high intensity sweetener marketed under the trademark Sunett, is used in a variety of beverages, confections and dairy products throughout the world. The primary raw materials for this product are diketene and sulfur trioxide. Sunett pricing for targeted applications reflects the value added by Nutrinova, such as technical services provided. Nutrinova'sNutrinova’s strategy is to be the most reliable and highest quality producer of this product, to develop new applications for the product and to expand into new markets. Nutrinova maintains a strict patent enforcement strategy, which has resulted in favorable outcomes in a number of patent infringement matters in Europe and the United States. Nutrinova'sNutrinova’s European and U.S. primary production patents for making Sunett expired at the end of the first quarter of 2005.
Nutrinova'sNutrinova’s food protection ingredients are mainly used in foods, beverages and personal care products. The primary raw materials for these products are ketene and crotonaldehyde. Sorbates pricing is extremely sensitive to demand and industry capacity and is not necessarily dependent on the prices of raw materials.
Facilities
Nutrinova has production facilities in Germany, as well as sales and distribution facilities in all major world markets.
Capital Expenditures
The Performance Products segment's capital expenditures by the Successor were $3 million and $3 million, for the year ended December 31, 2005 and the nine months ended December 31, 2004. The Performance Products segment's capital2004, respectively. Capital expenditures by the Predecessor were $0 million for the three months ended March 31, 2004 and $2 million and $4 million for the yearsyear ended December 31, 2003, and 2002, respectively. The capital expenditures incurred during these years related to efficiency, debottlenecking, quality and safety improvement items associated with the normal operation of the business.
Markets
The following table illustrates the destination of the net sales of the Performance Products segment by geographic region of the Successor for year ended December 31, 2005 and the nine months ended December 31, 2004, and of the Predecessor for the three months ended March 31, 2004 and for the yearsyear ended December 31, 2003 and 2002.2003.
Net Sales to External Customers by Destination—Performance Products
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, | ||||||||||||||||||||||||||||||||
2003 | 2002 | |||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 52 | 40 | % | 19 | 43 | % | 73 | 43 | % | 56 | 37 | % | ||||||||||||||||||||||
Europe/Africa | 49 | 37 | % | 17 | 39 | % | 59 | 35 | % | 55 | 36 | % | ||||||||||||||||||||||
Asia/Australia | 21 | 16 | % | 6 | 14 | % | 28 | 17 | % | 25 | 17 | % | ||||||||||||||||||||||
Rest of World | 9 | 7 | % | 2 | 4 | % | 9 | 5 | % | 15 | 10 | % | ||||||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||
$ | % of Segment | $ | % of Segment | $ | % of Segment | $ | % of Segment | |||||||||||||||||||||||||||
North America | 58 | 32 | % | 52 | 40 | % | 19 | 43 | % | 73 | 43 | % | ||||||||||||||||||||||
Europe/Africa | 80 | 44 | % | 49 | 37 | % | 17 | 39 | % | 59 | 35 | % | ||||||||||||||||||||||
Asia/Australia | 30 | 17 | % | 21 | 16 | % | 6 | 14 | % | 28 | 17 | % | ||||||||||||||||||||||
Rest of World | 12 | 7 | % | 9 | 7 | % | 2 | 4 | % | 9 | 5 | % | ||||||||||||||||||||||
Nutrinova directly markets Sunett primarily to a limited number of large multinational and regional customers in the beverage and food industry under long-term and annual contracts. Nutrinova markets food protection ingredients primarily through regional distributors to small and medium sized customers and directly through regional sales offices to large multinational customers in the food industry.
Competition
The principal competitors for Nutrinova'sNutrinova’s Sunett sweetener are Holland Sweetener Company, The NutraSweet Company, Ajinomoto Co., Inc., Tate & Lyle plc and several Chinese manufacturers. In sorbates, Nutrinova competes with Nantong AA, Daicel, Yu Yao/Ningbo, Yancheng AmeriPac and other Chinese manufacturers of sorbates.
Other ActivitiesOTHER ACTIVITIES
Other Activities includedincludes revenues mainly from the captive insurance companies, Celanese Advanced Materials, Inc., and Pemeas GmbH or Pemeas. Celanese Advanced Materials consists of high performance polymer PBI("Pemeas") and, the Vectran polymer fiber product lines.since July 2005, AT Plastics. Pemeas, a venture with a consortium of investors led by Conduit Ventures, a London based venture capital company, develops high temperature membrane assemblies or MEA'sMEA’s for fuel cells. We contributed our MEA activity to Pemeas in April 2004. In December 2004,2005, we approvedsold our common stock interest back to Pemeas Corporation. The Company continues to hold a plan to dispose of ourpreferred stock interest in Pemeas. Other activitiesActivities also includeincludes corporate activities, several service companies and other ancillary businesses, which do not have significant sales.
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 property, liability and workers compensation risks. The captive insurance companies issue insurance policies to our subsidiaries to provide consistent coverage amid fluctuating costs in the insurance market and to lower long-term insurance costs by avoiding or reducing commercial carrier overhead and regulatory fees. The captive insurance companies issue insurance policies and coordinate claims handling services with third party service providers. They retain risk at levels approved by the Celanese board of directors 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.
Investments
We have a significant portfolio of strategic investments, including a number of ventures, in Asia, North America and Europe. In aggregate, these strategic investments enjoy significant sales, earnings and cash flow. We have entered into these strategic investments in order to gain access to local markets, minimize costs and accelerate growth in areas we believe have significant future business potential. The table below sets forth the earnings, cash flow contribution and depreciation and amortization of our strategic investments:
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, | ||||||||||||||||
2003 | 2002 | |||||||||||||||||
(in millions) | ||||||||||||||||||
Earnings from equity investments | $ | 36 | $ | 12 | $ | 35 | $ | 21 | ||||||||||
Dividends from equity investments | 22 | 15 | 23 | 61 | ||||||||||||||
Other distributions from equity investments | — | 1 | — | 39 | ||||||||||||||
Dividends from cost investments | 33 | 6 | 53 | 35 | ||||||||||||||
Successor | Predecessor | |||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||
(in $ millions) | ||||||||||||||||||
Earnings from equity investments | 61 | 36 | 12 | 35 | ||||||||||||||
Dividends and other distributions from equity investments | 66 | 22 | 16 | 23 | ||||||||||||||
Dividends from cost investments | 89 | 33 | 6 | 53 | ||||||||||||||
Year Ended December 31, | ||||||||||||||
2004 | 2003 | 2002 | ||||||||||||
(in millions) | ||||||||||||||
Depreciation and amortization of equity investees (unaudited) | $ | 28 | $ | 27 | $ | 27 | ||||||||
Depreciation and amortization of cost investees (unaudited) | 16 | 17 | 17 | |||||||||||
Total depreciation and amortization equity and cost investees (unaudited) | 44 | 44 | 44 | |||||||||||
Year Ended December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
(in $ millions) | ||||||||||||||
Depreciation and amortization of equity investees (unaudited) | 32 | 28 | 27 | |||||||||||
Depreciation and amortization of cost investees (unaudited) | 15 | 16 | 17 | |||||||||||
Total depreciation and amortization equity and cost investees (unaudited) | 47 | 44 | 44 | |||||||||||
The fiscal year end for all ventures is December 31. Depreciation and amortization as presented in the table above represents the amounts recorded by the ventures based on local generally accepted accounting principles, computed in proportion to our ownership percentage. These amounts are not included in the depreciation and amortization reported by the Successor and the Predecessor.
The table below represents our significant ventures:
Name | Location | Ownership | Accounting Method | Partner(s) | Description | |||||||||||||||||
Chemical Products | ||||||||||||||||||||||
| | | | |||||||||||||||||||
European Oxo | Germany | 50.0% | Equity | Degussa AG | European propylene-based oxo chemicals business | |||||||||||||||||
Equity | CTE Petrochemicals | |||||||||||||||||||||
Technical Polymers Ticona | ||||||||||||||||||||||
Korea Engineering Plastics Co., Ltd. (KEPCO) | Korea | 50.0% | Equity | Mitsubishi Gas Chemical Company, Inc. | POM | |||||||||||||||||
Polyplastics Co., Ltd. | Japan | 45.0% | Equity | Daicel Chemical Industries Ltd. | ||||||||||||||||||
Fortron Industries | U.S. | 50.0% | Equity | Kureha Chemical Industries | PPS | |||||||||||||||||
Acetate Products | ||||||||||||||||||||||
Kunming Cellulose Fibers Co. Ltd. | China | 30.0% | Cost | China National Tobacco Corp. | Acetate tow production | |||||||||||||||||
Nantong Cellulose Fibers Co. Ltd. | China | 31.0% | Cost | China National Tobacco Corp. | Acetate tow & flake production | |||||||||||||||||
Zhuhai Cellulose Fibers Co. Ltd. | China | 30.0% | Cost | China National Tobacco Corp. | Acetate tow production | |||||||||||||||||
The following are our principal ventures:
Major Equity Investments
Polyplastics Co., Ltd. Polyplastics Co., Ltd. ("Polyplastics") is a leading supplier of engineering plastics in the Asia-Pacific region. Established in 1964 and headquartered in Japan, Polyplastics is a 45/55 venture between us and Daicel Chemical Industries Ltd. Polyplastics'
Daicel. Polyplastics’ principal production facilities are located in Japan, Taiwan, Malaysia and Malaysia (with an additional venture facility under construction in China).together with KEPCO and Mitsubishi, China. We believe Polyplastics is the largest producer and marketer of POM in the Asia-Pacific region.
Korea Engineering Plastics Co. LtdLtd.. Founded in 1987, Korea Engineering Plastics Co., Ltd. ("KEPCO")KEPCO is the leading producer of POMpolyacetal in South Korea. We acquired our 50% interest in KEPCO in 1999 from the Hyosung Corporation, a Korean conglomerate. Mitsubishi Gas Chemical Company owns the remaining 50% of KEPCO. KEPCO, which operates a 55,000-ton annual capacity polyacetal productsPOM plant in Ulsan, South Korea.Korea and participates in the facility in China mentioned under Polyplastics above.
Fortron IndustriesIndustries.. Fortron Industries is a 50/50 venture between us and Kureha Chemical Industry Co. Ltd. (KCI) of Japan.KCI for polyphenylene sulfide ("PPS"). Production facilities are located in Wilmington, NC.North Carolina. We believe Fortron has the leading technology in linear polymer.
European Oxo GmbH.. In October 2003, we entered into a European Oxo GmbH is our 50/50 venture for European oxo operations with Degussa AG. Under the terms of this venture, we merged our commercial, technical and operationalfor propylene-based oxo business activities, with those of Degussa AG's Oxeno subsidiary. European Oxochemicals and has plantsproduction facilities in Oberhausen and Marl, Germany.
InfraServsInfraServs.. We hold ownership interests in several InfraServ groups located in Germany. InfraServs own and develop industrial parks and provide on-site general and administrative support to tenants.
Major Cost Investments
China Acetate Products VenturesVentures.. We hold approximately 30% ownership interests (50% board representation) in three separate venture acetate products production entities in China: the Nantong, Kunming, and Zhuhai Cellulose Fiber Companies. In each instance, Chinese state-owned entities control the remainder. The terms of these ventures were recently extended through 2020. With an estimated 30% share of the world'sworld’s cigarette production and consumption, China is the world'sworld’s largest and fastest growing market for acetate tow products. In combination, these ventures represent the market leader in Chinese domestic acetate production and are well positioned to capture future growth in the Chinese cigarette market. In March 2003, weWe and our partners decided to expandexpanded the manufacturing facilities at all three ventures in China. The tow expansion at two of the ventures was completedChina in January 2005. The third is scheduled for completion in June 2005. Flake expansion is expected to be completed in 2007. The ventures are funding the investments from operating cash flows.
National Methanol Co. (Ibn Sina)Sina. ). With production facilities in Saudi Arabia, National Methanol Co. represents 2% of the world'sworld’s methanol production capacity and is the world'sworld’s eighth largest Methanol producer of MTBE. Methanol and MTBE are key global commodity chemical products. We indirectly own a 25% interest in National Methanol Co., with the remainder held by the Saudi Basic Industries Corporation (SABIC) (50%) and Texas Eastern Arabian Corporation Ltd. (25%). SABIC has responsibility for all product marketing.
These investments, where Celanese owns greater than a 20 percent20% ownership interest, are accounted for under the cost method of accounting because Celanese cannot exercise significant influence.
Acquisitions and Divestitures
In the last three years, we acquired the following businesses:
• | In July 2005, we acquired Acetex Corporation, a producer of acetyl products and specialty polymers and films. |
• | In February 2005, we acquired the Vinamul emulsions business of the National Starch and Chemical Company, a subsidiary of ICI. |
In the last three years, we divested the following businesses:
Successor
• | In December 2005, we sold our COC business to a venture between Daicel and Polyplastics. |
• | In December 2005, we sold our common stock interest in Pemeas GmbH to Pemeas Corporation. |
• | In December 2005, we sold our omega-3 DHA business. |
• | In August 2005, we announced our intention to wind up Estech, our venture with Hatco Corporation for neopolyol esters. |
• | In July 2005, we announced an agreement to sell our emulsion powders business to National Starch and Chemical Company and to Elotex AG, both subsidiaries of ICI. This transaction closed in September 2005. |
• | In May 2005, we sold our polybenzamidazole fiber and polymer business to PBI Performance Products, Inc., an affiliate of the Intertech Group. |
• | In April 2005, we sold our Vectran polyarylate fiber business to Kuraray America Inc., a subsidiary of Kuraray Co., Ltd. of Japan. |
Predecessor
• | In February 2004, CAG sold its acrylates business to Dow. |
• | In December 2003, |
For further information on the acquisition and divestitures discussed above, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 7 to the Consolidated Financial Statements.
Raw Materials and Energy
We purchase a variety of raw materials from sources in many countries for use in our production processes. We have a policy of maintaining, when available, multiple sources of supply for materials. However, some of our individual plants may have single sources of supply for some of their raw materials, such as carbon monoxide, steam and acetaldehyde. In 2003, a primary U.S. supplier of wood pulp to the Acetate Products segment shut down its pulp facility. This closure resulted in increased operating costs for expenses associated with qualifying wood pulp from alternative suppliers and significant increases in wood pulp inventory levels. We have secured alternative sources of wood pulp supply. Although we have been able to obtain sufficient supplies of raw materials, there can be no assurance that unforeseen developments will not affect our raw material supply. Even if we have multiple sources of supply for a raw material, there can be no assurance that these sources can make up for the loss of a major supplier. Nor can there be any guarantee that profitability will not be affected should we be required to qualify additional sources of supply in the event of the loss of a sole supplier. In addition, the price of raw materials varies, often substantially, from year to year.
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply/demand fundamentals change. For example, the volatility of prices for natural gas and ethylene (whose cost is in part linked to natural gas prices) has increased in recent years. Our production facilities rely largely on coal, fuel oil, natural gas and electricity for energy. Most of the raw materials for our European operations are centrally purchased by our subsidiary, which also buys raw materials on behalf of third parties. We manage our exposure through the use of derivative instruments and forward purchase contracts for commodity price hedging, entering into long-term supply agreements, and multi-year purchasing and sales agreements. Management'sManagement’s policy for the majority of its natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. As of December 31, 2005 and 2004, there were no derivative contracts outstanding. In 2003, there were forward contracts covering approximately 35% of the Company's Chemical Products segment North American requirements. Management regularly assesses its practice of purchasing a portion of its commodity requirements forward and the utilization of a variety of other raw material hedging instruments, in addition to forward purchase contracts, in accordance with changes in market conditions. Management capped its exposure on approximately 20% of its U.S. natural gas requirements during the months of August and September of 2004. The fixed price natural gas forward contracts and any premium associated with the purchase of a price cap are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap or cap contracts correlate to the actual purchases of the commodity and have the effect or securing or limiting predetermined prices for the underlying commodity. Although these contracts were structured to limit exposure to increases in commodity prices, certain swaps may also limit the potential benefit the Company might have otherwise received from decreases in commodity prices. These cash-settled swap or cap contracts were accounted for as cash flow hedges.
We also lease supplies of various precious metals, such as rhodium, used as catalysts for the manufacture of Chemical Products. With growing demand for these precious metals, most notably in the automotive industry, the cost to purchase or lease these precious metals has increased, caused by a
shortage in supply. These circumstances are expected to continue into the second half of 2006. For precious metals, the leases are distributed between a minimum of three lessors per product and are divided into several contracts. A reassessment of the long term strategy regarding the lease or purchase of precious metals, reflecting the changed market conditions for some metals, is under way. Although we seek to offset increases in raw material prices with corresponding increases in the prices of our products, we may not be able to do so, and there may be periods when such product price increases lag behind raw material cost increases.
Research and Development
All of our businesses conduct research and development activities to increase competitiveness. Our Technical Polymers Ticona and Performance Products, segments in particular, are innovation-oriented businesses that conduct research and development activities to develop new, and optimize existing, production technologies, as well as to develop commercially viable new products and applications.
The Chemical Products segment has been focusing on improving core production technologies, such as improving catalyst development, and supporting both debottlenecking and cost reduction efforts. In the segment’s Emulsions business line, research and development is focused on new products, new applications and new technology platforms. In particular, an emphasis is placed on continuously upgrading existing products, particularly in the paints and coatings area.
The Acetate Products segment has been concentrating on developing new applications for acetate tow, such as its use in disposable consumer materials.
Research in the Technical Polymers Ticona segment is focused on the development of new formulations and applications for its products, improved manufacturing processes and new polymer materials with varying chemical and physical properties in order to meet customer needs and to generate growth. This effort involves the entire value chain from new or improved monomer production, polymerization and compounding, to working closely with end-users to identify new applications that can take advantage of these high performance features. Ticona is continually improving compounding recipes to extend product properties and grades, while offering grade consistency on a global basis. In addition, Ticona is developing new polymerization and manufacturing technology in order to meet economic and ecological goals without sacrificing high quality processing.
The research and development activities of the Performance Products segment are conducted at Nutrinova'sNutrinova’s Frankfurt, Germany location. They are directed towards expanding its existing technologies and developing new applications for existing products in close cooperation with its customers.
Research and development costs are included in expenses as incurred. The Successor's development costs for the nine months ended December 31, 2004 were $67 million. The Predecessor's research and development costs for the three months ended March 31, 2004, and for 2003 and 2002 were $23 million, $89 million and $65 million, respectively. For additional information on our research and development expenses, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Summary of Consolidated Results— 2003 Compared with 2002—Research and Development Expenses."
Intellectual Property
We attach great importance to patents, trademarks, copyrights and product designs in order to protect our investment in research and development, manufacturing and marketing. Our policy is to seek the widest possible protection for significant product and process developments in our major markets. Patents may cover products, processes, intermediate products and product uses. Protection for individual products extends for varying periods in accordance with the date of patent application filing and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage.
In most industrial countries, patent protection exists for new substances and formulations, as well as for 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. We maintain strict 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, as well as employee awareness training. Moreover, we monitor our competitors and vigorously challenge patent and trademark infringement. For example, the Chemical Products segment maintains a strict patent enforcement strategy, which has resulted in favorable outcomes in a number of patent infringement matters in Europe, Asia and the United States. We are currently pursuing a number of matters relating to the infringement of our acetic acid patents. Some of our earlier acetic acid patents will expire in 2007; other patents covering acetic acid are presently pending.
As patents expire, the products and processes described and claimed in those patents become generally available for use by the public. Our European and U.S. patents for making Sunett, an important product in our Performance Products segment, expire byexpired at the end of the first quarter of 2005, which will
reducethereby reducing our ability to realize revenues from making Sunett due to increased competition and potential limitations and will result in ourpossibly causing results of operations and cash flows relating to the product beingto be less favorable than today.in the past. We believe that the loss of no other single patent which may expire in the next several years will materially adversely affect our business or financial results.
We also seek to register trademarks extensively as a means of protecting the brand names of our products, which brand names become more important once the corresponding patents have expired. We protect our trademarks vigorously against infringement and also seek to register design protection where appropriate.
Environmental and Other Regulation
Obtaining, producing and distributing many of our products involves the use, storage, transportation and disposal of toxic and hazardous materials. We are subject to extensive, evolving and increasingly stringent national and local environmental laws and regulations, which address, among other things, the following:
• | Emissions to the air; |
• | Discharges to surface and subsurface waters; |
• | Other releases into the environment; |
• | Generation, handling, storage, transportation, treatment and disposal of waste materials; |
• | Maintenance of safe conditions in the workplace; and |
• | Production, handling, labeling or use of chemicals used or produced by us. |
We are subject to environmental laws and regulations that may require us to remove or mitigate the effects of the disposal or release of chemical substances at various sites. Under some of these laws and regulations, a current or previous owner or operator of property may be held liable for the costs of removal or remediation of hazardous substances on, under, or in its property, without regard to whether the owner or operator knew of, or caused the presence of the contaminants, and regardless of whether the practices that resulted in the contamination were legal at the time they occurred. As many of our production sites have an extended history of industrial use, it is impossible to predict precisely what effect these laws and regulations will have on us in the future. Soil and groundwater contamination has occurred at some of our sites, and might occur or be discovered at other sites. The Predecessor'sOur worldwide expenditures for the three months ended March 31, 2004 and the Successor's worldwide expenditures for the nine monthsyear ended December 31, 2004, in each case,2005, including those with respect to third party and divested sites, and those for compliance with environmental control regulations and internal company initiatives, totaled $22$84 million, of which $2$8 million was for capital projects, and totaled $66 million of which $6 million was for capital projects, respectively.projects. It is anticipated that stringent environmental regulations will continue to be imposed on us and the industry in general. Although we cannot predict with certainty future expenditures, due to new air regulations in the U.S., management expects that there will be a temporary increase in compliance costs that will total approximately $30$35 million to $45 million through 2007. According to our estimates, there may be an additional increase of approximately $50 million overin addition to the $30$35 million to $45 million during that time depending on the outcome of the pending court challenge to the low risk alternative method of compliance allowed by recent air regulations for Industrial/Commercial/Institutional Boilers and Process Heaters, but thereafter management believes that the current spending trends will continue. It is difficult to estimate the future costs of environmental protection and remediation because of many uncertainties, including uncertainties about the status of laws, regulations, and information related to individual locations and sites. Subject to the foregoing, but taking into consideration our experience to date regarding environmental matters of a similar nature and facts currently known, we believe that capital expenditures and remedial actions to comply with existing laws governing environmental protection will not have a material adverse effect on our business and financial results.
Air Issues
In December 1997, the Conference of the Parties of the United Nations Framework Convention on Climate Change drafted the Kyoto Protocol, which would establish significant emission reduction targets
for six gases considered to have global warming potential (referred to as greenhouse gases) and would drive mandatory reductions in developed nations subject to the Protocol. With Russia'sRussia’s ratification in November 2004, the Protocol has been adopted by enough of the larger, industrialized countries (defined in Annex I to the Protocol) and came into effect in February 2005 in all nations that have ratified it. The European Union or EU, including Germany and other countries where the Company has interests, ratified the Kyoto Protocol in 2002 and is formulatinghave formulated applicable regulations. Recent European Union regulations required all EU member states to have implemented a trading system covering carbon dioxide emissions by January 1, 2005. Accordingly, an emission trading system came into effect at the start of 2005. The new regulation directly affects our power plants at the Kelsterbach and Oberhausen sites in Germany and the Lanaken site in Belgium, as well as the power plants being operated by other InfraServ entities on sites at which we operate. WeOur power plants and the InfraServ entities may be required to purchase carbon dioxide credits, which could result in increased operating costs, or may be required to develop additional cost-effective methods to reduce carbon dioxide emissions further, which could result in increased capital expenditures. We have not yet determined the impact of this legislation on future capital spending. The new regulation also indirectly affects our other operations in the EU, which may experience higher energy costs from third party providers. WeHowever, we have not yet determined that the impact of this legislation on ourfuture capital spending and operating costs.costs will not be material.
In 2002, President Bush announced new climate change initiatives for the U.S. Among the policies to be pursued is a voluntary commitment to reduce the "greenhouse‘‘greenhouse gas intensity"intensity’’ of the U.S. economy by 18 percent18% within the next ten years. The Bush Administration is seeking to partner with various industrial sectors, including the chemical industry, to reach this goal. The American Chemistry Council, of which we are a member, has committed to pursue additional reductions in greenhouse gas intensity toward an overall target of 18 percent18% by 2012, using 1990 emissions intensity as the baseline. We currently emit carbon dioxide and smaller amounts of methane and experience some losses of polyfluorinated hydrocarbons used as refrigerants. We have invested and continue to invest in improvements to our processes that increase energy efficiency and decrease greenhouse gas intensity.
In some cases, compliance with environmental health and safety requirements involves our incurring capital expenditures. Due to new air regulations in the United States, management expects that there will be a temporary increase in compliance costs that will total approximately $30$35 million to $45 million through 2007. For example, the Miscellaneous Organic National Emissions Standards for Hazardous Air Pollutants regulations, and various approaches to regulating boilers and incinerators, including the National Emission Standards for Hazardous Air Pollutants (NESHAP) for Industrial/Commercial/Institutional Boilers and Process Heaters, will impose additional requirements on our operations. Although some of these rules have been finalized, aA significant portion of the NESHAP for Industrial/Commercial/Industrial Boilers and Process Heaters regulation that provides for a low risk alternative method of compliance for hydrogen chloride emissions has been challenged in federal court. We cannot predict the outcome of this challenge, which could, if successful, increase our costs by, according to our estimates, approximately $50 million in addition to the $30$35 million to $45 million noted above through 2007 to comply with this regulation.
Chemical Products Issues
Other new or revised regulations may place additional requirements on the production, handling, labeling or use of some chemical products. Pursuant to a European Union regulation on Risk Assessment of Existing Chemicals, the European Chemicals Bureau of the European Commission has been conducting risk assessments on approximately 140 major chemicals. Some of the chemicals initially being evaluated include vinyl acetate monomer or VAM, which CAG produces, as well as competitors'competitors’ products, such as styrene and 1,3-butadiene. These risk assessments entail a multi-stage process to determine whether and to what extent the Commission should classify the chemical as a carcinogen and, if so, whether this classification, and related labeling requirements, should apply only to finished products that contain specified threshold concentrations of a particular chemical. In the case of VAM, we currently do not expect a final ruling until the end of the first half of 2005.2007. We and other VAM producers are participating in this process with detailed scientific analyses supporting the industry'sindustry’s position that VAM is not a probable human carcinogen and that labeling of end
products should not be required but that, if
it is, should only be at relatively high parts per million of residual VAM levels in the end products. It is not possible for us to predict the outcome or effect of any final ruling.
Several recent studies have investigated possible links between formaldehyde exposure and various medical conditions, including leukemia. The International Agency for Research on Cancer or IARC recently reclassified formaldehyde from Group 2A (probable human carcinogen) to Group 1 (known human carcinogen) based on studies linking formaldehyde exposure to nasopharyngeal cancer, a rare cancer in humans. IARC also concluded that there is insufficient evidence for a causal association between leukemia and occupational exposure to formaldehyde, although it also characterized evidence for such an association as strong. The results of IARC'sIARC’s review will be examined by government agencies with responsibility for setting worker and environmental exposure standards and labeling requirements.
We are a producer of formaldehyde and plastics derived from formaldehyde. We, together with other producers and users, are evaluating these findings. We cannot predict the final effect of IARC'sIARC’s reclassification.
Other recent initiatives will potentially require toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. These initiatives include the Voluntary Children'sChildren’s Chemical Evaluation Program and High Production Volume Chemical Initiative in the United States, as well as various European Commission programs, such as the new European Environment and Health Strategy, commonly known as SCALE, and the proposal for the Registration, Evaluation and Authorization and Restriction of Chemicals or REACH. REACH, which was proposed by the European Commission in October 2003, will establish a system to register and evaluate chemicals manufactured or imported to the European Union. Depending on the final ruling, additional testing, documentation and risk assessments will occur for the chemical industry. This will affect European producers of chemicals as well as all chemical companies worldwide that export to member states of the European Union. The final ruling has not yet been decided.
The above-mentioned assessments in the United States and Europe may result in heightened concerns about the chemicals involved, and in additional requirements being placed on the production, handling, labeling or use of the subject chemicals. Such concerns and additional requirements could increase the cost incurred by our customers to use our chemical products and otherwise limit the use of these products, which could adversely affect the demand for these products.
Remediation Issues
We are subject to claims brought by United States federal or state regulatory agencies, regulatory agencies in other jurisdictions or private individuals regarding the cleanup of sites that we own or operate, owned or operated, or where waste or other material from its operations was disposed, treated or recycled. In particular, we have a potential liability under the United States Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, commonly known as Superfund, the United States Resource Conservation and Recovery Act, and related state laws, or regulatory requirements in other jurisdictions, or through obligations retained by contractual agreements for investigation and cleanup costs. At many of these sites, numerous companies, including us, or one of our predecessor companies, have been notified that the Environmental Protection Agency or EPA, state governing body or private individuals consider such companies to be potentially responsible parties 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. We regularly review the liabilities for these sites and accrue our best estimate of our ultimate liability for investigation or cleanup costs, but, due to the many variables involved in such estimation, the ultimate liability may vary from these estimates.
Our wholly-owned subsidiary, InfraServ Verwaltungs GmbH, is the general partner of the InfraServ companies that provide on-site general and administrative services at German sites in Frankfurt am Main-Hoechst, Gendorf, Huerth-Knapsack, Wiesbaden, Oberhausen and Kelsterbach. Producers at the sites, including our subsidiaries, are owners of limited partnership interests in the respective InfraServ companies. The InfraServ companies are liable for any residual contamination and other pollution because they own the real estate on which the individual facilities operate. In addition, Hoechst, 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. However, the InfraServ companies have agreed to indemnify Hoechst from any environmental liability arising out of or in connection with environmental pollution of any InfraServ site. The partnership agreements provide that, as between the limited partners, each limited partner is responsible for any contamination caused predominantly by such partner. The limited partners have also undertaken to indemnify Hoechst against such liabilities. Any liability that cannot be attributed to an InfraServ partner and for which no third party is responsible, is required to be borne by the InfraServ company in question. In view of this potential obligation to eliminate residual contamination, the InfraServ companies in which we have an interest, have recorded provisions totaling approximately $81$69 million as of December 31, 2004.2005. If the InfraServ companies default on their respective indemnification obligations to eliminate residual contamination, the limited partners 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 companies or the limited partners, these liabilities are to be borne by us in accordance with the demerger agreement.
As between Hoechst and CAG, Hoechst has agreed to indemnify CAG for two-thirds of these demerged residual liabilities. Likewise, in some circumstances CAG could be responsible for the elimination of residual contamination on a few sites that were not transferred to Infraserv companies, in which case Hoechst must reimburse CAG for two-thirds of any costs so incurred.
Some of our facilities in Germany are over 100 years old, and there may be significant contamination at these facilities. Provisions are not recorded for potential soil or groundwater contamination liability at facilities still under operation, as German law does not currently require owners or operators to investigate and remedy soil or groundwater contamination until the facility is closed and dismantled, unless the authorities otherwise direct. However, soil or groundwater contamination known to the owner or operator must be remedied if such contamination is likely to have an adverse effect on the public. If we were to terminate operations at one of our facilities or if German law were changed to require such removal or clean up, the cost could be material to us. We cannot accurately determine the ultimate potential liability for investigation and clean up at such sites. We adjust provisions as new remedial commitments are made. See Notes 4 and 1918 to the Consolidated Financial Statements.consolidated financial statements.
In the demerger agreement between HoechstExport Control Regulation
From time to time, certain of our foreign subsidiaries have made sales of acetate, sweeteners and CAG, CAG agreedpolymer products to indemnify Hoechst against environmental liabilities for environmental contaminationcustomers in countries that could arise under some divestiture agreements regarding chemical businesses, participationsare or assets located in Germany,have previously been subject to sanctions and embargoes imposed by the U.S. government. These countries include Cuba, Iran, Sudan and Syria, four countries currently identified by the U.S. State Department as terrorist-sponsoring states and other countries that were entered intopreviously have been identified by Hoechst priorthe U.S. State Department as terrorist-sponsoring states, or countries to the demerger. CAG and Hoechstwhich sales have agreed that CAG will indemnify Hoechst against those liabilities up to an amount of €250 million (approximately $340 million). Hoechst will bear those liabilities exceeding €250 million (approximately $340 million), but CAG will reimburse Hoechst for one-third of those liabilities for amounts that exceed €750 million (approximately $1,022 million). CAG has made payments through December 31, 2004 of $38 million for environmental contamination liabilitiesbeen regulated in connection with the divestiture agreements. Asother foreign policy concerns. In September 2005, we began an investigation of December 31, 2004, CAG has reservesthese transactions and initially identified approximately $10 million of $46 million for this contingency andsales by our foreign subsidiaries that may be requiredin violation of regulations of the United States Treasury Department's Office of Foreign Assets Control, or OFAC, or the United States Department of Commerce's Bureau of Industry and Security. We now believe that approximately $5 million of these sales may actually be violations of U.S. law or regulation. The potential violations uncovered by the investigation include approximately $180,000 of sales of emulsions to record additional reservesCuba by two of our foreign subsidiaries. Sales to Cuba are violations of OFAC regulations. In addition, we have recently discovered that our sales office in Turkey sold polymer products to companies in Iran and Syria, including indirectly selling product through other companies located in non-embargoed locations. These transactions may have involved an intentional violation of our policies and federal regulations by employees of our office in Turkey. Our investigation of potentially prohibited sales is ongoing and we can not yet be certain of the future. See Notes 19 and 27number of these transactions, the sales amounts or the identity of every individual who may have been involved. However, sales from our office in Turkey to all customers are approximately $12 million annually.
We have voluntarily disclosed these matters to the Consolidated Financial Statements.U.S. Treasury Department and the U.S. Department of Commerce, and we are currently engaged in discussions with them. We have also taken corrective actions, including directives to senior business leaders prohibiting such sales, as well as
modifications to our accounting systems that are intended to prevent the initiation of sales to countries that are subject to the U.S. Treasury Department or the U.S. Department of Commerce restrictions.
At December 31, 2004,If violations of the estimatedU.S. export control laws are found we could be subject to civil penalties of up to $50,000 per violation, and criminal penalties could range for remediation costsup to the greater of $1 million per violation, or five times the value of the goods sold. If such violations occurred, the United States Government could deny us export privileges. The ultimate resolution of this matter is between $100 millionsubject to completion of our investigation and $143 million,a final ruling or settlement with the bestgovernment. Accordingly, we cannot estimate the potential sanctions or fines relating to this matter. There can be no assurance that any governmental investigation or our own investigation of $143 million. Future findingsthese matters will not conclude that violations of applicable laws have occurred or changes in estimates couldthat the results of these investigations will not have a material adverse effect on our business and results of operations. See ‘‘Risk Factors—Risks Related to Our Business—We are an international company and are exposed to general, economic, political and regulatory conditions and risks in the recorded reserves and Celanese's cash flows. As of December 31, 2004 and December 31, 2003,countries in which we had reserves of $143 million and $159 million, respectively, for environmental matters worldwide. We regularly review the liabilities for these sites and have accrued our best estimate of an ultimate liability for investigation or cleanup costs, but, due to many variables involved in such estimation, the ultimate liability may vary from these estimates.significant operations.’’
Organizational Structure
Significant Subsidiaries
We operate our global businesses through subsidiaries in Europe, North America and Asia, all of which are owned indirectly through a series of holding companies. Our European and Asian subsidiaries, including Celanese Chemicals Europe GmbH, Ticona GmbH, Nutrinova Nutrition Specialties & Food
Ingredients GmbH, and Celanese Singapore Pte., Ltd., are owned indirectly by CAG. In North America, many of the businesses are consolidated under CAC which, through its wholly-owned subsidiary, CNA Holdings, Inc., directly or indirectly owns the North American operating companies. These include Celanese Ltd., Ticona Polymers, Inc., Celanese Acetate LLC, and Grupo Celanese S.A.
Employees
As of December 31, 2004,2005, we had approximately 9,1009,300 employees worldwide from continuing operations, compared to 9,5009,100 as of December 31, 2003.2004. This represents a decreasean increase of approximately 4 percent.1.5%. The following table sets forth the approximate number of employees on a continuing basis as of December 31, 2005, 2004, 2003, and 2002.2003.
Employees as of December 31, | ||||||||||||||
2004 | 2003 | 2002 | ||||||||||||
North America | 5,500 | 5,600 | 6,300 | |||||||||||
thereof USA | 4,000 | 4,000 | 4,600 | |||||||||||
thereof Canada | 400 | 400 | 500 | |||||||||||
thereof Mexico | 1,100 | 1,200 | 1,200 | |||||||||||
Europe | 3,300 | 3,600 | 3,900 | |||||||||||
thereof Germany | 3,000 | 3,000 | 2,800 | |||||||||||
Asia | 200 | 200 | 200 | |||||||||||
Rest of World | 100 | 100 | 100 | |||||||||||
Total Employees | 9,100 | 9,500 | 10,500 | |||||||||||
Employees as of December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
North America | 4,900 | 5,500 | 5,600 | |||||||||||
thereof USA | 3,500 | 4,000 | 4,000 | |||||||||||
thereof Canada | 600 | 400 | 400 | |||||||||||
thereof Mexico | 800 | 1,100 | 1,200 | |||||||||||
Europe | 4,100 | 3,300 | 3,600 | |||||||||||
thereof Germany | 2,800 | 3,000 | 3,000 | |||||||||||
Asia | 200 | 200 | 200 | |||||||||||
Rest of World | 100 | 100 | 100 | |||||||||||
Total Employees | 9,300 | 9,100 | 9,500 | |||||||||||
Many of our employees are unionized, particularly in Germany, Canada, Mexico, Brazil, Belgium and France. However, in the United States, less than one quarter of our employees are unionized. Moreover, in Germany and France, wages and general working conditions are often the subject of centrally negotiated collective bargaining agreements. Within the limits established by these agreements, our various subsidiaries negotiate directly with the unions and other labor organizations, such as workers'workers’ councils, representing the employees. Collective bargaining agreements between the German chemical employers associations and unions relating to remuneration typically have a term of one year, while in the United States a three year term for collective bargaining agreements is typical. We offer comprehensive benefit plans for employees and their families and believe our relations with employees are satisfactory.
Item 1A. Risk Factors
Many factors could have an effect on Celanese’s financial condition, cash flows and results of operations. We are subject to various risks resulting from changing economic, environmental, political, industry, business and financial conditions. The principal factors are described below.
Risks Related to Our Business
We are an international company and are exposed to general economic, political and regulatory conditions and risks in the countries in which we have significant operations.
We operate in the global market and have customers in many countries. We have major facilities located in North America, Europe and Asia, including facilities in Germany, China, Japan, Korea and Saudi Arabia operated through ventures. Our principal customers are similarly global in scope, and the prices of our most significant products are typically world market prices. Consequently, our business and financial results are affected directly and indirectly by world economic, political and regulatory conditions.
Conditions such as the uncertainties associated with war, terrorist activities, epidemics, pandemics or political instability in any of the countries in which we operate could affect us by causing delays or losses in the supply or delivery of raw materials and products as well as increased security costs, insurance premiums and other expenses. These conditions could also result in or lengthen economic recession in the United States, Europe, Asia or elsewhere. Moreover, changes in laws or regulations, such as unexpected changes in regulatory requirements (including import or export licensing requirements), or changes in the reporting requirements of United States, German or European Union governmental agencies, could increase the cost of doing business in these regions. Any of these conditions may have an effect on our business and financial results as a whole and may result in volatile current and future prices for our securities, including our stock.
From time to time, certain of our foreign subsidiaries have made sales of acetate, sweeteners and polymer products to customers in countries that are or have previously been subject to sanctions and embargoes imposed by the U.S. government. These countries include Cuba, Iran, Sudan and Syria, four countries currently identified by the U.S. State Department as terrorist-sponsoring states and other countries that previously have been identified by the U.S. State Department as terrorist-sponsoring states, or countries to which sales have been regulated in connection with other foreign policy concerns. In September 2005, we began an investigation of these transactions and initially identified approximately $10 million of sales by our foreign subsidiaries that may be in violation of regulations of the United States Treasury Department's Office of Foreign Assets Control, or OFAC, or the United States Department of Commerce's Bureau of Industry and Security. We now believe that approximately $5 million of these sales may actually be violations of U.S. law or regulation. The potential violations uncovered by the investigation include approximately $180,000 of sales of emulsions to Cuba by two of our foreign subsidiaries. Sales to Cuba are violations of OFAC regulations. In addition, we have recently discovered that our sales office in Turkey sold polymer products to companies in Iran and Syria, including indirectly selling product through other companies located in non-embargoed locations. These transactions may have involved an intentional violation of our policies and federal regulations by employees of our office in Turkey. Our investigation of potentially prohibited sales is ongoing and we can not yet be certain of the number of these transactions, the sales amounts or the identity of every individual who may have been involved. However, sales from our office in Turkey to all customers are approximately $12 million annually.
We have voluntarily disclosed these matters to the U.S. Treasury Department and the U.S. Department of Commerce, and we are currently engaged in discussions with them. We have also taken corrective actions, including directives to senior business leaders prohibiting such sales, as well as modifications to our accounting systems that are intended to prevent the initiation of sales to countries that are subject to the U.S. Treasury Department or the U.S. Department of Commerce restrictions.
If violations of the U.S. export control laws are found we could be subject to civil penalties of up to $50,000 per violation, and criminal penalties could range up to the greater of $1 million per violation, or five times the value of the goods sold. If such violations occurred, the United States Government could
deny us export privileges. The ultimate resolution of this matter is subject to completion of our investigation and a final ruling or settlement with the government. Accordingly, we cannot estimate the potential sanctions or fines relating to this matter. There can be no assurance that any governmental investigation or our own investigation of these matters will not conclude that violations of applicable laws have occurred or that the results of these investigations will not have a material adverse effect on our business and results of operations.
Cyclicality in the industrial chemicals industry has in the past and may in the future result in reduced operating margins or in operating losses.
Consumption of the basic chemicals that we manufacture, in particular those in acetyl products, such as methanol, formaldehyde, acetic acid and vinyl acetate monomer, has increased significantly over the past 30 years. Despite this growth in consumption, producers have experienced alternating periods of inadequate capacity and excess capacity for these products. Periods of inadequate capacity, including some due to raw material shortages, have usually resulted in increased selling prices and operating margins. This has often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates, selling prices and operating margins.
We expect that these cyclical trends in selling prices and operating margins relating to capacity shortfalls and additions will likely persist in the future, principally due to the continuing combined impact of five factors:
• | Significant capacity additions, whether through plant expansion or construction, can take two to three years to come on stream and are therefore necessarily based upon estimates of future demand. |
• | When demand is rising, competition to build new capacity may be heightened because new capacity tends to be more profitable, with a lower marginal cost of production. This tends to amplify upswings in capacity. |
• | When demand is falling, the high fixed cost structure of the capital-intensive chemicals industry leads producers to compete aggressively on price in order to maximize capacity utilization. |
• | As competition in these products is focused on price, being a low-cost producer is critical to profitability. This favors the construction of larger plants, which maximize economies of scale, but which also lead to major increases in capacity that can outstrip current growth in demand. |
• | Cyclical trends in general business and economic activity produce swings in demand for chemicals. |
The length and depth of product and industry business cycles of our markets, particularly in the automotive, electrical, construction and textile industries, may result in reduced operating margins or in operating losses.
Some of the markets in which our customers participate, such as the automotive, electrical, construction and textile industries, are cyclical in nature, thus posing a risk to us which is beyond our control. These markets are highly competitive, to a large extent driven by end-use markets, and may experience overcapacity, all of which may affect demand for and pricing of our products.
We are subject to risks associated with the increased volatility in raw materials prices and the availability of key raw materials.
We purchase significant amounts of natural gas, ethylene, butane, methanol and propylene from third parties for use in our production of basic chemicals in the Chemical Products segment, principally formaldehyde, acetic acid, vinyl acetate monomer, as well as oxo products. We use a portion of our output of these chemicals, in turn, as inputs in the production of further products in all our segments. We also purchase significant amounts of cellulose or wood pulp for use in our production of cellulose acetate in the Acetate Products segment. We purchase significant amounts of natural gas, electricity, coal and fuel oil to supply the energy required in our production processes.
We also lease supplies of various precious metals, such as rhodium, used as catalysts for the production of these chemicals. With growing demand for these precious metals, most notably in the automotive industry, the cost to purchase or lease these precious metals has increased, caused by a shortage in supply. These circumstances are expected to continue into the second half of 2006.
Prices of natural gas, oil and other hydrocarbons and energy increased dramatically in 2005 and 2004. To the extent this trend continues and we are unable to pass through these price increases to our customers, our operating profit and results of operations may be less favorable than expected.
We are exposed to any volatility in the prices of our raw materials and energy. Although we have agreements providing for the supply of natural gas, ethylene, propylene, wood pulp, electricity, coal and fuel oil, the contractual prices for these raw materials and energy vary with market conditions and may be highly volatile. Factors which 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, strike action or involuntary shutdowns; |
• | The general level of business and economic activity; and |
• | The direct or indirect effect of governmental regulation. |
We strive to improve profit margins of many of our products through price increases when warranted and accepted by the market; however, our operating margins may decrease if we cannot pass on increased raw material prices to customers. Even in periods during which raw material prices decline, we may suffer decreasing operating profit margins if raw material price reductions occur at a slower rate than decreases in the selling prices of our products.
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply/demand fundamentals change. We manage our exposure through the use of derivative instruments and forward purchase contracts for commodity price hedging, entering into long-term supply agreements, and multi-year purchasing and sales agreements. Our policy, for the majority of our natural gas and butane requirements, allows entering into supply agreements and forward purchase or cash-settled swap contracts. As of December 31, 2005 and 2004, there were no derivative contracts of this type outstanding. In 2003, there were forward contracts covering approximately 35% of our Chemical Products North American requirements. We regularly assess our practice of purchasing a portion of our commodity requirements forward, and the utilization of a variety of other raw material hedging instruments, in addition to forward purchase contracts, in accordance with changes in market conditions.
We capped our exposure on approximately 20% of our U.S. natural gas requirements during the months of August and September of 2004. The fixed price natural gas forward contracts and any premium associated with the purchase of a price cap are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap or cap contracts correlate to the actual purchases of the commodity and have the effect of securing or limiting predetermined prices for the underlying commodity. Although these contracts were structured to limit exposure to increases in commodity prices, certain swaps may also limit the potential benefit we might have otherwise received from decreases in commodity prices. These cash-settled swap or cap contracts were accounted for as cash flow hedges.
We have a policy of maintaining, when available, multiple sources of supply for raw materials. However, some of our individual plants may have single sources of supply for some of their raw materials, such as carbon monoxide and acetaldehyde. We may not be able to obtain sufficient raw materials due to unforeseen developments that would cause an interruption in supply. Even if we have multiple sources of supply for a raw material, these sources may not make up for the loss of a major supplier. Nor can there be any guarantee that profitability will not be affected should we be required to qualify additional sources of supply in the event of the loss of a sole or a major supplier.
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, especially in our Performance Products and Ticona segments, depend significantly on the development of commercially viable new products, product grades and applications,
as well as production technologies. If we are unsuccessful in developing new products, applications and production processes in the future, our competitive position and operating results will be negatively affected. Likewise, we have undertaken and are continuing to undertake initiatives in all 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.
Frankfurt airport expansion could require us to reduce production capacity of, limit expansion potential of, or incur relocation costs for our Kelsterbach plant which would lead to significant additional costs.
The Frankfurt airport’s expansion plans include the construction of an additional runway (the northwest option), which would be located in close proximity to our Kelsterbach production plant. The construction of this particular runway could have a negative effect on the plant’s current production capacity and future development. While the government of the state of Hesse and the owner of the Frankfurt airport promote the expansion of the northwest option, it is uncertain whether this option is in accordance with applicable laws. Although the government of the state of Hesse expects the plan approval for the airport expansion in 2007 and the start of operations in 2009-2010, neither the final outcome of this matter nor its timing can be predicted at this time.
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 concerning, and potential obligations with respect to, contaminated sites may have a significant negative impact on our operating results. These include obligations related to sites currently or formerly owned or operated by us, or where waste from our operations was disposed. We also have obligations related to the indemnity agreement contained in the demerger and transfer agreement between CAG and Hoechst, also referred to as the demerger agreement, for environmental matters arising out of certain divestitures that took place prior to the demerger. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Environmental Liabilities,’’ Notes 18 and 25 to the consolidated financial statements.
Our operations are subject to extensive international, national, state, local, and other supranational 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 them, 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, regulations and enforcement policies could result in substantial costs and liabilities to us or limitations on our operations and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than at present. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities and our business and operating results may be less favorable than expected. Due to new air regulations in the U.S., management expects that there will be a temporary increase in compliance costs that will total approximately $35 million to $45 million through 2007. For example, the Miscellaneous Organic National Emissions Standards for Hazardous Air Pollutants (NESHAP) regulations, and various approaches to regulating boilers and incinerators, including the NESHAPs for Industrial/ Commercial/Institutional Boilers and Process Heaters, will impose additional requirements on our operations. Although some of these rules have been finalized, a significant portion of the NESHAPs for Industrial/Commercial/Institutional Boilers and Process Heaters regulation that provides for a low risk alternative method of compliance for hydrogen chloride emissions has been challenged in federal court. We cannot predict the outcome of this challenge, which could, if successful, increase our costs by, according to our estimates, approximately $50 million in addition to the $35 million to $45 million noted above through 2007 to comply with this regulation.
We are also involved in several claims, lawsuits and administrative proceedings relating to environmental matters. An adverse outcome in any of them may negatively affect our earnings and cash flows in a particular reporting period.
Changes in environmental, health and safety regulatory requirements could lead to a decrease in demand for our products.
New or revised governmental regulations relating to health, safety and the environment may also affect demand for our products.
Pursuant to the European Union regulation on Risk Assessment of Existing Chemicals, the European Chemicals Bureau of the European Commission has been conducting risk assessments on approximately 140 major chemicals. Some of the chemicals initially being evaluated include VAM, which we produce. These risk assessments entail a multi-stage process to determine to what extent the European Commission should classify the chemical as a carcinogen and, if so, whether this classification and related labeling requirements should apply only to finished products that contain specified threshold concentrations of a particular chemical. In the case of VAM, we currently do not expect a final ruling until the end of 2007. We and other VAM producers are participating in this process with detailed scientific analyses supporting the industry’s position that VAM is not a probable human carcinogen and that labeling of final products should not be required. If labeling is required, then it should depend on relatively high parts per million of residual VAM in these end products. We cannot predict the outcome or effect of any final ruling.
Several recent studies have investigated possible links between formaldehyde exposure and various end points including leukemia. The International Agency for Research on Cancer or IARC recently reclassified formaldehyde from Group 2A (probable human carcinogen) to Group 1 (known human carcinogen) based on studies linking formaldehyde exposure to nasopharyngeal cancer, a rare cancer in humans. IARC also concluded that there is insufficient evidence for a causal association between leukemia and occupational exposure to formaldehyde, although it also characterized evidence for such an association as strong. The results of IARC’s review will be examined by government agencies with responsibility for setting worker and environmental exposure standards and labeling requirements. We are a producer of formaldehyde and plastics derived from formaldehyde. We are participating together with other producers and users in the evaluations of these findings. We cannot predict the final effect of IARC’s reclassification.
Other recent initiatives will potentially require toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. These initiatives include the Voluntary Children’s Chemical Evaluation Program and High Production Volume Chemical Initiative in the United States, as well as various European Commission programs, such as the new European Environment and Health Strategy, commonly known as SCALE, as well as the Proposal for the Registration, Evaluation, Authorization and Restriction of Chemicals or REACH. REACH, which the European Commission proposed in October 2003, will establish a system to register and evaluate chemicals manufactured in, or imported to, the European Union. Depending on the final ruling, additional testing, documentation and risk assessments will occur for the chemical industry. This will affect European producers of chemicals as well as all chemical companies worldwide that export to member states of the European Union. The final ruling has not yet been decided.
The above-mentioned assessments in the United States and Europe may result in heightened concerns about the chemicals involved and in additional requirements being placed on the production, handling, labeling or use of the subject chemicals. Such concerns and additional requirements could 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.
Our production facilities handle the processing of some volatile and hazardous materials that subject us to operating risks that could have a negative effect on our operating results.
Our operations are subject to operating risks associated with chemical manufacturing, including the related storage and transportation of raw materials, products and wastes. These hazards include, among other things:
• | pipeline and storage tank leaks and ruptures; |
• | explosions and fires; and |
• | discharges or releases of toxic or hazardous substances. |
These operating risks can cause personal injury, property damage 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 and our operating results and cash flows.
We maintain property, business interruption and casualty insurance which we believe is in accordance with customary industry practices, but we cannot predict whether this insurance will be adequate to fully cover all potential hazards incidental to our business. We have established two captive insurance subsidiaries (‘‘Captives’’) that provide a portion of the total insurance coverage to us for certain of our lower tier property and casualty risks. They additionally provide coverage to third parties for their higher tier risk programs. If there were concurrent claims made on all policies issued by the Captives, sufficient capital may not be available for them to satisfy all claims against all such policies.
Our significant non-U.S. operations expose us to global exchange rate fluctuations that could impact our profitability.
We are exposed to market risk through commercial and financial operations. Our market risk consists principally of exposure to fluctuations in currency exchange and interest rates.
As we conduct a significant portion of our operations outside the U.S., fluctuations in currencies of other countries, especially the euro, may materially affect our operating results. For example, changes in currency exchange rates may affect:
• | The relative prices at which we and our competitors sell products in the same market; and |
• | The cost of items required in our operations. |
We use financial instruments to hedge our exposure to foreign currency fluctuations. The net notional amounts under such foreign currency contracts outstanding at December 31, 2005 were $564 million.
A substantial portion of our net sales is denominated in currencies other than the U.S. dollar. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international sales, earnings, assets and liabilities will be reduced because the local currency will translate into fewer U.S. dollars.
In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a currency different from the operating subsidiary’s functional currency. Given the volatility of exchange rates, we may not be able to manage our currency transaction and/or translation risks effectively, or volatility in currency exchange rates may expose our financial condition or results of operations to a significant additional risk. Since a portion of our indebtedness is and will be denominated in currencies other than U.S. dollars, a weakening of the U.S. dollar could make it more difficult for us to repay our indebtedness.
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.
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 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 can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. A change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost for subsequent fiscal years.
CAG may be required to make payments to Hoechst.
Under its 1999 demerger agreement with Hoechst, CAG agreed to indemnify Hoechst for environmental liabilities that Hoechst may incur with respect to CAG’s German production sites, which were transferred from Hoechst to CAG in connection with the demerger. CAG also has an obligation to indemnify Hoechst against liabilities for environmental damages or contamination arising under certain divestiture agreements entered into by Hoechst prior to the demerger. As the indemnification obligations depend on the occurrence of unpredictable future events, the costs associated with them are not yet determinable and may materially affect operating results.
CAG’s obligation to indemnify Hoechst against liabilities for environmental contamination in connection with the divestiture agreements is subject to the following thresholds (translated into U.S. dollars using the December 31, 2005 exchange rate):
• | CAG will indemnify Hoechst for the total amount of these liabilities up to €250 million (approximately $295 million); |
• | Hoechst will bear the full amount of those liabilities between €250 million (approximately $295 million) and €750 million (approximately $885 million); and |
• | CAG will indemnify Hoechst for one third of those liabilities for amounts exceeding €750 million (approximately $885 million). |
CAG has made total cumulative payments through December 31, 2005 of $41 million for environmental contamination liabilities in connection with the divestiture agreements, and may be required to make additional payments in the future. As of December 31, 2005, we have reserves of approximately $33 million for this contingency, and may be required to record additional reserves in the future.
Also, CAG has undertaken in the demerger agreement to indemnify Hoechst to the extent that Hoechst is required to discharge liabilities, including tax liabilities, in relation to assets included in the demerger, where such liabilities have not been demerged due to transfer or other restrictions. CAG did not make any payments to Hoechst during the year ended December 31, 2005, nor did it make any payments in 2004 or 2003 in connection with this indemnity.
Under the demerger agreement, CAG will also be responsible, directly or indirectly, for all of Hoechst’s obligations to past employees of businesses that were demerged to CAG. Under the demerger agreement, Hoechst agreed to indemnify CAG from liabilities (other than liabilities for environmental contamination) stemming from the agreements governing the divestiture of Hoechst’s polyester businesses, which were demerged to CAG, insofar as such liabilities relate to the European part of that business. Hoechst has also agreed to bear 80% of the financial obligations arising in connection with the government investigation and litigation associated with the sorbates industry for price fixing described in ‘‘Legal Proceedings—Sorbates Antitrust Actions’’ and Note 25 to the Consolidated Financial Statements, and CAG has agreed to bear the remaining 20%.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly and affect our operating results.
Certain of our borrowings, primarily borrowings under the amended and restated senior credit facilities, are at variable rates of interest and expose us to interest rate risk. If interest rates increase, which we expect to occur, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease. As of December 31, 2005, we had approximately $1.9 billion of variable rate debt, of which $0.3 billion is hedged with an interest rate swap, which leaves us approximately $1.6 billion of variable rate debt subject to interest rate exposure. Accordingly, a 1% increase in interest rates would increase annual interest expense by approximately $16 million.
We may enter into interest rate swap agreements to reduce the exposure of interest rate risk inherent in our debt portfolio. We have, in the past, used swaps for hedging purposes only.
We are a ‘‘controlled company’’ within the meaning of the New York Stock Exchange rules and, as a result, are exempt from certain corporate governance requirements.
Affiliates of the Sponsor continue to control a majority of the voting power of our outstanding common stock. As a result, we are a ‘‘controlled company’’ within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock Exchange rules, a company of which more than 50% of the voting power is held by another company is a ‘‘controlled company’’ and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (4) the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. We intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating and compensation committees consist entirely of independent directors. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.
Because our Sponsor controls us, the influence of our public shareholders over significant corporate actions will be limited, and conflicts of interest between our Sponsor and us or you could arise in the future.
Our Sponsor beneficially owns (or has a right to acquire) approximately 52.1% of our outstanding Series A common stock. Under the terms of the stockholders’ agreement between us and the Original Shareholders, certain of the Original Stockholders that are affiliates of the Sponsor are also entitled to designate all nominees for election to our board of directors for so long as they hold at least 25% of the total voting power of our Series A common stock. Thereafter, although our Sponsor will not have an explicit contractual right to do so, it may still nominate directors in its capacity as a stockholder. As a result, our Sponsor, through its control over the composition of our board of directors and its control of the majority of the voting power of our Series A common stock, will continue to have effective control over our decisions to enter into any corporate transaction and will have the ability to prevent any transaction that requires the approval of equityholders, regardless of whether or not other equityholders believe that any such transaction is in their own best interests. For example, our Sponsor effectively could cause us to make acquisitions that increase our indebtedness or to sell revenue-generating assets. Additionally, our Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our Sponsor continues to own a significant amount of our equity, even if such amount is less than 50%, it will continue to be able to significantly influence or effectively control our decisions.
Our second amended and restated certificate of incorporation renounces any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities. The second amended and restated certificate of incorporation further provides that none of the Original Stockholders (including the Sponsor) or their affiliates or any director who is not employed by Celanese (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates has any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us. In addition, in the event that any of the Original Stockholders (including the Sponsor) or any non-employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates and for Celanese or its affiliates, such Original Stockholder or non-employee director has no duty to communicate or offer such transaction or business opportunity to us and may take any such opportunity for themselves or offer it to another person or entity.
Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could reduce our ability to maintain our market position and our margins.
We attach great importance to patents, trademarks, copyrights and product designs in order to protect our investment in research and development, manufacturing and marketing. Our policy is to seek the widest possible protection for significant product and process developments in our major markets. Patents may cover products, processes, intermediate products and product uses. Protection for individual products extends for varying periods in accordance with the date of patent application filing and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Our continued growth strategy may bring us to regions of the world where intellectual property protection may be limited and difficult to enforce.
As patents expire, the products and processes described and claimed in those patents become generally available for use by the public. Our European and U.S. patents for making Sunett, an important Performance Products product, expired at the end of the first quarter of 2005, which reduces our ability to realize revenues from making Sunett due to increased competition and potential limitations and will result in our results of operations and cash flows relating to the product being less favorable than today.
We also seek to register trademarks extensively as a means of protecting the brand names of our products, which brand names become more important once the corresponding patents have expired. If we are not successful in protecting our trademark rights, our revenues, results of operations and cash flows may be adversely affected.
The market price of our Series A common stock may be volatile, which could cause the value of your investment to decline.
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of the Series A common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our Series A common stock could decrease significantly.
Provisions in our second amended and restated certificate of incorporation and bylaws, as well as any shareholders’ rights plan, may discourage a takeover attempt.
Provisions contained in our second amended and restated certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Provisions of our second amended and restated certificate of incorporation and bylaws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. For example, our second amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our shareholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our Series A common stock. These rights may have the effect of delaying or deterring a change of control of our company. In addition, a change of control of our company may be delayed or deterred as a result of our having three classes of directors (each class elected for a three year term) or as a result of any shareholders’ rights plan that our board of directors may adopt. In addition, we would be required to issue additional shares of our Series A common stock to holders of the preferred stock who convert following a fundamental change. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our Series A common stock.
Risks Related to the Acquisition of CAG
If the Domination Agreement ceases to be operative, the Company’s managerial control over Celanese AG is limited.
We own 100% of the outstanding shares of CAC and approximately 98% of the outstanding shares of CAG. Our access to the cash flows and our control of CAG is subject to the continuing effectiveness of the Domination Agreement.
The Domination Agreement is subject to legal challenges instituted by dissenting shareholders. Minority shareholders have filed several actions against CAG in the Frankfurt District Court (Landgericht), including actions that seek to set aside the shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004. Although a number of these lawsuits were settled in March 2006, if any of the remaining lawsuits are successful, the Domination Agreement and the change in CAG’s fiscal year could be declared void and CAG could be prohibited from performing its obligations under the Domination Agreement. In addition, public register proceedings instituted by two minority shareholders are pending in the Königstein Local Court (Amtsgericht). These proceedings were commenced with a view to have the registration of the Domination Agreement in the Commercial Register deleted (Amtslöschungsverfahren). See ‘‘Legal Proceedings.’’
If the Domination Agreement ceases to be operative, the Purchaser’s ability, and thus our ability to control the board of management decisions of CAG, will be significantly limited by German law. As a result, we may not be able to ensure that our strategy for the operation of our business can be fully implemented. In addition, our access to the operating cash flow of CAG in order to fund payment requirements on our indebtedness will be limited, which could have a material adverse effect on the value of our stock.
If the Domination Agreement ceases to be operative, certain actions taken under the Domination Agreement might have to be reversed.
If the legal challenges to the Domination Agreement by dissenting shareholders of CAG are successful, some or all actions taken under the Domination Agreement may be required to be reversed and the Purchaser may be required to compensate CAG for damages caused by such actions. Any such event could have a material adverse effect on our ability to make payments on our indebtedness and on the value of our stock.
Minority shareholders may interfere with CAG’s future actions, which may prevent us from causing CAG to take actions which may have beneficial effects for our shareholders.
The Purchaser currently owns approximately 98% of the CAG Shares. Shareholders unrelated to us hold the remainder of the outstanding CAG Shares. German law provides certain rights to minority shareholders, which could have the effect of delaying, or interfering with, corporate actions (including those requiring shareholder approval), such as a squeeze-out in accordance with the provisions of the German Transformation Act (Umwandlungsgesetz, UmwG). Minority shareholders may be able to delay or prevent the implementation of CAG’s corporate actions irrespective of the size of their shareholding. Any challenge by minority shareholders to the validity of a corporate action may be subject to judicial resolution that may substantially delay or hinder the implementation of such action. Such delays of, or interferences with, corporate actions as well as related litigation may limit our access to CAG’s cash flows and make it difficult or impossible for us to take or implement corporate actions which may be desirable in view of our operating or financial requirements, including actions which may have beneficial effects for our shareholders.
CAG’s board of management may refuse to comply with instructions given by the Purchaser pursuant to the Domination Agreement, which may prevent us from causing CAG to take actions which may have beneficial effects for our shareholders.
Under the Domination Agreement, the Purchaser is entitled to give instructions directly to the board of management of CAG, including, but not limited to, instructions that are disadvantageous to CAG, as long as such disadvantageous instructions benefit the Purchaser or the companies affiliated with either the Purchaser or CAG. CAG’s board of management is required to comply with any such instruction, unless, at the time when such instruction is given, (i) it is, in the opinion of the board of management of CAG, obviously not in the interests of the Purchaser or the companies affiliated with either the Purchaser or CAG, (ii) in the event of a disadvantageous instruction, the negative consequences to CAG are disproportionate to the benefits to the Purchaser or the companies affiliated with either the Purchaser or CAG, (iii) compliance with the instruction would violate legal or statutory restrictions, (iv) compliance with the instruction would endanger the existence of CAG or (v) it is doubtful whether the Purchaser will be able to fully compensate CAG, as required by the Domination Agreement, for its annual loss
(Jahresfehlbetrag) incurred during the fiscal year in which such instruction is given. The board of management of CAG remains ultimately responsible for making the executive decisions for CAG and the Purchaser, despite the Domination Agreement, is not entitled to act on behalf of, and has no power to legally bind, CAG. The CAG board of management may delay the implementation of, or refuse to implement, any of the Purchaser’s instructions despite its general obligation to follow such instructions (with the exceptions mentioned above). Such delays of, or interferences with, compliance with the Purchaser’s instructions by the board of management of CAG may make it difficult or impossible for the Purchaser to implement corporate actions which may be desirable in view of our operating or financial requirements, including actions which may have beneficial effects for our shareholders.
The Purchaser is required to ensure that CAG pays a guaranteed fixed annual payment to the minority shareholders of CAG, which may reduce the funds the Purchaser can otherwise make available to us.
As long as the Purchaser does not own 100% of the outstanding CAG Shares, the Domination Agreement requires, among other things, the Purchaser to ensure that CAG makes a gross guaranteed fixed annual payment (Ausgleich) to minority shareholders of €3.27 per CAG share less certain corporate taxes in lieu of any future dividend. Taking into account the circumstances and the tax rates at the time of entering into of the Domination Agreement, the net guaranteed fixed annual payment is €2.89 per CAG share for a full fiscal year. As of December 31, 2005, there were approximately 0.9 million CAG Shares held by minority shareholders. The net guaranteed fixed annual payment may, depending on applicable corporate tax rates, in the future be higher, lower or the same as €2.89. The amount of this guaranteed fixed annual payment was calculated in accordance with applicable German law. The amount of the payment is currently under review in special award proceedings (Spruchverfahren). See ‘‘Legal Proceedings.’’ Such guaranteed fixed annual payments will be required regardless of whether the actual distributable profits per share of CAG are higher, equal to, or lower than the amount of the guaranteed fixed annual payment per share. The guaranteed fixed annual payment will be payable for so long as there are minority shareholders of CAG and the Domination Agreement remains in place. No dividends for the period after the effectiveness of the Domination Agreement, other than the guaranteed fixed annual payment effectively paid by the Purchaser, have been or are expected to be paid by CAG. These requirements may reduce the funds the Purchaser can make available to the Company and its subsidiaries and, accordingly, diminish our ability to make payments on our respective indebtedness. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Domination Agreement’’.
The amounts of the fair cash compensation and of the guaranteed fixed annual payment offered under the Domination Agreement may be increased, which may further reduce the funds the Purchaser can otherwise make available to us.
Several minority shareholders of CAG have initiated special award proceedings (Spruchverfahren) seeking the court’s review of the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) offered under the Domination Agreement. On March 14, 2005, the Frankfurt District Court (Landgericht) dismissed on grounds of inadmissibility the motions of all minority shareholders regarding the initiation of these special award proceedings. In January 2006, the Frankfurt Higher District Court (Oberlandesgericht) ruled that the appeals were admissible, and the proceedings will therefore continue. As a result of these proceedings, the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) could be increased by the court, and the Purchaser would be required to make such payments within two months after the publication of the court’s ruling. Any such increase may be substantial. All minority shareholders including those who have already received the fair cash compensation would be entitled to claim the respective higher amounts. This may reduce the funds the Purchaser can make available to the Company and its subsidiaries and, accordingly, diminish our ability to make payments on our indebtedness. See ‘‘Legal Proceedings.’’
The Purchaser may be required to compensate CAG for annual losses, which may reduce the funds the Purchaser can otherwise make available to Celanese.
Under the Domination Agreement, the Purchaser is required, among other things, to compensate CAG for any annual loss incurred, determined in accordance with German accounting requirements, by
CAG at the end of the fiscal year in which the loss was incurred. This obligation to compensate CAG for annual losses will apply during the entire term of the Domination Agreement. If CAG incurs losses during any period of the operative term of the Domination Agreement and if such losses lead to an annual loss of CAG at the end of any given fiscal year during the term of the Domination Agreement, the Purchaser will be obligated to make a corresponding cash payment to CAG to the extent that the respective annual loss is not fully compensated for by the dissolution of profit reserves (Gewinnrücklagen) accrued at the level of CAG during the term of the Domination Agreement. The Purchaser may be able to reduce or avoid cash payments to CAG by off-setting against such loss compensation claims by CAG any valuable counterclaims against CAG that the Purchaser may have. If the Purchaser is obligated to make cash payments to CAG to cover an annual loss, we may not have sufficient funds to make payments on our indebtedness when due and, unless the Purchaser is able to obtain funds from a source other than annual profits of CAG, the Purchaser may not be able to satisfy its obligation to fund such shortfall. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity —Domination Agreement’’.
We and two of our subsidiaries have taken on certain obligations with respect to the Purchaser’s obligation under the Domination Agreement and intercompany indebtedness to CAG, which may diminish our ability to make payments on our indebtedness.
Our subsidiaries, Celanese Caylux and BCP Crystal, have each agreed to provide the Purchaser with financing so that the Purchaser is at all times in a position to completely meet its obligations under, or in connection with, the Domination Agreement. They have further guaranteed to all minority shareholders of CAG that the Purchaser will meet the obligations to make a guaranteed fixed annual payment to the outstanding minority shareholders and to offer to acquire all outstanding CAG Shares from the minority shareholders in return for payment of fair cash consideration. In addition, Celanese has guaranteed (i) that the Purchaser will meet its obligation under the Domination Agreement to compensate CAG for any annual loss incurred by CAG during the term of the Domination Agreement; and (ii) the repayment of all existing intercompany indebtedness of Celanese’s subsidiaries to CAG. Further, under the terms of Celanese’s guarantee, in certain limited circumstances CAG may be entitled to require the immediate repayment of some or all of the intercompany indebtedness owed by Celanese’s subsidiaries to CAG. If Celanese, Celanese Caylux and/or BCP Crystal are obligated to make payments under their obligations to the Purchaser or CAG, as the case may be, or if the intercompany indebtedness owed to CAG is accelerated, we may not have sufficient funds for payments on our indebtedness when due or other expenditures.
Even if the minority shareholders’ challenges to the Domination Agreement are unsuccessful and the Domination Agreement continues to be operative, we may not be able to receive distributions from CAG sufficient to pay our obligations.
Even if the minority shareholders’ challenges to the Domination Agreement are unsuccessful and the Domination Agreement continues to be operative, we are limited in the amount of distributions we may receive in any year from CAG. Under German law, the amount of distributions to the Purchaser will be determined based on the amount of unappropriated earnings generated during the term of the Domination Agreement as shown in the unconsolidated annual financial statements of CAG, prepared in accordance with German accounting principles and as adopted and approved by resolutions of the CAG board of management and supervisory board, which financial statements may be different from Celanese’s consolidated financial statements under U.S. GAAP. Our share of these earnings, if any, may not be sufficient to allow us to pay our indebtedness as it becomes due which could have a material adverse effect on the value of our stock.
We must rely on payments from our subsidiaries to fund payments on our preferred stock, and certain of our subsidiaries must rely on payments from their own subsidiaries to fund payments on their indebtedness. Such funds may not be available in certain circumstances.
We must rely on payments from our subsidiaries to fund dividend, redemption and other payments on our preferred stock. In addition, our subsidiaries Crystal US Holdings 3 L.L.C. (‘‘Crystal LLC’’) and BCP Crystal are holding companies and all of their operations are conducted through their subsidiaries. Therefore, they depend on the cash flow of their subsidiaries, including CAG, to meet their obligations.
If the Domination Agreement ceases to be operative, such subsidiaries may be unable to meet their obligations under such indebtedness. Although the Domination Agreement became operative on October 1, 2004, it is subject to legal challenges instituted by dissenting shareholders. See "Legal Proceedings".
The ability of our subsidiaries to make distributions to us, BCP Crystal and Crystal LLC by way of dividends, interest, return on investments, or other payments (including loans) or distributions is subject to various restrictions, including restrictions imposed by the amended and restated senior credit facilities and indentures governing their indebtedness, and the terms of future debt may also limit or prohibit such payments. In addition, the ability of the subsidiaries to make such payments may be limited by relevant provisions of German and other applicable laws.
The Purchaser may be required to purchase all of the remaining outstanding CAG Shares at a price yet to be determined.
The Purchaser currently owns approximately 98% of CAG’s shares. In November 2005, we requested the Purchaser to require, as permitted under German law, the transfer of the CAG shares owned by the then-outstanding minority shareholders of CAG in exchange for fair cash compensation (the ‘‘Squeeze-Out’’). A Squeeze-Out is permitted under German law once a shareholder acquires 95% or more of CAG’s registered ordinary share capital (excluding treasury shares). A shareholders’ resolution authorizing the Squeeze-Out is scheduled to be brought before the annual general meeting in May 2006. The amount of the fair cash compensation per share under the Squeeze-Out has been set to €62.22 per share. This price might even be increased if the amount of fair cash compensation is challenged in court. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Basis of Presentation — Squeeze-Out."
Risks Related to Internal Controls
Our internal controls over financial reporting may not be effective and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the Securities and Exchange Commission ("SEC") thereunder, which we refer to as Section 404. We are currently performing the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with management certification and auditor attestation requirements of Section 404. The management certification and auditor attestation requirements of Section 404 will initially apply to us as of December 31, 2006 and CAG as of September 30, 2007. In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that may need improvement, and are implementing enhanced processes and controls to address these and any other issues that might be identified through this review. However, as we are still in the evaluation process, we may identify conditions that may result in significant deficiencies or material weaknesses in the future. In 2004, certain members of our accounting staff identified two significant deficiencies. In 2005, we identified a significant deficiency initiated from an SEC review of a registration statement filed in the third quarter of 2005. Two material weaknesses, in addition to, and separate from, our Section 404 evaluation process were also identified in connection with the audit of our financial statements as of and for the nine months ended December 31, 2004. Those deficiencies are discussed in detail in the immediately subsequent risk factor.
We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our internal controls would be considered ineffective for purposes of Section 404, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results.
We and our independent auditors have identified significant deficiencies and material weaknesses in our internal controls that could affect our ability to ensure timely and reliable financial reports.
In addition to, and separate from, our evaluation of internal controls under Section 404 and any areas requiring improvement that we identify as part of that process, we previously identified two significant deficiencies and two material weaknesses in our internal controls. The Public Company Accounting Oversight Board (‘‘PCAOB’’) defines a significant deficiency as a control deficiency, or a combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. The PCAOB defines a material weakness as a single deficiency, or a combination of deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
In 2004, we identified two significant deficiencies in internal controls in the computation of certain accounting adjustments. These deficiencies were discovered in addition to, and separate from, the evaluation process we are conducting in connection with Section 404. The first deficiency was identified during the quarter ended June 30, 2004 by members of our corporate financial reporting group and related to the qualifications and ability of certain accounting managers to initially calculate the change from the LIFO (last-in, first-out) method of accounting for inventories to FIFO (first-in, first-out) and the resulting failure of such employees to correctly make such calculations. The second was identified during the quarter ended June 30, 2004 by one of our financial accounting managers and related to an omitted employee benefit accrual due to the failure to provide the applicable employment contracts to the actuary prior to the cut-off date for the December 31, 2003 pension valuation. Corrective actions taken by us included an internal audit review, the development of enhanced guidelines, the termination and reassignment of responsible persons and an elevation of the issues to the Supervisory Board of CAG. The significant deficiencies noted were corrected in the quarter ended September 30, 2004 and thus did not exist as of December 31, 2004 and 2005.
In September 2005 we identified a significant deficiency in internal controls relating to sales to countries and other parties that are or have previously been subject to sanctions and embargoes imposed by the U. S. government. This significant deficiency was identified as a result of an internal investigation that was initiated in connection with the SEC review of a registration statement filed in the third quarter of 2005. The Company has informed the U.S. Treasury Department and the U.S. Department of Commerce of these matters and is currently engaged in discussions with the Departments. To the extent that the Company violated any regulations with respect to the above or other transactions, the Company may be subject to fines or other sanctions, including possible criminal penalties, which may result in adverse business consequences. We have taken immediate corrective actions which include a directive to senior business leaders stating that they are prohibited from selling products into certain countries subject to these trade restrictions, as well as making accounting systems modifications that prevents the initiation of purchase orders and shipment of products to these countries. Also, we plan to enhance the business conduct policy training in the area of export control. As a result, we believe that we have taken remediation measures that, once fully implemented, will be effective in eliminating this deficiency.
In connection with the audit of our financial statements as of and for the nine months ended December 31, 2004, we identified a material weakness in our internal controls for the same period. On March 30, 2005, we received a letter from KPMG LLP ("KPMG"), our independent auditors, who also identified the same material weakness and a second material weakness in the course of their audit. The additional material weakness identified by KPMG related to several deficiencies in the assessment of hedge effectiveness and documentation. The required adjustments were made in the proper accounting period, except for one immaterial hedging transaction adjusted during the quarter ended June 30, 2005. The material weakness identified by KPMG and us related to conditions preventing our ability to adequately research, document, review and draw conclusions on accounting and reporting matters, which had previously resulted in adjustments that had to be recorded to prevent a material misstatement of our financial statements. The conditions largely related to significant increases in the frequency of and the limited number of personnel available to address, complex accounting matters and transactions and as a result of the consummation of simultaneous debt and equity offerings during the year-end closing process.
We do not believe that the adjustments made in connection with these material weaknesses had any material impact on previously reported financial information. In response to the letter from KPMG with respect to the first material weakness identified above, we organized a team responsible for the identification and documentation of potential derivative accounting transactions and commenced and completed formal training for team members specifically related to derivative accounting. With respect to the second material weakness identified above, we hired additional qualified accounting personnel which should ensure that we will be able to adequately research, document, review and draw conclusions on accounting, and reporting, matters. Both material weaknesses were identified during our December 31, 2004 year-end closing process and we believe that we have remediated these material weaknesses as of December 31, 2005.
During 2005, we have been implementing changes to strengthen our internal controls. As a result of these changes, we believe that as of December 31, 2005, our disclosure controls and procedures are effective for gathering and analyzing and disclosing on a timely basis the information required to be disclosed under the rules and forms of the SEC. While we have taken actions to address these deficiencies and weaknesses, additional measures may be necessary and these measures along with other measures we expect to take to improve our internal controls may not be sufficient to address the issues identified by us or ensure that our internal controls are effective. If we are unable to correct existing or future deficiencies or weaknesses in internal controls in a timely manner, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities. In addition, there could be a negative reaction in the financial markets due to a loss of confidence in reliability of future financial statements and SEC filings.
Risks Related to Our Indebtedness
Our high level of indebtedness could diminish our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or the chemicals industry and prevent us from meeting obligations under our indebtedness.
We are highly leveraged. Our total indebtedness totals approximately $3.4 billion as of December 31, 2005 (excluding $175 million of future accretion on the senior discount notes).
Our substantial debt could have important consequences, including:
• | making it more difficult for us to make payments on our debt; |
• | increasing vulnerability to general economic and industry conditions; |
• | requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on indebtedness, therefore reducing our ability to use our cash flow to fund operations, capital expenditures and future business opportunities; |
• | exposing us to the risk of increased interest rates as certain of our borrowings, including the borrowings under the amended and restated senior credit facilities, are at variable rates of interest; |
• | limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; 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. |
Despite our current high leverage, we and our subsidiaries may be able to incur substantially more debt. This could further exacerbate the risks of our high leverage.
We may be able to incur substantial additional indebtedness in the future. The terms of our existing debt do not fully prohibit us from doing so. If new debt, including amounts available under our senior credit facilities, is added to our current debt levels, the related risks that we now face could intensify. See
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity—Contractual Obligations.’’
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 satisfy our cash needs depends on cash on hand, receipt of additional capital, including possible additional borrowings, and receipt of cash from our subsidiaries by way of distributions, advances or cash payments. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity—Contractual Obligations.’’
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 is subject to prevailing economic and competitive conditions and to certain 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. The amended and restated senior credit facilities and the indentures governing our indebtedness restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which 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 instruments may limit our ability to engage in certain transactions and may diminish our ability to make payments on our indebtedness.
The amended and restated senior credit facilities and the indentures governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of Crystal LLC, BCP Crystal and their restricted subsidiaries to, among other things, incur additional indebtedness or issue preferred stock, pay dividends on or make other distributions on or repurchase their capital stock or make other restricted payments, make investments, and sell certain assets.
In addition, the amended and restated senior credit facilities contain covenants that require Celanese Holdings to maintain specified financial ratios and satisfy other financial condition tests. Celanese Holdings’ ability to meet those financial ratios and tests can be affected by events beyond its control, and it may not be able to meet those tests at all. A breach of any of these covenants could result in a default under the amended and restated senior credit facilities. Upon the occurrence of an event of default under the amended and restated senior credit facilities, the lenders could elect to declare all amounts outstanding under the amended and restated senior credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If Celanese Holdings were unable to repay those amounts, the lenders under the amended and restated senior credit facilities could proceed against the collateral granted to them to secure that indebtedness. Celanese’s subsidiaries have pledged a significant portion of their assets as collateral under the amended and restated senior credit facilities. If the lenders under the amended and restated senior credit facilities accelerate the repayment of borrowings, the Company and its subsidiaries may not have sufficient assets to repay the amended and restated senior credit facilities as well as their other indebtedness, which could have a material adverse effect on the value of our stock.
The terms of our amended and restated senior credit facilities limit the ability of BCP Crystal and its subsidiaries to pay dividends or otherwise transfer their assets to us.
Our operations are conducted through our subsidiaries and our ability to pay dividends is dependent on the earnings and the distribution of funds from our subsidiaries. However, the terms of our amended
and restated senior credit facilities limit the ability of BCP Crystal and its subsidiaries to pay dividends or otherwise transfer their assets to us. Accordingly, our ability to pay dividends on our stock is similarly limited.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Description of Property
As of December 31, 2004,2005, we had 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 production and other facilities throughout the world as of December 31, 2004.2005.
Site | Leased/Owned | Products/Functions | ||||||||
Corporate Offices | ||||||||||
Dallas, Texas, USA | Leased | Corporate headquarters | ||||||||
Kronberg/Taunus, Germany | Leased | Administrative offices | ||||||||
Bedminster, New Jersey, USA | Leased | Administrative offices(1) | ||||||||
Chemical Products | ||||||||||
Bay City, Texas, USA | Owned | Butyl acetate Iso-butylacetate Propylacetate Carboxylic acids n/i-Butyraldehyde Butyl alcohols Propionaldehyde, Propyl alcohol | ||||||||
Bishop, Texas, USA | Owned | Formaldehyde Methanol Pentaerythritol Polyols | ||||||||
Boucherville, Quebec, Canada | Owned | Conventional emulsions | ||||||||
Calvert City, Kentucky, USA | Owned | |||||||||
Cangrejera, Veracruz, Mexico | Owned | Acetic anhydride Acetone derivatives Ethyl acetate Methyl amines | ||||||||
Clear Lake, Texas, USA | Owned | Acetic acid | ||||||||
Edmonton, Alberta, Canada(2) | Owned | Methanol | ||||||||
Enoree, South Carolina | Owned | Conventional emulsions Vinyl acetate ethylene emulsions | ||||||||
Frankfurt am Main, Germany | Owned by InfraServ GmbH & Co. Hoechst KG, in which CAG holds a limited partnership interest | Acetaldehyde Butyl acetate Conventional emulsions Vinyl acetate ethylene emulsions | ||||||||
Site | Leased/Owned | Products/Functions | ||||||||
Geleen, Netherlands | Owned | Vinyl acetate ethylene emulsions | ||||||||
Guardo, Spain(3) | Owned | PVOH Polyvinyl acetate | ||||||||
Meredosia, Illinois, USA | Owned | Vinyl acetate ethylene emulsions Conventional emulsions | ||||||||
Oberhausen, Germany | Owned by InfraServ GmbH & Co. Oberhausen KG, in which CAG holds an 84.0% limited partnership interest | Amines Carboxylic acids Neopentyl glycols | ||||||||
Pampa, Texas, USA | Owned | Acetic acid Acetic anhydride Ethyl acetate | ||||||||
Pardies, France(3) | Owned | Acetic acid VAM | ||||||||
Roussillon, France(3) | Leased | Acetic anhydride Polyvinyl acetate | ||||||||
Pasadena, Texas, USA | Owned | |||||||||
Jurong Island, Singapore | Owned | Acetic acid Butyl acetate Ethyl acetate | ||||||||
Koper, Slovenia | Owned | Conventional emulsions | ||||||||
Tarragona, Spain | Owned by Complejo Industrial Taqsa AIE, in which CAG holds a | Vinyl acetate monomer Vinyl acetate ethylene emulsions Conventional emulsions | ||||||||
Tarragona, Spain | Owned | PVOH | ||||||||
Perstorp, Sweden | Owned | Conventional emulsions Vinyl acetate ethylene emulsions | ||||||||
Owned | Conventional emulsions Vinyl acetate ethylene emulsions | |||||||||
Acetate Products | ||||||||||
Edmonton, Alberta, Canada(2) | Owned | Flake | ||||||||
Lanaken, Belgium | Owned | Tow | ||||||||
Narrows, Virginia, USA | Owned | Tow, | ||||||||
Ocotlán, Jalisco, Mexico | Owned | Tow, | ||||||||
Technical Polymers Ticona | ||||||||||
Auburn Hills, Michigan, USA | Leased | Automotive Development Center | ||||||||
Bishop, Texas, USA | Owned | PE-UHMW (GUR) Compounding | ||||||||
Site | Leased/Owned | Products/Functions | ||||||||
Florence, Kentucky, USA | Owned | Compounding | ||||||||
Kelsterbach, Germany | Owned by InfraServ GmbH & Co. Kelsterbach KG, in which CAG holds a 100.0% limited partnership interest | LFT (Celstran) POM (Hostaform) Compounding | ||||||||
Oberhausen, Germany | Owned by InfraServ GmbH & Co. Oberhausen KG, in which CAG holds an 84.0% limited partnership interest | PE-UHMW (GUR) | ||||||||
Shelby, North Carolina, USA | Owned | LCP PBT and PET (Celanex) Compounding | ||||||||
Suzano, Brazil | Owned | Compounding | ||||||||
Wilmington, North Carolina, USA | Owned by Fortron Industries, a non-consolidated venture, in which we have a 50% interest, except for adjacent administrative office space which is leased by the venture | PPS (Fortron) | ||||||||
Winona, Minnesota, USA | Owned | LFT (Celstran) | ||||||||
Performance Products | ||||||||||
Frankfurt am Main, Germany | Owned by InfraServ GmbH & Co. Hoechst KG, in which CAG holds a 31.2% limited partnership interest | Sorbates Sunett | ||||||||
(1) |
(2) | In August 2005, we announced the shutdown of the Edmonton methanol unit. |
(3) | Acquired in July 2005 in the Acetex acquisition. |
(4) | Flake production at Ocotlan |
Polyplastics has its principal production facilities in Japan, Taiwan and Malaysia. Korea Engineering PlasticsKEPCO has its principal production facilities in South Korea. Our Chemical Products segment has ventures with manufacturing facilities in Saudi Arabia and Germany and itsour Acetate Products segment has three ventures with production facilities in China.
During the nine months ended December 31, 2004, the Successor and its consolidated subsidiaries, in the aggregate, had capital expenditures for the expansion and modernization of production, manufacturing, research and administrative facilities of $166 million. During the three months ended March 31, 2004, the Predecessor and its consolidated subsidiaries, in the aggregate, had capital expenditures for the expansion and modernization of production, manufacturing, research and administrative facilities of $44 million. In 2003 and 2002, these expenditures amounted to $211 million and $203 million, respectively. We believe that our current facilities and those of our consolidated subsidiaries are adequate to meet the requirements of our present and foreseeable future operations. We continue to review our capacity requirements as part of our strategy to maximize our global manufacturing efficiency.
For information on environmental issues associated with our properties, see "Business—‘‘Business—Environmental and Other Regulation"Regulation’’ and "Management's‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Environmental Matters."’’ Additional information with respect to our property, plant and equipment, and leases is contained in Notes 1211 and 2523 to the Consolidated Financial Statements.consolidated financial statements.
Item 3. Legal Proceedings
We are involved in a number of legal proceedings, lawsuits and claims incidental to the normal conduct of our business, relating to such matters as product liability, anti-trust, past waste disposal practices and release of chemicals into the environment. While it is impossible at this time to determine with certainty the ultimate outcome of these proceedings, lawsuits and claims, management believes, based on the advice of legal counsel, that adequate provisions have been made and that the ultimate outcomes will not have a material adverse effect on our financial position, but may have a material adverse effect on the results of operations or cash flows in any given accounting period. See also Note 2725 to the Consolidated Financial Statements.consolidated financial statements.
Plumbing Actions
CNA Holdings, Inc. ("(‘‘CNA Holdings"Holdings’’), a U.S. subsidiary of Celanese Corporation, which included the U.S. business now conducted by the Ticona segment, CNA Holdings, along with Shell Oil Company ("Shell"(‘‘Shell’’), DuPont and others, havehas been the defendantsa defendant in a series of lawsuits, including a number of class actions, alleging that plastics manufactured by these companies that were utilized in the production of plumbing systems for residential property were defective or caused such plumbing systems to fail. Based on, among other things, the findings of outside experts and the successful use of Ticona's acetalTicona’s acetyl copolymer in similar applications, CNA Holdings does not believe Ticona's acetalTicona’s acetyl copolymer was defective or caused the plumbing systems to fail. In many cases CNA Holdings'Holdings’ exposure may be limited by invocation of the statute of limitations since CNA Holdings ceased selling the resin for use in the plumbing systems in site built homes during 1986 and in manufactured homes during 1990.
CNA Holdings has been named a defendant in ten putative class actions, further described below, as well as a defendant in other non-class actions filed in ten states, the U.S. Virgin Islands, and Canada. In these actions, the plaintiffs typically have sought recovery for alleged property damages and, in some cases, additional damages under the Texas Deceptive Trade Practices Act or similar type statutes. Damage amounts have not been specified.
Developments under these matters are as follows:
• | Dilday, et al. v. Hoechst Celanese Corporation, et al.—Weakley County, Tennessee 27th Judicial Chancery |
• | Shelter General Insurance Co., et al. v. Shell Oil Company, et al.—Weakley County, Tennessee Chancery |
• | Tom Tranter v. Shell Oil Company, et al.—Ontario Court, General Division; Gariepy, et al. v. Shell Oil Company, et al.—Ontario Court, General |
• | Richard Couture, et al. v. Shell Oil Company, et al.—Superior Court, Providence of Quebec; Furlan v. Shell Oil Company, et al.—British Columbia Supreme Court, Vancouver Registry. Dupont and Shell have each settled these matters, as noted above. CNA Holdings is the only defendant remaining in these lawsuits. They are |
• | Howard, et al. v. Shell Oil Company, et al.—9th Judicial Circuit Court of Common Pleas, Charleston County, South Carolina; Viera, et al. v. Hoechst Celanese Corporation, et al.—11th Judicial Circuit Court, Dade County, Florida; Fry, et al. v. Hoechst Celanese Chemical Group, Inc., et al.—5th Judicial Circuit Court, Marion County, Florida. Certification has been denied in these putative class actions pending in South Carolina and Florida state courts. The |
• | St. Croix Ltd., et al. v. Shell Oil Company, et al.—Virgin Islands Territorial Court, St. Croix |
In order to reduce litigation expenses and to provide relief to qualifying homeowners, in November 1995, CNA Holdings, DuPont and Shell Oil Company entered into national class action settlements, which have been approved by the courts. The settlements call for the replacement of plumbing systems of claimants who have had qualifying leaks, as well as reimbursements for certain leak damage. Furthermore, the three companies have agreed to fund these replacements and reimbursements up to $950 million. As of December 31, 2004,2005, the aggregate funding is $1,073 million due to additional contributions and funding commitments made primarily by other parties. There are additional pending lawsuits in approximately 5ten jurisdictions not covered by this settlement; however, these cases do not involve (either individually or in the aggregate) a large number of homes, and management does not expect the obligations arising from these lawsuits to have a material adverse effect on the Company.
In 1995, CNA Holdings and Shell Oil Company settled the claims relating to individuals in Texas owning a total of 110,000 property units, who are represented by a Texas law firm, for an amount that will not exceed $170 million. These claimants are also eligible for a replumb of their homes in accordance with terms similar to those of the national class action settlement. CNA Holdings'Holdings’ and Shell Oil Company'sShell's contributions under this settlement were subject to allocation as determined by binding arbitration.
In addition, a lawsuit filed in November 1989 in Delaware Chancery Court, between CNA Holdings and various of its insurance companies relating to all claims incurred and to be incurred for the product liability exposure led to a partial declaratory judgment in CNA Holdings'Holdings’ favor. As a result, settlements have been reached with a majority of CNA Holdings'Holdings’ insurers specifying their responsibility for these claims. However, in January 2000, CNA Holdings filed a motion in Superior State Court in Wilmington, Delaware to set a trial date with respect to this lawsuit against one insurer, asserting that the settlement is void because the insurer refused to make the required "coverage in place" payments to CNA Holdings. The insurer and CNA Holdings signed a settlement agreement in June 2003. Pursuant to the settlement agreement, the insurer agreed to pay CNA Holdings $105 million in five annual installments in satisfaction of all claims incurred and to be incurred for the product liability expense previously covered by the insurer. In February 2005, CNA Holdings reached a settlement agreement through mediation with another insurer, pursuant to which the insurer agreed to pay CNA Holdings $44 million in exchange for the release of certain claims.claims against the policy with the insurer. This amount was recorded as a reduction of goodwill.goodwill as of December 31, 2004 and was received during the year ended December 31, 2005.
Management believes that the plumbing actions are adequately provided for in the Consolidated Financial Statementsconsolidated financial statements and that they will not have a material adverse effect on our financial position.
However, if we were to incur an additional charge for this matter, such a charge would not be expected to have a material adverse effect on our financial position, but may have a material adverse effect on our results of operations or cash flows in any given accounting period. No assurance can be given that our litigation reserves will be adequate or that we will fully recover claims under our insurance policies.
Sorbates Antitrust Actions
In 1998, Nutrinova, Inc., a U.S. subsidiary of Nutrinova Nutrition Specialties & Food Ingredients GmbH, then a wholly-owned subsidiary of Hoechst, received a grand jury subpoena from the United States District Court for the Northern District of California in connection with a criminal antitrust investigation of the sorbates industry. On May 3, 1999, Hoechst and the U.S. Federal Government entered into an agreement under which Hoechst pled guilty to a one-count indictment charging Hoechst with participating in a conspiracy to fix prices and allocate market shares of sorbates sold in the United States. Hoechst and the U.S. Federal Government agreed to recommend that the U.S. District Court fine Hoechst $36 million, payable over five years, with the last payment of $5 million being paid in June 2004. Hoechst also agreed to cooperate with the U.S. Federal investigation and prosecutions related to the sorbates industry. The U.S. District Court accepted this plea on June 18, 1999 and imposed a penalty as recommended in the plea agreement.
Nutrinova and Hoechst have cooperated with the European Commission since 1998 in connection with matters relating to the sorbates industry. In May 2002, the European Commission informed Hoechst of its intent to investigate officially the sorbates industry, and inindustry. In early January 2003, the European Commission served Hoechst, Nutrinova and a number of competitors with a statement of objections alleging unlawful, anticompetitive behavior affecting the European sorbates market. In October 2003, the European Commission ruled that Hoechst, Chisso Corporation, Daicel, Chemical Industries Ltd., The Nippon Synthetic Chemical Industry Co. Ltd. and Ueno Fine Chemicals Industry Ltd. operated a cartel in the European sorbates market between 1979 and 1996. The European Commission imposed a total fine of €138.4 million (approximately $189 million), of which €99 million (approximately $135 million) was assessed against Hoechst. The case against Nutrinova was closed. The
fine against Hoechst is based on the European Commission'sCommission’s finding that Hoechst does not qualify under the leniency policy, is a repeat violator and, together with Daicel, was a co-conspirator. In Hoechst'sHoechst’s favor, the European Commission gave a discount for cooperating in the investigation. Hoechst appealed the European Commission'sCommission’s decision in December 2003, and that appeal is still pending.
In addition, several civil antitrust actions by sorbates customers, seeking monetary damages and other relief for alleged conduct involving the sorbates industry, have been filed in U.S. state and federal courts naming Hoechst, Nutrinova, and our other subsidiaries, as well as other sorbates manufacturers, as defendants. Many of these actions have been settled and dismissed by the court. One private action, Kerr v. Eastman Chemical Co. et al.al., is stillpreviously pending in the Superior Court of New Jersey, Law Division, Gloucester County.County, was dismissed for failure to prosecute. The plaintiff allegesalleged violations of the New Jersey Antitrust Act and the New Jersey Consumer Fraud Act and seekssought unspecified damages. The only other private action that had still been pending, Freeman v. Daicel, was dismissed. The plaintiffs lost their appeal to the Supreme Court of Tennessee in August 2005 and have since filed a motion for leave.
In July 2001, Hoechst and Nutrinova entered into an agreement with the Attorneys General of 33 states, pursuant to which the statutes of limitations were tolled pending the states'states’ investigations. This agreement expired in July 2003. Since October 2002, the Attorneys General for New York, Illinois, Ohio, Utah and Idahoseveral states filed suit on behalf of indirect purchasers in their respective states.states, all of which have been either settled or dismissed, except as noted below. The Utah, Nevada and Idaho actions haveaction has been dismissed as to Hoechst, Nutrinova and CAG. ACAG, and a motion for reconsideration is pending in Nevada. An appeal filed in Idaho was dismissed and that dismissal was upheld by the Idaho Supreme Court. The Ohio and Illinois actions have been settled, and the Idaho action was dismissed in February 2005.denied. The New York action, New York v. Daicel Chemical Industries Ltd., et al.al., which was pending in the New York State Supreme Court, New York County, is the only Attorney General action still pending; it too seeks unspecified damages. All antitrust claimswas dismissed in this matter were dismissed by the court in September 2004;August 2005; however, appeals are pending.
In January 2005, Hoechst, Nutrinova, and other state law claims are still pending. Hoechst and Nutrinova have filed an appeal of the court's denial of the motion to dismiss those remaining claims. Asubsidiaries, as well as other sorbates manufacturers entered into a settlement agreement with the Attorneys General of Connecticut, Florida, Hawaii, Maryland, South Carolina, Oregon and Washington is currently being negotiated and these Attorneys General have been granted extensionsbefore those states filed suit. Pursuant to the terms of the tolling agreement.settlement agreement, the defendants agreed to refrain from engaging in anticompetitive conduct with respect to the sale or distribution of sorbates and to pay an immaterial amount to the states in satisfaction of all released claims.
Although the outcome of the foregoing proceedings and claims cannot be predicted with certainty, we believe that any resulting liabilities, net of amounts recoverable from Hoechst, will not, in the aggregate, have a material adverse effect on our financial position, but may have a material adverse effect on the results of operations or cash flows in any given period. In the demerger agreement, Hoechst agreed to pay 80 percent80% of liabilities that may arise from the government investigation and the civil antitrust actions related to the sorbates industry.
Acetic Acid Patent Infringement Matters
Celanese International Corporation v. China Petrochemical Development Corporation—Taiwan Kaohsiung District CourtCourt.. On February 7, 2001, Celanese International Corporation filed a private criminal action for patent infringement against China Petrochemical Development Corporation, or CPDC, alleging that CPDC infringed Celanese International Corporation'sCorporation’s patent covering the manufacture of acetic acid. This criminal action was subsequently converted to a civil action alleging damages against CPDC based on a period of infringement of five years, 1996-2000, and based on CPDC'sCPDC’s own data and as reported to the Taiwanese securities and exchange commission. Celanese International Corporation'sCorporation’s patent was held valid by the Taiwanese patent office. The amount of damages claimed byOn August 31, 2005, a Taiwanese court held that CPDC infringed Celanese International Corporation’s acetic acid patent and awarded Celanese International Corporation approximately $28 million for the period of 1995 through 1999. This judgment has been reassessed at $35 million. This actionappealed. The Company will not record income associated with this favorable judgement until cash is still pending.received.
Shareholder Litigation
CAG is a defendant in the following nine consolidated actions brought byA number of minority shareholders during August 2004of CAG have filed lawsuits in the Frankfurt District Court (Landgericht): that, among other things, request the court to set aside shareholder resolutions passed at
the extraordinary general meeting held on July 30 and 31, 2004, as well as the confirmatory resolutions passed at the annual general meeting held on May 19 and 20, 2005. On March 6, 2006, the Purchaser and CAG signed a settlement agreement with eleven minority shareholders who had filed such lawsuits (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the plaintiffs agreed to withdraw the actions to which they are a party and to recognize the validity of the Domination Agreement in exchange for the Purchaser to offer at least €51.00 per share as cash consideration to each shareholder who will cease to be a shareholder in the context of the Squeeze-Out. The Purchaser further agreed to make early payment of the guaranteed annual payment (Ausgleich) pursuant to the Domination Agreement for the financial year 2005/2006, ending on September 30, 2006. Such guaranteed annual payment normally would have come due following the annual general meeting in 2007; however, pursuant to the Settlement Agreement, it will be made on the first banking day following CAG's annual general meeting that commences on May 30, 2006. To receive the early compensation payment, the respective minority shareholder will have to declare that (i) their claim for payment of compensation for the financial year 2005/2006 pursuant to the Domination Agreement is settled by such early payment and that (ii) in this respect, they indemnify the Purchaser against compensation claims by any legal successors to their shares.
During August 2004, the following ten actions requesting the court to set aside shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004 had been brought by minority shareholders against CAG in the Frankfurt District Court (Landgericht), all of which were consolidated in September 2004:
• | Mayer v. Celanese AG |
• | Knoesel v. Celanese AG |
• | Allerthal Werke AG |
• | Dipl.-Hdl. Christa Götz v. Celanese AG |
• | Carthago Value Invest AG v. Celanese AG |
• | Prof. Dr. Ekkehard Wenger v. Celanese AG |
• | Jens-Uwe Penquitt & Claus Deiniger Vermögensverwaltung GbR v. Celanese AG |
• | Dr. Leonhard Knoll v. Celanese AG |
• | B.E.M. Bö |
• | Protagon Capital GmbH v. Celanese AG |
Further, severalSeveral minority shareholders have joined thethese proceedings via a third party intervention in support of the plaintiffs. The Purchaser has joined the proceedings via a third party intervention in support of CAG. On September 8, 2004,These ten actions will be withdrawn pursuant to the Frankfurt District Court consolidated the nine actions.Settlement Agreement.
Among other things, these actions requestrequested the court to set aside shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004 based on allegations that include the alleged violation of procedural requirements and information rights of the shareholders.
Further,Twenty-seven minority shareholders filed lawsuits (Anfechtungs- und Nichtigkeitsklagen) in the Frankfurt District Court (Landgericht) contesting the shareholder resolutions passed at the annual general meeting of CAG held May 19-20, 2005, which confirmed the resolutions passed at the July 30-31, 2004 extraordinary general meeting. Of these lawsuits, thirteen minority shareholders also contested the resolutions regarding the ratification (Entlastung) of the acts of the members of the board of management and the supervisory board; two minority shareholders also contested the resolutions regarding the election of the statutory auditors for the 2005 fiscal year, as well as the amendment of the articles of association; and eight minority shareholders also contested the dismissal of the motion to hold a special investigation (Sonderprüfung) and asked the court to declare that the annual general meeting had in fact resolved in favor of such an investigation (positive Beschlussfestellungsklage). All of these actions are based, among other things, on the alleged violation of procedure requirements and information rights of the shareholders. In February 2006, the court upheld only the challenge to the resolutions regarding the ratification (Entlastung) of the acts of the members of the board of management
and the supervisory board. All other claims, including those contesting the confirmatory resolutions, were dismissed. This decision is still subject to appeal. Two of these lawsuits were withdrawn in conjunction with the acquisition of 5.9 million of the additional CAG shares from two shareholders in August 2005, and another eleven will be withdrawn pursuant to the Settlement Agreement.
Celanese is also a defendant in five actions filed in the Frankfurt District Court (Landgericht) requesting that the court declare some or all of the shareholder resolutions passed at the extraordinary general meeting of CAG on July 30 and 31, 2004 null and void (Nichtigkeitsklage), based on allegations that certain formal requirements necessary in connection with the invitation to the extraordinary general meeting of Celanese had been violated. The Frankfurt District Court (Landgericht) has suspended the proceedings regarding the resolutions passed at the July 30-31, 2004 extraordinary general meeting of CAG described above so long as lawsuits contesting the confirmatory resolution are pending.
On August 2, 2004, two minority shareholders instituted public register proceedings with the Königstein local court (Amtsgericht) and the Frankfurt district court,District Court (Landgericht), both with a view to have the registration of the Domination Agreement in the Commercial Register deleted (Amtslöschungsverfahren). These actions are based on an alleged violation of procedural requirements at the July 30-31, 2004 extraordinary general meeting, an alleged undercapitalization of the Purchaser and Blackstoneits related entities as of the time of the Tender Offer and an alleged misuse of discretion by the competent court with respect to the registration of the Domination Agreement in the Commercial Register. In April 2005, the court of appeals rejected the demand by one shareholder for injunctive relief, and in June 2005 the Frankfurt District Court (Landgericht) ruled that it does not have jurisdiction over this matter. One of the claims in the Königstein Local Court (Amtsgericht) is still pending; the other will be withdrawn pursuant to the Settlement Agreement.
In February 2005, a minority shareholder of CAG also brought a lawsuit against the Purchaser, as well as a former member of CAG’s board of management and a former member of CAG’s supervisory board, in the Frankfurt District Court (Landgericht). Among other things, this action seeks to unwind the tender of the plaintiff’s shares in the Tender Offer and seeks compensation for damages suffered as a consequence of tendering shares in the Tender Offer. The court ruled against the plaintiff in this matter in June 2005. The plaintiff appealed this decision with respect to the Purchaser and the former member of the CAG board of management; however, the appeal will be withdrawn pursuant to the Settlement Agreement.
Based upon the information available as of the date of this document,available, the outcome of the foregoing proceedings cannot be predicted with certainty. The time period to bring forward challenges has expired.
The amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) offered under the Domination Agreement may be increased in special award proceedings
(Spruchverfahren) initiated by minority shareholders, which may further reduce the funds the Purchaser can otherwise make available to us. As of the date of this Annual Report, several minority shareholders of CAG had initiated special award proceedings seeking court'scourt’s review of the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) offered under the Domination Agreement. ThisAs a result of these proceedings, the amount of the fair cash consideration and the guaranteed fixed annual payment offered under the Domination Agreement could reducebe increased by the fundscourt so that all minority shareholders, including those who have already tendered their shares into the Purchaser can make available to Celanesemandatory offer and its subsidiaries and, accordingly, diminish our ability to make payments on our indebtedness. However,have received the fair cash compensation, could claim the respective higher amounts. The court dismissed all of these proceedings in March 2005 on the grounds of inadmissibility. TheThirty-three plaintiffs appealed the dismissal, is subjectand in January 2006, twenty-three of these appeals were granted by the court. They were remanded back to appeal.
In February 2005, a minority shareholder also brought a lawsuit against the Purchaser, as well as a former membercourt of CAG's board of management and a former member of CAG's supervisory board, infirst instance, where the Frankfurt District Court. Among other things, this action seeks to unwind the tender of the plaintiff's shares in the Tender Offer and seeks compensation for damages suffered as a consequence of tendering shares in the Tender Offer.
Based upon the information as available, the outcome of the foregoing proceedings cannotvaluation will be predicted with certainty.further reviewed.
Other Matters
As of the latest practical date,December 31, 2005, Celanese Ltd. and/or CNA Holdings, Inc., both our U.S. subsidiaries, are defendants in approximately 850630 asbestos cases. Because many of these cases involve numerous plaintiffs, we are subject to claims significantly in excess of the number of actual cases. We have reserves for defense costs related to claims arising from these matters. We believe we do not have any significant exposure in these matters.
Item 4. Submission of Matters to a Vote of Security Holders
On December 31, 2004,No matters were submitted to a vote of security holders during the holdersfourth quarter of shares of our capital stock representing all of our then outstanding voting power by written consent without a meeting (i) approved and adopted the 2004 Stock Incentive Plan and authorized the reservation of 16,250,000 shares of Series A common stock for issuance under such plan, (ii) approved and adopted our Deferred Compensation Plan and authorized awards to be granted under such plan, with the maximum amount payable to be $192 million, and (iii) authorized the payment of $15 million in retention and other bonuses to certain executive officers and key employees.2005.
PART II
Item 5. | Market for the |
Market Information
Trading in Celanese'sOur Series A common stock commencedhas traded on the New York Stock Exchange on January 21, 2005, under the symbol "CE". All‘‘CE’’ since January 21, 2005. The closing sale price of our Series A common stock, as reported by the New York Stock Exchange, on March 6, 2006 was $20.98. The following table sets forth the high and low intraday sales prices per share of our common stock, as reported by the New York Stock Exchange, for the periods indicated.
Price Range | ||||||||||
2005 | High | Low | ||||||||
Quarter ended March 31, 2005 | $ | 18.65 | $ | 15.10 | ||||||
Quarter ended June 30, 2005 | $ | 18.16 | $ | 13.54 | ||||||
Quarter ended September 30, 2005 | $ | 20.06 | $ | 15.88 | ||||||
Quarter ended December 31, 2005 | $ | 19.76 | $ | 15.58 | ||||||
Holders
No shares of Celanese'sCelanese’s Series B common stock are held by the Original Shareholders,issued and there is currently no public market for these shares.
Holders
outstanding. As of March 23, 2005,6, 2006, there were 4551 holders of record of theour Series A common stock, and 4 holdersone holder of record of the Series B commonour perpetual preferred stock. By including persons holding shares in broker accounts under street names, however, we estimate our shareholder base to be approximately 10,7006,800 as of March 23, 2005.6, 2006.
Dividend Policy
We declared and paid, as applicable, the following special Series B common stock dividends to holders ofIn July 2005, our Series B common stock, which are required by our amended and restated certificate of incorporation:
The stock dividend described above was paid on March 9, 2005. We expect to pay the cash dividend described above on April 7, 2005. Under the terms of our amended and restated certificate of incorporation, we have been obligated to take all actions required or permitted under applicable Delaware law to permit the payment of the special Series B common stock dividends and to declare and pay these dividends to the extent there are funds legally available therefor. Upon payment of the $804 million dividend, the shares of Series B common stock convert automatically to shares of Series A common stock.
Our board of directors currently intends to adoptadopted a policy of declaring, subject to legally available funds, a quarterly cash dividend on each share of our common stock at an annual rate initially equal to approximately 0.75%1% of the $16.00$16 price per share in the initial public offering price per share of our Series A common stock (or $0.12$0.16 per share) unless our board of directors, in its sole discretion, determines otherwise, commencing the second quarter of 2005. Our boardPursuant to this policy, the Company paid the quarterly dividends of directors may at any time modify or revoke our dividend policy$0.04 per share on our Series A common stock.August 11, 2005, November 1, 2005 and February 1, 2006. Based uponon the number of outstanding shares of our Series A common stock, after the initial public offering, the common stock dividend declared on March 8, 2005 of 7,500,000 shares of our Series A common stock and the conversion as mentioned above, the anticipated annual cash dividend payment will beis approximately $19$25 million. However, there is no assurance that sufficient cash or surplus will be available in the future to pay such dividend. Further, such dividends payable to holders of our Series A common stock cannot be declared or paid or havenor can any funds be set aside for the payment thereof, unless we have paid or set aside funds for the payment of all accumulated and unpaid dividends with respect to the shares of our preferred stock, as described below.
Our board of directors may, at any time, modify or revoke our dividend policy on our Series A common stock.
We are required under the terms of the preferred stock to pay scheduled quarterly dividends, subject to legally available funds, at the rate of 4.25% per annum (or $1.06 per share) of liquidation
preference, payable quarterly in arrears. This dividend is expected to result in an annual dividend payment of approximately $10 million.funds. For so long as the preferred stock remains outstanding, (1) we will not declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any junior stock or parity stock and (2) neither we, nor any of our subsidiaries, will, subject to certain exceptions, redeem, purchase or otherwise acquire for consideration junior stock or parity stock through a sinking fund or otherwise, in each case unless we have paid or set apart funds for the payment of all accumulated and unpaid dividends with respect to the shares of preferred stock and any parity stock for all preceding dividend periodsperiods. Pursuant to this policy, the Company paid the quarterly dividends of $0.265625 on its 4.25% convertible perpetual preferred stock on August 1, 2005, November 1, 2005 and except for the special Series B common stock dividends.February 1, 2006. The anticipated annual cash dividend is approximately $10 million.
The amountsamount available to us to pay cash dividends will beis restricted by our subsidiaries'subsidiaries’ debt agreements. Under the terms of the senior credit facilities, certain limits have been placed on the ability of BCP Crystal and its subsidiaries to pay dividends or otherwise transfer their assets to us. The indentures governing the senior subordinated notes and the senior discount notes also limit, but do not prohibit, the ability of BCP Crystal, Crystal LLC and their respective subsidiaries to pay dividends. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
Under the Domination Agreement, any minority shareholder of Celanese AG who elects not to sell its shares to the Purchaser will be entitled to remain a shareholder of Celanese AG and to receive a netgross guaranteed fixed annual payment (Ausgleich)on their shares of €2.89€3.27 per Celanese Share less certain corporate taxes to be paid by CAG Share based on the current German tax law.in lieu of any future dividend. See "Management's Discussion‘‘The Transactions— Post-Tender Offer Events—Domination and Analysis of Financial ConditionProfit and Results of Operations—Liquidity—DominationLoss Transfer Agreement."’’
Under Delaware law, our board of directors may declare dividends only to the extent of our "surplus"‘‘surplus’’ (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal years. The value of a corporation'scorporation’s assets can be measured in a number of ways and may not necessarily equal their book value. The value of our capital may be adjusted from time to time by our board of directors but in no event will be less than the aggregate par value of our issued stock. Our board of directors may base this determination on our financial statements, a fair valuation of our assets or another reasonable method. Our board of directors will seek to assure itself that the statutory requirements will be met before actually declaring dividends. In future periods, our board of directors may seek opinions from outside valuation firms to the effect that our solvency or assets are sufficient to allow payment of dividends, and such opinions may not be forthcoming. With respect to the declaration of the Series B common stock cash and stock dividends described above, we obtained such an opinion indicating that we had a sufficient surplus to allow the payment of these cash and stock dividends. If we sought and were not able to obtain such an opinion, we likely would not be able to pay dividends. In addition, pursuant to the terms of our preferred stock, we are prohibited from paying a dividend on our Series A common stock (except for the special Series B common stock dividends) unless all payments due and payable under the preferred stock have been made.
Use of Proceeds
The net proceeds from the initial public offering of our Series A common stock, after deducting underwriting discounts and estimated offering expenses, was approximately $760 million. The net proceeds from the offering of our preferred stock, after deducting underwriting discounts and estimated offering expenses, was approximately $233 million.
We contributed $779 million of the net proceeds from the offering of our Series A common stock and the offering of our preferred stock to our subsidiary, Crystal U.S. 3 Holdings L.L.C. ("Crystal LLC"), which used approximately $207 million of such net proceeds to redeem a portionCelanese Purchases of its senior discount notes. Crystal LLC contributed the remaining proceeds to its subsidiary, Celanese Holdings, which in turn contributed those proceeds to its subsidiary, BCP Crystal. BCP Crystal used such proceeds to redeem a portion of its senior subordinated notes. BCP Crystal used a portion of borrowings of approximately $1,135 million under the amended and restated senior credit facilities to repay the amounts outstanding under the $350 million floating rate term loan and expects pay approximately a $577 million dividend to
Celanese Holdings, which in turn will distribute this amount to Crystal LLC. Crystal LLC will distribute this amount up to us and we will use it, together with the remaining net proceeds from the offering of our Series A common stock and the net proceeds from the offering of our preferred stock, to pay a dividend of $804 million to the holders of our Series B common stock. Celanese's acquisition of Vinamul was primarily financed by $200 million of the borrowings under the amended and restated senior credit facilities. The loans under our prior senior credit facilities will remain outstanding under the amended and restated senior credit facilities. The expected sources and uses of funds used in connection with the Concurrent Financings are set forth in the table below.Equity Securities
Sources (in millions) | Uses (in millions) | |||||||||||||
Series A Common Stock | $ | 800 | Partial Redemption of Senior Discount Notes | $ | 207 | |||||||||
Preferred Stock | 240 | Partial Redemption of Senior Subordinated Notes | 572 | |||||||||||
Amended and Restated Senior Credit Facilities | 1,135 | Repayment of Floating Rate Term Loan | 353 | |||||||||||
Discounted Shares | 12 | Dividend to Holders of our Series B Common Stock | 804 | |||||||||||
Estimated Fees and Expenses | 51 | |||||||||||||
Acquisition of Vinamul | 200 | |||||||||||||
Total Sources | $ | 2,187 | Total Uses | $ | 2,187 | |||||||||
Period | Total Number of Shares (or Units) Purchased (1) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plans or Programs | ||||||||||||||
October 1 – October 31, 2005 | — | — | — | — | ||||||||||||||
November 1 – November 30, 2005 | — | — | — | — | ||||||||||||||
December 1 – December 31, 2005 | 10,000 | $ | 18.705 | 10,000 | — | |||||||||||||
Total | 10,000 | $ | 18.705 | 10,000 | — | |||||||||||||
(1) | 10,000 shares of Series A common stock were purchased on the open market in December 2005 at $18.705 per share, approved by the Board of Directors pursuant to the provisions of the 2004 Stock Incentive Plan, approved by shareholders in December 2004, to be granted to two employees in recognition of their contributions to the Company. No other purchases are currently planned. |
Approximately $227 million, or 22% of the combined net proceeds from the offering of our Series A common stock and the offering of our preferred stock will be used to pay a portion of the $804 million special Series B common stock dividends. In addition, $577 million of the proceeds from additional borrowings under the amended and restated senior credit facilities will be used to fund the remaining portion of the special Series B common stock dividends such that $804 million, or 37% of the combined proceeds from the Concurrent Financings, will be paid to the Original Shareholders.Equity Compensation Plans
The interest rate and maturity of indebtedness that we discharged using the net proceeds from the Concurrent Financings, as well as the use of proceeds from such indebtedness, are described below:
Senior Discount Notes. In September 2004, our subsidiaries Crystal US 3 Holdings L.L.C. and Crystal US Sub 3 Corp., issued $853 million aggregate principal amount at maturity of their senior discount notes due 2014 consisting of $163 million aggregate principal amount at maturity of their 10% Series A senior discount notes and $690 million aggregate principal amount at maturity of their 10½% Series B senior discount notes. The gross proceeds of the offering were $513 million. Approximately $500 million of the proceeds were distributed to the Original Shareholders, with the remaining proceeds used to pay fees associated with this financing. Until October 1, 2009, interest on the senior discount notes will accrue in the form of an increase in the accreted value of such notes. Cash interest on the senior discount notes will accrue commencing on October 1, 2009 and be payable semiannually in arrears on April 1 and October 1. In February 2005, we used approximately $37 million of the net proceeds from the offering of our Series A common stock to redeem a portion of the Series A senior discount notes, $151 million to redeem a portion of the Series B senior discount notes and $19 million to pay the premium associated with such redemption. In March 2005, Crystal U.S. Holdings 3 L.L.C. and Crystal U.S. Sub 3 Corp. entered into a supplemental indenture to provide that the Company guarantee the senior discount notes in order that the financial information required to be filed under the indenture can be filedincluded in this Item 5 with respect to our equity compensation plans is incorporated by the Company, rather than the issuers of the senior discount notes.
Senior Subordinated Notes. In June and July 2004, BCP Caylux issued $1,225 million aggregate principal amount of 9 5/8% senior subordinated notes due 2014 and €200 million principal amount of 10 3/8% senior subordinated notes due 2014. In February 2005, we used approximately $521 million of the net proceedsreference from the offering of our Series A common stock to redeem a portion of the senior subordinated notes and $51 million to pay the premium associated with the redemption.
Senior Credit Facilities. In January 2005, BCP Crystal US Holding Corp., Celanese Holdings LLC and CAC entered into an Amended and Restated Credit Agreement with a syndicate of banks and other financial institutions led by Deutsche Bank AG, New York Branch, as administrative agent, Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as joint lead arrangers, Deutsche Bank
Securities Inc., Morgan Stanley Senior Funding, Inc. and Banc of America Securities LLC, as joint book runners, Morgan Stanley Senior Funding, Inc., as syndication agent, and Bank of America, N.A., as documentation agent, which modifies certain terms of the credit agreement dated as of April 6, 2004. The senior credit facilities provide financing of approximately $2.8 billion. The senior credit facilities consist of (1) a term loan facilitysection captioned "Securities Authorized for Issuance under Equity Compensation Plans" in the aggregate amount of approximately $ 1.8 billion (including approximately €275 million of Euro denominated loans) which matures in 2011; (2) a $228 million credit-linked revolving facility which matures in 2009 and includes borrowing capacity available for letters of credit; (3) a $600 million revolving credit facility which matures in 2009; and (4) a new delayed draw term loan facility in the aggregate amount of $242 million which, once borrowed, shall be treated (as to amortization and repayments) on the same basis as the term loan facility. We expect to use this delayed draw facility to finance the acquisition of Acetex Corporation ("Acetex"), a Canadian corporation. The Company entered into an agreement to acquire Acetex in October 27, 2004, and the closing of such acquisition is conditioned upon regulatory approvals and other customary requirements. The borrowings under the senior credit facilities bear interest at a rate equal to an applicable margin plus, at BCP Crystal's option, either base rate or a LIBOR rate. The applicable margin for borrowings under the base rate option is 1.50% andCompany's definitive proxy statement for the LIBOR option, 2.50% (in each case subject to a step-down based on a performance test). In addition to paying interest, BCP Crystal is required to pay certain fees. See "Management's Discussion and Analysis2006 annual meeting of Financial Condition and Resultsstockholders.
Recent Sales of Operations – Liquidity – Senior Credit Facilities".Unregistered Securities
Floating Rate Term Loan. In June 2004, BCP Caylux entered into a $350 million floating rate term loan with Deutsche Bank AG New York Branch, as administrative agent, Morgan Stanley Senior Funding, Inc., as global coordinator, and Deutsche Bank Securities Inc. and Morgan Stanley Senior Funding, Inc., as joint lead arrangers. BCP Crystal is the borrower under the floating rate term loan. The floating rate term loan matures in 2011. The borrowings under the floating rate term loan bear interest at a rate equal to an applicable margin plus, at BCP Crystal's option, either a base rate or a LIBOR rate. Subsequent to the completion of the Restructuring, the applicable margin for borrowings under the base rate option was 3.25% and for the LIBOR option, 3.50%. The floating rate term loan accrues interest. This loan was repaid in January 2005 as described in "Use of Proceeds" above.
Use of Proceeds From Indebtedness Being Discharged and Original Shareholder Equity Investment. The Purchaser used the borrowings under the then-existing senior credit facilities, together with the borrowings under the senior subordinated bridge loan facilities, and the cash equity investment by the Original Shareholders (which included the proceeds from the issuance of the mandatory redeemable preferred shares) to acquire CAG Shares in connection with the Tender Offer, to refinance certain existing debt of CAG, pre-fund certain pension obligations of CAG, pre-fund certain contingencies and certain obligations linked to the value of the CAG Shares, such as the payment of fair cash compensation under the Domination Agreement for the remaining CAG Shares, and payment obligations related to outstanding stock appreciation rights, stock options and interest payments, provide additional funds for working capital and other general corporate purposes, and pay related fees and expenses. BCP Caylux used the proceeds from the offering of the senior subordinated notes, together with available cash and borrowings under the floating rate term loan to repay its two senior subordinated bridge loan facilities, plus accrued interest, to redeem the mandatory redeemable preferred shares and to pay related fees and expenses. The issuers of the senior discount notes used the net proceeds from the offering to make a return of capital distribution to Celanese, which in turn made a distribution to the Original Shareholders, and to pay fees and expenses.None.
Item 6. Selected Financial Data
The balance sheet data shown below as of December 31, 20042005 and 2003,2004, and the statements of operations and cash flow data for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004, and the yearsyear ended December 31, 2003, and 2002, all of which are set forth below, are derived from the Consolidated Financial Statementsconsolidated financial statements included elsewhere in this document and should be read in conjunction with those financial statements and the notes thereto. The statement of operations data for the years ended December 31, 20012002 and 2000 (in the case of the year ended December 31, 2000 only, unaudited)2001 and the balance sheet data as of December 31, 2003, 2002 2001 and 20002001 (in the case of the December 31, 20012002 and 20002001 only, unaudited), all of which are set forth below, have been derived from, and translated into U.S. Dollarsdollars based on, CAG'sCAG’s historical euro audited financial statements and the underlying accounting records. This document presents the financial information relating to the Predecessor and the Successor.
As of the date of this document, the Purchaser, an indirect wholly owned subsidiary ofAnnual Report, Celanese owns approximately 84%98% of the outstanding CAG Shares. Celanese is a recently formed company which, apart from the financing of the Transactions, does not have any independent external operations other than through the indirect ownership of the CAG businesses.shares. Accordingly, financial and other information of CAG is presented in this document for periods through March 31, 2004 and our financial and other information is presented as of and for the year ended December 31, 2005 and as of and for the nine months ended December 31, 2004.
Predecessor | Successor | |||||||||||||||||||||||||
Year Ended December 31, | Three Months Ended March 31, 2004 | Nine Months Ended December 31, 2004 | ||||||||||||||||||||||||
2000 | 2001 | 2002 | 2003 | |||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
(in millions, except per share and per share data) | ||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||
Net sales | $ | 4,120 | $ | 3,970 | $ | 3,836 | $ | 4,603 | $ | 1,243 | $ | 3,826 | ||||||||||||||
Cost of sales | (3,403 | ) | (3,409 | ) | (3,171 | ) | (3,883 | ) | (1,002 | ) | (3,092 | ) | ||||||||||||||
Selling, general and administrative expenses | (497 | ) | (489 | ) | (446 | ) | (510 | ) | (137 | ) | (498 | ) | ||||||||||||||
Research and development expenses | (75 | ) | (74 | ) | (65 | ) | (89 | ) | (23 | ) | (67 | ) | ||||||||||||||
Special charges(1): | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 18 | 28 | — | 107 | — | 1 | ||||||||||||||||||||
Sorbates antitrust matters | — | — | — | (95 | ) | — | — | |||||||||||||||||||
Restructuring, impairment and other special charges, net | (36 | ) | (444 | ) | 5 | (17 | ) | (28 | ) | (92 | ) | |||||||||||||||
Foreign exchange gain (loss) | 5 | 1 | 3 | (4 | ) | — | (3 | ) | ||||||||||||||||||
Gain (loss) on disposition of assets | 1 | — | 11 | 6 | (1 | ) | 3 | |||||||||||||||||||
Operating profit (loss) | 133 | (417 | ) | 173 | 118 | 52 | 78 | |||||||||||||||||||
Equity in net earnings of affiliates | 18 | 12 | 21 | 35 | 12 | 36 | ||||||||||||||||||||
Interest expense | (68 | ) | (72 | ) | (55 | ) | (49 | ) | (6 | ) | (300 | ) | ||||||||||||||
Interest and other income (expense), net(2) | 101 | 53 | 41 | 92 | 14 | 12 | ||||||||||||||||||||
Income tax benefit (provision) | (99 | ) | 111 | (57 | ) | (53 | ) | (17 | ) | (70 | ) | |||||||||||||||
Minority interests | — | — | — | — | — | (8 | ) | |||||||||||||||||||
Earnings (loss) from continuing operations | 85 | (313 | ) | 123 | 143 | 55 | (252 | ) | ||||||||||||||||||
Earnings (loss) from discontinued operations | 1 | (52 | ) | 27 | 6 | 23 | (1 | ) | ||||||||||||||||||
Cumulative effect of changes in accounting principles, net of income tax | — | — | 18 | (1 | ) | — | — | |||||||||||||||||||
Net earnings (loss) | $ | 86 | $ | (365 | ) | $ | 168 | $ | 148 | $ | 78 | $ | (253 | ) | ||||||||||||
Earnings (loss) per share(3) | ||||||||||||||||||||||||||
Earnings (loss) per common share—basic: | ||||||||||||||||||||||||||
Continuing operations | $ | 1.59 | $ | (6.22 | ) | $ | 2.44 | $ | 2.89 | $ | 1.12 | $ | (2.54 | ) | ||||||||||||
Discontinued operations | $ | 0.02 | $ | (1.03 | ) | $ | 0.54 | $ | 0.12 | $ | 0.46 | $ | (0.01 | ) | ||||||||||||
Cumulative effect of change in accounting principle | $ | 0.36 | $ | (0.02 | ) | |||||||||||||||||||||
Net earnings (loss) | $ | 1.61 | $ | (7.25 | ) | $ | 3.34 | $ | 2.99 | $ | 1.58 | $ | (2.55 | ) | ||||||||||||
Weighted average shares—basic | 53,293,128 | 50,331,847 | 50,329,346 | 49,445,958 | 49,321,468 | 99,377,884 | ||||||||||||||||||||
Earnings (loss) per common share—diluted(3): | ||||||||||||||||||||||||||
Continuing operations | $ | 1.59 | $ | (6.22 | ) | $ | 2.44 | $ | 2.89 | $ | 1.11 | $ | (2.54 | ) | ||||||||||||
Discontinued operations | $ | 0.02 | $ | (1.03 | ) | $ | 0.54 | $ | 0.12 | $ | 0.46 | $ | (0.01 | ) | ||||||||||||
Cumulative effect of change in accounting principle | $ | 0.36 | $ | (0.02 | ) | |||||||||||||||||||||
Net earnings (loss) | $ | 1.61 | $ | (7.25 | ) | $ | 3.34 | $ | 2.99 | $ | 1.57 | $ | (2.55 | ) | ||||||||||||
Weighted average shares—diluted(3): | 53,293,128 | 50,331,847 | 50,329,346 | 49,457,145 | 49,712,421 | 99,377,884 | ||||||||||||||||||||
Predecessor | Successor | |||||||||||||||||||||||||
Year Ended December 31, | Three Months Ended March 31, 2004 | Nine Months Ended December 31, 2004 | Year Ended December 31, 2005 | |||||||||||||||||||||||
2001 | 2002 | 2003 | ||||||||||||||||||||||||
(in $ millions, except per share and per share data) | ||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||
Net sales | 3,837 | 3,735 | 4,485 | 1,218 | 3,744 | 6,070 | ||||||||||||||||||||
Cost of sales | (3,277 | ) | (3,085 | ) | (3,795 | ) | (983 | ) | (3,026 | ) | (4,773 | ) | ||||||||||||||
Gross margin | 560 | 650 | 690 | 235 | 718 | 1,297 | ||||||||||||||||||||
Selling, general and administrative expenses | (481 | ) | (442 | ) | (504 | ) | (136 | ) | (497 | ) | (562 | ) | ||||||||||||||
Research and development expenses | (72 | ) | (65 | ) | (89 | ) | (23 | ) | (67 | ) | (91 | ) | ||||||||||||||
Special (charges) gains(1): | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 28 | — | 107 | — | 1 | 34 | ||||||||||||||||||||
Sorbates antitrust matters | — | — | (95 | ) | — | — | — | |||||||||||||||||||
Restructuring, impairment and other special charges, net | (407 | ) | 5 | (17 | ) | (28 | ) | (83 | ) | (107 | ) | |||||||||||||||
Foreign exchange gain (loss) | 1 | 3 | (4 | ) | — | (3 | ) | — | ||||||||||||||||||
Gain (loss) on disposition of assets | — | 10 | 6 | (1 | ) | 3 | (10 | ) | ||||||||||||||||||
Operating profit (loss) | (371 | ) | 161 | 94 | 47 | 72 | 561 | |||||||||||||||||||
Equity in net earnings of affiliates | 12 | 21 | 35 | 12 | 36 | 61 | ||||||||||||||||||||
Interest expense | (72 | ) | (55 | ) | (49 | ) | (6 | ) | (300 | ) | (387 | ) | ||||||||||||||
Interest and other income, net(2) | 53 | 41 | 92 | 14 | 12 | 127 | ||||||||||||||||||||
Income tax benefit (provision) | 97 | (55 | ) | (45 | ) | (15 | ) | (70 | ) | (57 | ) | |||||||||||||||
Minority interests | — | — | — | — | (8 | ) | (37 | ) | ||||||||||||||||||
Earnings (loss) from continuing operations | (281 | ) | 113 | 127 | 52 | (258 | ) | 268 | ||||||||||||||||||
Earnings (loss) from discontinued operations | (84 | ) | 37 | 22 | 26 | 5 | 9 | |||||||||||||||||||
Cumulative effect of change in accounting principle, net of income tax | — | 18 | (1 | ) | — | — | — | |||||||||||||||||||
Net earnings (loss) | (365 | ) | 168 | 148 | 78 | (253 | ) | 277 | ||||||||||||||||||
Cumulative declared and undeclared preferred stock dividend | — | — | — | — | — | (10 | ) | |||||||||||||||||||
Net earnings (loss) available to common shareholders | (365 | ) | 168 | 148 | 78 | (253 | ) | 267 | ||||||||||||||||||
Earnings (loss) per share(3) | ||||||||||||||||||||||||||
Earnings (loss) per common share — basic: | ||||||||||||||||||||||||||
Continuing operations | (5.31 | ) | 2.21 | 2.57 | 1.05 | (2.60 | ) | 1.67 | ||||||||||||||||||
Discontinued operations | (1.94 | ) | 0.77 | 0.44 | 0.53 | 0.05 | 0.06 | |||||||||||||||||||
Cumulative effect of change in accounting principle | — | 0.36 | (0.02 | ) | — | — | — | |||||||||||||||||||
Net earnings (loss) | (7.25 | ) | 3.34 | 2.99 | 1.58 | (2.55 | ) | 1.73 | ||||||||||||||||||
Weighted average shares — basic | 50,331,847 | 50,329,346 | 49,445,958 | 49,321,468 | 99,377,884 | 154,402,575 | ||||||||||||||||||||
Earnings (loss) per common share — diluted(3): | ||||||||||||||||||||||||||
Continuing operations | (5.31 | ) | 2.21 | 2.57 | 1.05 | (2.60 | ) | 1.61 | ||||||||||||||||||
Discontinued operations | (1.94 | ) | 0.77 | 0.44 | 0.52 | 0.05 | 0.06 | |||||||||||||||||||
Cumulative effect of change in accounting principle | — | 0.36 | (0.02 | ) | — | — | — | |||||||||||||||||||
Net earnings (loss) | (7.25 | ) | 3.34 | 2.99 | 1.57 | (2.55 | ) | 1.67 | ||||||||||||||||||
Weighted average shares — diluted(3) | 50,331,847 | 50,329,346 | 49,457,145 | 49,712,421 | 99,377,884 | 166,200,048 | ||||||||||||||||||||
Predecessor | Successor | |||||||||||||||||||||||||
Year Ended December 31, | Three Months Ended March 31, 2004 | Nine Months Ended December 31, 2004 | ||||||||||||||||||||||||
2000 | 2001 | 2002 | 2003 | |||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||
(in millions, except per share and per share data) | ||||||||||||||||||||||||||
Statement of Cash Flows Data: | ||||||||||||||||||||||||||
Net cash provided by (used in) continuing operations: | ||||||||||||||||||||||||||
Operating activities | N/A | $ | 462 | $ | 363 | $ | 401 | $ | (107 | ) | $ | (63 | ) | |||||||||||||
Investing activities | N/A | (105 | ) | (139 | ) | (275 | ) | 96 | (1,810 | ) | ||||||||||||||||
Financing activities | N/A | (337 | ) | (150 | ) | (108 | ) | (43 | ) | 2,686 | ||||||||||||||||
Balance Sheet Data (at the end of period) (2000 and 2001 unaudited): | ||||||||||||||||||||||||||
Trade working capital(4) | N/A | $ | 499 | $ | 599 | $ | 641 | $ | 715 | $ | 762 | |||||||||||||||
Total assets | $ | 7,138 | 6,232 | 6,417 | 6,814 | 6,613 | 7,410 | |||||||||||||||||||
Total debt | 1,084 | 775 | 644 | 637 | 587 | 3,387 | ||||||||||||||||||||
Shareholders' equity (deficit) | 2,671 | 1,954 | 2,096 | 2,582 | 2,622 | (112 | ) | |||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||
Depreciation and amortization | 308 | 326 | 247 | 294 | 72 | 184 | ||||||||||||||||||||
Capital expenditures | 185 | 191 | 203 | 211 | 44 | 166 | ||||||||||||||||||||
Dividends paid per share(5) | $ | 0.10 | $ | 0.35 | — | $ | 0.48 | — | — | |||||||||||||||||
Predecessor | Successor | |||||||||||||||||||||||||
Year Ended December 31, | Three Months Ended March 31, 2004 | Nine Months Ended December 31, 2004 | Year Ended December 31, 2005 | |||||||||||||||||||||||
2001 | 2002 | 2003 | ||||||||||||||||||||||||
(in $ millions, except per share and per share data) | ||||||||||||||||||||||||||
Statement of Cash Flows Data: | ||||||||||||||||||||||||||
Net cash provided by (used in) continuing operations: | ||||||||||||||||||||||||||
Operating activities | 462 | 363 | 401 | (107 | ) | (63 | ) | 714 | ||||||||||||||||||
Investing activities | (105 | ) | (139 | ) | (275 | ) | 96 | (1,810 | ) | (920 | ) | |||||||||||||||
Financing activities | (337 | ) | (150 | ) | (108 | ) | (43 | ) | 2,686 | (144 | ) | |||||||||||||||
Balance Sheet Data (at the end of period) (2001 unaudited): | ||||||||||||||||||||||||||
Trade working capital(4) | 476 | 562 | 591 | 670 | 731 | 769 | ||||||||||||||||||||
Total assets | 6,232 | 6,417 | 6,814 | 6,613 | 7,410 | 7,445 | ||||||||||||||||||||
Total debt | 775 | 644 | 637 | 587 | 3,387 | 3,437 | ||||||||||||||||||||
Shareholders’ equity (deficit) | 1,954 | 2,096 | 2,582 | 2,622 | (112 | ) | 235 | |||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||
Depreciation and amortization | 326 | 240 | 289 | 70 | 181 | 286 | ||||||||||||||||||||
Capital expenditures | 191 | 203 | 211 | 44 | 166 | 212 | ||||||||||||||||||||
Cash basis dividends paid per common share(5) | 0.35 | — | 0.48 | — | — | 0.08 | ||||||||||||||||||||
(1) | Special |
(2) | Interest and other income, net, includes interest income, dividends from cost basis investments and other non-operating income (expense). |
(3) | Successor earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average shares outstanding after giving effect to the 152.772947 for one stock split. Earnings (loss) per share for the Predecessor periods has been calculated by dividing net earnings (loss) by the historical weighted average shares outstanding of the Predecessor. As the capital structure of the Predecessor and Successor are different, the reported earnings (loss) per share are not comparable. |
(4) | Trade working capital is defined as trade accounts receivable from third parties and affiliates net of allowance for doubtful accounts, plus inventories, less trade accounts payable to third parties and affiliates. Trade working capital is calculated in the table below |
Predecessor | Successor | |||||||||||||||||||||
December 31, | March 31, 2004 | December 31, 2004 | ||||||||||||||||||||
2001 | 2002 | 2003 | ||||||||||||||||||||
(in millions) | ||||||||||||||||||||||
Trade receivables, net | $ | 536 | $ | 666 | $ | 722 | $ | 798 | $ | 866 | ||||||||||||
Inventories | 483 | 505 | 509 | 516 | 618 | |||||||||||||||||
Trade payables | (520 | ) | (572 | ) | (590 | ) | (599 | ) | (722 | ) | ||||||||||||
Trade working capital | $ | 499 | $ | 599 | $ | 641 | $ | 715 | $ | 762 | ||||||||||||
Predecessor | Successor | |||||||||||||||||||||||||
December 31, | March 31, 2004 | December 31, 2004 | December 31, 2005 | |||||||||||||||||||||||
2001 | 2002 | 2003 | ||||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Trade receivables, net | 512 | 633 | 686 | 768 | 843 | 918 | ||||||||||||||||||||
Inventories | 470 | 489 | 489 | 495 | 604 | 661 | ||||||||||||||||||||
Trade payables | (506 | ) | (560 | ) | (584 | ) | (593 | ) | (716 | ) | (810 | ) | ||||||||||||||
Trade working capital | 476 | 562 | 591 | 670 | 731 | 769 | ||||||||||||||||||||
(5) | In the nine months ended December 31, 2004, CAG declared and paid a dividend of €0.12 ($0.14) per share for the year ended December 31, 2003. Dividends paid to Celanese and its consolidated subsidiaries eliminate in consolidation. |
During 2005, we declared and paid dividends to holders of our Series A common shares of $13 million, or $0.04 per share per quarter. |
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
In this Annual Report on Form 10-K, the term ‘‘Celanese’’ refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The terms the ‘‘Company,’’ ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ and Successor refer to Celanese and its subsidiaries on a consolidated basis. The term ‘‘BCP Crystal’’ refers to our subsidiary, BCP Crystal US Holdings Corp., a Delaware corporation, and not its subsidiaries. The term ‘‘Purchaser’’ refers to our subsidiary, Celanese Europe Holding GmbH & Co. KG, formerly known as BCP Crystal Acquisition GmbH & Co. KG, a German limited partnership (Kommanditgesellschaft, KG), and not its subsidiaries, except where otherwise indicated. The term ‘‘Original Shareholders’’ refers, collectively, to Blackstone Capital Partners (Cayman) Ltd. 1, Blackstone Capital Partners (Cayman) Ltd. 2, Blackstone Capital Partners (Cayman) Ltd. 3 and BA Capital Investors Sidecar Fund, L.P. The terms ‘‘Sponsor’’ and ‘‘Advisor’’ refer to certain affiliates of The Blackstone Group.
You should read the following discussion and analysis of the financial condition and the results of operations of Celanese Corporation and its subsidiaries (collectively the "Company" or the "Successor") together with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements, and the notes to those financial statements, which were prepared in accordance with U.S. GAAP.
The following discussion and analysis of financial condition and results of operations covers periods prior and subsequent to the acquisition of Celanese AGCAG and its subsidiaries (collectively "CAG"‘‘CAG’’ or the "Predecessor"‘‘Predecessor’’). Accordingly, the discussion and analysis of historical periods prior to the acquisition do not reflect the significant impact that the acquisition of CAG has had and will have on the Successor, including increased leverage and liquidity requirements as well as purchase accounting adjustments. In addition, investorsFurthermore, the Successor and the Predecessor have different accounting policies with respect to certain matters (see Note 4 to the notes to consolidated financial statements). Investors are cautioned that the forward-looking statements contained in this section 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 Information"‘‘Forward-Looking Information’’ located at the end of this section.
The results for the nine months ended December 31, 20032005 and the three months ended March 31, 20032005 have not been auditedaudited; together with the results of the nine months ended December 31, 20042003 and the three months ended March 31, 20042003 and should not be taken as an indication of the results of operations to be reported for any subsequent period or for the full fiscal year.
Reconciliation of Non-U.S. GAAP Measures: Management compensates for the limitations ofbelieves that using non-U.S. GAAP financial measures by using them to supplement U.S. GAAP results is useful to provideinvestors because such use provides a more complete understanding of the factors and trends affecting the business other than disclosing U.S. GAAP results alone. In this regard, we disclose net debt, and trade working capital, which areis a non-U.S. GAAP financial measures.measure. Net debt is defined as total debt less cash and cash equivalents, and trade working capital is defined as trade accounts receivable from third parties and affiliates net of allowance for doubtful accounts, plus inventories, less trade accounts payable to third parties and affiliates.equivalents. Management uses net debt to evaluate the capital structure and trade working capital to evaluate the investment in receivables and inventory, net of payables.structure. Net debt and trade working capital areis not a substitute for any U.S. GAAP financial measure. In addition, calculations of net debt and trade working capital contained in this report may not be consistent with that of other companies. The most directly comparable financial measuresmeasure presented in accordance with U.S. GAAP in our financial statements for net debt and trade working capital areis total debt and the working capital components of trade working capital identified above, respectively.debt. For a reconciliation of net debt and total debt, see "Financial Highlights"‘‘Financial Highlights’’ below. For a reconciliation of trade working capital to the working capital, components, see "Selected Financial Data."
Basis of Presentation
ImpactSuccessor
Represents our audited consolidated financial position as of December 31, 2005 and 2004 and our audited consolidated results of operations and cash flows for the year ended December 31, 2005 and the nine months ended December 31, 2004. These consolidated financial statements reflect the application of purchase accounting, described below, relating to the original acquisition of CAG and purchase price accounting adjustments relating to the acquisitions of Vinamul, Acetex and additional CAG shares acquired during the year ended December 31, 2005.
Predecessor
Represents CAG’s audited consolidated results of operations and cash flows for the year ended December 31, 2003, its audited interim consolidated results of operations and cash flows for the three
months ended March 31, 2004, and its unaudited interim consolidated results of operations and cash flows for the three months ended March 31, 2003 and the nine months ended December 31, 2003. These consolidated financial statements relate to periods prior to the acquisition of CAG and present CAG’s historical basis of accounting without the application of purchase accounting.
The results of the AcquisitionSuccessor are not comparable to the results of Celanese AGthe Predecessor due to the difference in the basis of presentation of purchase accounting as compared to historical cost. Furthermore, the Successor and the Predecessor have different accounting policies with respect to certain matters.
On April 6,Change in Ownership
Pursuant to a voluntary tender offer commenced in February 2004, Celanese Europe Holding GmbH & Co. KG, formerly known as BCP Crystal Acquisition GmbH & Co. KG ("BCP" or the "Purchaser"),Purchaser, an indirect wholly owned subsidiary of the Successor,Celanese Corporation, on April 6, 2004 acquired approximately 84% of the Celanese AG ordinary shares of CAG, excluding treasury shares, ("(the ‘‘CAG Shares"Shares’’). The ordinary shares were acquired at for a price of €32.50 per share or an aggregate purchase price of $1,693 million, including direct acquisition costs of approximately $69 million.million (the ‘‘Acquisition’’). During the year ended December 31, 2005 and the nine months ended December 31, 2004, the Purchaser acquired additional CAG Sharesshares for a purchase price$473 million and $33 million, respectively, including direct acquisition costs of $33 million. As$4 million and less than $1 million, respectively. The additional CAG shares were acquired pursuant to either i) the mandatory offer which commenced in September 2004 and was extended such that it will expire on April 1, 2006, unless further extended or ii) the acquisition of additional CAG shares acquired primarily represented exercised employee stock options, the Purchaser's ownership percentage remained at approximately 84% as of December 31, 2004.described below.
As part of the initial acquisition of CAG, the Purchaser agreed to refinance certain existing debt of CAG, pre-fund certain pension obligations of CAG, pre-fund certain contingencies and certain obligations linked to the value of the CAG, such as the payment of fair cash compensation under a Domination and Profit and Loss Transfer Agreement ("(‘‘Domination Agreement"Agreement’’) for the remaining outstanding CAG Shares and payment obligations related to outstanding stock appreciation rights, stock options and interest payments, provide additional funds for working capital and other general corporate purposes, and pay related fees and expenses.
The funds used in connection with the initial acquisition of CAG were provided by equity investments of $641 million from the Blackstone Capital Partners (Cayman) Ltd. 1, Blackstone Capital Partners (Cayman) Ltd. 2, and Blackstone Capital Partners (Cayman) Ltd. 3 (collectively, "Blackstone"‘‘Blackstone’’) and BA Capital Investors Sidecar Fund, L.P. (and together with Blackstone, the "Original Shareholders"‘‘Original Shareholders’’); term loans of approximately $608 million, borrowings under senior subordinated bridge loan facilities of $1,565 million as well as the issuance of mandatorilly redeemable preferred stock totaling $200 million. The senior subordinated bridge loan facilities have since been refinanced by the senior subordinated notes and the floating rate term loan. As a result of the financing, our interest expense currently is, and will continue to be, substantially higher than it was prior to the acquisition or as compared with historical CAG.Acquisition.
We accounted for the initial acquisition of CAG using the purchase method of accounting and, accordingly, this resulted in a new basis of accounting. The purchase price was allocated based on the fair value of the underlying assets acquired and liabilities assumed. The assets acquired and liabilities assumed arewere reflected at fair value for the approximately 84% portion acquired and at CAG historical basis for the remaining approximate 16%. The excess of the total purchase price over the fair value of the net assets acquired at closing was allocated to goodwill, and this indefinite lived asset is subject to an annual impairment review. GoodwillDuring the three months ended March 31, 2005, we finalized the purchase accounting adjustments for the original acquisition of CAG (See Notes 1 and 2 to the consolidated financial statements).
During the year ended December 31, 2005, we decreased goodwill by $26 million as a result of purchase accounting adjustments related to the Acquisition and the acquisition of additional CAG shares. Included in this adjustment is a $23 million increase to goodwill, and a corresponding increase to our minority interest liability primarily associated with the Restructuring that occurred in October 2004 (See Note 1 to the consolidated financial statements). We also increased goodwill by $5 million, net, for various purchase accounting adjustments related to the acquisition of additional CAG shares. As these represented immaterial adjustments, individually and in the transaction totalled $747 million.aggregate, prior periods have not been restated. Also included in this adjustment is a $54 million decrease to goodwill associated with the additional CAG shares purchased based on the fair value of the assets and liabilities acquired (See Note 2 to the consolidated financial statements).
In connection with the acquisition of CAG,Acquisition, at the acquisition date, the Company began formulatingwe implemented a plan to exit or restructure certain activities. We have not completed this analysis, but have recorded initial liabilities of $60 million, primarily for employee severance and related costs in connection with the preliminary plan as well as approvingand have approved the continuation of all existing Predecessor restructuring and exit plans. As we finalize our plans to exit or restructure activities, we may record additional liabilities for, among other things, severance and severance related costs, which may also increase the goodwill recorded. See(See Note 2 into the Consolidated Financial Statements.
Successor
Successor—Represents the Company's audited consolidated financial position as of December 31, 2004 and its audited consolidated results of operations and cash flows for the nine months ended December 31, 2004. These consolidated financial statements reflect the application of purchase accounting, described above, relating to the acquisition of CAG.statements).
PredecessorMajor Events In 2005
Predecessor—Represents CAG's audited consolidated financial position as of December 31, 2003 and its audited consolidated results of operations and cash flows for each of the years in the two-year period ended December 31, 2003, its audited interim consolidated results of operations and cash flows for the three months ended March 31, 2004, and its unaudited interim consolidated results of operations and cash flows for the three months ended March 31, 2003 and the nine months ended December 31, 2003. These consolidated financial statements relate to periods prior to the acquisition of CAG and present CAG's historical basis of accounting without the application of purchase accounting.
The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation of purchase accounting as compared to historical cost.
• | In January 2005, we completed an intial public offering of 50,000,000 shares of Series A common stock. Concurrently, we issued 9,600,000 shares of convertible perpetual preferred stock. |
• | In December 2005, we announced a plan to develop our Nanjing, China site into an integrated chemical complex that will include a 600,000 metric ton acetic acid plant, a vinyl acetate unit and a vinyl acetate emulsions unit. Startup is targeted for the first half of 2007. |
• | Increased our ownership of CAG to approximately 98% as of November 2, 2005 following an agreement with major shareholders and ongoing tender offers. In November 2005, our Board of Directors granted approval to effect a Squeeze-Out of the remaining minority shareholders of CAG. |
• | In February 2005, we completed the acquisition of Vinamul, the North American and European emulsion polymer business of Imperial Chemical Industries PLC (‘‘ICI’’) for $208 million. |
• | In July 2005, we completed the acquisition of Acetex Corporation for $270 million and assumed Acetex's $247 million of debt, which is net of cash acquired of $54 million. We also redeemed Acetex’s outstanding 10 7/8% senior notes primarily with available cash of $280 million. |
• | Completed the transition to purchase our total requirements for Gulf Coast methanol from Southern Chemical Corporation, a Trinidad-based supplier. |
• | Announced plans to construct a world-scale plant for the manufacture of GUR® ultra-high molecular weight polyethylene in Asia. Production is expected to begin in the second half of 2007. |
• | Announced plans to implement our next generation of vinyl acetate monomer technology, known as Vantage Plus™. We expect to further improve production efficiency and lower operating costs across our global manufacturing platform through the use of this technology. |
• | In August 2005, our board adopted a dividend policy and we began to pay common shareholders a dividend of $0.16 per share annually, or 1%, based on the initial public offering price of $16 per share. |
• | In December 2005, we reached settlements with two insurer's of CNA Holdings' pursuant to which CNA Holdings will be paid a total of $16 million in the next two years ($7 million in 2006 and $9 million in 2007) in exchange for the release of certain claims against the policy of the insurer. We recorded approximately $30 million in income to special (charges) gains for two plumbing action insurance settlements in the fourth quarter of 2005. |
• | In December 2005, we resolved litigation pertaining to antitrust claims filed against certain shipping companies. Pursuant to these agreements, we received net proceeds of approximately $36 million which was recorded as a reduction to cost of sales in the fourth quarter of 2005. |
• | In October 2005, we completed the sale of our acetate manufacturing facility in Rock Hill, South Carolina to Greens of Rock Hill LLC. Production at the facility was phased out earlier in 2005 as part of our previously announced plans to consolidate our acetate flake manufacturing operations. We recognized a gain on sale of approximately $23 million, which includes the reversal of $12 million of asset retirement obligations and $7 million of environmental reserves, as the purchaser assumed these obligations. |
• | In the fourth quarter of 2005, we exited our filament business (See Note 6 to the notes to consolidated financial statements). |
• | In December 2005, we sold our cyclo-olefine copolymer business, or COC, to a venture of Japan's Daicel Chemical Industries Ltd. (‘‘Daicel’’) and Polyplastics Co, Ltd. (‘‘Polyplastics’’). Daicel holds a majority stake in the venture with 55% interest and Polyplastics, which itself is a venture between us and Daicel, owns the remaining 45%. The transaction resulted in a loss of approximately $35 million. |
• | In December 2005, we completed the sale of our common stock interest in the Pemeas GmbH fuel cell venture and recognized a gain of less than $1 million. |
• | In December 2005, we announced that discussions regarding the venture project being developed by Acetex and Tasnee Petrochemicals in the Kingdom of Saudi Arabia have been temporarily suspended due to the current high demand on contractors and vendors which have affected expected project costs. |
• | Continued to focus the product portfolio by exiting non-strategic businesses, such as the high performance polymer polybenzamidazole (‘‘PBI’’), vectran polymer and emulsion powders. |
• | In December 2005, we announced our intention to pursue strategic alternatives for our Pampa, Texas plant. The facility, which produces a variety of products based on butane, including 290,000 metric tons of acetic acid, faces competitive pressures due to the technology utilized. If we elect to exit the facility, an impairment charge may be recognized, which could be material. |
Initial Public Offering and Concurrent Financings
In January 2005, the Companywe completed an initial public offering of 50,000,000 shares of Series A common stock and received net proceeds of approximately $760$752 million after deducting underwriters'underwriters’ discounts and estimated offering expenses.expenses of $48 million. Concurrently, the Companywe received net proceeds of $233 million from the offering of itsour convertible perpetual preferred stock. A portion of the proceeds of the share offerings were used to redeem $188 million of senior discount notes and $521 million of senior subordinated notes, excluding early redemption premiums of $19 million and $51 million, respectively.
Subsequent to the closing of the initial public offering, the Companywe borrowed an additional $1,135 million under the amended and restated senior credit facilities;facilities, a portion of which was used to repay a $350 million of floating rate term loan, and $200 million of which was primarily used to financeas the primary financing for the February 2005 acquisition of the Vinamul emulsions business.Vinamul. Additionally, the amended and restated senior credit facilities includesincluded a $242 million delayed draw term loan, which is expected to be used to finance the Acetex acquisition.expired unutilized in July 2005.
On April 7, 2005, the Company expects to usewe used the remaining proceeds of the initial public offering and concurrent financings to pay a special cash dividend, declared on March 8, 2005, to holders of the Company'sour Series B common stock of $804 million. Upon payment of the $804 million which was declared ondividend, all of the outstanding shares of Series B common stock converted automatically into shares of Series A common stock. On March 8, 2005. In addition, the Company9, 2005, we issued a 7,500,000 Series A common stock dividend to the holders of itsour Series B common stock,stock.
Acquisition of Additional CAG Shares
On August 24, 2005, we acquired 5.9 million, or approximately 12%, of the Original Shareholders, respectively,outstanding CAG shares from two shareholders for €302 million ($369 million). We also paid to such shareholders €12 million ($15 million) in consideration for the settlement of certain claims and for such shareholders agreeing to, among other things, (1) accept the shareholders' resolutions passed at the extraordinary general meeting of CAG held on March 9, 2005. See Note 3July 30 and 31, 2004 and the annual general meeting of CAG held on May 19 and 20, 2005, (2) acknowledge the legal effectiveness of the domination and profit and loss transfer agreement, (3) irrevocably withdraw and abandon all actions, applications and appeals each brought or joined in legal proceedings related to, among other things, challenging the effectiveness of the domination and profit and loss transfer agreement and amount of fair cash compensation offered by the Purchaser in the mandatory offer required by Section 305(1) of the
German Stock Corporation Act, (4) refrain from acquiring any CAG shares or any other investment in CAG, and (5) refrain from taking any future legal action with respect to shareholder resolutions or corporate actions of CAG. We paid the aggregate consideration of €314 million ($384 million) for the additional CAG shares using available cash.
We also made a limited offer to purchase from all other shareholders any remaining outstanding CAG shares for €51 per share (plus interest on €41.92 per share) against waiver of the shareholders’ rights to participate in an increase of the offer consideration as a result of the pending award proceedings. In addition, all shareholders who tendered their shares pursuant to the Consolidated Financial Statements.
Major Events InSeptember 2004
In response mandatory offer of €41.92 per share were entitled to greater demandclaim the difference between the increased offer and the mandatory offer. The limited offer period ran from August 30, 2005 through September 29, 2005, inclusive. For shareholders who did not accept the limited offer on or prior to the September 29, 2005 expiration date, the terms of the original mandatory offer continue to apply. The mandatory offer will remain open for Ticona's technical polymers, two projects were announced to expand manufacturing capacity. Ticona announced plans to increase productionmonths following final resolution of polyacetal in North America by about 20%, raising total capacity to 102,000 tons per year at the Bishop, Texas facility. This project was completed in October 2004. Fortron Industries, a venture of Ticona and Kureha Chemicals Industries, plans to increase the capacity of its Fortron polyphenylene sulfide plant in Wilmington, North Carolina, by 25%, award proceedings (Spruchverfahren) by the endGerman courts.
As of 2005.
In OctoberDecember 31, 2005 and 2004, we completed an organizational restructuring (the "Restructuring"). As partour ownership interest in CAG was approximately 98% and 84%, respectively. On November 3, 2005, our Board of Directors approved commencement of the Restructuring,process for effecting a squeeze-out of the parentremaining shareholders, as defined below.
Squeeze-Out
Because we own shares representing more than 95% of BCP, by causing BCPthe registered ordinary share capital (excluding treasury shares) of CAG, we have decided to give corresponding instructionexercise our right, as permitted under the Domination Agreement, effectedGerman law, to the transfer of all of the shares owned by the outstanding minority shareholders of Celanese Americas Corporation ("CAC") from Celanese Holding GmbH, a wholly owned subsidiary of Celanese AG, to BCP Caylux Holdings Luxembourg S.C.A. ("BCP Caylux") which resulted in BCP Caylux owning 100% of the equity of CAC and, indirectly, all of its assets, including subsidiary stock.
Following the transfer of CAC to BCP Caylux (1) Celanese Holdings contributed substantially all of its assets and liabilities (including all outstanding capital stock of BCP Caylux) to BCP Crystal US Holdings Corp. ("BCP Crystal")CAG in exchange for all outstanding capital stock of BCP Crystal; and (2) BCP Crystal assumed certain obligations of BCP Caylux, including all rights and obligations of BCP Caylux underfair cash compensation (the ‘‘Squeeze-Out’’). The Squeeze-Out will require the senior credit facilities,approval by the floating rate term loan and the senior subordinated notes. BCP Crystal, at discretion may subsequently cause the liquidation of BCP Caylux.
As a result of these transactions, BCP Crystal holds 100% of CAC's equity and, indirectly, all equity owned by CAC in its subsidiaries. In addition, BCP Crystal holds, indirectly, allaffirmative vote of the outstanding common stockmajority of Celanese AG heldthe votes cast at CAG’s annual general meeting in May 2006 and will become effective upon its registration in the commercial register. If we are successful in effecting the Squeeze-Out, we must pay the then remaining minority shareholders of CAG fair cash compensation, in exchange for their shares. The amount of the fair cash compensation per share has been set at €62.22. The amount to be paid to the minority shareholders as fair cash compensation in exchange for their CAG Shares in connection with the Squeeze-Out was determined on the basis of the fair value of CAG, determined by us in accordance with applicable German legal requirements, as of the date of the applicable resolution of CAG’s shareholders’ meeting, and examined by a duly qualified auditor chosen and appointed by the Purchaser and allFrankfurt District Court (Landgericht).
The Squeeze-Out will require approval by the shareholders of CAG. While it is expected that we will have the requisite majority in such meeting to assure approval of such measures, minority shareholders, irrespective of the wholly owned subsidiariessize of Celanese that guarantee BCP Caylux's obligations undertheir shareholding, may, within one month from the senior credit facilities guaranteedate of any such shareholder resolution, file an action with the senior subordinated notes issuedcourt to have such resolution set aside. While such action would only be successful if the resolution were passed in violation of applicable laws and cannot be based on June 8, 2004, and July 1, 2004 on an unsecured senior subordinated basis.
If legal challengesthe unfairness of the Domination Agreement by dissenting shareholders of Celanese AG are successful, some or all actions taken under the Domination Agreement, including the transfer of CAC may be requiredamount to be reversedpaid to the minority shareholders, a shareholder action may substantially delay the implementation of the challenged shareholder resolution pending final resolution of the action. If such action proved to be successful, the action could prevent the implementation of the Squeeze-Out. Accordingly, there can be no assurance that the Squeeze-Out can be implemented timely or at all.
Impact of the Acquisitions of Vinamul and the Purchaser may be required to compensate Celanese AG for damages caused by such actions.Acetex
In October 2004,February 2005, we announced plans to implement a strategic restructuring of our acetate business to increase efficiency, reduce overcapacity in certain areas and to focus on products and markets that provide long-term value. As part of this restructuring, we plan to discontinue acetate filament production by mid-2005 and to consolidate our acetate flake and tow operations at three locations, instead of five. The restructuring resulted in $50 million of asset impairment charges recorded as a special charge and $12 million in charges to depreciation for related asset retirement obligations for the nine months ended December 31, 2004.
In October 2004, we agreed to acquire Acetex Corporation ("Acetex"), a Canadian corporation, for approximately $261 million and the assumption by us of debt owed by Acetex, valued at approximately $231 million. Acetex has two primary businesses: the Acetyls Business and the Specialty Polymers and Films Business. The Acetyls business produces acetic acid, polyvinyl alcohol and vinyl acetate monomer. The Specialty Polymers and Films Business produces specialty polymers (used in the manufacture of a variety of plastics products, including packaging and laminating products, auto parts, adhesives and medical products) as well as products for the agricultural, horticultural and construction industries. Closing of the acquisition is conditioned upon regulatory approvals and other customary conditions. We expect to finance this acquisition through borrowings under the $242 million delayed draw term loan, which is part of the amended and restated senior credit facilities.
In November 2004, we announced our plans to purchaseacquired Vinamul, Polymers, the North American and European emulsion polymer business of National Starch and Chemical Company ("NSC"), for $208 million. NSC is a subsidiary of Imperial Chemical Industries PLC ("ICI"(‘‘ICI’’). Emulsion polymers enhance for $208 million. The Vinamul product line includes vinyl acetate-ethylene copolymers, vinyl acetate homopolymers and copolymers, and acrylic and vinyl acrylic emulsions. Vinamul operates manufacturing facilities in the performanceUnited States, Canada, the United Kingdom, and The Netherlands. As part of adhesives, paints and coatings, textiles, paper, building productsthe agreement, ICI will continue to supply Vinamul with starch, dextrin and other goods.specialty ingredients following the acquisition. We will supply ICI with vinyl acetate monomer and polyvinyl alcohols. The supply agreements are for fifteen years,
and the pricing is based on market and other negotiated terms. This acquisition was completed in February 2005 and wasprimarily financed through an amendmentborrowings of $200 million under the amended and restated senior credit facilities. The net sales and operating profit (loss) of the senior credit facilities.
In November 2004, Blackstone Crystal Holdings Capital Partners (Cayman) IV Ltd., reorganized as a Delaware company and changed its name to Celanese Corporation.
In December 2004, we approved a plan to dispose of the Cyclo-olefin Copolymer ("COC")Vinamul business included within the Technical Polymers Ticona segment andin our interest in Pemeas GmbH, the fuel cell venture included in Other Activities. This decision resulted in $32 millionresults of asset impairment charges recorded as a special charge related to the COC business. The revenues and the operating (loss) for COCoperations were $8$343 million and $(59)$(15) million, for the nine months ended December 31, 2004, $1 million and $(9) million for the three months ended March 31, 2004 and $7 million and $(35) millionrespectively, for the year ended December 31, 2003, respectively.2005. Vinamul's results included integration costs incurred in connection with the acquistion. See Note 6 to the consolidated financial statements.
In September 2005, in connection with the Vinamul transaction, we sold our emulsion powders business to ICI for $25 million. The revenuestransaction included a supply agreement whereby we will supply product to ICI for a period of up to fifteen years. The fair value of the supply contract was $11 million and was recorded as deferred revenue to be amortized over the fifteen year life of the contract. In connection with the sale, we reduced goodwill related to the acquisition of Vinamul by $6 million. Net sales and operating profit (loss) for the fuel cellemulsions powders business were not material for any period presented. Operating (losses) for the fuel cell business was $(8) million for the nine months ended December 31, 2004, $(2)September 30, 2005 were approximately $30 million and $1 million, respectively.
In July 2005, we acquired Acetex Corporation (‘‘Acetex’’) for $270 million and assumed Acetex’s $247 million of debt, which is net of cash acquired of $54 million. Acetex’s operations include an acetyls business with plants in Europe and a North-American specialty polymers and film business. We acquired Acetex primarily using existing cash. We caused Acetex to exercise its option to redeem its 10 7/8% senior notes due 2009 totaling $265 million. The redemption was funded primarily with cash on hand and occurred on August 19, 2005. The redemption price was $280 million, which represents 105.438% of the three months ended March 31, 2004outstanding principal amount, plus accrued and $(12)unpaid interest to August 19, 2005. On August 25, 2005, we repaid the remaining $36 million of assumed debt with available cash. The net sales and operating profit (loss) of the Acetex business included in our results of operations were $247 million and $(4) million, respectively, for the year ended December 31, 2003. As2005. Acetex's results included integration costs and inventory purchase accounting adjustments incurred in connection with the acquisition.
In connection with the above acquisitions, we allocated the purchase price on the basis of the fair value of the assets acquired and the liabilities assumed. We expect to finalize the purchase accounting for Acetex by March 31, 2006. Included in the liabilities assumed are certain obligations related to the acquired pension and postretirement benefit plans. The excess of the purchase price over the amounts allocated to assets and liabilities is included in goodwill, and as of December 31, 2004, the estimated total assets and total liabilities of COC, including intercompany payables, were2005, is approximately $42$44 million and $74$166 million respectively,for Vinamul and the estimated total assets and total liabilities of Pemeas GmbH were $24 million and $3 million,Acetex, respectively.
Major Events In December 2004 we approved a stock incentive plan for executive officers, key employees and directors, a deferred compensation plan for executive officers and key employees, as well as other management incentive programs. We recorded expense of $50 million related to these new compensation plans during the nine months ended December 31, 2004.
• | In response to greater demand for Ticona’s technical polymers, two projects were announced to expand manufacturing capacity. Ticona announced plans to increase production of polyacetal in North America by about 20%, raising total capacity to 102,000 tons per year at the Bishop, Texas facility. This project was completed in October 2004. |
• | In October 2004, we completed an organizational restructuring (the ‘‘Restructuring’’). (See Note 1 to the consolidated financial statements). |
• | In October 2004, we announced plans to implement a strategic restructuring of our acetate business to increase efficiency, reduce overcapacity in certain areas and to focus on products and markets that provide long-term value. The restructuring resulted in $50 million of asset impairment charges recorded as a special charge and $12 million in charges to depreciation for related asset retirement obligations for the nine months ended December 31, 2004. |
• | In November 2004, Blackstone Crystal Holdings Capital Partners (Cayman) IV Ltd., reorganized as a Delaware company and changed its name to Celanese Corporation. |
• | In December 2004, we approved a stock incentive plan for executive officers, key employees and directors, a deferred compensation plan for executive officers and key employees, as well as other management incentive programs. We recorded expense of $50 million related to these new compensation plans during the nine months ended December 31, 2004. |
Major Events In 2003
In 2003, CAG took major steps to enhance the value of its businesses, by investing in new production capacity in growth areas, reducing costs and increasing productivity.
Optimizing the Portfolio
• | Agreed to sell |
• | Completed the venture of its European oxo businesses with Degussa AG |
• | Sold |
Investing in Growth Areas
• | Received governmental approval and began preparations to build a world-scale acetic acid plant in China, the |
• | Announced agreement with China National Tobacco Corporation to double capacities of three acetate tow plants in China, in which CAG owns a 30% |
• | Announced plans to expand its |
• | Broke ground with Asian partners for a new investment in a polyacetal plant in China, the |
Reducing Costs and Increasing Productivity
• | Agreed to source methanol from Southern Chemical Corporation in mid-2005 under a multi-year contract expected to reduce significantly overall exposure to U.S. Gulf Coast natural gas |
• | Initiated measures to redesign |
• | Achieved significant cost savings from completion of Focus and Forward restructuring |
• | Intensified use of Six Sigma and other productivity tools throughout the organization to reduce costs and generate additional |
• | Began implementation of a company-wide SAP platform to reduce administrative costs by eliminating complexity in information systems and to provide for ongoing improvement in business processes and |
• | Completed a new, more efficient plant for synthesis gas, a primary raw material used at the Oberhausen, Germany site. |
Major Events In 2002
Enhancing the Value of CAG's Portfolio
Continuing Internal Growth Activities
Additional Highlights:
Financial Highlights
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||
Net sales | 3,826 | 3,466 | 1,243 | 1,137 | 4,603 | 3,836 | ||||||||||||||||||||
Special charges | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | 107 | — | — | 107 | — | ||||||||||||||||||||
Sorbates antitrust matters | — | (95 | ) | — | — | (95 | ) | — | ||||||||||||||||||
Restructuring, impairment and other special charges, net | (92 | ) | (16 | ) | (28 | ) | (1 | ) | (17 | ) | 5 | |||||||||||||||
Operating profit | 78 | 46 | 52 | 72 | 118 | 173 | ||||||||||||||||||||
Earnings (loss) from continuing operations before tax | ||||||||||||||||||||||||||
and minority interests | (174 | ) | 108 | 72 | 88 | 196 | 180 | |||||||||||||||||||
Earnings (loss) from continuing operations | (252 | ) | 79 | 55 | 64 | 143 | 123 | |||||||||||||||||||
Earnings (loss) from discontinued operations | (1 | ) | 13 | 23 | (7 | ) | 6 | 27 | ||||||||||||||||||
Net earnings (loss) | (253 | ) | 92 | 78 | 56 | 148 | 168 | |||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Nine Months Ended December 31, 2003 | |||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||
Net sales | 4,592 | 3,744 | 1,478 | 1,218 | 1,137 | 3,348 | ||||||||||||||||||||
Special (charges) gains: | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 34 | 1 | — | — | — | 107 | ||||||||||||||||||||
Sorbates antitrust matters | — | — | — | — | — | (95 | ) | |||||||||||||||||||
Restructuring, impairment and other special (charges) gains | (69 | ) | (83 | ) | (38 | ) | (28 | ) | (1 | ) | (16 | ) | ||||||||||||||
Operating profit | 405 | 72 | 156 | 47 | 72 | 22 | ||||||||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | 349 | (180 | ) | 13 | 67 | 88 | 84 | |||||||||||||||||||
Earnings (loss) from continuing operations | 288 | (258 | ) | (20 | ) | 52 | 68 | 59 | ||||||||||||||||||
Earnings (loss) from discontinued operations | (1 | ) | 5 | 10 | 26 | (11 | ) | 33 | ||||||||||||||||||
Net earnings (loss) | 287 | (253 | ) | (10 | ) | 78 | 56 | 92 | ||||||||||||||||||
Successor | Predecessor | |||||||||
As of December 31, 2004 | As of December 31, 2003 | |||||||||
(in $ millions) | ||||||||||
Balance Sheet Data: | ||||||||||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 144 | 148 | ||||||||
Plus: Long-term debt | 3,243 | 489 | ||||||||
Total debt | 3,387 | 637 | ||||||||
Less: Cash and cash equivalents | 838 | 148 | ||||||||
Net debt | 2,549 | 489 | ||||||||
Successor | ||||||||||
As of December 31, 2005 | As of December 31, 2004 | |||||||||
(in $ millions) | ||||||||||
Balance Sheet Data: | ||||||||||
Short-term borrowings and current installments of long-term debt - third party and affiliates | 155 | 144 | ||||||||
Plus: Long-term debt | 3,282 | 3,243 | ||||||||
Total debt | 3,437 | 3,387 | ||||||||
Less: Cash and cash equivalents | 390 | 838 | ||||||||
Net debt | 3,047 | 2,549 | ||||||||
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||
Depreciation and amortization | 184 | 224 | 72 | 70 | 294 | 247 | ||||||||||||||||||||
Operating margin(1) | 2.0 | % | 1.3 | % | 4.2 | % | 6.3 | % | 2.6 | % | 4.5 | % | ||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests as a percentage of net sales | (4.5 | )% | 3.1 | % | 5.8 | % | 7.7 | % | 4.3 | % | 4.7 | % | ||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Nine Months Ended December 31, 2003 | |||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||
Depreciation and amortization | 223 | 181 | 63 | 70 | 70 | 219 | ||||||||||||||||||||
Operating margin(1) | 8.8 | % | 1.9 | % | 10.6 | % | 3.9 | % | 6.3 | % | 0.7 | % | ||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests as a percentage of net sales | 7.6 | % | (4.8 | )% | 0.9 | % | 5.5 | % | 7.7 | % | 2.5 | % | ||||||||||||||
(1) | Defined as operating profit divided by net sales. |
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Net sales | 3,826 | 3,466 | 1,243 | 1,137 | 4,603 | 3,836 | ||||||||||||||||||||
Cost of sales | (3,092 | ) | (2,948 | ) | (1,002 | ) | (935 | ) | (3,883 | ) | (3,171 | ) | ||||||||||||||
Selling, general and administrative expenses | (498 | ) | (402 | ) | (137 | ) | (108 | ) | (510 | ) | (446 | ) | ||||||||||||||
Research and development expenses | (67 | ) | (69 | ) | (23 | ) | (20 | ) | (89 | ) | (65 | ) | ||||||||||||||
Special charges: | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | 107 | — | — | 107 | — | ||||||||||||||||||||
Sorbates antitrust matters | — | (95 | ) | — | — | (95 | ) | — | ||||||||||||||||||
Restructuring, impairment and other special charges, net | (92 | ) | (16 | ) | (28 | ) | (1 | ) | (17 | ) | 5 | |||||||||||||||
Foreign exchange gain (loss) | (3 | ) | (3 | ) | — | (1 | ) | (4 | ) | 3 | ||||||||||||||||
Gain (loss) on disposition of assets | 3 | 6 | (1 | ) | — | 6 | 11 | |||||||||||||||||||
Operating profit | 78 | 46 | 52 | 72 | 118 | 173 | ||||||||||||||||||||
Equity in net earnings of affiliates | 36 | 25 | 12 | 10 | 35 | 21 | ||||||||||||||||||||
Interest expense | (300 | ) | (37 | ) | (6 | ) | (12 | ) | (49 | ) | (55 | ) | ||||||||||||||
Interest income | 24 | 38 | 5 | 6 | 44 | 18 | ||||||||||||||||||||
Other income (expense), net | (12 | ) | 36 | 9 | 12 | 48 | 23 | |||||||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | (174 | ) | 108 | 72 | 88 | 196 | 180 | |||||||||||||||||||
Income tax provision | (70 | ) | (29 | ) | (17 | ) | (24 | ) | (53 | ) | (57 | ) | ||||||||||||||
Earnings (loss) from continuing operations before minority interests | (244 | ) | 79 | 55 | 64 | 143 | 123 | |||||||||||||||||||
Minority interests | (8 | ) | — | — | — | — | — | |||||||||||||||||||
Earnings (loss) from continuing operations | (252 | ) | 79 | 55 | 64 | 143 | 123 | |||||||||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||||||||||
Earnings (loss) from operation of discontinued operations | — | 7 | (5 | ) | (8 | ) | (1 | ) | (43 | ) | ||||||||||||||||
Gain (loss) on disposal of discontinued operations | (2 | ) | 9 | 14 | (2 | ) | 7 | 14 | ||||||||||||||||||
Income tax benefit | 1 | (3 | ) | 14 | 3 | — | 56 | |||||||||||||||||||
Earnings (loss) from discontinued operations | (1 | ) | 13 | 23 | (7 | ) | 6 | 27 | ||||||||||||||||||
Cumulative effect of changes in accounting principles, net of income tax | — | — | — | (1 | ) | (1 | ) | 18 | ||||||||||||||||||
Net earnings (loss) | (253 | ) | 92 | 78 | 56 | 148 | 168 | |||||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Nine Months Ended December 31, 2003 | |||||||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||
(in $ millions) | ||||||||||||||||||||||||||
Net sales | 4,592 | 3,744 | 1,478 | 1,218 | 1,137 | 3,348 | ||||||||||||||||||||
Cost of sales | (3,667 | ) | (3,026 | ) | (1,106 | ) | (983 | ) | (935 | ) | (2,860 | ) | ||||||||||||||
Gross margin | 925 | 718 | 372 | 235 | 202 | 488 | ||||||||||||||||||||
Selling, general and administrative expenses | (403 | ) | (497 | ) | (159 | ) | (136 | ) | (108 | ) | (396 | ) | ||||||||||||||
Research and development expenses | (68 | ) | (67 | ) | (23 | ) | (23 | ) | (20 | ) | (69 | ) | ||||||||||||||
Special (charges) gains: | ||||||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 34 | 1 | — | — | — | 107 | ||||||||||||||||||||
Sorbates antitrust matters | — | — | — | — | — | (95 | ) | |||||||||||||||||||
Restructuring, impairment and other special (charges) gains | (69 | ) | (83 | ) | (38 | ) | (28 | ) | (1 | ) | (16 | ) | ||||||||||||||
Foreign exchange gain (loss) | (3 | ) | (3 | ) | 3 | — | (1 | ) | (3 | ) | ||||||||||||||||
Gain (loss) on disposition of assets | (11 | ) | 3 | 1 | (1 | ) | — | 6 | ||||||||||||||||||
Operating profit | 405 | 72 | 156 | 47 | 72 | 22 | ||||||||||||||||||||
Equity in net earnings of affiliates | 46 | 36 | 15 | 12 | 10 | 25 | ||||||||||||||||||||
Interest expense | (211 | ) | (300 | ) | (176 | ) | (6 | ) | (12 | ) | (37 | ) | ||||||||||||||
Interest income | 23 | 24 | 15 | 5 | 6 | 38 | ||||||||||||||||||||
Other income (expense), net | 86 | (12 | ) | 3 | 9 | 12 | 36 | |||||||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | 349 | (180 | ) | 13 | 67 | 88 | 84 | |||||||||||||||||||
Income tax provision | (49 | ) | (70 | ) | (8 | ) | (15 | ) | (20 | ) | (25 | ) | ||||||||||||||
Earnings (loss) from continuing operations before minority interests | 300 | (250 | ) | 5 | 52 | 68 | 59 | |||||||||||||||||||
Minority interests | (12 | ) | (8 | ) | (25 | ) | — | — | — | |||||||||||||||||
Earnings (loss) from continuing operations | 288 | (258 | ) | (20 | ) | 52 | 68 | 59 | ||||||||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||||||||||
Earnings (loss) from operation of discontinued operations | (1 | ) | 5 | 10 | — | (8 | ) | 31 | ||||||||||||||||||
Gain (loss) on disposal of discontinued operations | — | (1 | ) | — | 14 | (2 | ) | 9 | ||||||||||||||||||
Income tax benefit | — | 1 | — | 12 | (1 | ) | (7 | ) | ||||||||||||||||||
Earnings (loss) from discontinued operations | (1 | ) | 5 | 10 | 26 | (11 | ) | 33 | ||||||||||||||||||
Cumulative effect of changes in accounting principles, net of income tax | — | — | — | — | (1 | ) | — | |||||||||||||||||||
Net earnings (loss) | 287 | (253 | ) | (10 | ) | 78 | 56 | 92 | ||||||||||||||||||
Overview – Nine Months Ended December 31, 2005 Compared with Nine Months Ended
December 31, 2004
Net sales in the nine months ended December 31, 2005 increased 23% to $4,592 million compared to the same period in 2004. The improvement is primarily due to an 11% increase in net sales from the Vinamul and Acetex businesses and 11% higher pricing, mainly in Chemical Products, offset by slightly lower volumes. Net sales from Vinamul and Acetex were approximately $280 million and $247 million, respectively.
Our performance improved over 2004 as increased pricing and cost savings initiatives more than offset higher raw material and energy costs. As a result, our operating profit margin increased to 8.8% for the nine months ended December 31, 2005 from 1.9% in the same period in 2004. For the nine months ended December 31, 2005, Vinamul and Acetex (including AT Plastics), had operating losses of $15 million and $4 million, respectively, primarily related to integration costs in connection with the acquisitions and inventory purchase accounting adjustments for Acetex.
Earnings from continuing operations before tax and minority interests for the nine months ended December 31, 2005 increased to $349 million compared to a net loss of $180 million in the same period in 2004. This increase is primarily due to higher operating profit, lower interest expense and higher dividend income. Interest expense in 2004 included the expensing of deferred financing costs of $89 million and a prepayment premium of $21 million associated with the refinancing of the mandatorily redeemable preferred stock. This increase was partially offset by a $21 million increase in 2005 in interest expense due to higher debt levels and higher interest rates. Earnings from continuing operations before tax and minority interests for the nine months ended December 31, 2005 includes an $11 million net loss on disposition of assets compared to a $3 million net gain on disposition of assets in the same period in 2004. The net earnings for the nine months ended December 31, 2005 includes a $35 million loss on the disposal of Ticona’s COC business, offset by a $23 million gain on the disposition of two Acetate Products properties and $1 million in other gains, net.
Net earnings (loss) for the nine months ended December 31, 2005 improved to net earnings of $287 million compared to a net loss of $253 million for the same period in 2004.
Net debt (total debt less cash and cash equivalents) rose to $3,047 million at December 31, 2005 from $2,549 million at December 31, 2004, primarily due to a decrease in cash and cash equivalents of $448 million. We largely used available cash to finance the Vinamul and Acetex acquisitions, the redemption of Acetex senior notes and the purchase of the additional CAG shares from two minority shareholders.
In September 2005, we announced a controlled shutdown of our plants in Clear Lake, Pasadena, Bay City and Bishop, Texas in preparation for Hurricane Rita. We subsequently announced that these plants sustained minimal damage from this hurricane and production resumed at these plants in October 2005. We believe the hurricane had an aggregate negative impact on earnings of approximately $15 million during the nine months ended December 31, 2005.
Overview – Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
In the three months ended March 31, 2005, net sales rose 21% to $1,478 million compared to $1,218 million, in the same period in 2004, primarily due to higher pricing, higher volumes, favorable currency movements and product composition changes, of which $66 million was related to the Vinamul acquisition. Net earnings (loss) declined to a net loss of $10 million compared to net earnings of $78 million in the same period in 2004 largely due to higher interest expense, which included $102 million in debt refinancing related costs (comprised of early redemption premiums and accelerated amortization of deferred financing costs of $74 million and $28 million, respectively), and higher special charges, mainly due to $35 million in expenses for the termination of sponsor monitoring services. The three months ended March 31, 2005 benefited from higher pricing mainly in Chemical Products, driven by strong demand and higher industry capacity utilization. We also benefited from cost savings resulting from restructuring and productivity improvement programs as well as lower depreciation and amortization. These benefits were partially offset by higher raw materials and energy costs.
Overview – Nine Months Ended December 31, 2004 Compared with Nine Months Ended
December 31, 2003
All business segments experienced volume growth in the nine months ended December 31, 2004 compared to the same period last year.in 2003. The Chemical Products segment benefited from stronger overall demand, while the Ticona segment grew on new commercial applications and stronger demand from the automotive, electrical/electronics, household goods, and medical markets. The performance of Ticona'sTicona’s affiliates also reflected improved business conditions. The overall economic environment, however, remained challenging due to higher raw material and energy costs, as well as weaker pricing for some products in the Ticona and Performance Products segments compared to the same period last year.in 2003.
Net sales in the nine months ended December 31, 2004 rose 10%12% to $3,826$3,744 million compared to net sales for the same period in 2003 mainly on higher volumes in all business segments, stronger pricing in Chemical Products and favorable currency effects, which were partially offset by lower pricing in the remaining segments and changes in the composition of the Chemical Products segment.
Operating profit increased by 70% to $78$72 million compared tofrom $22 million in the same period last year.in 2003. Operating profit benefited from increased net sales, lower stock appreciation rights expense of $76 million as well as cost savings. These factors were partially offset by increased raw material and energy costs, higher special charges of $87$78 million, expenses associated with a new management compensation plan of $50 million, and higher professional and consulting fees. For the nine months ended December 31, 2004, operating profit included lower depreciation and amortization of $40$38 million resulting primarily from purchase accounting adjustments and a non-cash charge of $53 million in inventory-related purchase accounting adjustments.
Earnings from continuing operations before tax and minority interests decreased to a loss of $174$180 million from earnings of $108$84 million in the same period last yearin 2003 mainly due to an increase in interest expense of $263 million, resulting from the higher debt levels and the expensing of deferred financing costs of $89 million, and the absence of $18 million in income from the demutualization of an insurance provider, which was partially offset by higher operating profit of $32$50 million.
Net earnings (loss) decreased to a loss of $253 million compared to earnings of $92 million for the same period a year earlier.
Net debt (total debt less cash and cash equivalents) rose to $2,549 million from $489 million as of December 31, 2003, primarily to finance the acquisition of CAG and to prefund benefit obligations.
Overview – Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
In the three months ended March 31, 2004, all of CAG'sthe Predecesor’s businesses experienced strong volume growth compared to the same period the previous year. CAGyear and benefited from increased activity in some of its markets, such as electrical/electronics, new applications for technical polymers and food ingredients, and tight supply conditions in the acetyl products markets. Operating profit declined, however, due to higher raw material and energy costs, special charges and the absence of income from stock appreciation rights, which were partially offset by favorable currency effects.
Net sales increased 9%7% to $1,243$1,218 million due to volume increases and favorable currency effects, resulting mainly from the stronger euro versus the U.S. dollar. Volume increases were particularly strong in the Acetate Products and Ticona segments. These factors were partially offset by the effects of transfer of the European oxo business to a venture in the fourth quarter of 2003.
Earnings from continuing operations before tax and minority interests were $55$67 million compared to $64$88 million in the comparable period in 2003. Net earnings (loss) increased to $78 million from $56 million in the same period in 2003.
Selected Data by Business Segment—Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004 and Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Chemical Products | 3,292 | 2,573 | 1,044 | 818 | ||||||||||||||
Technical Polymers Ticona | 648 | 636 | 239 | 227 | ||||||||||||||
Acetate Products | 494 | 441 | 165 | 147 | ||||||||||||||
Performance Products | 133 | 131 | 47 | 44 | ||||||||||||||
Segment Total | 4,567 | 3,781 | 1.495 | 1,236 | ||||||||||||||
Other Activities | 132 | 45 | 12 | 11 | ||||||||||||||
Inter-segment Eliminations | (107 | ) | (82 | ) | (29 | ) | (29 | ) | ||||||||||
Total Net Sales | 4,592 | 3,744 | 1,478 | 1,218 | ||||||||||||||
Special (Charges) Gains | ||||||||||||||||||
Chemical Products | (24 | ) | (3 | ) | (1 | ) | (1 | ) | ||||||||||
Technical Polymers Ticona | 9 | (37 | ) | (1 | ) | (1 | ) | |||||||||||
Acetate Products | (8 | ) | (41 | ) | (1 | ) | — | |||||||||||
Performance Products | — | — | — | — | ||||||||||||||
Segment Total | (23 | ) | (81 | ) | (3 | ) | (2 | ) | ||||||||||
Other Activities | (12 | ) | (1 | ) | (35 | ) | (26 | ) | ||||||||||
Total Special (Charges) Gains | (35 | ) | (82 | ) | (38 | ) | (28 | ) | ||||||||||
Operating Profit (Loss) | ||||||||||||||||||
Chemical Products | 396 | 248 | 177 | 65 | ||||||||||||||
Technical Polymers Ticona | 21 | (12 | ) | 39 | 31 | |||||||||||||
Acetate Products | 57 | (17 | ) | 10 | 4 | |||||||||||||
Performance Products | 38 | 18 | 13 | 11 | ||||||||||||||
Segment Total | 512 | 237 | 239 | 111 | ||||||||||||||
Other Activities | (107 | ) | (165 | ) | (83 | ) | (64 | ) | ||||||||||
Total Operating Profit | 405 | 72 | 156 | 47 | ||||||||||||||
Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | ||||||||||||||||||
Chemical Products | 462 | 265 | 193 | 64 | ||||||||||||||
Technical Polymers Ticona | 65 | 26 | 51 | 45 | ||||||||||||||
Acetate Products | 61 | (13 | ) | 10 | 4 | |||||||||||||
Performance Products | 34 | 15 | 12 | 11 | ||||||||||||||
Segment Total | 622 | 293 | 266 | 124 | ||||||||||||||
Other Activities | (273 | ) | (473 | ) | (253 | ) | (57 | ) | ||||||||||
Total Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | 349 | (180 | ) | 13 | 67 | |||||||||||||
Depreciation & Amortization | ||||||||||||||||||
Chemical Products | 133 | 89 | 34 | 39 | ||||||||||||||
Technical Polymers Ticona | 45 | 48 | 15 | 16 | ||||||||||||||
Acetate Products | 20 | 30 | 9 | 11 | ||||||||||||||
Performance Products | 10 | 10 | 3 | 2 | ||||||||||||||
Segment Total | 208 | 177 | 61 | 68 | ||||||||||||||
Other Activities | 15 | 4 | 2 | 2 | ||||||||||||||
Total Depreciation & Amortization | 223 | 181 | 63 | 70 | ||||||||||||||
Selected Data by Business Segment—Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004 and Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004 (Continued)
Factors Affecting Nine Months Ended December 31, 2005 Segment Sales Compared to Nine Months Ended December 31, 2004
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | (3 | ) | 15 | — | 16 | 28 | ||||||||||||||||
Technical Polymers Ticona | (1 | ) | 4 | (1 | ) | — | 2 | |||||||||||||||
Acetate Products | 7 | 5 | — | — | 12 | |||||||||||||||||
Performance Products | 6 | (4 | ) | — | — | 2 | ||||||||||||||||
Factors Affecting Three Months Ended March 31, 2005 Segment Sales Compared to Three Months Ended March 31, 2004
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | (1 | ) | 22 | 3 | 4 | 28 | ||||||||||||||||
Technical Polymers Ticona | 2 | — | 3 | — | 5 | |||||||||||||||||
Acetate Products | 9 | 3 | — | — | 12 | |||||||||||||||||
Performance Products | 9 | (7 | ) | 5 | — | 7 | ||||||||||||||||
Summary by Business Segment—Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004 and Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Chemical Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Nine Months Change in $ | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 3,292 | 2,573 | 719 | 1,044 | 818 | |||||||||||||||||
Net sales variance | ||||||||||||||||||||||
Volume | (3 | )% | (1 | )% | ||||||||||||||||||
Price | 15 | % | 22 | % | ||||||||||||||||||
Currency | — | 3 | % | |||||||||||||||||||
Other | 16 | % | 4 | % | ||||||||||||||||||
Operating profit | 396 | 248 | 148 | 177 | 65 | |||||||||||||||||
Operating margin | 12.0 | % | 9.6 | % | 17.0 | % | 7.9 | % | ||||||||||||||
Special (charges) gains | (24 | ) | (3 | ) | (21 | ) | (1 | ) | (1 | ) | ||||||||||||
Earnings from continuing operations before tax and minority interests | 462 | 265 | 197 | 193 | 64 | |||||||||||||||||
Depreciation and amortization | 133 | 89 | 44 | 34 | 39 | |||||||||||||||||
Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004
Chemical Products’ net sales increased 28% to $3,292 million for the nine months ended December 31, 2005 compared to the same period in 2004. The increase is primarily due to anthe inclusion of net sales from Vinamul and Acetex (excluding AT Plastics) during 2005 of approximately $280 million and $135 million, respectively. In addition, pricing increased for most products, but primarily from acetic acid, vinyl acetate monomer and acetyl derivatives. The price increase was driven by continued strong demand, high industry utilization in base products and higher raw material costs, particularly for ethylene and
natural gas. Overall, volumes declined 3% primarily from acetyl derivatives partially offset by significantly improved volumes from vinyl acetate monomer. Volumes for emulsions was flat. The increase in earnings of $30volumes from vinyl acetate monomer is primarily driven by continued strong demand.
Special charges increased by $21 million from discontinued operations resulting mainly fromfor the salenine months ended December 31, 2005 compared to the same period in 2004. Included in 2005 is $12 million in charges for a change in the environmental remediation strategy related to the closure of the acrylates business.Edmonton methanol plant and $6 million for severance charges related to the same closure.
Overview – 2003 Compared 2002
In a global business environment characterizedOperating profit increased 60% to $396 million for the nine months ended December 31, 2005 compared to the same period in 2004. The increase is principally driven by higher pricing, which more than offset higher raw material and energy costs. The segment also benefited from a full quarter impact of its Southern Chemical methanol supply contract. Basic products, such as acetic acid and vinyl acetate monomer, had greater success in maintaining margins while downstream products, such as polyvinyl alcohol and emulsions, continued to experience margin compression due to raw material costs rising faster than our pricing. Operating profit was also favorably impacted in this period due to $36 million from the settlement of transportation-related anti-trust matters, $14 million in lower non-cash inventory-related purchase accounting adjustments and modest growth, CAG achieved full year 2003 net earningsAcetex (excluding AT Plastics) recording an operating profit of $148$11 million in the nine months ended December 31, 2005. The increase in operating profit was partially offset by Vinamul recording operating losses of $15 million, which included integration costs in connection with the acquisition. Additionally, depreciation and amortization increased in 2005 compared to net earnings of $168the same period in 2004 primarily related to purchase accounting adjustments in both years.
million for 2002. Earnings from continuing operations before tax and minority interests increased 74% to $143$462 million in 2003 compared to $123 millionthe same period in 2002. Earnings2004 benefiting from continuing operations excludes the results of the nylonincreased operating profit and the majority of the acrylates businesses, which were divested on Decemberdividends from our Saudi cost investment.
Three Months Ended March 31, 2003 and February 1,2005 Compared with Three Months Ended March 31, 2004 respectively, and are included in earnings (loss) from discontinued operations. Net
Chemical Products' net sales increased 28% to $4,603$1,044 million in 2003 from $3,836compared to the same period last year mainly on higher pricing, segment composition changes, of which $66 million in 2002 duewas related to price and volume increasesVinamul, and favorable currency movements.effects. Pricing increased for most products, driven by continued strong demand and high utilization rates across the chemical industry.
Earnings from continuing operations before tax and minority interests increased to $196$193 million from $64 million in 2003the same period in 2004 as higher pricing was partially offset by higher raw material costs. Earnings also benefited from an increase of $9 million in dividends from our Saudi cost investment, which totaled $12 million in the quarter. The three months ended March 31, 2005 included $1 million in earnings from Vinamul, which included $1 million in non-cash inventory related purchase accounting adjustments and integration costs in connection with the acquisition.
Technical Polymers Ticona
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Nine Months Change in $ | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 648 | 636 | 12 | 239 | 227 | |||||||||||||||||
Net sales variance | ||||||||||||||||||||||
Volume | (1 | )% | 2 | % | ||||||||||||||||||
Price | 4 | % | — | |||||||||||||||||||
Currency | (1 | )% | 3 | % | ||||||||||||||||||
Other | — | — | ||||||||||||||||||||
Operating profit (loss) | 21 | (12 | ) | 33 | 39 | 31 | ||||||||||||||||
Operating margin | 3.2 | % | (1.9 | )% | 16.3 | % | 13.7 | % | ||||||||||||||
Special (charges) gains | 9 | (37 | ) | 46 | (1 | ) | (1 | ) | ||||||||||||||
Earnings from continuing operations before tax and minority interests | 65 | 26 | 39 | 51 | 45 | |||||||||||||||||
Depreciation and amortization | 45 | 48 | (3 | ) | 15 | 16 | ||||||||||||||||
Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004
Ticona’s net sales increased 2% to $648 million for the nine months ended December 31, 2005 compared to $180 millionthe same period in 2002.2004. The increase is primarily driven by the successful implementation of price increases, introduction of new applications and increased penetration into key markets. This increase was primarily dueis partially offset by lower overall volumes and slightly unfavorable currency effects. Improved volumes from most of Ticona’s product lines were more than offset by a decline in polyacetal volumes attributable to higher pricing, particularlya weak European automotive market and reduced sales to lower-end applications.
Ticona recorded income from special charges of $9 million for the nine months ended December 31, 2005 compared to expense of $37 million for the same period in the Chemical Products segment, increased volumes2004. Included in all segments, cost reductions, productivity improvements and favorable currency movements. Additional favorable adjustments included greater earnings from affiliates, mainly in Asia, increased interest and income from2005 is approximately $34 million associated with plumbing insurance recoveries, andwhich was partially offset by an additional $25 million non-cash impairment charge associated with the demutualization of an insurance provider, as well as the additionplanned disposal of the emulsionsCOC business. The $37 million in 2004 is primarily related to a non-cash impairment charge from the COC business.
Operating profit increased to $21 million for the nine months ended December 31, 2005 compared to an operating loss of $12 million for the same period in 2004. The successful implementation of price increases helped to offset higher raw material and energy costs. Also contributing to the increase are productivity improvements, cost savings from an organizational redesign and lower depreciation and amortization expenses due to changes in the useful lives of certain property, plant and equipment. In addition, 2004 included a $20 million charge to cost of sales for a non-cash inventory related purchase accounting adjustment. Operating profit in the nine months ended December 31, 2005 includes approximately $35 million for the loss on disposal of the COC business acquired at the endcompared to an impairment charge of 2002. Also affecting earnings$32 million taken in 2004.
Earnings from continuing operations before tax and minority interests was income of $107increased to $65 million from insurance recoveries and $95for the nine months ended December 31, 2005 compared to $26 million of expense associated with antitrust matters in the Sorbates industrysame period in 2004. This increase is primarily due to the increase in operating profit, improved equity earnings from Asian and U.S. affiliates due to increased sales volumes, a $46 million reduction in special charges, and the absence of a 2004 purchase accounting adjustment of $20 million in 2005.
Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Net sales for Ticona increased by 5% to $239 million compared to the same period last year due to favorable currency effects and slightly higher volumes. Volumes increased for most product lines due to the successful introduction of new applications, which outweighed declines in polyacetal volumes
resulting from our focus on high-end business and decreased sales to European automotive customers. Overall pricing remained flat over the same periods as discussed below. Thesesuccessfully implemented price increases were mainly offset by higher costslower average pricing for raw materials and energy and increased expensecertain products due to the commercialization of lower cost grades for stock appreciation rights.new applications.
Significant items affecting earningsEarnings from continuing operations before tax and minority interests from 2003increased 13% to 2002$51 million as the result of restructuring cost savings, the favorable effects of a planned maintenance turnaround and slightly higher volumes. These increases were approximately:partially offset by higher raw material and energy costs.
Acetate Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Nine Months Change in $ | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 494 | 441 | 53 | 165 | 147 | |||||||||||||||||
Net sales variance | ||||||||||||||||||||||
Volume | 7 | % | 9 | % | ||||||||||||||||||
Price | 5 | % | 3 | % | ||||||||||||||||||
Currency | — | — | ||||||||||||||||||||
Other | — | — | ||||||||||||||||||||
Operating profit (loss) | 57 | (17 | ) | 74 | 10 | 4 | ||||||||||||||||
Operating margin | 11.5 | % | (3.9 | )% | 6.1 | % | 2.7 | % | ||||||||||||||
Special (charges) gains | (8 | ) | (41 | ) | 33 | (1 | ) | — | ||||||||||||||
Earnings from continuing operations before tax and minority interests | 61 | (13 | ) | 74 | 10 | 4 | ||||||||||||||||
Depreciation and amortization | 20 | 30 | (10 | ) | 9 | 11 | ||||||||||||||||
Although CAGNine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004
Acetate Products’ net sales for the nine months ended December 31, 2005 increased 12% to $494 million compared to the same period in 2004. The improvement is due to a 5% increase in pricing and a 7% increase in overall volumes. Higher flake volumes from increased sales to our recently expanded China tow ventures were partially offset by lower tow volumes due to the shutdown of our Edmonton, Canada tow plant. Price increases partially offset higher raw material and energy costs.
For the nine months ended December 31, 2005, the Acetate Products’ segment recorded special charges of only $5$8 million special charges significantly affectedcompared to $41 million in the operating results ofsame period in 2004. Special (charges) gains in 2005 primarily related to a change in the Ticona and Performance Products segments in 2003. Ticona's operating profit benefited from income of $107 million from insurance recoveriesenvironmental remediation strategy related to the plumbing cases.closure of the Edmonton methanol plant, while special (charges) gains in the same period in 2004 primarily represented asset impairments associated with the planned consolidation of tow and flake production.
Operating profit increased to $57 million in the nine months ended December 31, 2005 compared to an operating loss of $17 million in the same period in 2004. The insurance recoveriesincrease is largely due to the decrease in special (charges) gains described above and a $23 million gain on the sale of the Rock Hill, S.C. plant and the Charlotte, N.C. research and development center. In addition, depreciation and amortization expense decreased primarily resulting from a lower depreciable assets base due to previous asset impairments and an $8 million charge for asset retirement obligations recorded in 2004 associated with the restructuring of the business. Higher pricing and savings from restructuring and productivity improvements more than offset special charges related to Ticona's organizational redesign efforts and the closing of a manufacturing facility in the United Kingdom. The operating profit of the Performance Products' segment was burdened by $95 million in special charges relating to a European Commission decision to fine Hoechst €99 million ($115 million) for antitrust matters in the sorbates industry that occurred prior to the demerger.
Segment net sales in 2003 increased 21% compared to 2002 due to the inclusion of the emulsions business acquired at year-end 2002 (+8%), favorable currency effects (+5%) and higher pricing (+5%) and volumes (+4%). These increases were partly offset by the transfer of the European oxo business to a venture in the fourth quarter of 2003 (−1%). Operating profit declined by 32% to $118 million in 2003 compared to $173 million in 2002. This decline reflected increased raw material and energy costs, as well as temporarily higher expensemanufacturing costs resulting from a realignment of inventory levels as part of the restructuring strategy.
Earnings from continuing operations before tax and minority interests increased to $61 million for stock appreciation rights andthe nine months ended December 31, 2005 compared to a $13 million loss from continuing operations in the same period in 2004. This increase is primarily due to the increase in operating profit which included $33 million in lower special charges discussed below. These factors outweighed increased pricing inand the Chemical Products and$23 million gain on disposition of assets.
Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Net sales for Acetate Products segments,increased by 12% to $165 million compared to the same quarter last year on higher volumes in all segments, particularly in Ticona and Performance Products, cost reductions, productivity improvements,pricing. Flake volumes increased income from the captive insurance companies and the addition of the emulsions business.
In the Chemical Products segment, the contribution from the emulsions business, favorable currency movements and cost reductions were outweighed bydue to higher energy costs and an increase in stock appreciation rights expense. Overall in 2003,sales to our recently expanded China tow ventures. Pricing increased selling prices offset higher raw material costs, although pricing outpaced raw material costs in the first half of the year and lagged in the second half. In the Acetate Products segment, increased pricing and volumes as well as productivity gains onlyto partially offset higher raw material and energy prices. Increased demand ledcosts.
Earnings from continuing operations before tax and minority interests more than doubled from $4 million in first quarter last year to volume$10 million this year due to increased volumes, pricing and productivity improvements, which more than offset higher raw material and energy costs. Earnings also benefited from $2 million in lower depreciation and amortization expense largely as a result of previous restructuring impairments, which was partly offset by $3 million of expense for an asset retirement obligation.
Performance Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Nine Months Change in $ | Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 133 | 131 | 2 | 47 | 44 | |||||||||||||||||
Net sales variance | ||||||||||||||||||||||
Volume | 6 | % | 9 | % | ||||||||||||||||||
Price | (4 | )% | (7 | )% | ||||||||||||||||||
Currency | — | 5 | % | |||||||||||||||||||
Other | — | — | ||||||||||||||||||||
Operating profit | 38 | 18 | 20 | 13 | 11 | |||||||||||||||||
Operating margin | 28.6 | % | 13.7 | % | 27.7 | % | 25.0 | % | ||||||||||||||
Special (charges) gains | — | — | — | — | — | |||||||||||||||||
Earnings from continuing operations before tax and minority interests | 34 | 15 | 19 | 12 | 11 | |||||||||||||||||
Depreciation and amortization | 10 | 10 | — | 3 | 2 | |||||||||||||||||
Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004
Net sales for the Performance Products segment increased 2% to $133 million compared to $131 million in the Ticona segment onsame period in 2004. The increase is primarily due to higher volumes for the development of new applications and entry into new markets,Sunett® sweetener partially offset by organizational redesign costs. Volume increaseslower pricing. The increased volumes for Sunett reflects continuous growth from new and existing applications mainly in the U.S. and European beverage and confectionary markets. Pricing for Sunett declined on lower unit selling prices associated with higher volumes to major customers which is consistent with our positioning strategy for the Performance Products' Sunett sweetener were offset by lowerproduct. The pricing decrease for Sunett and sorbates.
CAG reduced its net debt by 6% to $489 million as of December 31, 2003 compared to $520 million as of December 31, 2002. This decrease primarily represents the net repayment of $68 million of debt offsetwas also driven by the addition of $38 million of debt related to the consolidationexpiration of a variable interest entity under Financial Accounting Standard Board Interpretation No. 46, Consolidation of Variable Interest Entities. Trade working capital increased to $641 million at December 31, 2003 from $599 million at December 31, 2002. This increase is primarily related to favorable foreign currency effects as lower payables more than offset the reduction in inventory resulting from the high levelsprimary European and U.S. production patent for Sunett at the end of 2002, resulting from advance purchases of wood pulp, a key raw material,March 2005. Pricing for Sorbates increased in 2005, although worldwide overcapacity still prevailed in the Acetate Products segment causedindustry.
Operating profit increased 111% from the same period in 2004. The increase is driven by improved business conditions for Sorbates, as well as the shutdownresults of various ongoing cost savings initiatives. In addition, 2005 included a major supplier. Operating cash flow benefited by $180$3 million relatinggain on the sale of the omega-3 DHA business as part of management’s strategy to sharpen its focus on the effectscore sweetener and food protection businesses. 2004 included a $12 million charge to cost of hedging of currency exposure on intercompany funding ofsales for a non-cash inventory-related purchase accounting adjustment.
Earnings from continuing operations in U.S. dollars, compared to approximately $95 million in 2002. Benefit obligations decreased by $106 million to $1,165 million in 2003 from $1,271 millionbefore tax and minority interests increased 127% primarily due to anthe increase in operating profit, which principally resulted from the fair valueabsence of plan assets, contributions, paymentsthe purchase accounting charge in 2005 and the gain on the sale of the omega-3 DHA business.
Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Net sales for the Performance Products segment increased by 7% to $47 million compared to the same period last year mainly on higher volumes, which more than offset lower pricing. Favorable currency movements also contributed to the sales increase. Higher volumes for Sunett sweetener reflected strong growth from new and existing applications in the U.S. and European beverage and confectionary markets. Pricing for Sunett declined on lower unit selling prices associated with higher volumes to major customers. The pricing decrease for Sunett was also driven by the expiration of a plan amendmentprimary European and U.S. production patent for Sunett at the end of March 2005. Pricing for sorbates continued to recover, although worldwide overcapacity still prevailed in the industry.
Earnings from continuing operations before tax and minority interests increased to $12 million from $11 million in the same quarter last year. Strong volumes for Sunett, as well as favorable currency movements and cost savings outpaced lower pricing for the sweetener.
Other Activities
Other Activities primarily consists of corporate center costs, including financing and administrative activities, and certain other operating entities, including the captive insurance companies and the AT Plastics business. AT Plastics is a business acquired in connection with the acquisition of Acetex in July 2005.
Nine Months Ended December 31, 2005 Compared with Nine Months Ended December 31, 2004
Net sales for Other Activities increased to $132 million from $45 million in the same period in 2004. The increase is primarily due to the addition of $112 million in net sales from the AT Plastics business, which was partially offset by $13 million in lower third party revenues from the captive insurance companies and $7 million related to the U.S. postretirement medical plan. These factorsdivestitures of the performance polymer polybenzamidazole and vectran polymer fiber businesses in the second quarter of 2005.
The operating loss of Other Activities decreased to $107 million for the nine months ended December 31, 2005 compared to $165 million for the same period in 2004. This decrease was primarily due to the absence of $38 million in management incentive compensation expenses, which were recorded in 2004, and lower IPO related consulting and professional fees. The management incentive compensation expenses included charges related to a new deferred compensation plan, a new stock incentive plan and other executive bonuses. The decrease is partially offset by operating losses from AT Plastics of $15 million in 2005.
Loss from continuing operations before tax and minority interests improved to a loss of $273 million from a loss of $473 million in the effects ofsame period in 2004. The decrease is primarily due to the decrease in operating losses discussed above and a decrease in interest expense of $89 million. The decrease in interest expense is due to expensing deferred financing costs of $89 million and a prepayment premium of $21 million associated with the discount rate.refinancing of the mandatorily redeemable preferred stock in 2004. The decrease was partially offset by a $21 million increase in interest expense due to higher debt levels and interest rates in 2005.
In 2003, CAG took major stepsThree Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Net sales for Other Activities increased slightly to concentrate on its core businesses. In September, CAG reached an agreement to sell its acrylates business to Dow. The transaction was completed on February 1, 2004. On October 1, European Oxo GmbH, CAG's oxo chemicals venture with Degussa, began operations.
CAG streamlined its manufacturing operations and administrative functions, mainly$12 million from $11 million in the Chemical Productssame quarter last year. Loss from continuing operations before tax and Ticona segments, and, asminority interests increased to $253 million from a result, recorded termination benefit expensesloss of $26$57 million in costthe same period last year, largely due to $169 million of sales, primarilyhigher interest expense related to refinancing costs, increased debt levels, and higher interest rates in 2005. The loss includes $45 million of expenses for sponsor monitoring and related cancellation fees compared to special charges of $25 million in the fourth quartersame period in 2004 for advisory services related to the acquisition of 2003.CAG.
Selected Data by Business Segment – Segment—Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003 and Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Chemical Products | 2,573 | 2,298 | 818 | 767 | ||||||||||||||
Technical Polymers Ticona | 636 | 566 | 227 | 196 | ||||||||||||||
Acetate Products | 523 | 513 | 172 | 142 | ||||||||||||||
Performance Products | 131 | 128 | 44 | 41 | ||||||||||||||
Segment Total | 3,863 | 3,505 | 1,261 | 1,146 | ||||||||||||||
Other Activities | 45 | 38 | 11 | 11 | ||||||||||||||
Intersegment Eliminations | (82 | ) | (77 | ) | (29 | ) | (20 | ) | ||||||||||
Total Net Sales | 3,826 | 3,466 | 1,243 | 1,137 | ||||||||||||||
Special Charges | ||||||||||||||||||
Chemical Products | (3 | ) | 2 | (1 | ) | (1 | ) | |||||||||||
Technical Polymers Ticona: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | 107 | — | — | ||||||||||||||
Restructuring, impairment and other special charges, net | (38 | ) | (20 | ) | (1 | ) | — | |||||||||||
Acetate Products | (50 | ) | — | — | — | |||||||||||||
Performance Products: | ||||||||||||||||||
Sorbates antitrust matters | — | (95 | ) | — | — | |||||||||||||
Segment Total | (90 | ) | (6 | ) | (2 | ) | (1 | ) | ||||||||||
Other Activities | (1 | ) | 2 | (26 | ) | — | ||||||||||||
Total Special Charges | (91 | ) | (4 | ) | (28 | ) | (1 | ) | ||||||||||
Operating Profit (Loss) | ||||||||||||||||||
Chemical Products | 248 | 86 | 65 | 52 | ||||||||||||||
Technical Polymers Ticona | (12 | ) | 103 | 31 | 19 | |||||||||||||
Acetate Products | (11 | ) | 11 | 9 | 2 | |||||||||||||
Performance Products | 18 | (56 | ) | 11 | 12 | |||||||||||||
Segment Total | 243 | 144 | 116 | 85 | ||||||||||||||
Other Activities | (165 | ) | (98 | ) | (64 | ) | (13 | ) | ||||||||||
Total Operating Profit | 78 | 46 | 52 | 72 | ||||||||||||||
Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | ||||||||||||||||||
Chemical Products | 265 | 115 | 64 | 60 | ||||||||||||||
Technical Polymers Ticona | 26 | 140 | 45 | 27 | ||||||||||||||
Acetate Products | (7 | ) | 15 | 9 | 2 | |||||||||||||
Performance Products | 15 | (56 | ) | 11 | 12 | |||||||||||||
Segment Total | 299 | 214 | 129 | 101 | ||||||||||||||
Other Activities | (473 | ) | (106 | ) | (57 | ) | (13 | ) | ||||||||||
Total Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | (174 | ) | 108 | 72 | 88 | |||||||||||||
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Chemical Products | 2,573 | 2,298 | 818 | 767 | ||||||||||||||
Technical Polymers Ticona | 636 | 566 | 227 | 196 | ||||||||||||||
Acetate Products | 441 | 395 | 147 | 142 | ||||||||||||||
Performance Products | 131 | 128 | 44 | 41 | ||||||||||||||
Segment Total | 3,781 | 3,387 | 1,236 | 1,146 | ||||||||||||||
Other Activities | 45 | 38 | 11 | 11 | ||||||||||||||
Inter-segment Eliminations | (82 | ) | (77 | ) | (29 | ) | (20 | ) | ||||||||||
Total Net Sales | 3,744 | 3,348 | 1,218 | 1,137 | ||||||||||||||
Special (Charges) Gains | ||||||||||||||||||
Chemical Products | (3 | ) | 2 | (1 | ) | (1 | ) | |||||||||||
Technical Polymers Ticona | (37 | ) | 87 | (1 | ) | — | ||||||||||||
Acetate Products | (41 | ) | — | — | — | |||||||||||||
Performance Products | — | (95 | ) | — | — | |||||||||||||
Segment Total | (81 | ) | (6 | ) | (2 | ) | (1 | ) | ||||||||||
Other Activities | (1 | ) | 2 | (26 | ) | — | ||||||||||||
Total Special (Charges) Gains | (82 | ) | (4 | ) | (28 | ) | (1 | ) | ||||||||||
Operating Profit (Loss) | ||||||||||||||||||
Chemical Products | 248 | 86 | 65 | 52 | ||||||||||||||
Technical Polymers Ticona | (12 | ) | 103 | 31 | 19 | |||||||||||||
Acetate Products | (17 | ) | (13 | ) | 4 | 2 | ||||||||||||
Performance Products | 18 | (56 | ) | 11 | 12 | |||||||||||||
Segment Total | 237 | 120 | 111 | 85 | ||||||||||||||
Other Activities | (165 | ) | (98 | ) | (64 | ) | (13 | ) | ||||||||||
Total Operating Profit | 72 | 22 | 47 | 72 | ||||||||||||||
Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | ||||||||||||||||||
Chemical Products | 265 | 115 | 64 | 60 | ||||||||||||||
Technical Polymers Ticona | 26 | 140 | 45 | 27 | ||||||||||||||
Acetate Products | (13 | ) | (9 | ) | 4 | 2 | ||||||||||||
Performance Products | 15 | (56 | ) | 11 | 12 | |||||||||||||
Segment Total | 293 | 190 | 124 | 101 | ||||||||||||||
Other Activities | (473 | ) | (106 | ) | (57 | ) | (13 | ) | ||||||||||
Total Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | (180 | ) | 84 | 67 | 88 | |||||||||||||
Selected Data by Business Segment – Segment—Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003 and Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003 (Continued)
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Stock Appreciation Rights | ||||||||||||||||||
Chemical Products | — | (18 | ) | — | 4 | |||||||||||||
Technical Polymers Ticona | (1 | ) | (18 | ) | — | 5 | ||||||||||||
Acetate Products | — | (6 | ) | — | 2 | |||||||||||||
Performance Products | — | (1 | ) | — | — | |||||||||||||
Segment Total | (1 | ) | (43 | ) | — | 11 | ||||||||||||
Other Activities | — | (34 | ) | — | 7 | |||||||||||||
Total Stock Appreciation Rights | (1 | ) | (77 | ) | — | 18 | ||||||||||||
Depreciation & Amortization | ||||||||||||||||||
Chemical Products | 89 | 119 | 39 | 38 | ||||||||||||||
Technical Polymers Ticona | 48 | 42 | 16 | 15 | ||||||||||||||
Acetate Products | 33 | 53 | 13 | 13 | ||||||||||||||
Performance Products | 10 | 5 | 2 | 2 | ||||||||||||||
Segment Total | 180 | 219 | 70 | 68 | ||||||||||||||
Other Activities | 4 | 5 | 2 | 2 | ||||||||||||||
Total Depreciation & Amortization | 184 | 224 | 72 | 70 | ||||||||||||||
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Stock Appreciation Rights | ||||||||||||||||||
Chemical Products | — | (18 | ) | — | 4 | |||||||||||||
Technical Polymers Ticona | (1 | ) | (18 | ) | — | 5 | ||||||||||||
Acetate Products | — | (6 | ) | — | 2 | |||||||||||||
Performance Products | — | (1 | ) | — | — | |||||||||||||
Segment Total | (1 | ) | (43 | ) | — | 11 | ||||||||||||
Other Activities | — | (34 | ) | — | 7 | |||||||||||||
Total Stock Appreciation Rights | (1 | ) | (77 | ) | — | 18 | ||||||||||||
Depreciation & Amortization | ||||||||||||||||||
Chemical Products | 89 | 119 | 39 | 38 | ||||||||||||||
Technical Polymers Ticona | 48 | 42 | 16 | 15 | ||||||||||||||
Acetate Products | 30 | 48 | 11 | 13 | ||||||||||||||
Performance Products | 10 | 5 | 2 | 2 | ||||||||||||||
Segment Total | 177 | 214 | 68 | 68 | ||||||||||||||
Other Activities | 4 | 5 | 2 | 2 | ||||||||||||||
Total Depreciation & Amortization | 181 | 219 | 70 | 70 | ||||||||||||||
Factors Affecting Nine Months Ended December 31, 2004 Segment Sales Compared to Nine Months Ended December 31, 2003
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | 4 | 10 | 4 | (6 | ) | 12 | ||||||||||||||||
Technical Polymers Ticona | 11 | (4 | ) | 5 | — | 12 | ||||||||||||||||
Acetate Products | 1 | 1 | — | — | 2 | |||||||||||||||||
Performance Products | 14 | (16 | ) | 4 | — | 2 | ||||||||||||||||
Segment total | 6 | 5 | 3 | (4 | ) | 10 | ||||||||||||||||
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | 4 | 10 | 4 | (6 | ) | 12 | ||||||||||||||||
Technical Polymers Ticona | 11 | (4 | ) | 5 | — | 12 | ||||||||||||||||
Acetate Products | 11 | 1 | — | — | 12 | |||||||||||||||||
Performance Products | 14 | (16 | ) | 4 | — | 2 | ||||||||||||||||
Factors Affecting Three Months Ended March 31, 2004 Segment Sales Compared to Three Months Ended March 31, 2003
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | 5 | 2 | 5 | (5 | ) | 7 | ||||||||||||||||
Technical Polymers Ticona | 13 | (5 | ) | 8 | — | 16 | ||||||||||||||||
Acetate Products | 21 | — | — | — | 21 | |||||||||||||||||
Performance Products | 7 | (15 | ) | 15 | — | 7 | ||||||||||||||||
Segment total | 8 | (1 | ) | 6 | (3 | ) | 10 | |||||||||||||||
in percentages | Volume | Price | Currency | Other | Total | |||||||||||||||||
Chemical Products | 5 | 2 | 5 | (5 | ) | 7 | ||||||||||||||||
Technical Polymers Ticona | 13 | (5 | ) | 8 | — | 16 | ||||||||||||||||
Acetate Products | 4 | — | — | — | 4 | |||||||||||||||||
Performance Products | 7 | (15 | ) | 15 | — | 7 | ||||||||||||||||
Summary by Business Segment—Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003 and Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Chemical Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 2,573 | 2,298 | 275 | 818 | 767 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 4 | % | 5 | % | ||||||||||||||||||
Price | 10 | % | 2 | % | ||||||||||||||||||
Currency | 4 | % | 5 | % | ||||||||||||||||||
Other | (6 | )% | (5 | )% | ||||||||||||||||||
Operating profit | 248 | 86 | 162 | 65 | 52 | |||||||||||||||||
Operating margin | 9.6 | % | 3.7 | % | 7.9 | % | 6.8 | % | ||||||||||||||
Special (charges) gains | (3 | ) | 2 | (5 | ) | (1 | ) | (1 | ) | |||||||||||||
Earnings from continuing operations before tax and minority interests | 265 | 115 | 150 | 64 | 60 | |||||||||||||||||
Depreciation and amortization | 89 | 119 | (30 | ) | 39 | 38 | ||||||||||||||||
Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Chemical Products'Products’ net sales increased by 12% to $2,573 million for the nine months ended December 31, 2004 from the comparable period last year as higher selling prices (+10%), increased volumes (+4%) and favorable currency movements (+4%) were partially offset by changes in the composition of the segment (-6%).
Pricing increased for most products, particularly vinyl acetate monomer, acetic acid, and acetyl derivative products, driven by high industry utilization and higher costs for raw materials. Volumes also increased, particularly for vinyl acetate monomer, polyvinyl alcohol and emulsions due to strong overall demand.
The changes in the composition of the segment result from the transfer of the European oxo business intoto a venture in the fourth quarter of 2003 (-2%) and a change in the structure of the business under which certain acrylates products, which were formerly sold into the merchant market, are now being sold under a contract manufacturing agreement (-4%). Only the margin realized under such contract manufacturing arrangement is now reported in net sales.
Operating profit increased to $248 million for the nine months ended December 31, 2004 from $86 million in the same period last year. Higher pricing, higher volumes, as well as favorable currency effects, were partially offset by increased raw material costs and energy.energy costs. Operating profit was also favorably impacted by lower stock appreciation rights expense of $18 million and the absence of a $5 million loss from the European oxo business, as well as a decrease in depreciation and amortization expense of $30 million, largely as a result of purchase accounting adjustments. Operating profit in the nine months ended December 31, 2004 included a $17 million non-cash charge for the manufacturing profit added to inventory under purchase accounting which was charged to cost of sales as the inventory was sold.
Earnings from continuing operations before tax and minority interests increased to $265 million compared to $115 million for the nine months ended December 31, 2003 as a result of higher operating profit which included one time adjustments such as the significant decline in stock appreciation rights expense and the absence of purchase accounting adjustments in 2003. This was partially offset by lower dividend income from cost investments and lower equity in net earnings of affiliates due to restructuring charges in the European oxo venture.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Chemical Products'Products’ net sales increased by 7% to $818 million in the three months ended March 31, 2004 from the comparable period last year as increased volumes (+5%), favorable currency movements
(+5%) and higher selling prices (+2%) were partially offset by the effects of the transfer of the European oxo business into a venture (-4%) as well as a change in the structure of the business under which certain acrylates products, which were formerly sold into the merchant market, are now being sold under a contract manufacturing agreement (-1%). Only the margin realized under such contract manufacturing arrangement is now reported in net sales.
Volumes and pricing for most acetyl products, particularly vinyl acetate monomer, increased in most regions, due to a temporary competitor outage and stronger overall demand.
Operating profit increased to $65 million in the three months ended March 31, 2004 from $52 million in the same period last year. Higher volumes and selling prices, as well as favorable currency effects, were partially offset by increased raw material costs and spending associated with productivity initiatives, increased energy costs, the transfer of the European oxo business, and the absence of income from stock appreciation rights of $4 million.
Earnings from continuing operations before tax and minority interests increased to $64 million compared to $60 million in the three months ended March 31, 2004 primarily due to a higher operating profit partially offset by lower dividend income from cost investments and our share of the loss generated from theby our European oxo venture.
Technical Polymers Ticona
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 636 | 566 | 70 | 227 | 196 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 11 | % | 13 | % | ||||||||||||||||||
Price | (4 | )% | (5 | )% | ||||||||||||||||||
Currency | 5 | % | 8 | % | ||||||||||||||||||
Operating profit (loss) | (12 | ) | 103 | (115 | ) | 31 | 19 | |||||||||||||||
Operating margin | (1.9 | )% | 18.2 | % | 13.7 | % | 9.7 | % | ||||||||||||||
Special charges: | ||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | 107 | (106 | ) | — | — | ||||||||||||||||
Restructuring, impairment and other special charges, net | (38 | ) | (20 | ) | (18 | ) | (1 | ) | — | |||||||||||||
Earnings from continuing operations before tax and minority interests | 26 | 140 | (114 | ) | 45 | 27 | ||||||||||||||||
Depreciation and amortization | 48 | 42 | 6 | 16 | 15 | |||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 636 | 566 | 70 | 227 | 196 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 11 | % | 13 | % | ||||||||||||||||||
Price | (4 | )% | (5 | )% | ||||||||||||||||||
Currency | 5 | % | 8 | % | ||||||||||||||||||
Operating profit (loss) | (12 | ) | 103 | (115 | ) | 31 | 19 | |||||||||||||||
Operating margin | (1.9 | )% | 18.2 | % | 13.7 | % | 9.7 | % | ||||||||||||||
Special (charges) gains: | ||||||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | 107 | (106 | ) | — | — | ||||||||||||||||
Restructuring, impairment and other special (charges) gains, net | (38 | ) | (20 | ) | (18 | ) | (1 | ) | — | |||||||||||||
Earnings from continuing operations before tax and minority interests | 26 | 140 | (114 | ) | 45 | 27 | ||||||||||||||||
Depreciation and amortization | 48 | 42 | 6 | 16 | 15 | |||||||||||||||||
Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Net sales for Ticona increased by 12% to $636 million for the nine months ended December 31, 2004 compared to the same period last year. Strong volume increases (+11%) and favorable currency effects (+5%) were partly offset by a decline in pricing (-4%).
Volumes grew in all product lines, particularly in core products. Polyacetal volumes grew on stronger sales in the automotive and medical industries in North America while European sales benefited from greater demand for uses in consumer products and the commercialization of new applications. Volumes for Vectra liquid crystal polymers rose in North America and Europe due to new commercial applications, such as household goods, and stronger sales to the electrical/electronics industry. GUR ultra high
molecular weight polyethylene grew as a result of increased sales for new specialty applications and stronger sales to Asia. Overall pricing declined due to changes in product mix and ongoing competitive pressure from Asian exports of polyacetal into North America and Europe.
Ticona recorded special charges of $37 million for the nine months ended December 31, 2004 compared to income from special charges of $87 million for the same period last year. The special charges
in 2004 are mainly related to a $32 million non-cash impairment charge associated with a plan to dispose of the cyclo-olefin copolymerCOC business. Income from special charges in 2003 consisted of insurance recoveries related to the plumbing cases of $107 million, which were partially offset by $20 million in organizational redesign costs.
Operating profit decreased to a loss of $12 million for the nine months ended December 31, 2004 from an operating profit of $103 million for the same period last year principally due to the impact of changes in special charges mentioned above. Results for the nine months ended December 31, 2004 benefited from higher volumes, lower stock appreciation rights expense of $17 million and productivity improvements. These factors were partly offset by higher raw material and energy costs. Operating profit in the nine months ended December 31, 2004 included a $20 million non-cash charge for the manufacturing profit added to inventory under purchase accounting, which was charged to cost of sales as the inventory was sold.
Earnings from continuing operations before tax and minority interests decreased to $26 million for the nine months ended December 31, 2004 from $140 million for the same period in 2003. This decrease resulted primarily from the changes in operating profit and lower interest income related to insurance recoveries, which was partly offset by improved equity earnings from Asian and U.S. affiliates due to increased sales volumes.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Net sales for Ticona increased by 16% to $227 million for the three months ended March 31, 2004 compared to the same period last year as higher volumes (+13%) and favorable currency movements (+8%) was partially offset by lower selling prices (-5%(−5%).
Volumes increased in most business lines, particularly in polyacetal and Vectra liquid crystal polymers. Polyacetal volumes grew in North America and Europe on sales to new end uses and higher sales to the North American automotive market. Volumes for Vectra rose due to new commercial applications in North America and Europe and stronger sales to the electrical/electronics industry. Pricing declined as lower priced products constituted a higher percentage of sales and competitive pressure continued from Asian imports of polyacetal into North America.
Operating profit increased to $31 million versus $19 million in the same period last year due to higher volumes, lower average production costs for Vectra, reduced spending partly resulting from the closure of the Telford, UK production facility in 2003 and favorable currency movements. These increases were partially offset by lower pricing as well as the absence of $5 million of income from stock appreciation rights.
Earnings from continuing operations before tax and minority interests increased to $45 million compared to $27 million in the same period in 2003. This increase resulted from the higher operating profit and improved equity earnings from our Polyplastics and Fortron Industries affiliates due to increased sales volumes.
Acetate Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 523 | 513 | 10 | 172 | 142 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 1 | % | 21 | % | ||||||||||||||||||
Price | 1 | % | 0 | % | ||||||||||||||||||
Operating profit (loss) | (11 | ) | 11 | (22 | ) | 9 | 2 | |||||||||||||||
Operating margin | (2.1 | )% | 2.1 | % | 5.2 | % | 1.4 | % | ||||||||||||||
Special charges | (50 | ) | — | (50 | ) | — | — | |||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | (7 | ) | 15 | (22 | ) | 9 | 2 | |||||||||||||||
Depreciation and amortization | 33 | 53 | (20 | ) | 13 | 13 | ||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 441 | 395 | 46 | 147 | 142 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 11 | % | 4 | % | ||||||||||||||||||
Price | 1 | % | 0 | % | ||||||||||||||||||
Operating profit (loss) | (17 | ) | (13 | ) | (4 | ) | 4 | 2 | ||||||||||||||
Operating margin | (3.9 | )% | (3.3 | )% | 2.7 | % | 1.4 | % | ||||||||||||||
Special (charges) gains | (41 | ) | — | (41 | ) | — | — | |||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | (13 | ) | (9 | ) | (4 | ) | 4 | 2 | ||||||||||||||
Depreciation and amortization | 30 | 48 | (18 | ) | 11 | 13 | ||||||||||||||||
Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Acetate Products'Products’ net sales for the nine months ended December 31, 2004 increased by 2%12% to $523$441 million compared to the same period last year due to slightly higher volumes (+1%11%) and prices (+1%).
Volumes grew on higher tow demand in Asia, which was partially offset by lower filament sales, primarily in Mexico. Additionally, pricing increased for both tow and filament.Asia.
Operating profit declinedloss increased to a loss of $11$17 million in the nine months ended December 31, 2004 from an operating profita loss of $11$13 million in the same period last year reflecting special charges of $50$41 million for non-cash asset impairments associated with the planned consolidation of tow production, and our planned exit from the filament business, as well as higher raw material costs. These decreases were partly offset by lower depreciation and amortization expense of $20$18 million, largely as a result of purchase accounting adjustments, and a lower depreciable asset base, as well as from productivity gains. Operating loss in the nine months ended December 31, 2004 included a $4 million non-cash charge for the manufacturing profit added to inventory under purchase accounting, which was charged to cost of sales as the inventory was sold.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Acetate Products'Products’ net sales in the first three months ended March 31, 2004 increased by 21%4% to $172$147 million compared to the same period in 2003 primarily due to higher volumes (+21%4%). Average pricing remained unchanged.
Volumes grew on higher sales of tow, particularly toin China. This increase more than offset slightly lower filament volumes, primarily in Mexico.
Operating profit and earnings from continuing operations before tax and minority interests rose to $9$4 million compared to $2 million in the same period last year on higher volumes of tow as well as productivity gains. These increases more than offset higher raw material costs.
Performance Products
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 131 | 128 | 3 | 44 | 41 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 14 | % | 7 | % | ||||||||||||||||||
Price | (16 | )% | (15 | )% | ||||||||||||||||||
Currency | 4 | % | 15 | % | ||||||||||||||||||
Operating profit (loss) | 18 | (56 | ) | 74 | 11 | 12 | ||||||||||||||||
Operating margin | 13.7 | % | (43.8 | )% | 25.0 | % | 29.3 | % | ||||||||||||||
Special charges: | ||||||||||||||||||||||
Sorbates antitrust matters | — | (95 | ) | 95 | — | — | ||||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | 15 | (56 | ) | 71 | 11 | 12 | ||||||||||||||||
Depreciation and amortization | 10 | 5 | 5 | 2 | 2 | |||||||||||||||||
Successor | Predecessor | |||||||||||||||||||||
in $ millions (except for percentages) | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Change in $ | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||
Net sales | 131 | 128 | 3 | 44 | 41 | |||||||||||||||||
Net sales variance: | ||||||||||||||||||||||
Volume | 14 | % | 7 | % | ||||||||||||||||||
Price | (16 | )% | (15 | )% | ||||||||||||||||||
Currency | 4 | % | 15 | % | ||||||||||||||||||
Operating profit (loss) | 18 | (56 | ) | 74 | 11 | 12 | ||||||||||||||||
Operating margin | 13.7 | % | (43.8 | )% | 25.0 | % | 29.3 | % | ||||||||||||||
Special (charges) gains: | ||||||||||||||||||||||
Sorbates antitrust matters | — | (95 | ) | 95 | — | — | ||||||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | 15 | (56 | ) | 71 | 11 | 12 | ||||||||||||||||
Depreciation and amortization | 10 | 5 | 5 | 2 | 2 | |||||||||||||||||
Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Net sales for the Performance Products segment, which consists primarily of the Nutrinova food ingredients business,and Sorbates businesses, increased by 2% to $131 million compared to the same period last year as increased volumes (+14%) and favorable currency effects (+4%) more thanwere principally offset by price decreases (-16%).
Increased volumes for Sunett sweetener reflected strong growth from new and existing applications in the U.S. and European beverage and confectionary markets. Consistent with our strategy, pricing for Sunett declined on lower unit selling prices associated with higher volumes to major customers and the anticipated expiration of the primary European and U.S. production patents at the end of March 2005. Pricing for sorbates, which had been under pressure from Asian producers, began to stabilize, although worldwide overcapacity still prevailed in the industry.
Operating profit increased to $18 million compared to loss of $56 million in the same period last year, which included special charges(charges) gains of $95 million related to antitrust matters in the sorbates industry. Operating profit in the nine months ended December 31, 2004 included a $12 million non-cash charge for the manufacturing profit added to inventory under purchase accounting, which was charged to cost of sales as the inventory was sold, and higher depreciation and amortization expense of $5 million largely as a result of purchase accounting adjustments.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Net sales for the Performance Products segment increased by 7% to $44 million primarily due to favorable currency effects (+15%) and increased volumes (+7%). These positive factors were largely offset by price decreases (-15%).
Pricing for Sunett sweetener declined on lower unit selling prices associated with higher volumes to major customers, an overall price decline in the high intensity sweetener market, and the anticipated expiration of the European and U.S. production patents at the end of March 2005. Increased Sunett volumes reflected strong growth from new and existing applications in the U.S. and European beverage and confectionary markets. In sorbates, pricing and volume pressure from Asian producers continued due to worldwide overcapacity.
Operating profit and earnings from continuing operations before tax and minority interests declined to $11 million compared to $12 million in the same period last year, primarily due to lower pricing. Higher Sunett volumes and currency movements partly offset this decline.
Other Activities
Other Activities primarily consists of corporate center costs, including financing and certain administrative activities, and certain other operating entities, including the captive insurance companies.
Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Net sales for Other Activities increased by 18% to $45 million for the nine months ended December 31, 2004 compared to the same period last year. This increase primarily reflects higher third party revenues by the captive insurance companies.
The operating loss of Other Activities increased to $165 million for the nine months ended December 31, 2004 compared to $98 million for the same period last year. This increase was primarily due to $38 million in new management incentive compensation expenses, which includes charges related to a new a deferred compensation plan, a new stock incentive plan and other executive bonuses, as well as higher consulting and professional fees, which includes the advisor monitoring fees of $10 million. The operating loss for the nine months ended December 31, 2003 included income resulting from the reversal of environmental reserves of $12 million, which was offset by expense associated with stock appreciation rights of $34 million.
Loss from continuing operations before tax and minority interests increased to $473 million from a loss of $106 million for the same period last year. This was largely due to $259 million of higher interest expense from significantly higher costs ofdue to increased debt levels, an $89 million fromcharge for the refinancing of debt, and increased debt levels, a higher operating loss and the absence of income from the demutualization of an insurance provider of $18 million.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Net sales for Other Activities remained flat at $11 million for the three months ended March 31, 2004 compared to the same period last year.
The operating loss of Other Activities increased to $64 million for the three months ended March 31, 2004 compared to $13 million for the same period last year. This increase was primarily due to special charges of $26 million mainly related to advisory services associated with the acquisition of CAG. Also contributing to this decline was the absence of income from stock appreciation rights of $7 million.
Selected Data by Business Segment - Annual Results
Predecessor | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||
2003 | 2002 | |||||||||||||||||
$ | % of Segments | $ | % of Segments | |||||||||||||||
(in $ millions, except for percentages) | ||||||||||||||||||
Net Sales | ||||||||||||||||||
Chemical Products | 3,065 | 66 | % | 2,419 | 63 | % | ||||||||||||
Technical Polymers Ticona | 762 | 16 | 656 | 17 | ||||||||||||||
Acetate Products | 655 | 14 | 632 | 16 | ||||||||||||||
Performance Products | 169 | 4 | 151 | 4 | ||||||||||||||
Segment Total | 4,651 | 100 | % | 3,858 | 100 | % | ||||||||||||
Other Activities | 49 | 52 | ||||||||||||||||
Intersegment Eliminations | (97 | ) | (74 | ) | ||||||||||||||
Total Net Sales | 4,603 | 3,836 | ||||||||||||||||
Special Charges | ||||||||||||||||||
Chemical Products | 1 | (14 | )% | 2 | (50 | )% | ||||||||||||
Technical Polymers Ticona: | ||||||||||||||||||
Plumbing actions | 107 | n.m. | — | — | ||||||||||||||
Other activities | (20 | ) | n.m. | (6 | ) | n.m. | ||||||||||||
Acetate Products | — | — | — | — | ||||||||||||||
Performance Products: | ||||||||||||||||||
Sorbates antitrust matters | (95 | ) | n.m. | — | — | |||||||||||||
Segment Total | (7 | ) | 100 | % | (4 | ) | 100 | % | ||||||||||
Other Activities | 2 | 9 | ||||||||||||||||
Total Special Charges | (5 | ) | 5 | |||||||||||||||
Operating Profit (Loss) | ||||||||||||||||||
Chemical Products | 138 | 60 | % | 152 | 61 | % | ||||||||||||
Technical Polymers Ticona | 122 | 53 | 23 | 9 | ||||||||||||||
Acetate Products | 13 | 6 | 31 | 12 | ||||||||||||||
Performance Products | (44 | ) | (19 | ) | 45 | 18 | ||||||||||||
Segment Total | 229 | 100 | % | 251 | 100 | % | ||||||||||||
Other Activities | (111 | ) | (78 | ) | ||||||||||||||
Total Operating Profit | 118 | 173 | ||||||||||||||||
Earnings (Loss) from Continuing Operations Before Tax and Minority Interests | ||||||||||||||||||
Chemical Products | 175 | 56 | % | 161 | 57 | % | ||||||||||||
Technical Polymers Ticona | 167 | 53 | 35 | 12 | ||||||||||||||
Acetate Products | 17 | 5 | 43 | 15 | ||||||||||||||
Performance Products | (44 | ) | (14 | ) | 45 | 16 | ||||||||||||
Segment Total | 315 | 100 | % | 284 | 100 | % | ||||||||||||
Other Activities | (119 | ) | (104 | ) | ||||||||||||||
Total Earnings from Continuing Operations Before Tax and Minority Interests | 196 | 180 | ||||||||||||||||
Depreciation and Amortization | ||||||||||||||||||
Chemical Products | 157 | 55 | % | 130 | 54 | % | ||||||||||||
Technical Polymers Ticona | 57 | 20 | 52 | 21 | ||||||||||||||
Acetate Products | 66 | 23 | 53 | 22 | ||||||||||||||
Performance Products | 7 | 2 | 7 | 3 | ||||||||||||||
Segment Total | 287 | 100 | % | 242 | 100 | % | ||||||||||||
Other Activities | 7 | 5 | ||||||||||||||||
Total Depreciation and Amortization | 294 | 247 | ||||||||||||||||
Summary by Business Segment – 2003of Consolidated Results—Nine Months Ended December 31, 2005 Compared with 2002Nine Months Ended December 31, 2004
Chemical Products Net Sales
Predecessor | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||
in $ millions (except for percentages) | 2003 | 2002 | Change in $ | Change in % | ||||||||||||||
Net sales | 3,065 | 2,419 | 646 | 27 | % | |||||||||||||
Net sales variance: | ||||||||||||||||||
Volume | 2 | % | ||||||||||||||||
Price | 9 | % | ||||||||||||||||
Currency | 5 | % | ||||||||||||||||
Other | 11 | % | ||||||||||||||||
Operating profit | 138 | 152 | (14 | ) | (9 | )% | ||||||||||||
Operating margin | 4.5 | % | 6.3 | % | ||||||||||||||
Special charges | 1 | 2 | (1 | ) | (50 | )% | ||||||||||||
Earnings from continuing operations before tax and minority interests | 175 | 161 | 14 | 9 | % | |||||||||||||
Depreciation and amortization | 157 | 130 | 27 | 21 | % | |||||||||||||
Net sales ofincreased 23% to $4,592 million in the nine months ended December 31, 2005 compared to the same period in 2004. The improvement is primarily due to an 11% increase in net sales from the Vinamul and Acetex acquisitions and 11% higher pricing, mainly in the Chemical Products rose 27%segment. Net sales from Vinamul and Acetex (including AT Plastics) were approximately $280 million and approximately $247 million, respectively. These increases are partially offset by a 1% decline in volumes primarily from the Chemical Products’ acetyl derivatives business line and a decline in Ticona’s polyacetal volumes, partially offset by improved volumes from Acetate Products and Performance Products. For Chemical Products, this is primarily due to $3,065 million in 2003 as comparedweaker European market conditions. The decline for Ticona is due to 2002,a weak European automotive market and reduced sales to lower-end applications. Acetate Products volumes improved 7% due to higher flake sales to our recently expanded China tow ventures, which were partially offset by lower tow volumes due to the full year effectshutdown of the emulsionsCanadian tow plant. Volumes from Performance Products improved primarily for the Sunett sweetener and sorbates due to continued growth from new and existing applications mainly in the U.S. and European beverage and confectionary markets.
Cost of Sales
Cost of sales increased by $641 million to $3,667 million for the nine months ended December 31, 2005 versus the same period in 2004. The increase is primarily due to including $254 million and $225 million cost of sales from Vinamul and Acetex (including AT Plastics), respectively. The increase is also due to higher raw material and energy costs, mainly from natural gas and ethylene. Cost of sales was favorably impacted by a $36 million settlement of transportation-related antitrust matters in December 2005 and $42 million in lower non-cash inventory-related purchase accounting adjustments. As a percentage of net sales, cost of sales was 79.9% in 2005 compared to 80.8% in 2004. Excluding the $36 million settlement and purchase accounting adjustments, cost of sales would have been 80.4% in 2005 compared to 79.4% in 2004. The increase is primarily due to higher raw material and energy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $94 million to $403 million in the nine months ended December 31 2005 compared to the same period in 2004. This decrease is due to ongoing cost savings initiatives, organizational redesign of the Ticona and Acetate Products segments, and decreases in legal, audit and general expenses associated with the acquisition of CAG and the IPO. In addition, 2004 included approximately $50 million in new management incentive compensation expenses, which includes charges for a new deferred compensation plan, a new stock incentive plan and other executive bonuses. These decreases are partially offset by the addition of costs associated with Vinamul and Acetex of $23 million and $22 million, respectively, which included integration costs incurred in connection with the acquisitions.
Special (Charges) Gains
Special (charges) gains include provisions for restructuring and other expenses and income incurred outside the normal ongoing course of operations. Restructuring provisions represent costs related to severance and other benefit programs related to major activities undertaken to fundamentally redesign the business acquired at year-end 2002 (+12%), higher selling prices (+9%), favorable currency effects (+5%)operations, as well as costs incurred in connection with decisions to exit non-strategic businesses. These measures are based on formal management decisions, establishment of agreements with employees’ representatives or individual agreements with affected employees, as well as the public announcement of the restructuring plan. The related reserves reflect certain estimates, including those pertaining to separation costs, settlements of contractual obligations and other closure costs. We reassess the reserve requirements to complete each individual plan under existing restructuring programs at the end of each reporting period. Actual experience may be different from these estimates.
The components of special (charges) gains for the nine months ended December 31, 2005 and 2004 were as follows:
Successor | Successor | |||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (25 | ) | (8 | ) | ||||||
Plant/office closures | (7 | ) | (45 | ) | ||||||
Restructuring adjustments | — | 3 | ||||||||
Total Restructuring | (32 | ) | (50 | ) | ||||||
Environmental related plant closures | (12 | ) | — | |||||||
Plumbing actions | 34 | 1 | ||||||||
Asset impairments | (25 | ) | (32 | ) | ||||||
Other | — | (1 | ) | |||||||
Total Special (Charges) Gains | (35 | ) | (82 | ) | ||||||
Special charges decreased to $35 million compared to $82 million for the same period last year. The nine months ended December 31, 2005 primarily relates to charges for a change in the environmental
remediation strategy related to the closure of the Edmonton methanol plant, severance associated with the same closure, severance related to the relocation of corporate offices and asset impairments associated with the planned disposal of the COC business of $12 million, $8 million, $10 million and $25 million, respectively. In addition, 2005 includes $34 million associated with plumbing insurance recoveries. Special charges for the nine months ended December 31, 2004 of $82 million were largely related to restructing charges of $43 million resulting from plans by the Acetate Products segment to consolidate tow production at fewer sites and to discontinue production of acetate filament and $32 million related to a decision to dispose of the Ticona COC business.
Operating Profit
Operating profit increased volumes (+2%). These increases were partlyto $405 million in the nine months ended December 31, 2005 compared to $72 million in the same period in 2004, principally driven by higher pricing and productivity improvements resulting in a $207 million increase in the gross profit margin, $94 million of lower selling, general and administrative expenses and $47 million of lower special charges. Partially offsetting the increase is an $11 million loss on disposition of assets compared to a $3 million gain recorded in the same period in 2004 and higher raw material and energy costs, mainly for ethylene and natural gas in 2005. Included in 2005 is a $23 million gain on the disposition of two Acetate Products properties, a $3 million gain on the sale of Performance Products’ omega-3 DHA business, offset by a $35 million loss on the transferdisposal of Ticona’s COC business and $2 million of other losses. For the nine months ended December 31, 2005, Vinamul and Acetex (including AT Plastics), had operating losses of $15 million and $4 million, respectively, primarily related to integration costs in connection with the acquisitions and inventory purchase accounting adjustments for Acetex.
Equity in Net Earnings of Affiliates
Equity in net earnings of affiliates increased by $10 million to $46 million for the nine months ended December 31, 2005. The increase is primarily due to restructuring charges in our European oxo venture in 2004. During the nine months ended December 31, 2005, we received cash distributions from our equity affiliates of $29 million compared to $22 million in the same period in 2004.
Interest Expense
Interest expense decreased $89 million to $211 million for the nine months ended December 31, 2005 compared to $300 million in the same period in 2004. The decrease in interest expense is due to expensing deferred financing costs of $89 million and a prepayment premium of $21 million associated with the refinancing of the European oxomandatorily redeemable preferred stock in 2004. The decrease was partially offset by a $21 million increase in interest expense due to higher debt levels and interest rates in 2005.
Other Income (Expense), Net
Other income (expense), net increased to income of $86 million for the nine months ended December 31, 2005, compared to expense of $12 million for the comparable period last year. This increase is largely due to $42 million in higher dividend income in 2005 primarily from our Saudi cost investment due to higher methanol pricing. In addition, $36 million of the increase is related to favorable exchange rate movements and $17 million is due to favorable changes in cross currency swap valuations in 2005.
Income Taxes
Income taxes for the year ended December 31, 2005 and the nine months ended December 31, 2004 are recorded based on the annual effective tax rate. For the year ending December 31, 2005, the annual effective tax rate is 16%, which is less than the combination of the federal statutory rate and blended state income tax rates in the U.S. The annual effective tax rate for 2005 reflects earnings in low tax jurisdictions, a valuation allowance on the tax benefit associated with U.S. and other foreign losses (which includes expenses associated with the early redemption of debt), tax expense in certain non-U.S. jurisdictions and reversal of a $31 million valuation allowance on certain German deferred tax assets, primarily net of
operating loss carryforwards, principally as a result of a tax sharing agreement. For the nine months ended December 31, 2005, we recorded tax expense of $49 million. For the nine months ended December 31, 2004, we recorded tax expense of $70 million and the effective tax rate was negative 39%. The effective tax rate in 2004 was unfavorably affected primarily by the application of full valuation allowances against post-Acquisition net U.S. deferred tax assets, Canadian deferred tax assets due to post-acquisition restructuring, certain German deferred tax assets and the non-recognition of tax benefits associated with acquisition related expenses. These unfavorable effects were partially offset by unrepatriated low taxed earnings primarily in Singapore.
Earnings (Loss) from Discontinued Operations
In October 2004, we announced plans to implement a strategic restructuring of our acetate business to a ventureincrease efficiency, reduce overcapacity in certain areas and to focus on products and markets that provide long-term value. As part of this restructuring we consolidated our acetate flake and tow operations at three locations, instead of five and in the fourth quarter of 2003 (-1%)2005, we discontinued Acetate Products’ filament operations. As a result, the assets, liabilities, revenues and expenses related to the filament business line are reflected as a component of discontinued operations in the consolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
For details regarding the discontinued operations of Chemical Products and Ticona, see the discussion in ‘‘Summary of Consolidated Results—Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003’’ under the ‘‘Earnings (Loss) from Discontinued Operations’’ caption.
Net Sales | Operating Profit (Loss) | |||||||||||||||||
Successor | Successor | Successor | Successor | |||||||||||||||
Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2005 | Nine Months Ended December 31, 2004 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | — | 1 | — | — | ||||||||||||||
Discontinued operations of Technial Polymers Ticona | — | 1 | — | — | ||||||||||||||
Discontinued operations of Acetate Products | 12 | 82 | (1 | ) | 5 | |||||||||||||
Total discontinued operations | 12 | 84 | (1 | ) | 5 | |||||||||||||
Net Earnings (Loss)
As a result of the factors mentioned above, our net earnings was $287 million in the nine months ended December 31, 2005, compared to 2002, selling pricesa net loss of $253 million in 2003 increased for major products, including acetic acid and vinyl acetate monomer, following the substantial risesame period in raw material costs, particularly natural gas, ethylene, and propylene. Volumes2004.
Summary of Consolidated Results—Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004
Net Sales
Net sales rose for acetic acid, particularly21% to $1,478 million in Asia, as volumes were comparablythe first quarter compared to the same period last year primarily on higher due, in part, to an interruption in production in 2002. Vinyl acetate monomer volumes were higher in most regions, partly due to competitor outages, while volumes declined for polyvinyl alcohol in Asia and specialtiespricing of 15%, mainly in Europe due to competitive pricing.
the Chemical Products had income from special chargessegment. Favorable currency movements, higher volumes, and a composition change in the Chemical Products segment each increased net sales by 2%.
The segment composition changes consisted of $1the acquisition of Vinamul in February 2005, which was partly offset by the effects of a contract manufacturing arrangement under which certain acrylates products are now being sold. Only the margin realized under the contract manufacturing arrangement is included in net sales.
Cost of Sales
Cost of sales increased by $123 million to $1,106 million for the three months ended March 31, 2005 versus the same period in 2003 and $2 million2004. As a percentage of net sales, cost of sales was 74.8% in 2002. The income recorded2005 compared to 80.7% in 2003 and 2002 relate to favorable adjustments to previously recorded restructuring reserves that more than offset employee severance costs related to production facility closures.
Operating profit decreased to $138 million in 2003 from $152 million in 2002. The contribution from the emulsions business,2004, as higher pricing, favorable currency movements and cost reductions were outweighed by higher energy costs and anvolumes contributed to the improvement. The increase in stock appreciation rights expense of $13 million. Termination benefit expenses of $14 million were recorded inis primarily due to including cost of sales primarily in the fourth quarter of 2003, related to the streamlining of manufacturing operationsfrom Vinamul and administrative functions. Overall in 2003, increased selling prices offsetAcetex and higher raw material and energy costs, although pricing outpaced raw material costs in the first half of the yearmainly from natural gas and lagged in the second half.ethlene.
Earnings from continuing operations before tax Selling, General and minority interestsAdministrative Expenses
Selling, general and administrative expense increased to $175$159 million in 2003 compared to $161$136 million in 2002.for the same period last year. This increase resulted from higher dividend income from the Saudi Arabian cost investment,is primarily due to expenses for sponsor monitoring services of $10 million, higher methanol pricing partially offset by lower operating profit.
Technical Polymers Ticona
Predecessor | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||
in $ millions (except for percentages) | 2003 | 2002 | Change in $ | Change in % | ||||||||||||||
Net sales | 762 | 656 | 106 | 16 | % | |||||||||||||
Net sales variance: | ||||||||||||||||||
Volume | 11 | % | ||||||||||||||||
Price | (3 | )% | ||||||||||||||||
Currency | 8 | % | ||||||||||||||||
Operating profit | 122 | 23 | 99 | >100 | % | |||||||||||||
Operating margin | 16.0 | % | 3.5 | % | ||||||||||||||
Special charges | 87 | (6 | ) | 93 | >100 | % | ||||||||||||
Earnings from continuing operations before tax and minority interests | 167 | 35 | 132 | >100 | % | |||||||||||||
Depreciation and amortization | 57 | 52 | 5 | 10 | % | |||||||||||||
Net sales for Ticona increased by 16% to $762amortization expense of identifiable intangible assets acquired of $10 million in 2003 as compared to 2002 as higher volumes (+11%) and favorable currency movements (+8%) were partly offset by lower selling prices (-3%).
Volumes increased in most business lines, particularly in polyacetal and GUR ultra high molecular weight polyethylene. The global volume growth in polyacetals resulted from sales to new customers and new end-uses. Volumes for GUR increased as the result of the commercialization of new applications in North America and Europe, as well as the exit of a major competitor in North America. Pricing declined on a higher percentage of sales from lower priced products and increased competitive pressure from Asian imports of polyacetal into North America.
Ticona recorded income from special charges of $87 million in 2003 comparedcosts primarily related to expense of $6 million in 2002. The income in 2003 primarily resulted from insurance recoveries of $107 million associatedcompliance with the plumbing cases, which was partially offset by restructuring charges for organizational redesign costs of $12 million and the closureSection 404 of the Telford, UK, compounding facilitySarbanes-Oxley Act of $8 million. 2002.
Special (Charges) Gains
The 2002 expense resulted from restructuring costs associated withcomponents of special (charges) gains for the consolidation of manufacturing operations in Europethree months ended March 31, 2005 and the United States.2004 were as follows:
Successor | Predecessor | |||||||||
Three Months Ended March 31, 2005 | Three Months Ended March 31, 2004 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (2 | ) | (2 | ) | ||||||
Plant/office closures | (1 | ) | — | |||||||
Total restructuring | (3 | ) | (2 | ) | ||||||
Other | (35 | ) | (26 | ) | ||||||
Total Special (Charges) Gains | (38 | ) | (28 | ) | ||||||
Operating Profit
Operating profit increased to $122$156 million in 2003 versus $23the quarter compared to $47 million in 2002. Income from insurance recoveries,the same period last year on gross margin expansion of $137 million, as significantly higher volumes,pricing, primarily in Chemical Products, lower depreciation expense and reduced spendingproductivity improvements more than offset higher raw material and energy costs. Operating profit also benefited from increased volumes in Acetate Products, Performance Products and Ticona. Depreciation and amortization expense declined by $9 million as decreases in depreciation resulting from purchase accounting adjustments, more than offset increased amortization expense for acquired intangible assets.
Equity in Net Earnings of Affiliates
Equity in net earnings of affiliates rose by $3 million to $15 million for the three months ended March 31, 2005, compared to the same period last year. Cash distributions received from equity affiliates increased to $36 million for the three months ended March 31, 2005, compared to $16 million in the same period of 2004. The increase in cash distributions is mainly due to strong business conditions in 2004 for Ticona's high performance product ventures and Chemical Products' methanol venture and the timing of dividend payments.
Interest Expense
Interest expense increased to $176 million for the three months ended March 31, 2005 from $6 million in the same period last year, primarily due to expenses of $102 million including early redemption premiums and deferred financing costs lower pricing,associated with the refinancing that occurred in the first quarter of 2005. Higher debt levels resulting primarily from the acquisition of CAG and higher expense associated with stock appreciation rights of $13 million. Ticona continued to incur significant market development costs for cyclo-olefin copolymers in 2003. Termination benefit expenses of $9 million were recorded in cost of sales, primarily in the fourth quarter 2003, related to the streamlining of manufacturing operations and administrative functions.
Earnings from continuing operations before tax and minority interestsinterest rates also increased to $167 million in 2003 compared to $35 million in 2002. This increase resulted from higher operating profit and higher equity earnings from the Polyplastics venture, due to growth in the Chinese and Taiwanese economies in 2003, as well as interest income from insurance recoveries.expense.
Acetate Products Interest Income
Predecessor | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||
in $ millions (except for percentages) | 2003 | 2002 | Change in $ | Change in % | ||||||||||||||
Net sales | 655 | 632 | 23 | 4 | % | |||||||||||||
Net sales variance: | ||||||||||||||||||
Volume | 2 | % | ||||||||||||||||
Price | 2 | % | ||||||||||||||||
Operating profit | 13 | 31 | (18 | ) | (58 | )% | ||||||||||||
Operating margin | 2.0 | % | 4.9 | % | ||||||||||||||
Special charges | — | — | — | n.m. | ||||||||||||||
Earnings from continuing operations before tax and minority interests | 17 | 43 | (26 | ) | (60 | )% | ||||||||||||
Depreciation and amortization | 66 | 53 | 13 | 25 | % | |||||||||||||
Net sales forFor the Acetate Products segmentthree months ended March 31, 2005, interest income increased by 4%$10 million to $655$15 million in 2003 as compared to 2002 largelythe same period in the prior year, primarily due to higher pricing (+2%) and higher volumes (+2%).average cash levels.
Average pricing rose in 2003 as higher tow prices offset slightly lower filament prices. Volumes grew as higher demand for filament and flake more than offset slightly lower tow volumes, primarily in Europe and Africa. Despite a long-term trend of declining global demand for filament, volumes improved mainly due to higher demand from the U.S. fashion industry. Volumes of acetate flake, a primary raw material in acetate filament and tow production, also increased due to higher opportunistic sales in the merchant market.
Acetate Products recorded an operating profit of $13 million in 2003, compared to $31 million in 2002 as higher pricing and volumes, as well as productivity gains, only partially offset higher raw material and energy prices. The segment also incurred costs for transitioning to new wood pulp suppliers as a primary supplier closed its U.S. facility in 2003. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 143, Accounting for Asset Retirement Obligations Other Income (Expense), the Acetate Products segment recorded a charge of $8 million, included within depreciation expense, as the result of a worldwide assessment of our acetate production capacity. That assessment concluded that it was probable that certain facilities would be closed in the latter half of the decade.
Earnings from continuing operations before tax and minority interests declined to $17 million in 2003 compared to $43 million in 2002. This decline resulted from lower operating profit and lower dividend income from cost investments in China, where earnings are being reinvested for capacity expansions.
Performance Products
Predecessor | ||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||
in $ millions (except for percentages) | 2003 | 2002 | Change in $ | Change in % | ||||||||||||||
Net sales | 169 | 151 | 18 | 12 | % | |||||||||||||
Net sales variance: | ||||||||||||||||||
Volume | 6 | % | ||||||||||||||||
Price | (11 | )% | ||||||||||||||||
Currency | 17 | % | ||||||||||||||||
Operating profit (loss) | (44 | ) | 45 | (89 | ) | >100 | % | |||||||||||
Operating margin | (26.0 | )% | 29.8 | % | ||||||||||||||
Special charges | (95 | ) | — | (95 | ) | n.m. | ||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | (44 | ) | 45 | (89 | ) | >100 | % | |||||||||||
Depreciation and amortization | 7 | 7 | — | 0 | % | |||||||||||||
Net sales for the Performance Products segment increased by 12% to $169 million in 2003 as compared to 2002 due to favorable currency movements (+17%) and increased volumes (+6%), partially offset by price decreases (-11%).
Pricing for Sunett sweetener declined primarily as a result of lower unit selling prices associated with higher volumes to major customers and the anticipated expiration of the European and U.S. production patents in 2005. Increased Sunett volumes reflected strong growth from new applications in the U.S. and European beverage and confectionary markets. In sorbates, pricing and volume pressure from Asian producers intensified during 2003 due to worldwide overcapacity.
Performance Products recorded special charges of $95 million in 2003, related to a decision by the European Commission on antitrust matters in the sorbates industry.
Operating profit and earnings (loss) from continuing operations before tax and minority interests declined from $45 million in 2002 to a loss of $44 million in 2003, due to special charges and lower pricing. This decline was slightly offset by favorable currency movements, higher Sunett volumes, cost reductions and increased productivity.
Other Activities
Net sales for Other Activitiesincome (expense), net decreased by 6% to $49 million in 2003 from $52 million in 2002, primarily reflecting slightly lower third party sales by the captive insurance companies.
Other Activities recorded $2$3 million of income in special charges in 2003for the three months ended March 31, 2005, compared to $9 million of income in 2002. The $2 million represented higher than expected collections of a note receivable. The $9 million of income in 2002 related to a reduction in environmental reserves due to a settlement of obligations associated with former Hoechst entities.
The operating loss of Other Activities increased to $111 million in 2003 compared to $78 million in 2002.for the comparable period last year. This increase was primarily the result of higher expense for stock appreciation rights of $27 million and lower income from special charges, offset by $17 million of increased income from the captive insurance companies mainly due to a reduction in loss reserves resulting from expired policies and actuarial revaluations.
Earnings (loss) from continuing operations before tax and minority interests increased to a loss of $119 million in 2003 compared to a loss of $104 million in 2002. This decline resulted from higher operating losses partially offset by lower interest expense and higher interest and other income, net. Lower interest expensedecrease is primarily due to lower interestexpenses associated with the anticipated guaranteed payment to CAG minority shareholders and the ineffective portion of a net investment hedge. These decreases were partially offset by higher dividends from cost investments. Dividend income accounted for under the cost method increased by $8 million to $14 million for the three months ended March 31, 2005, compared to the same period in 2004. The increase in the first quarter of 2005 primarily resulted from the timing of receipt of dividends.
Income Taxes
Income taxes for the three months ended March 31, 2005 and 2004, are recorded based on the annual effective tax rate. As of March 31, 2005, the annual effective tax rate for 2005 was 35%, which was slightly less than the combination of the statutory rate and state income tax rates in the U.S. The estimated annual effective tax rate for 2005 reflects earnings in low tax jurisdictions, a valuation allowance for the tax benefit associated with projected U.S. losses (which includes expenses associated with the early redemption of debt), and currency translation effects as well as lower average debt levels. Higher interest and other income, net resultedtax expense in certain non-U.S. jurisdictions. The Predecessor had an effective tax rate of 24% for the three months ended March 31, 2004, compared to the German statutory rate of 40%, which was primarily affected by earnings in low tax jurisdictions.
Earnings from income of $18Discontinued Operations
Earnings from discontinued operations was $10 million for the three months ended March 31, 2005 compared to $26 million from the demutualizationcomparable period last year. Included in 2005 were earnings from the discontinued operation of an insurance providerthe Acetate Products filament business line. Acetate filament net sales for the three months ended March 31, 2005 was $31 million and operating profit was $10 million compared to net sales of $25 million and operating profit of $5 million for the same period in 2004. Earnings in 2004 also reflected a $14 million gain onand $12 million tax benefit associated with the sale of investments of $4 million, partially offset by expense of $14 million relatedthe acrylates business. The tax benefit is mainly attributable to the unfavorable currency effects onutilization of a capital loss carryover benefit that had been previously subject to a valuation allowance.
Net Earnings
As a result of the unhedged positionfactors mentioned above, net earnings decreased by $88 million to a net loss of intercompany net receivables denominated$10 million in U.S. dollars.the three months ended March 31, 2005, compared to the same period last year.
Summary of Consolidated Results—Nine Months Ended December 31, 2004 Compared with Nine Months Ended December 31, 2003
Net Sales
For the nine months ended December 31, 2004, net sales increased by 10%12% to $3,826$3,744 million compared to the same period in 2003. Volume increases in all segments, higher pricing in the Chemical Products segment and favorable currency effects resulting mainly from the stronger euro versus the U.S. dollar were partially offset by lower pricing in the remaining segments and the effects of reductions due to changes in the composition of the Chemical Products.
Cost of Sales
Cost of sales increased by $144$166 million to $3,092$3,026 million for the nine months ended December 31, 2004 versus the comparable period last year. Higher raw material costs and unfavorable currency
effects were partially offset by decreases due to changes in the composition of our Chemical Products segment and cost savings. Cost of sales for the nine months ended December 31, 2004 also included a $53 million non-cash charge for the manufacturing profit added to inventory under purchase accounting which was charged to cost of sales as the inventory was sold offset by lower depreciation expense, largely as a result of purchase accounting adjustments. Excluding the $53 million purchase accounting adjustment, cost of sales as a percentage of net sales was 79.4% in 2004 compared to 85.4% in 2003. The improvement is largely due to higher net sales and cost savings during 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased by $96$101 million to $498$497 million for nine months ended December 31, 2004 compared to the same period last year. This increase was primarily due to new management compensation expense of approximately $50 million, higher consulting and professional fees, which includes advisor monitoring fees of $10 million, increased amortization expense of identifiable intangible assets acquired, as unfavorable currency movements as well as the absence of a favorable adjustment to our estimate of certain environmental reserves during the nine months ended December 31, 2003 of $12 million, which were partially offset by $69 million of lower stock appreciation rights expense.
In January 2005, Special (Charges) Gains
The components of special (charges) gains for the Company paid $10 million to affiliates of the Blackstone Group related to an advisor monitoring agreement. This agreement was terminated concurrent with the initial public offeringnine months ended December 31, 2004 and resulted in an additional $35 million payment. As such, the Company recorded expense of $45 million in the first quarter of 2005.
Special Charges
Special charges include provisions for restructuring and other expenses and income incurred outside the normal ongoing course of operations. Restructuring provisions represent costs related to severance and other benefit programs related to major activities undertaken to fundamentally redesign the business operations,2003 were as well as costs incurred in connection with decisions to exit non-strategic businesses. These measures are based on formal management decisions, establishment of agreements with employees' representatives or individual agreements with affected employees, as well as the public announcement of the restructuring plan. The related reserves reflect certain estimates, including those pertaining to separation costs, settlements of contractual obligations and other closure costs. We reassess the reserve requirements to complete each individual plan under existing restructuring programs at the end of each reporting period. Actual experience may be different from these estimates.follows:
Successor | Predecessor | |||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (8 | ) | (17 | ) | ||||||
Plant/office closures | (52 | ) | (7 | ) | ||||||
Restructuring adjustments | 3 | 6 | ||||||||
Total restructuring | (57 | ) | (18 | ) | ||||||
Sorbates antitrust matters | — | (95 | ) | |||||||
Plumbing actions | 1 | 107 | ||||||||
Asset impairments | (34 | ) | — | |||||||
Other | (1 | ) | 2 | |||||||
Total special charges | (91 | ) | (4 | ) | ||||||
Successor | Predecessor | |||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (8 | ) | (17 | ) | ||||||
Plant/office closures | (45 | ) | (7 | ) | ||||||
Restructuring adjustments | 3 | 6 | ||||||||
Total restructuring | (50 | ) | (18 | ) | ||||||
Sorbates antitrust matters | — | (95 | ) | |||||||
Plumbing actions | 1 | 107 | ||||||||
Asset impairments | (32 | ) | — | |||||||
Other | (1 | ) | 2 | |||||||
Total Special (Charges) Gains | (82 | ) | (4 | ) | ||||||
Special charges for the nine months ended December 31, 2004 of $91$82 million were largely related to non-cash impairment charges of $50$41 million and $32 million resulting from plans by the Acetate Products segment to consolidate tow production at fewer sites and to discontinue production of acetate filament and a decision to dispose of the Ticona COC business, respectively. Special charges for the nine months ended December 31, 2003 of $4 million resulted mainly from expenses of $95 million associated with antitrust matters in the sorbates industry and employee termination benefits of $17 million, which were largely offset by income of $107 million from insurance recoveries.
Operating Profit
Operating profit for the nine months ended December 31, 2004 increased to $78$72 million from $46$22 million in the same period last year. Operating profit benefited from increased net sales and $76 million of lower expense for stock appreciation rights and lower depreciation and amortization expense of $40
million, which were partially offset mainly by increased raw material and energy costs, higher special charges, new management compensation expense of $50 million, and inventory purchase accounting adjustments of $53 million, and higher professional and consulting fees.
Equity in Net Earnings of Affiliates
Equity in net earnings of affiliates rose by $11 million to $36 million in the nine months ended December 31, 2004 compared to the same period last year. This increase primarily represents improved equity earnings from Asian and U.S. affiliates due to increased sales volumes, partially offset by lower earnings due to restructuring charges in the European oxo venture. Cash distributions received from equity affiliates were $22 million in the nine months ended December 31, 2004 compared to $8 million in the same period of 2003.
Interest Expense
Interest expense increased to $300 million for the nine months ended December 31, 2004 from $37 million in the same period last year. The higher interest expense resulted from increased debt levels of $3,387 million as of December 31, 2004 versus $637 million as of December 31, 2003, resulting from the acquisition of CAG as well as the expensing of deferred financing costs of $89 million from the refinancing of the senior subordinated bridge loan facilities and mandatorily redeemable preferred stock.
The Company expects to incur expenses of approximately $105 million associated with the refinancing that occurred during the first quarter of 2005, which represents early repayment premiums and expensing of deferred finance costs.
Interest Income
For the nine months ended December 31, 2004, interest income decreased by $14 million to $24 million compared to the same period in the prior year, primarily due to significantly lower interest income associated with insurance recoveries.
Other Income (Expense), Net
Other income (expense), net decreased by $48 million to an expense of $12 million compared to the same period last year. This decrease is primarily due to unfavorable foreign currency exchange effects on cash and cash equivalents and the absence of $18 million in income from the demutualization of an insurance provider, as well as unfavorable changes in swap valuations. Dividend income from investments in the nine months ended December 31, 2004 accounted for under the cost method decreased to $33 million compared to $46 million in the same period in the prior year due to the timing of receipt of dividends.
Income Taxes
Income tax expense increased by $41$45 million to $70 million for the nine months ended December 31, 2004 and the effective tax rate for this period was negative 40 percent.39%. The effective tax rate was unfavorably affected primarily by the application of full valuation allowances against post-acquisition net U.S. deferred tax assets, Canadian deferred tax assets due to post-acquisition restructurings, certain German deferred tax assets and the non-recognition of tax benefits associated with acquisition related expenses. These unfavorable effects were partially offset by unrepatriated low taxed earnings primarily in Singapore. For the same period in 2003, income tax expense of $29$25 million was recorded based on a annual effective tax rate of 27%.
Minority Interests
For the nine months ended December 31, 2004, minority interests increased to $8 million from $0 million in the same period in the prior year. This increase primarily relates to the minority interests in the earnings of Celanese AG.CAG.
Earnings (Loss) from Discontinued Operations
In October 2004, we announced plans to implement a strategic restructuring of our acetate business to increase efficiency, reduce overcapacity in certain areas and to focus on products and markets that provide long-term value. As part of this restructuring, we planned to discontinue acetate filament production before the end of 2005 and to consolidate our acetate flake and tow operations at three locations, instead of five.
In September 2003, CAG and Dow reached an agreement for Dow to purchase the acrylates business of CAG. This transaction was completed in February 2004 and the sales price was $149 million, resulting in a gain of approximately $14 million. Dow acquired CAG'sCAG’s acrylates business line, including inventory, intellectual property and technology for crude acrylic acid, glacial acrylic acid, ethyl acrylate, butyl acrylate, methyl acrylate and 2-ethylhexyl acrylate, as well as acrylates production assets at the Clear Lake, Texas facility. In related agreements the Companywe will provide certain contract manufacturing services to Dow, and Dow will supply acrylates to the Companyus acrylates for use in itsour emulsions production. The acrylates business was part of the chemical business.Chemical Products. As a result of this transaction, the assets, liabilities, revenues and expenses related to the acrylates product lines at the Clear Lake, Texas facility are reflected as a component of discontinued operations in the Consolidated Financial Statementsconsolidated financial statements in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
In December 2003, the Ticona segment completed the sale of its nylon business line to BASF. Ticona received cash proceeds of $10 million and recorded a gain of $3 million.
Net Sales | Operating Profit | |||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | 1 | 186 | — | 7 | ||||||||||||||
Discontinued operations of Ticona | 1 | 33 | — | — | ||||||||||||||
Total discontinued operations | 2 | 219 | — | 7 | ||||||||||||||
Net Sales | Operating Profit | |||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||
Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | Nine Months Ended December 31, 2004 | Nine Months Ended December 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | 1 | 186 | — | 7 | ||||||||||||||
Discontinued operations of Technical Polymers Ticona | 1 | 33 | — | — | ||||||||||||||
Discontinued operations of Acetate Products | 82 | 92 | 5 | 18 | ||||||||||||||
Total discontinued operations | 84 | 311 | 5 | 25 | ||||||||||||||
Net Earnings
As a result of the factors mentioned above, net earnings decreased to a loss of $253 million in the nine months ended December 31, 2004 from earnings of $92 million in the same period last year.
Summary of Consolidated Results – Results—Three Months Ended March 31, 2004 Compared with Three Months Ended March 31, 2003
Net Sales
For the three months ended March 31, 2004, net sales increased by 9%7% to $1,243$1,218 million compared to the same period in 2003. This increase is primarily due to favorable currency effects relating mainly to the stronger euro versus the U.S. dollar as well as volume increases in all the segments. These factors were partially offset by the transfer of the European oxo business to a venture in the fourth quarter of 2003.
Cost of Sales
Cost of sales increased to $1,002$983 million in the three months ended March 31, 2004 from $935 million in the comparable period last year, primarily reflecting higher raw materials costs, increased volumes and the effects of currency movements. The absence of the European oxo business partly offset these factors. Cost of sales as a percentage of net sales was 80.7% in 2004 compared to 82.2% in 2003. The improvement is largely due to higher net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased to $137$136 million compared to $108 million for the same period last year. Unlike the three months ended March 31, 2003, the comparable period in 2004 did not benefit from $16 million of income from stock appreciation rights. Unfavorable currency movements also contributed to this increase.
Special Charges(Charges) Gains
The components of special charges(charges) gains for the three months ended March 31, 2004 and 2003 were as follows:
Predecessor | ||||||||||
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (2 | ) | (1 | ) | ||||||
Total restructuring | (2 | ) | (1 | ) | ||||||
Other | (26 | ) | — | |||||||
Total special charges | (28 | ) | (1 | ) | ||||||
Predecessor | ||||||||||
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||
(unaudited) | ||||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (2 | ) | (1 | ) | ||||||
Total restructuring | (2 | ) | (1 | ) | ||||||
Advisory services | (25 | ) | — | |||||||
Other | (1 | ) | — | |||||||
Total Special (Charges) Gains | (28 | ) | (1 | ) | ||||||
The $27 million increase in special charges for the three months ended March 31, 2004 compared to the same period last year is primarily due to expenses for advisory services related to the acquisition of CAG.
Operating Profit
Operating profit declined in the three months ended March 31, 2004 to $52$47 million compared to $72 million in the same period last year. The favorable effects of higher volumes and favorable currency movements were offset by higher raw material costs, special charges and the absence of income from stock appreciation rights. Operating profit declined also due to $10 million of spending associated with productivity initiatives, primarily in the Chemical Products segment. Stock appreciation rights had no effect on operating profit for the three months ended March 31, 2004, as the share price remained relatively flat whereas in the three months ended March 31, 2003, operating profit included $18 million of income as a result of a decline in the share price.
Equity in Net Earnings of Affiliates
Equity in net earnings of affiliates rose by $2 million to $12 million for the three months ended March 31, 2004 compared to the same period last year. Cash distributions received from equity affiliates increased to $16 million for the three months ended March 31, 2004 compared to $15 million the same period of 2003.
Interest Expense
Interest expense decreased to $6 million for the three months ended March 31, 2004 from $12 million in the same period last year primarily due to lower average debt levels.
Other Income (Expense), Net
Other income (expense), net decreased by $3 million to $9 million for the three months ended March 31, 2004 compared to $12 million for the comparable period last year. Dividend income accounted for under the cost method decreased by $1 million to $6 million for the three months ended March 31, 2004 compared to the same period in 2003.
Income Taxes
CAG recognized income tax expense of $17$15 million based on an annual effective tax rate of 24% in the three months ended March 31, 2004 compared to $24$20 million based on an annual effective tax rate of 27% for the same period in 2003. The decrease in the annual effective tax rate is the result of higher earnings in lower taxed jurisdictions.
Earnings (Loss) from Discontinued Operations
Earnings (loss) from discontinued operations increased by $30$37 million to earnings of $23$26 million for the three months ended March 31, 2004 compared to a loss of $7$11 million for the comparable period last
year, reflecting primarily ana $14 million gain and a $14$12 million tax benefit associated with the sale of the acrylates business in 2004. The tax benefit is mainly attributable to the utilization of a capital loss carryover benefit that had been previously subject to a valuation allowance.
The following table summarizes the results of the discontinued operations for the three months ended March 31, 2004 and 2003.
Net Sales | Operating Loss | |||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | 21 | 50 | (5 | ) | (8 | ) | ||||||||||||
Discontinued operations of Ticona | — | 12 | — | — | ||||||||||||||
Total discontinued operations | 21 | 62 | (5 | ) | (8 | ) | ||||||||||||
Net Sales | Operating Loss | |||||||||||||||||
Successor | Predecessor | Successor | Predecessor | |||||||||||||||
Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | Three Months Ended March 31, 2004 | Three Months Ended March 31, 2003 | |||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | 21 | 50 | (5 | ) | (8 | ) | ||||||||||||
Discontinued operations of Technical Polymers Ticona | — | 12 | — | — | ||||||||||||||
Discontinued operations of Acetate Products | 25 | 26 | 5 | 6 | ||||||||||||||
Total discontinued operations | 46 | 88 | — | (2 | ) | |||||||||||||
Net Earnings
As a result of the factors mentioned above, net earnings increased by $22 million to net earnings of $78 million in the three months ended March 31, 2004 compared to the same period last year.
Summary of Consolidated Results – 2003 Compared with 2002
Net Sales
Net sales increased by $767 million to $4,603 million in 2003 as compared to $3,836 million in 2002 due primarily to the full year effect of the emulsions business acquired at year-end 2002, favorable currency movements resulting from the strengthening of the euro versus the U.S. dollar as well as higher selling prices and volumes. Overall, all segments had an increase in net sales.
Cost of Sales
Cost of sales increased by 22% to $3,883 million in 2003 compared with $3,171 million in 2002. Cost of sales as a percentage of net sales also increased to 84% in 2003 from 83% in 2002, reflecting significantly higher raw material and energy costs, partly offset by increased selling prices primarily in the Chemical Products segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by 14% to $510 million in 2003 from $446 million in 2002 primarily due to a $51 million increase in expenses for stock appreciation rights, unfavorable currency effects as well as the inclusion of the emulsions business. This increase was partially offset by cost reduction efforts.
Research and Development Expenses
Research and development expenses increased by 37% to $89 million in 2003 from $65 million in 2002. This increase resulted primarily from currency movements, the inclusion of the emulsions business and expiration of cost sharing arrangements at Celanese Ventures during 2002. Research and development expenses as a percentage of sales increased to 1.9% for 2003 from 1.7% in 2002.
Special Charges
The components of special charges for the years ended December 31, 2003 and 2002 were as follows:
Predecessor | ||||||||||
Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||
(in $ millions) | ||||||||||
Employee termination benefits | (18 | ) | (8 | ) | ||||||
Plant/office closures | (7 | ) | (6 | ) | ||||||
Restructuring adjustments | 6 | 10 | ||||||||
Total restructuring | (19 | ) | (4 | ) | ||||||
Sorbates antitrust matters | (95 | ) | — | |||||||
Plumbing actions | 107 | — | ||||||||
Other | 2 | 9 | ||||||||
Total special charges | (5 | ) | 5 | |||||||
In 2003, the Predecessor recorded expense of $5 million in special charges, which consisted of $25 million of restructuring charges, $6 million of income from favorable adjustments to restructuring reserves that were recorded previously, and $14 million of income from other special charges. The $25 million of additions to the restructuring reserve included employee severance costs of $18 million and plant and office closure costs of $7 million. Within other special charges there was income of $107 million related to insurance recoveries associated with the plumbing cases, partially offset by $95 million of expenses for antitrust matters in the sorbates industry, primarily related to a decision by the European Commission.
In 2003, the Chemical Products segment recorded employee severance charges of $4 million, which primarily related to the shutdown of an obsolete synthesis gas unit in Germany.
In 2003, Ticona commenced the redesign of its operations. These plans included a decision to sell the Summit, New Jersey site and to relocate administrative and research and development activities to the existing Ticona site in Florence, Kentucky in 2004. As a result of this decision, the Predecessor recorded termination benefit expense of $5 million in 2003. In addition to the relocation in the United States, Ticona has streamlined its operations in Germany, primarily through offering employees early retirement benefits under an existing employee benefit arrangement. As a result of this arrangement, Ticona recorded a charge of $7 million in 2003.
Also in 2003, based on a 2002 restructuring initiative to concentrate its European manufacturing operations in Germany, Ticona ceased its manufacturing operations in Telford, United Kingdom. This resulted in contract termination costs and asset impairments totaling $7 million and employee severance costs of $1 million in 2003. Through December 31, 2003, the total cost of the Telford shutdown through 2003 were $12 million.
The $6 million of income from favorable adjustments of previously recorded restructuring reserves consisted of a $1 million adjustment to the 2002 reserves, a $4 million adjustment to the 2001 reserves and a $1 million adjustment to the 1999 reserves. The adjustment to the 2002 reserve related to lower than expected costs related to the demolition of the GUR Bayport facility. The adjustment to the 2001 reserve was primarily due to the lower than expected decommissioning costs of the Mexican production facility. The adjustment to the 1999 reserve was due to lower than expected payments related to the closure of a former administrative facility in the United States.
In 2002, the Predecessor recorded income from special charges of $5 million, which consisted of $14 million of restructuring charges, $10 million of income from favorable adjustments to previously recorded restructuring reserves, $1 million of income from reimbursements from third party site partners related to prior year initiatives, and $8 million of income from other special charges. The $14 million of restructuring charges included employee severance costs of $8 million and plant and office closure costs of $6 million.
Project Focus, initiated in early 2001, set goals to reduce trade working capital, limit capital expenditures and improve earnings before interest, taxes, depreciation and amortization from programs
to increase efficiency. Project Forward was announced in August 2001 and initiated additional restructuring and other measures to reduce costs and increase profitability. During 2002, the Predecessor recorded employee severance charges of $8 million, of which $3 million related to adjustments to the 2001 forward initiatives and $4 million for streamlining efforts of production facilities in Germany and the United States, and $1 million for employee severance costs in the polyvinyl alcohol business.
Ticona recorded asset impairments of $4 million in 2002 related to a decision in 2002 to shutdown operations in Telford, United Kingdom in 2003. In addition, with the construction of a new and expanded GUR plant in Bishop, Texas, the GUR operations in Bayport, Texas were transferred to a new facility. Decommissioning and demolition costs associated with the Bayport closure were $2 million.
The $10 million of favorable adjustments of previously recorded restructuring reserves consisted of an $8 million adjustment to the 2001 reserves and a $2 million adjustment to the 2000 reserves. The 2001 adjustment was primarily due to lower than expected personnel and closure costs associated with the streamlining of chemical facilities in the United States, Canada, and Germany. The 2000 adjustment was due to lower than expected demolition costs for the Chemical Products production facility in Knapsack, Germany. The other special charges income of $8 million related to a reduction in reserves associated with settlements of environmental indemnification obligations associated with former Hoechst entities.
Foreign Exchange Gain (Loss)
Foreign exchange gain (loss) decreased to a loss of $4 million in 2003 from a gain of $3 million in 2002. This change is primarily attributable to the strengthening of the Mexican peso and Canadian dollar against the U.S. dollar.
Operating Profit
Operating profit declined to $118 million in 2003 compared to $173 million in 2002. The favorable effects of higher selling prices primarily in the Chemical Products segment, favorable currency movements, cost reductions, and income from insurance recoveries of $107 million in the Ticona segment, were offset by expenses of $95 million in the Performance Products segment related to antitrust matters, $12 million of organizational redesign costs at Ticona, increased stock appreciation rights expense as well as higher raw material and energy costs in most segments. Stock appreciation rights expense for 2003 was $59 million compared to $3 million in 2002. CAG streamlined its manufacturing operations, mainly in the Chemical Products and Ticona segments and, as a result, recorded termination benefit expenses, in cost of sales, of $26 million, primarily in the fourth quarter of 2003.
Equity in Net Earnings of Affiliates
Equity in net earnings of affiliates increased to $35 million in 2003 from $21 million in 2002. This increase was mainly attributable to an increase in the earnings from the Polyplastics venture, an investment held by the Ticona segment, partly due to growth in the Chinese and Taiwanese economies in 2003. Cash distributions from equity affiliates were $23 million in 2003 compared to $100 million in 2002.
Interest Expense
Interest expense decreased by 11% to $49 million in 2003 from $55 million in 2002. This decrease is primarily related to currency translation effects and lower interest rates as well as lower average debt levels.
Interest Income
Interest income increased by $26 million to $44 million in 2003 compared to 2002, primarily due to interest income associated with insurance recoveries of $20 million in the Ticona segment.
Other Income (Expense), Net
Other income (expense), net increased to $48 million in 2003 from $23 million in 2002, mainly due to income of $18 million resulting from the demutualization of an insurance provider and an increase in
dividend income. These increases were partially offset by expense of $14 million related to the unfavorable currency effects on the unhedged position of intercompany net receivables denominated in U.S. dollars. Investments accounted for under the cost method contributed dividend income of $53 million and $35 million in 2003 and 2002, respectively. The increase in 2003 primarily resulted from higher dividends from the Saudi Arabian cost investment on higher methanol pricing, which were slightly offset by lower dividend income from the Acetate Products cost investments in China, where earnings are being reinvested for capacity expansions.
Income Taxes
CAG recognized income tax expense of $53 million in 2003 compared to $57 million in 2002.
The effective tax rate for CAG in 2003 was 27 percent compared to 32 percent in 2002. In comparison to the German statutory rate, the 2003 effective tax rate was favorably affected by unrepatriated low-taxed earnings, favorable settlement of prior year (1996) taxes in the U.S., equity earnings from Polyplastics, which are excluded from U.S. taxable income and utilization of a U.S. capital loss carryforward that had been subject to a valuation allowance. The effective tax rate was unfavorably affected in 2003 by dividend distributions from subsidiaries and writedowns of certain German corporate and trade tax benefits related to prior years.
In comparison to the German statutory rate, the effective tax rate in 2002 was favorably affected by the utilization of certain net operating loss carryforwards in Germany, the release of certain valuation allowances on prior years' deferred tax assets, unrepatriated low-taxed earnings and a lower effective minimum tax burden in Mexico. The effective tax rate was unfavorably affected in 2002 by distributions of taxable dividends from certain equity investments and the reversal of a tax-deductible writedown in 2000 of a German investment.
Earnings (Loss) from Discontinued Operations
In September 2003, CAG and Dow reached an agreement for Dow to purchase the acrylates business of CAG. This transaction was completed in February 2004 and the sales price was $149 million, resulting in a gain of approximately $14 million. Dow acquired CAG's acrylates business line, including inventory, intellectual property and technology for crude acrylic acid, glacial acrylic acid, ethyl acrylate, butyl acrylate, methyl acrylate and 2-ethylhexyl acrylate, as well as acrylates production assets at the Clear Lake, Texas facility. In related agreements, the Company will provide certain contract manufacturing services to Dow, and Dow will supply acrylates to the Company AG for use in its emulsions production. Simultaneously with the sale, CAG repaid an unrelated obligation of $95 million to Dow. The acrylates business was part of the chemical business. As a result of this transaction, the assets, liabilities, revenues and expenses related to the acrylates product lines at the Clear Lake, Texas facility are reflected as a component of discontinued operations in the Consolidated Financial Statements in accordance with SFAS No. 144.
In December 2003, the Ticona segment completed the sale of its nylon business line to BASF. Ticona received cash proceeds of $10 million and recorded a gain of $3 million.
In 2003, CAG recorded a $1 million loss from operations of discontinued operations related to the acrylates and nylon business divestitures. In 2003, CAG also recorded adjustments related to prior year discontinued operations representing a gain of $4 million.
In December 2002, CAG completed the sale of Trespaphan, its global oriented polypropylene ("OPP") film business, to a consortium consisting of Dor-Moplefan Group and Bain Capital, Inc. for a value of $214 million. Net of the purchase price adjustments of $19 million and the repayment of $80 million in intercompany debt that Trespaphan owed CAG, CAG received net proceeds of $115 million. Trespaphan was formerly part the Performance Products segment.
During 2002, CAG sold its global allylamines and U.S. alkylamines businesses to U.S. Amines Ltd. These businesses were part of the chemicals business.
In 2002, CAG received net proceeds of $106 million and recorded a pre-tax gain of $14 million on the disposal of discontinued operations relating to these divestitures. Pre-tax earnings from operations of
discontinued operations in 2002 were $1 million. CAG recognized a tax benefit of $40 million for discontinued operations, which includes a tax benefit associated with a tax deductible writedown of the tax basis for Trespaphan's subsidiary in Germany relating to tax years ended December 31, 2001 and 2000. Since this tax benefit related to an entity solely engaged in a business designated as discontinued operations, this tax benefit has been correspondingly included in earnings (loss) from discontinued operations.
The following table summarizes the results of the discontinued operations for the years ended December 31, 2003 and 2002.
Net Sales | Operating Profit (Loss) | |||||||||||||||||
Predecessor | ||||||||||||||||||
Year Ended December 31, 2003 | Year Ended December 31, 2002 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||
(in $ millions) | ||||||||||||||||||
Discontinued operations of Chemical Products | 236 | 246 | (1 | ) | (52 | ) | ||||||||||||
Discontinued operations of Performance Products | — | 257 | — | 10 | ||||||||||||||
Discontinued operations of Ticona | 45 | 57 | — | (1 | ) | |||||||||||||
Total discontinued operations | 281 | 560 | (1 | ) | (43 | ) | ||||||||||||
Cumulative Effect of Changes in Accounting Principles
CAG recorded $1 million loss in a cumulative effect of changes in accounting principles, net of tax, on January 1, 2003, related to the adoption of SFAS No. 143. CAG recognized transition amounts for existing asset retirement obligation liabilities, associated capitalized costs and accumulated depreciation. The ongoing amortization expense on an annual basis resulting from the initial adoption of SFAS No. 143 is not material.
In 2002, CAG recorded income of $18 million for the cumulative effect of two changes in accounting principles, net of tax of $5 million. The adoption of SFAS No. 142, Goodwill and Other Intangible Assets, in 2002 resulted in income of $9 million, as it required unamortized negative goodwill (excess of fair value over cost) on the balance sheet to be written off immediately and classified as a cumulative effect of change in accounting principle in the consolidated statement of operations. Additionally, in 2002 CAG changed the actuarial measurement date for its U.S. pension and other postretirement benefit plans from September 30 to December 31. As this change was accounted for as a change in accounting principle, a cumulative effect adjustment of income of $9, net of taxes of $5 million, was recorded in 2002.
Net Earnings
As a result of the factors mentioned above, the net earnings of CAG decreased by $20 million to net earnings of $148 million in 2003 compared to $168 million in 2002.
Liquidity and Capital Resources
Cash Flows
Net Cash Provided by/Used in Operating Activities
Cash flow from operating activities increased to a cash inflow of $714 million in 2005 compared to a cash outflow of $170 million for the same period in 2004. This increase primarily resulted from a $452 million increase in net earnings from 2004, $429 million in lower pension contributions and a $142 million increase in cash received for trade receivables due to better receivables turnover. These increases were partially offset by $72 million in less cash from trade accounts payable as trade accounts payable grew, but at a slower rate than in 2004. In addition, we paid $77 million more interest payments and $45 million in monitoring fees.
Cash flow from operating activities decreased to a cash outflow of $170 million for 2004 compared to a cash inflow of $401 million for 2003. This decrease primarily resulted from $473 million of pension contributions, which are $343 million more than 2003. Additionally, lower income from insurance recoveries, the payment of a $95 million obligation to a third party, as well as payments of $59 million associated with the exercising of stock appreciation rights in 2004 also contributed to this decrease. These
outflows were partially offset by a decline in payments associated with bonuses and income taxes, as well as lower cash consumed through changes in trade receivables and trade payables. The hedging of foreign currency net receivables, primarily intercompany, resulted in $17 million cash inflow in 2004 compared to a $180 million inflow in 2003. Unfavorable foreign currency effects on the euro versus the U.S. dollar on cash and cash equivalents increased to $24 million in 2004.
Net cash provided by operating activities increased by $38 million to $401 million in 2003 as compared to 2002 primarily due to insurance recoveries of $120 million, plus interest, offset by higher net taxes paid of $143 million and lower dividends from equity investments of $41 million. In addition, higher contributions were made to the U.S. qualified defined benefit pension plan of $130 million in 2003 compared to $100 million in 2002. The hedging activity of foreign currency denominated intercompany net receivables served to partially offset unfavorable currency effects on net earnings of $155 million and resulted in a $180 million cash inflow in 2003 compared to $95 million in 2002 due to the timing of settlements of these contracts.
Net Cash Used in Investing Activities
Net cash from investing activities improved to a cash outflow of $920 million in 2005 compared to a cash outflow of $1,714 million in 2004. The cash outflow in 2004 primarily resulted from the CAG acquisition. The 2005 cash outflow included the acquisitions of the Vinamul and Acetex businesses, the acquisition of additional CAG shares and a decrease in net proceeds from disposal of discontinued operations of $64 million. The net proceeds from the disposal of discontinued operations represents cash received in 2005 from an early contractual settlement of receivables of $75 million related to the sale of Vinnolit Kunstoff GmbH and Vintron GmbH. The net proceeds of $139 million in the same period last year represented the net proceeds from the sale of the acrylates business.
Net cash from investing activities decreased to a cash outflow of $1,714 million in 2004 compared to a cash outflow of $275 million in 2003. The increased cash outflow primarily resulted from the acquisition of CAG. This increase was partially offset by higher net proceeds received from disposals of discontinued operations of $129 million and lower cash outflows related to higher net purchases of marketable securities of $22 million.
Our capital expenditures were $212 million, $210 million and $211 million for the calendar years 2005, 2004 and 2003, respectively. Capital expenditures decreased by $1 million to $210 million in 2004. Spending in 2004were primarily related to a new Ticona research and administrative facility in Florence, Kentucky, the expansion of production facilities for polyacetal in Bishop, Texas and GUR in Oberhausen, Germany, major replacements of equipment, capacity expansions, major investments to reduce future operating costs, environmental, health and safety initiatives and in 2004, the integration of a company-wide SAP platform. SpendingCapital expenditures in 2005 included costs for the expansion of our Nanjing, China site into an integrated chemical complex. Capital expenditures in 2004 included expenditures related to a new Ticona research and administrative facility in Florence, Kentucky and the expansion of production facilities for polyacetal in Bishop, Texas and GUR in Oberhausen, Germany. Capital expenditures in 2003 primarily related toincluded costs for the completion of a production facility for synthesis gas, which is a primary raw material at the Oberhausen site in Germany, major replacements of equipment, capacity expansions, majorGermany. Capital expenditures remained below depreciation levels as management continued to make selective capital investments to reduce future operating costs, environmental, health and safety initiatives andenhance the integrationmarket positions of a company-wide SAP platform.its products.
The increase in cash outflows of $136 million in 2003 compared to 2002 is mainly due to lower proceeds from disposal of discontinued operations of $196 million and the receipt of $39 million in returns of capital from investments in non-consolidated InfraServ companies in 2002. This increase in cash outflow for 2003 was partially offset by a $131 million cash outflow for the 2002 purchase of the net assets of the emulsions businesses. Additionally, net cash outflows increased by $41 million related to higher net purchases of marketable securities.
Capital expenditures increased by $8 million to $211 million in 2003, primarily due to foreign currency effects. Spending in 2003 primarily related to the completion of a production facility for synthesis gas, a primary raw material at the Oberhausen site in Germany, major replacements of equipment, capacity expansions, major investments to reduce future operating costs, environmental, health and safety initiatives and the integration of a company-wide SAP platform. The spending in 2002 included the start of construction of the synthesis gas production facility at the Oberhausen site. In addition, major projects included the completion of a new GUR plant at the Bishop, Texas, facility and the capacity expansion for Vectra at Shelby, North Carolina. The Vectra expansion was built to supply the projected long-term demand of the telecommunications industry and to develop and grow emerging markets.
Net Cash Provided by/Used in Financing Activities
Net cash from financing activities decreased to a cash outflow of $144 million in 2005 compared to a cash inflow of $2,643 million in the same period last year. The cash inflow in 2004 primarily reflected higher net proceeds from borrowings in connection with the acquisition of CAG. Major financing activities for 2005 are as follows:
• | Borrowings under the term loan facility of $1,135 million. |
• | Distribution to Series B shareholders of $804 million. |
• | Redemption and related premiums of the senior subordinated notes of $572 million and senior discount notes of $207 million. |
• | Proceeds from the issuances of common stock, net of $752 million and preferred stock, net of $233 million. |
• | Repayment of floating rate term loan, including related premium, of $354 million. |
• | Exercise of Acetex’s option to redeem its 10 7/8% senior notes for approximately $280 million. |
• | Payment of cash dividends of $13 million on our Series A common stock and $8 million on our convertible preferred stock. |
Net cash from financing activities increased to a cash inflow of $2,643 million in 2004 compared to a cash outflow of $108 million in 2003. The increased cash inflow primarily reflects higher net proceeds from borrowings in connection with the acquisition of CAG and borrowings to prefund benefit obligations. These increased cash inflows were partially offset by a $500 million return of capital to the Original Shareholders. Refer
In addition, unfavorable currency effects on the euro versus the U.S. dollar on cash and cash equivalents increased to the Liquidity section below for additional information.
Net cash used in financing activities declined by $42 million to an outflow of $108$98 million in 2003 compared2005 from $24 million in 2004. Unfavorable foreign currency effects on the euro versus the U.S. dollar on cash and cash equivalents increased to 2002. This decrease is primarily related to lower net payments of short-term borrowings of
$121$24 million offset by net payments of long-term debt in 2003 of $48 million. In addition,2004 from $6 million in 2003, Celanese AG paid a cash dividend of $25 million and repurchased 749,848 of its shares, to be held in treasury, for approximately $15 million. Net cash used in financing activities in 2002 was primarily due to net debt repayments aggregating $144 million. In addition, Celanese AG repurchased 284,798 of its shares, to be held in treasury, for approximately $6 million.2003.
Liquidity
The primary source of liquidity hashad been cash generated from operations, which included cash inflows from currency hedging activities. Historically, the primary liquidity requirements were for capital expenditures, working capital, pension contributions and investments. Our contractual obligations, commitments and debt service requirements over the next several years are significant and are substantially higher than historical amounts. Our primary source of liquidity will continue to be cash generated from operations as well as existing cash on hand. We have availability under our amended and restated credit facilities to assist, if required, in meeting our working capital needs and other contractual obligations.
We believe we will have available resources to meet both our short-term and long-term liquidity requirements, including debt service. If our cash flow from operations is insufficient to fund our debt service and other obligations, we may be forced to use other means available to us such as to increase our borrowings under our lines of credit, reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness.
In January 2005, we completed an initial public offeringsoffering of Series A common stock and received net proceeds of approximately $760$752 million after deducting underwriters’ discounts and offering expenses of $48 million. Concurrently, the Companywe received net proceeds of $233 million from the offering of its convertible preferred stock.stock and borrowed an additional $1,135 million under the amended and restated senior credit facilities. A portion of the proceeds of the share offerings were used to redeem $188 million of senior discount notes and $521 million of senior subordinated notes, which excludes early redemption premiums of $19 million and $51 million, respectively.
Subsequent to the closing We also used a portion of the initial public offering, we borrowed anproceeds from additional $1,135 millionborrowings under theour senior credit facilities which were amended and restated in January 2005; a portion of which was used to repay aour $350 million floating rate term loan, which excludes premiums of $3a $4 million early redemption premium and used $200 million was primarily used to financeof the proceeds as the primary financing for the acquisition of the Vinamul emulsion business. Additionally, the amended and restated senior credit facilities include a $242 million delayed draw term loan which is expected to be used to finance the Acetex acquisition.
On April 7, 2005, we expect to useused the remaining proceeds to pay a special cash dividend to holders of the Company'sour Series B common stock of $804 million, which was declared on March 8, 2005.million. Upon payment of the $804 million dividend, all of the shares of Celanese Series B common stock convertconverted automatically to shares of Celanese Series A common stock. In addition, we may use the available sources of liquidity to purchase the remaining outstanding shares of Celanese AG.CAG.
As a result of the offeringsdiscussed above, in January 2005 we now haveissued $240 million aggregate liquidation preference of outstanding preferred stock. Holders of the preferred stock are entitled to receive, when, as and if, declared by our board of directors, out of funds legally available therefor, cash dividends at the rate of 4.25% per annum (or $1.06 per share) of liquidation preference, payable quarterly in arrears, commencing on May 1, 2005. Dividends on the preferred stock are cumulative from the date of initial issuance. This dividend is expected to result in an annual dividend payment of approximately $10 million. Accumulated but unpaid dividends accumulate at an annual rate of 4.25%. The preferred stock is convertible, at the option of the holder, at any time into shares of our Series A common stock at a conversion rate of approximately 1.25 shares of our Series A common stock per $25.00 liquidation preference of the preferred stock. As of December 31, 2005, we paid $8 million in aggregate dividends on our preferred stock. In addition, at December 31, 2005 we had $2 million of accumulated but undeclared and unpaid dividends, which were declared on January 5, 2006 and paid on February 1, 2006.
OurIn July 2005, our board of directors currently intends to adoptadopted a policy of declaring, subject to legally available funds, a quarterly cash dividend on each share of our Series A common stock at an annual rate initially equal to approximately 0.75%1.0% of the $16.00 initial public offering price per share of our Series A common stock (or $0.12$0.16 per share) unless our board of directors in its sole discretion determines otherwise, commencing the second quarterotherwise. As of 2005.December 31, 2005, we paid $13 million in aggregate dividends on our Series A common stock. Based upon the number of oustandingoutstanding shares after the initial
public offering, the common stock dividend declared on March 8,as of December 31, 2005, and the conversion as mentioned above, the anticipated annual cash dividend payment is approximately $19$25 million. However, there is no assurance that sufficient cash or surplus will be available to pay such dividend.
As of December 31, 2004,2005, we had total debt of $3,387$3,437 million and cash and cash equivalents of $838$390 million. In connection with the acquisition of CAG, we incurred a substantial amount of debt. We entered into senior subordinated bridge loansNet debt (total debt less cash and issued $200cash equivalents) increased to $3,047 million of mandatorily redeemable preferred shares, both of which were subsequently refinanced by the senior subordinated notes and the floating rate term loan. Additionally, we issued senior discount notes and additional senior subordinated notesfrom $2,549 million as well as entered into senior credit facilities.
In connection with the CAG acquisition, the Company cancelled its committed commercial paper backup facilities and revolving credit facilities. Additionally, we agreed to pre-fund $463 million of certain pension obligations, which is expected to eliminate the need for future funding for seven to ten years. As of December 31, 2004 $409 million was pre-funded,primarily due to a decrease in cash and in February 2005 we contributed ancash equivalents of $448 million. We largely used available cash to finance the Acetex acquisition, the redemption of Acetex senior notes and the purchase of the additional $42 million to the non-qualified pension plan's rabbi trusts. We terminated our $120 million trade receivable securitization program in February 2005, which was unavailable since the CAG acquisition and had no outstanding sales of receivables as of December 31, 2004.shares from two minority shareholders.
During the nine months ended December 31, 2004, $409 million was contributed to the pension plans. In March 2005, we repaid approximately $235contributed an additional $63 million of CAG's variable rate debt that was originally scheduled to mature in 2005, 2008 and 2009.the non-qualified pension plan's rabbi trusts.
We were initially capitalized by equity contributions totaling $641 million from the Original Shareholders. On a stand alone basis, Celanese Corporation and Crystal US Holdings 3 LLC ("(‘‘Crystal LLC"LLC’’), the issuer of the senior discount notes, have no material assets other than the stock of their subsidiaries, that they own, and no independent external operations of their own apart from the financing. As such, Celanese Corporation and Crystal LLC generally will depend on the cash flow of their subsidiaries to meet their obligations including their obligations under the preferred stock, the senior discount notes, the senior subordinated notes, the term loans and any revolving credit borrowings and guarantees.
In March 2005, the Company received $75 million for an early contractual settlement of receivables related to the 2000 sale of CAG's 50% interest in the Vinnolit Kunstoff GmbH venture. The Company has receivables related to this settlement as of December 31, 2004, which was recorded in the allocation of the purchase price of CAG.
Domination Agreement. At the Celanese AGCAG annual shareholders'shareholders’ meeting on June 15, 2004, Celanese AGCAG shareholders approved payment of a dividend on the CAG Shares for the fiscal year ended December 31, 2003 of €0.12 per share. For the nine month fiscal year ended on September 30, 2004, Celanese AG willCAG was not be able to pay a dividend to its shareholders due to losses incurred in the Celanese AGCAG statutory accounts. Accordingly, in the near term, Celanese Corporation, Crystal LLC and BCP Crystal US Holdings Corp ("(‘‘BCP Crystal"Crystal’’), which issued the senior subordinated notes and term loans, will use existing cash and borrowings from their subsidiaries, subject to various restrictions, including restrictions imposed by the senior credit facilities and indentures and by relevant provisions of German and other applicable laws, to make interest payments. If the Domination Agreement ceases to be operative, the ability of Celanese Corporation and BCP Crystal to meet their obligations will be materially and adversely affected.
The Domination Agreement was approved at the Celanese AGCAG extraordinary shareholders'shareholders’ meeting on July 31, 2004. The Domination Agreement between Celanese AGCAG and the Purchaser became effective on
October 1, 2004. When the Domination Agreement became effective, the Purchaser was obligated to offer to acquire all outstanding CAG Shares from the minority shareholders of Celanese AGCAG in return for payment of fair cash compensation. This offer will continue until two months following the date on which the decision on the last motion in award proceedings (Spruchverfahren) as described in "Legal‘‘Legal Proceedings—Shareholder Litigation"Litigation’’, has been disposed of and has been published. These award proceedings were dismissed in 2005; however, the dismissal is still subject to appeal. The amount of this fair cash compensation has been determined to be €41.92 per share, plus interest, in accordance with applicable German law. Any minority shareholder who elects not to sell their shares to the Purchaser will
be entitled to remain a shareholder of Celanese AGCAG and to receive from the Purchaser a gross guaranteed fixed annual payment on their shares of €3.27 per CAG Share less certain corporate taxes in lieu of any future dividend. Taking into account the circumstances and the tax rates at the time of entering into the Domination Agreement, the net guaranteed fixed annual payment is €2.89 per share for a full fiscal year. Based upon the number of CAG Shares held by the minority shareholders as of December 31, 2004,2005, a net guaranteed fixed annual payment of €23$4 million is expected.expected in 2006. In addition, pursuant to the settlement agreement entered into on March 6, 2006 with eleven minority shareholders who had filed lawsuits in the Frankfurt District Court (Landgericht), the fixed annual payment for the 2005/2006 fiscal year will also be paid on this date. This will amount to an additional net aggregate amount of approximately $2 million. The net guaranteed fixed annual payment may, depending on applicable corporate tax rates, in the future be higher, lower or the same as €2.89. If
On March 10, 2006, the Purchaser acquires all CAG Shares outstanding asset the cash compensation in relation to the transfer of December 31, 2004,shares held by the minority shareholders at €62.22 per share. The total amount of funds necessary to purchase such remaining outstanding shares wouldunder the current offer of €62.22 per share is approximately €58 million. The Company is currently evaluating the financial impact of this offer on its financial position, results of operations and cash flows, but does not believe that the impact will be at least €334 million plus accrued interest from October 2, 2004.material.
While the Domination Agreement is operative, the Purchaser is required to compensate Celanese AGCAG for any statutory annual loss incurred by Celanese AG,CAG, the dominated entity at the end of its fiscal year when the loss was incurred. If the Purchaser were obligated to make cash payments to Celanese AGCAG to cover an annual loss, the Purchaser may not have sufficient funds to pay interest when due and, unless the Purchaser is able to obtain funds from a source other than annual profits of Celanese AG,CAG, the Purchaser may not be able to satisfy its obligation to fund such shortfall. The Domination Agreement cannot be terminated by the Purchaser in the ordinary course until September 30, 2009.
Our subsidiaries, BCP Caylux Holdings Luxembourg S.C.A. and BCP Crystal, have each agreed to provide the Purchaser with financing to strengthen the Purchaser'sPurchaser’s ability to fulfill its obligations under, or in connection with, the Domination Agreement and to ensure that the Purchaser will perform all of its obligations under, or in connection with, the Domination Agreement when such obligations become due, including, without limitation, the obligations to make a guaranteed fixed annual payment to the outstanding minority shareholders, to offer to acquire all outstanding CAG Shares from the minority shareholders in return for payment of fair cash consideration and to compensate Celanese AGCAG for any statutory annual loss incurred by Celanese AGCAG during the term of the Domination Agreement. If BCP Caylux and/or BCP Crystal are obligated to make payments under such guarantees or other security to the Purchaser and/or the minority shareholders, we may not have sufficient funds for payments on our indebtedness when due.
In the first quarter of 2005, the Companywe paid $10 million to affiliates of the Blackstone Group related to an advisor monitoring agreement. This agreement was terminated concurrent with the initial public offering and resulted in an additional $35 million payment.
Contractual Debt Obligations. The following table sets forth our fixed contractual debt obligations as of December 31, 2004,2005, on a pro forma basis, after giving effect to additional borrowings under the term loan facility of $1,135 million and repayments of $521 million of the senior subordinated notes, $188 million of the senior discount notes and the $350 million floating rate term loan which excludes premiums of $51 million, $19 million and $3 million, respectively.basis.
Fixed Contractual Debt Obligations (1) | Total | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Senior Credit Facilities: | ||||||||||||||||||||||
Term Loans Facility | 1,759 | 17 | 34 | 34 | 1,674 | |||||||||||||||||
Senior Subordinated Notes (2) | 973 | — | — | — | 973 | |||||||||||||||||
Senior Discount Notes (3) | 554 | — | — | — | 554 | |||||||||||||||||
Assumed Debt (4) | 385 | 139 | 45 | 16 | 185 | |||||||||||||||||
Total Fixed Contractual Debt Obligations | 3,671 | 156 | 79 | 50 | 3,386 | |||||||||||||||||
Fixed Contractual Debt Obligations | Total | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Term Loans Facility | 1,708 | 17 | 33 | 33 | 1,625 | |||||||||||||||||
Senior Subordinated Notes (1) | 950 | — | — | — | 950 | |||||||||||||||||
Senior Discount Notes (2) | 554 | — | — | — | 554 | |||||||||||||||||
Other Debt (3) | 399 | 138 | 18 | 35 | 208 | |||||||||||||||||
Total Fixed Contractual Debt Obligations | 3,611 | 155 | 51 | 68 | 3,337 | |||||||||||||||||
(1) |
(2) |
Does not include a $2 million reduction due to purchase |
Senior Credit Facilities. As of December 31, 2004,2005, the senior credit facilities of $1,232$2,536 million consist of a term loan facility of $1,708 million, a revolving credit facility of $600 million and a credit-linked revolving facility.
The term loan facility consists of commitments of $454 million and €125 million, both maturing in 2011. As of December 31, 2004, we borrowed $624 million (including €125 million) under the term loan facility.
The revolving credit facility, through a syndication of banks, provides for borrowings of up to $380 million, including the availability of letters of credit in U.S. dollars and euros and for borrowings on same-day notice. As of December 31, 2004, there were no amounts outstanding under the revolving credit facility, which matures in 2009.$228 million.
Subsequent to the consummation of the initial public offering in January 2005, we entered into amended and restated senior credit facilities.facilities which increased the term facility. The terms of the amended and restated senior credit facilities are substantially similar to the terms of our existingimmediately previous senior credit facilities. Under the amended and restated facilitiesAs of December 31, 2005, the term loan facility increased to $1,759had a balance of $1,708 million (including €275 million). approximately €273 million of euro denominated debt), which matures in 2011.
In addition, there iswe have a new $242 million delayed draw facility which when drawn will be added to the existing term loan facility. We expect to use this delayed draw facility to finance the acquisition of Acetex.
Also in January 2005, the revolving credit facility was increased from $380 million to $600 million under the amended and restated senior credit facilities. The $228 million credit-linked revolving facility, which matures in 2009 and includes borrowing capacity available for letters of credit. As of December 31, 2004,2005, there were $207$199 million of letters of credit issued under the credit-linked revolving facility. As of December 31, 2004, $401 million remained available for borrowing under the revolving credit facilities (taking into account letters of credit issued under the revolving credit facilities).
Substantially all of the assets of Celanese Holdings LLC ("(‘‘Celanese Holdings"Holdings’’), the direct parent of BCP Crystal, and, subject to certain exceptions, substantially all of its existing and future U.S. subsidiaries, referred to as U.S. Guarantors, secure these facilities. The borrowings under the senior credit facilities bear interest at a rate equal to an applicable margin plus, at the borrower'sborrower’s option, either a base rate or a LIBOR rate. The applicable margin for borrowing under the base rate option is 1.50% and for the LIBOR option, 2.50% (in each case, subject to a step-down based on a performance test).
In the first quarter of 2005, the revolving credit facility was increased from $380 million to $600 million under the amended and restated senior credit facilities. As of December 31, 2005, there were no borrowings under the revolving credit facility and $64 million of letters of credit had been issued under the revolving credit facility leaving $536 million of availability.
In November of 2005, we entered into an amendment of the Amended and Restated Credit Agreement decreasing the margin over LIBOR on approximately $1,386 million of the U.S. dollar denominated portion of the Term Loans from 2.25% to 2.00%. In addition, a further reduction of the interest rate to LIBOR plus 1.75% is allowed if certain conditions are met.
The senior credit facilities are subject to prepayment requirements and contain covenants, defaults and other provisions. The senior credit facilities require BCP Crystal to prepay outstanding term loans, subject to certain exceptions, with:
-— 75% (such percentage will be reduced to 50% if BCP Crystal'sCrystal’s leverage ratio is less than 3.00 to 1.00 for any fiscal year ending on or after December 31, 2005) of BCP Crystal'sCrystal’s excess cash flow;
-— 100% of the net cash proceeds of all non-ordinary course asset sales and casualty and condemnation events, unless BCP Crystal reinvests or contracts to reinvest those proceeds in assets to be used in BCP Crystal'sCrystal’s business or to make certain other permitted investments within 12 months, subject to certain limitations;
-— 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the senior credit facilities, subject to certain exceptions; and
-— 50% of the net cash proceeds of issuances of equity of Celanese Holdings, subject to certain exceptions.
BCP Crystal may voluntarily repay outstanding loans under the senior credit facility at any time without premium or penalty, other than customary "breakage"‘‘breakage’’ costs with respect to LIBOR loans.
In connection with the borrowing by BCP Crystal under the term loan portion of the senior credit facilities, BCP Crystal and CAC have entered into an intercompany loan agreement whereby BCP Crystal has agreed to lend the proceeds from any borrowings under its term loan facility to CAC. The intercompany loan agreement contains the same amortization provisions as the senior credit facilities. The interest rate with respect to the loans made under the intercompany loan agreement is the same as the
interest rate with respect to the loans under BCP Crystal'sCrystal’s term loan facility plus three basis points. BCP Crystal intends to service the indebtedness under its term loan facility with the proceeds of payments made to it by CAC under the intercompany loan agreement.
Floating Rate Term Loan. The $350 million floating rate term loan matures in 2011. The borrowings under the floating rate term loan bear interest at a rate equal to an applicable margin plus, at BCP Crystal's option, either a base rate or a LIBOR rate. Prior to the completion of the Restructuring, the applicable margin for borrowings under the base rate option was 3.25% and for the LIBOR option, 4.25%. Subsequent to the completion of the Restructuring, the applicable margin for borrowings under the base rate option is 2.50% and for the LIBOR option, 3.50%. The floating rate term loan accrues interest. We used a portion of new borrowings under the amended and restated senior credit facilities to repay the floating rate term loan and $3 million of associated premium in January 2005.
Senior Subordinated Notes. The senior subordinated notes consist of $1,225 million of 9 5/8% Senior Subordinated Notes due 2014 and €200 million of 10 3/8% Senior Subordinated Notes due 2014. From the completion of the Restructuring, all of BCP Crystal's U.S. domestic, wholly owned subsidiaries that guarantee BCP Crystal's obligations under the senior credit facilities guarantee the senior subordinated notes on an unsecured senior subordinated basis. In February 2005, we used approximately $521 million of the net proceeds of the offering of our Series A common stock to redeem a portion of the senior subordinated notes and $51 million to pay the premium associated with the redemption. As of December 31, 2005, the senior subordinated notes, excluding $3 million of premiums, consist of $797 million of 9 5/8% Senior Subordinated Notes due 2014 and $153 million (€130 million) of 10 3/8% Senior Subordinated Notes due 2014. All of BCP Crystal’s obligations under the senior credit facilities guarantee the senior subordinated notes on an unsecured senior subordinated basis.
Senior Discount Notes. In September 2004, Crystal LLC and Crystal US Sub 3 Corp., a subsidiary of Crystal LLC, issued $853 million aggregate principal amount at maturity of their senior discount notes due 2014 consisting of $163 million principal amount at maturity of their 10% Series A senior discount notesSenior Discount Notes due 2014 and $690 million principal amount at maturity of their 10 1/2% Series B Senior Discount Notes due 2014 (collectively, the "senior‘‘senior discount notes"notes’’). The gross proceeds of the offering were $513 million. Approximately $500 million of the proceeds were distributed to the Company'sour Original Shareholders, with the remaining proceeds used to pay fees associated with the refinancing. Until October 1, 2009, interest on the senior discount notes will accrue in the form of an increase in the accreted value of such notes. Cash interest on the senior discount notes will accrue commencing on October 1, 2009 and be payable semiannually in arrears on April 1 and October 1. In February 2005, we used approximately $37 million of the net proceeds of the offering of our Series A common stock to redeem a portion of the Series A senior discount notes and $151 million to redeem a portion of the Series B senior discount notes and $19 million to pay the premium associated with such redemption.
Assumed Debt. As a resultof December 31, 2005, there were $554 million aggregate principal amount at maturity outstanding, consisting of $106 million principal amount at maturity of the acquisition10% Series A Senior Discount Notes due 2014 and $448 million principal amount at maturity of CAG, the Company prepaid, in April 2004, $175101/2% Series B Senior Discount Notes due 2014. At December 31, 2005, $306 million of debt scheduled to mature in 2005 and 2008$73 million were outstanding under the 10.5% and in September 2004, prepaid approximately $60 million of additional debt previously scheduled to mature in 2009. The outstanding assumed10% Senior Discount Notes, respectively.
Other Debt. Other debt of $383$399 million, which includesdoes not include a $2 million fair value reduction underdue to purchase accounting, is primarily made up of fixed rate pollution control and industrial revenue bonds, short-term borrowings from affiliated companies and capital lease obligations.
Covenants. The indentures governing the senior subordinated notes and the senior discount notes limit the ability of the issuers of such notes and the ability of their restricted subsidiaries to:
• | incur additional indebtedness or issue preferred stock; |
• | pay dividends on or make other distributions or repurchase the respective |
• | make certain investments; |
• | enter into certain transactions with affiliates; |
• | limit dividends or other payments by BCP |
• | create liens or other pari passu or subordinated indebtedness without securing the respective notes; |
• | designate subsidiaries as unrestricted subsidiaries; and |
• | sell certain assets or merge with or into other companies. |
Subject to certain exceptions, the indentures governing the senior subordinated notes and the senior discount notes permit the issuers of the notes and their restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
The senior credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of Celanese Holdings and its subsidiaries'subsidiaries’ ability, to:
• | sell assets; |
• | incur additional indebtedness or issue preferred stock; |
• | repay other indebtedness (including the notes); |
• | pay dividends and distributions or repurchase their capital stock; |
• | create liens on assets; |
• | make investments, loans guarantees or advances; |
• | make certain acquisitions; |
• | engage in mergers or consolidations; |
• | enter into sale and leaseback transactions; |
• | engage in certain transactions with affiliates; |
• | amend certain material agreements governing BCP |
• | change the business conducted by Celanese Holdings and its subsidiaries; and |
• | enter into hedging agreements that restrict dividends from subsidiaries. |
In addition, the senior credit facilities require BCP Crystal to maintain the following financial covenants: a maximum total leverage ratio, a maximum bank debt leverage ratio, a minimum interest coverage ratio and maximum capital expenditures limitation.
A breach of covenants of the senior credit facilities as of December 31, 20042005 that are tied to ratios based on adjusted earnings before interest, taxes, depreciation and amortization (‘‘Adjusted EBITDA,’’) as defined in our credit agreements, could result in a default under the senior credit facilities and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the indentures governing the senior subordinated notes and the senior discount notes. Additionally, under the senior credit facilities, the floating rate term loan and the indentures governing the senior subordinated notes and the senior discount notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA. As of December 31, 2004,2005, we were in compliance with these covenants. The maximum consolidated net bank debt to Adjusted EBITDA ratio, previously required under the senior credit facilities, was eliminated when we amended the facilities in January 2005.
Covenant levels and ratios for the four quarters ended December 31, 20042005 are as follows:
Covenant Level | December 31, 2004 Ratios | |||||||||
Senior credit facilities(1) | ||||||||||
Minimum Adjusted EBITDA to cash interest ratio | 1.7 | x | 4.2 | x | ||||||
Maximum consolidated net debt to Adjusted EBITDA ratio | 5.5 | x | 2.5 | x | ||||||
Senior subordinated notes indenture(2) | ||||||||||
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions | 2.0 | x | 3.4 | x | ||||||
Discount notes indenture(3) | ||||||||||
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions | 2.0 | x | 2.8 | x | ||||||
Covenant Level | December 31, 2005 Ratios | |||||||||
Senior credit facilities(1) | ||||||||||
Minimum Adjusted EBITDA to cash interest ratio | 1.7x | 5.8x | ||||||||
Maximum consolidated net debt to Adjusted EBITDA ratio | 5.5x | 2.4x | ||||||||
Senior subordinated notes indenture(2) | ||||||||||
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions | 2.0x | 5.4x | ||||||||
Discount notes indenture(3) | ||||||||||
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions | 2.0x | 4.6x | ||||||||
(1) | The senior credit facilities require BCP Crystal to maintain an Adjusted EBITDA to cash interest ratio starting at a minimum of 1.7x for the period April 1, 2004 to December 31, 2005, 1.8x for the period January 1, 2006 to December 31, 2006, 1.85x for the period January 1, 2007 to December 31, 2007 and 2.0x thereafter. Failure to satisfy these ratio requirements would constitute a default under the senior credit facilities. If lenders under the senior credit facilities failed to waive any such default, repayment obligations under the senior credit facilities could be accelerated, which would also constitute a default under the indenture. |
(2) | BCP |
(3) | Crystal |
Adjusted EBITDA is used to determine compliance with manyContractual Obligations. The following table sets forth our fixed contractual cash obligations as of the covenants contained in the indentures governing our outstanding notes and in the senior credit facilities. Adjusted EBITDA and all of its component elements are defined in our debt agreements and include non-U.S. GAAP measures and terms that are the same as U.S. GAAP measures which are not determined on the same basis as U.S. GAAP. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items, non-cash items and other adjustments permitted in calculating covenant compliance under our indentures and senior credit facilities, as shown in the table below. We believe that the disclosure of the calculation of Adjusted EBITDA provides information that is useful to an investor's understanding of our liquidity and financial flexibility.
Adjusted EBITDA as calculated under our senior credit facilities and the indentures for the senior subordinated notes and the senior discount notes for the four quarters ended December 31, 2004 is as follows:2005.
Senior Credit Facilities Senior Subordinated Notes | Senior Discount Notes | |||||||||
(unaudited)(in$millions) | ||||||||||
Net loss of Celanese Corporation | (175 | ) | (175 | ) | ||||||
Net loss of entities not included in covenant calculation(1) | 66 | 51 | ||||||||
Net loss for covenant purposes | (109 | ) | (124 | ) | ||||||
Earnings from discontinued operations | (22 | ) | (22 | ) | ||||||
Cumulative effect of changes in accounting principles | — | — | ||||||||
Interest expense net: | ||||||||||
Interest expense | 245 | 260 | ||||||||
Interest income | (31 | ) | (31 | ) | ||||||
Cash interest income used by captive insurance subsidiaries to fund operations | 10 | 10 | ||||||||
Taxes: | ||||||||||
Income tax provision | 87 | 87 | ||||||||
Franchise taxes | 2 | 2 | ||||||||
Depreciation and amortization | 256 | 256 | ||||||||
Unusual items: | ||||||||||
Special charges(2) | ||||||||||
Insurance recoveries associated with plumbing cases | (1 | ) | (1 | ) | ||||||
Restructuring, impairment and other special charges, net | 120 | 120 | ||||||||
Severance and other restructuring charges not included in special charges | 31 | 31 | ||||||||
Unusual and non-recurring items(3) | 103 | 103 | ||||||||
Other non-cash charges (income): | ||||||||||
Non-cash charges(4) | 74 | 74 | ||||||||
Equity in net earnings of affiliates in excess of cash dividends received | (10 | ) | (10 | ) | ||||||
Excess of cash dividends paid to minority shareholders in subsidiaries over the minority interest income of these subsidiaries | 7 | 7 | ||||||||
Other adjustments(5): | ||||||||||
Advisor monitoring fee | 10 | 10 | ||||||||
Net gain on disposition of assets | (2 | ) | (2 | ) | ||||||
Pro forma cost savings(6) | 32 | 32 | ||||||||
Adjusted EBITDA | 802 | 802 | ||||||||
Fixed Contractual Cash Obligations | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Total Debt (1) | 3,437 | 155 | 51 | 68 | 3,163 | |||||||||||||||||
Of which Capital Lease Obligations and Other Secured Borrowings | 28 | 3 | 5 | 4 | 16 | |||||||||||||||||
Operating Leases | 205 | 60 | 64 | 31 | 50 | |||||||||||||||||
Unconditional Purchase Obligations | 1,312 | 229 | 186 | 159 | 738 | |||||||||||||||||
Other Contractual Obligations | 602 | 380 | 57 | 47 | 118 | |||||||||||||||||
Fixed Contractual Cash Obligations | 5,556 | 824 | 358 | 305 | 4,069 | |||||||||||||||||
(1) | Includes |
Consolidated net debt, a required measure for covenant compliance purposes and its components are defined in our credit agreements as total indebtedness, consisting of borrowed money and the deferred purchase price of property or services plus net cash for receivables financing less unrestricted cash and cash equivalents of our subsidiary Celanese Holdings LLC and its subsidiaries on a consolidated basis. Consolidated net debt is calculated as follows as of December 31, 2004:
Contractual Obligations. The following table sets forth our fixed contractual cash obligations as of December 31, 2004.
Fixed Contractual Cash Obligations | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Total Debt (1) | 3,389 | 144 | 57 | 28 | 3,160 | |||||||||||||||||
of which Capital Lease Obligations and Other Secured Borrowings | 49 | 9 | 35 | 3 | 2 | |||||||||||||||||
Operating Leases | 238 | 57 | 82 | 41 | 58 | |||||||||||||||||
Unconditional Purchase Obligations | 967 | 155 | 177 | 139 | 496 | |||||||||||||||||
Other Contractual Obligations | 185 | 183 | 2 | — | — | |||||||||||||||||
Fixed Contractual Cash Obligations | 4,779 | 539 | 318 | 208 | 3,714 | |||||||||||||||||
In the first quarter of 2005, the Companywe paid $10 million to affiliates of the Blackstone Group related to an advisor monitoring agreement. This agreement was terminated concurrent with the initial public offering and resulted in an additional $35 million termination payment. Based upon the number of CAG Shares held by the minority shareholders as of December 31, 2004,2005, a net guaranteed fixed annual payment of €23$4 million is expected.expected in 2006. In addition, pursuant to the settlement agreement entered into on March 6, 2006 with eleven minority shareholders who had filed lawsuits in the Frankfurt District Court (Landgericht), the fixed annual payment for the 2005/2006 fiscal year will also be paid on this date. This will amount to an additional net aggregate amount of approximately $2 million. These amounts are excluded from the above table.
Unconditional Purchase Obligations primarily include take or pay contracts and fixed price forward contracts. The Company doesWe do not expect to incur any material losses under these contractual arrangements. In addition, these contracts may include variable price components.
Other Contractual Obligations primarily includes committed capital spending and fines associated with the U.S. antitrust settlement described in Note 2725 to the Consolidated Financial Statements.consolidated financial statements. Included in Other Contractual Obligations is a €99 million ($135117 million) fine from the European Commission
related to antitrust matters in the sorbates industry, which is pending an appeal. The Company isWe are indemnified by a third party for 80% of the expenses relating to these matters, which is not reflected in the amount above.
At December 31, 2004, the Company has2005, we have contractual guarantees and commitments as follows:
Expiration per period | ||||||||||||||||||||||
Contractual Guarantees and Commitments | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Financial Guarantees | 55 | 7 | 14 | 15 | 19 | |||||||||||||||||
Standby Letters of Credit | 212 | 212 | — | — | — | |||||||||||||||||
Contractual Guarantees and Commitments | 267 | 219 | 14 | 15 | 19 | |||||||||||||||||
Expiration per period | ||||||||||||||||||||||
Contractual Guarantees and Commitments | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||||
(in $ millions) | ||||||||||||||||||||||
Financial Guarantees | 49 | 7 | 15 | 16 | 11 | |||||||||||||||||
Standby Letters of Credit | 263 | 263 | — | — | — | |||||||||||||||||
Contractual Guarantees and Commitments | 312 | 270 | 15 | 16 | 11 | |||||||||||||||||
The Company isWe are secondarily liable under a lease agreement pursuant to which the Company haswe have assigned a direct obligation to a third party. The lease assumed by the third party expires on April 30, 2012. The lease liability for the period from January 1, 20052006 to April 30, 2012 is estimated to be approximately $55$49 million.
Standby letters of credit of $212$263 million at December 31, 20042005 are irrevocable obligations of an issuing bank that ensure payment to third parties in the event that certain Successor subsidiaries fail to perform in accordance with specified contractual obligations. The likelihood is remote that material payments will be required under these agreements. The stand-by letters of credit include $207$199 million issued under the credit-linked revolving facility of which approximately $28$25 million relates to obligations associated with the sorbates antitrust matters as described in the "Other‘‘Other Contractual Obligations"Obligations’’ above.
For additional commitments and contingences,contingencies, see Note 2725 to the Consolidated Financial Statements.consolidated financial statements.
The Company expectsOther Obligations
We expect to continue to incur costs for the following significant obligations. Although, the Companywe cannot predict with certainty the annual spending for these matters, such matters will affect our future cash flows of the Company.flows.
Successor | Predecessor | Successor | ||||||||||||
Other Obligations | Spending for Nine Months Ended December 31, 2004 | Spending for Three Months Ended March 31, 2004 | 2005 Projected Spending | |||||||||||
(in $ millions) | ||||||||||||||
Environmental Matters | 66 | 22 | 92 | |||||||||||
Pension and Other Benefits | 487 | 48 | 77 | |||||||||||
Other Obligations | 553 | 70 | 169 | |||||||||||
Successor | Predecessor | Successor | ||||||||||||||||
Other Obligations | Spending for the Year Ended December 31, 2005 | Spending for the Nine Months Ended December 31, 2004 | Spending for the Three Months Ended March 31, 2004 | 2006 Projected Spending | ||||||||||||||
Environmental Matters | 84 | 66 | 22 | 95 | ||||||||||||||
Pension and Other Benefits | 111 | 487 | 48 | 96 | ||||||||||||||
Other Obligations | 195 | 553 | 70 | 191 | ||||||||||||||
Environmental Matters
For the year ended December 31, 2005 and the nine months ended December 31, 2004, the Successor'sSuccessor’s worldwide expenditures, including expenditures for legal compliance, internal environmental initiatives and remediation of active, orphan, divested and U.S. Superfund sites were $84 million and $66 million.million, respectively. The Predecessor'sPredecessor’s worldwide expenditures for the three months ended March 31, 2004 and the yearsyear ended December 31, 2003 and 2002 were $22 million $80 million and $83$80 million, respectively. The Successor'sSuccessor’s capital project related environmental expenditures for the year ended December 31, 2005, the nine months ended December 31, 2004, and the Predecessor'sPredecessor’s for the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, and 2002, included in worldwide expenditures, were $8 million, $6 million, $2 million $10 million and $4$10 million, respectively. Environmental reserves for remediation matters were $143$124 million and $159$143 million as of December 31, 2005 and 2004, and December 31, 2003, respectively. See Notes 14 and 15. As of December 31, 2004,respectively, which represents our best estimate. (See Note 18 to the estimated range for remediation costs is between $100 million and $143 million, with the best estimate of $143 million.consolidated financial statements)
It is anticipated that stringent environmental regulations will continue to be imposed on the chemical industry in general. Management cannot predict with certainty future environmental expenditures, especially expenditures beyond 2005.2006. Due to new air regulations in the U.S., management expects that
there will be a temporary increase in compliance costs that will total approximately $30$35 million to $45 million through 2007. An additional $50 million may be needed depending upon the outcome of a challenge in U.S. federal court related to key portions of the regulation. In addition, a recent European Union directive requires a trading system for carbon dioxide emissions to be in place by January 1, 2005. Accordingly, Emission Trading Systems will directly affect the power plants at the Kelsterbach and Oberhausen sites in Germany and the Lanaken site in Belgium, as well as power plants operated by InfraServ entities on sites at which we operate. The Company and the InfraServ entities may be required to purchase carbon dioxide credits, which could result in increased operating costs, or may be required to develop additional cost-effective methods to reduce carbon dioxide emissions further, which could result in increased capital expenditures. Additionally, the new regulation indirectly affects our other operations in the European Union, which may experience higher energy costs from third party providers. We have not yet determined the impact of this legislation on our operating costs.
Due to itsour industrial history, the Company haswe have the obligation to remediate specific areas on itsour active sites as well as on divested, orphan or U.S. Superfund sites. In addition, as part of the demerger agreement with Hoechst, a specified proportion of the responsibility for environmental liabilities from a number of pre-demerger divestitures was transferred to the Company.us. Management has provided for such obligations when the event of loss is probable and reasonably estimable. Management believes that the environmental costs will not have a material adverse effect on theour financial position, of the Company, but they may have a material adverse effect on the results of operations or cash flows in any given accounting period. See Note 19(See Notes 18 and 2725 to the Consolidated Financial Statements.consolidated financial statements)
Pension and Other Benefits
The funding policy for pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. For the year ended December 31, 2005, the nine months ended December 31, 2004 and the three months ended March 31, 2004, and for the year ended December 31, 2003, pension contributions to the U.S. qualified defined benefit pension plan amounted to $0 million, $300 million $33 million and $130$33 million, respectively. Contributions to the German pension plans for the year ended December 31, 2005 and the nine months ended December 31, 2004 were $5 million and $105 million.million, respectively. Also for the year ended December 31, 2005, the nine months ended December 31, 2004 and the three months ended March 31, 2004, and for the year ended December 31, 2003, payments to other non-qualified plans (including Rest of the World) totaled $39 million, $29 million $6 million and $24$6 million, respectively.
Spending by the CompanyOur spending associated with other benefit plans, primarily retiree medical, defined contribution and long-term disability, amounted to $67 million, $53 million and $9 million and $65 million for the year ended December 31, 2005, the nine months ended December 31, 2004 and the three months ended March 31, 2004, and for the year ended December 31, 2003, respectively. See(See Note 17 to the Consolidated Financial Statements.consolidated financial statements).
In 2004, Celanese amended its long-term disability plan to align the benefit levels with the retiree medical plan. As a result of this change, the employee contribution for the long-term disability medical coverage increased substantially for current participants in the disability plan. Subsequent to the adoption of the change, enrollment in the plan has been trending downward, with 20% of the participants declining coverage. Accordingly, the Company reduced the disability accrual by $9 million at December 31, 2005 as a result of the lower enrollment experience. In addition, medical claims assumptions were lowered to reflect actual plan experience and the percentage of long-term disability medical payments paid for by Medicare. This change lowered the long-term disability accrual by an additional $9 million.
Other Matters
Plumbing Actions and Sorbates Litigation
The Company isWe are involved in a number of legal proceedings and claims incidental to the normal conduct of itsour business. In February 2005, we settled with an insurance carrier and received cash proceeds of $44 million in March 2005 and in December 2005, we received $30 million in additional settlements. For the nine months ended December 31, 2004 there were no net cash inflows of zero in connection with the plumbing actions and sorbates litigation. For the three months ended March 31, 2004 and for the year ended December 31, 2003, there were net cash inflows of approximately zero$0 million and $110 million in connection with the plumbing actions and sorbates litigation. As of December 31, 2005 and 2004, there were reserves of
$197 million and $218 million, respectively, for these matters. In addition, the Company hadwe have receivables from insurance companies and Hoechst in connection with the plumbing and sorbates matters of $125 million and $191 million as of December 31, 2004.2005 and 2004, respectively.
Although it is impossible at this time to determine with certainty the ultimate outcome of these matters, management believes, based on the advice of legal counsel, that adequate provisions have been made and that the ultimate outcome will not have a material adverse effect on theour financial position, of the Company, but could have a material adverse effect on the results of operations or cash flows in any given accounting period. See(See Note 2725 to the Consolidated Financial Statements.
Capital Expenditures
The Company's capital expenditures were $210 million for the calendar year 2004. Capital expenditures primarily related to a new Ticona research and administrative facility in Florence, Kentucky,
the expansion of production facilities for polyacetal in Bishop, Texas and GUR in Oberhausen, Germany, major replacements of equipment, capacity expansions, major investments to reduce future operating costs, environmental, health and safety initiatives and the integration of a company-wide SAP platform. Capital expenditures remained below depreciation levels as management continued to make selective capital investments to enhance the market positions of its products.
Capital expenditures were financed principally with cash from operations. Spending for 2005 is expected to be between $210 million to $230 million. At December 31, 2004, there were approximately $40 million of outstanding commitments related to capital projects, which are included within the fixed contractual cash obligations table above.consolidated financial statements).
Off-Balance Sheet Arrangements
We have not entered into any material off-balance arrangements.
Recent Accounting PronouncementsMarket Risks
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, amendment to ARB No. 43 Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs,Please see ‘‘Quantitative and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is in the process of assessing the impact of SFAS No. 151 on its future results of operations and financial position.
In December 2004, the FASB revised SFAS No. 123, Accounting for Stock Based Compensation, which requires that the cost from all share-based payment transactions be recognized in the financial statements. SFAS No. 123 (revised) is effective for the first interim or annual period beginning after June 15, 2005. The Company is currently evaluating the potential impact of SFAS No. 123 (revised), although it is anticipated that the adoption will have a negative impact on results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisionsQualitative Disclosure about Market Risk’’ under Item 7A of this statement shall be applied prospectively. The Company is currently evaluating the potential impact of this statement.
In October 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. Three of the more significant provisions of the Act relate to a one-time opportunity to repatriate foreign earnings at a reduced rate, manufacturing benefitsForm 10-K for qualified production activity income and new requirements with respect to deferred compensation plans. The Company has not yet determined the impact, if any, of this Act on its future results of operations or cash flows. Additionally, under new Section 409A of the Internal Revenue Code, created in connection with the Act, the U.S. Treasury Department is directed to issue regulations providing guidance and provide a limited period during which deferred compensation plans may be amended to comply with the requirements of Section 409A. When the regulations are issued, the Company may be required to make modifications to certain compensation plans to comply with Section 409A.
additional information about our Market RisksRisks.
We are exposed to market risk through commercial and financial operations. Our market risk consists principally of exposure to currency exchange rates, interest rates and commodity prices. The Predecessor had in place policies of hedging against changes in currency exchange rates, interest rates and commodity prices as described below. We adopted the Predecessor's written policies regarding the use of derivative financial instruments. Contracts to hedge exposures are accounted for under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 148, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. See Note 26 to the Consolidated Financial Statements.
Foreign Exchange Risk Management
We and the Predecessor have receivables and payables denominated in currencies other than the functional currencies of the various subsidiaries, which create foreign exchange risk. For the purposes of this document, the Predecessor's reporting currency is the U.S. dollar, the reporting currency of Celanese AG continues to be the euro. The U.S. dollar, the euro, Mexican peso, Japanese yen, British pound sterling, and Canadian dollar are the most significant sources of currency risk. Accordingly, we enter into foreign currency forwards and swaps to minimize our exposure to foreign currency fluctuations. The foreign currency contracts are designated for recognized assets and liabilities and forecasted transactions. The terms of these contracts are generally under one year. Our centralized hedging strategy states that foreign currency denominated receivables or liabilities recorded by the operating entities will be internally hedged, only the remaining net foreign exchange position will then be hedged externally with banks. As a result, foreign currency forward contracts relating to this centralized strategy did not meet the criteria of SFAS No. 133 to qualify for hedge accounting. Net foreign currency transaction gains or losses are recognized on the underlying transactions, which are offset by losses and gains related to foreign currency forward contracts.
On June 16, 2004, as part of its currency risk management, the Company entered into a currency swap with certain financial institutions. Under the terms of the swap arrangement, the Company will pay approximately €13 million in interest and receive approximately $16 million in interest on each June 15 and December 15 (with interest for the first period prorated). Upon maturity of the swap agreement on June 16, 2008, the Company will pay approximately €276 million and receive approximately $333 million. The Company designated the swap, the euro term loan and a euro note as a net investment hedge (for accounting purposes) in the fourth quarter of 2004. The loss related to the swap was $21 million for the nine months ended December 31, 2004, of which $14 million is related to the ineffectiveness of the net investment hedge. During the nine months ended December 31, 2004, the effects of the swap resulted in an increase in total liabilities and a decrease in shareholder's equity of $57 million and $36 million, respectively.
Contracts with notional amounts totaling approximately $288 million and $765 million at December 31, 2004 and 2003, respectively, are predominantly in U.S. dollars, British pound sterling, Japanese yen, and Canadian dollars. Most of the Company's foreign currency forward contracts did not meet the criteria of SFAS No. 133 to qualify for hedge accounting. The Company recognizes net foreign currency transaction gains or losses on the underlying transactions, which are offset by losses and gains related to foreign currency forward contracts. For the year ended December 31, 2004, the Company's foreign currency forward contracts resulted in a decrease in total assets and an increase in total liabilities of $42 million and $2 million, respectively. As of December 31, 2004, these contracts, in addition to natural hedges, hedged approximately 100% of the Company's net receivables held in currencies other than the entities' functional currency for the Company's European operations. Related to the unhedged portion during the year, a net gain (loss) of approximately ($2) million and $4 million from foreign exchange gains or losses was recorded to other income (expense), net for the nine months ended December 31, 2004 and the three months ended March 31, 2004. During 2003, the Predecessor's foreign currency forward contracts resulted in a decrease in total assets of $8 million and an increase in total liabilities of $1 million. As of December 31, 2003, these contracts hedged a portion (approximately 85%) of the Predecessor's U.S. dollar denominated intercompany net receivables held by euro denominated entities. Related to the unhedged portion, a net loss of approximately $14 million from foreign exchange gains or losses was recorded to other income (expense), net in 2003. During the year ended December 31, 2002, the Predecessor hedged all of its U.S. dollar denominated intercompany net receivables held by euro denominated entities. Therefore, there was no material net effect from foreign exchange gains or losses. Hedging activities primarily related to intercompany net receivables yielded cash flows from operating activities of approximately $17 million, $180 million and $95 million for the nine months ended December 31, 2004, year ended December 31, 2003 and 2002, respectively.
A substantial portion of our assets, liabilities, revenues and expenses is denominated in currencies other than U.S. dollar, principally the euro. Fluctuations in the value of these currencies against the U.S. dollar, particularly the value of the euro, can have, and in the past have had, a direct and material impact on the business and financial results. For example, a decline in the value of the euro versus the U.S. dollar, results in a decline in the U.S. dollar value of our sales denominated in euros and earnings due to translation effects. Likewise, an increase in the value of the euro versus the U.S. dollar would result in an opposite effect. The Company estimates that the translation effects of changes in the value of other currencies against the U.S. dollar increased net sales by approximately 3% and increased total assets by approximately 3% for the nine months ended December 31, 2004. The Predecessor estimated that the translation effects of changes in the value of other currencies against the U.S. dollar increased net sales by approximately 6% for the three months ended March 31, 2004 and by approximately 7% for the year ended December 31, 2003 and by approximately 2% in 2002. The Predecessor also estimated that the translation effects of changes in the value of other currencies against the U.S. dollar decreased total assets by approximately 1% for the three months ended March 31, 2004 and approximately 5% in 2003. Exposure to transactional effects is further reduced by a high degree of overlap between the currencies in which sales are denominated and the currencies in which the raw material and other costs of goods sold are denominated.
As of December 31, 2004, we had total debt of $3,387 million, of which approximately $610 million (€447 million) is euro denominated debt. A 1% increase in foreign exchange rates would increase the euro denominated debt by $6 million.
Interest Rate Risk Management
The Company may enter into interest rate swap agreements to reduce the exposure of interest rate risk inherent in the Company's outstanding debt by locking in borrowing rates to achieve a desired level of fixed/floating rate debt depending on market conditions. At December 31, 2004, the Successor had no interest rate swap agreements in place. The Predecessor had open interest rate swaps with a notional amount of $200 million at December 31, 2003. In the second quarter of 2004, the Successor recorded a loss of less than $1 million in other income (expense), net associated with the early termination of its $200 million interest rate swap. During 2003, the Predecessor recorded a loss of $7 million in other income (expense), net, associated with the early termination of one of its interest rate swaps. The Successor recognized net interest expense from hedging activities relating to interest rate swaps of $1 million for the nine months ended December 31, 2004. The Predecessor recognized net interest expense from hedging activities relating to interest rate swaps of $2 million, $11 million and $12 million for the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002. During 2003, the Predecessor's interest rate swaps, designated as cash flow hedges, resulted in a decrease in total assets and total liabilities and an increase in shareholders' equity of $4 million, $14 million and $7 million, net of related income tax of $4 million, respectively. The Predecessor recorded a net gain (loss) of less than ($1) million, $2 million and ($3) million in other income (expense), net of the ineffective portion of the interest rate swaps, during the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002, respectively.
On a pro forma basis as of December 31, 2004, we had approximately $1,900 million of variable rate debt. A 1% increase in interest rates would increase annual interest expense by approximately $19 million.
Commodity Risk Management
The Company's policy for the majority of our natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. Fixed price natural gas forward contracts are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap contracts correlate to the actual purchases of the commodity and have the effect of securing predetermined prices for the underlying commodity. Although these contracts are structured to limit our exposure to increases in commodity prices, they can also limit the potential benefit we might have otherwise received from decreases in commodity prices. These cash-settled swap contracts are accounted for as cash flow hedges. Realized gains and losses on these contracts are included in the cost of the commodity upon settlement of the contract. The Successor recognized losses of less than $1 million from natural gas swaps and butane contracts for the nine months ended December 31, 2004. The
Predecessor recognized losses of $1 million, $3 million and less than $1 million from natural gas swaps and butane contracts for the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002, respectively. There was no material impact on the balance sheet at December 31, 2004 and December 31, 2003. There were no unrealized gains and losses associated with the cash-settled swap contracts as of December 31, 2004 and December 31, 2003. The Company did not have any open commodity swaps as of December 31, 2004. The Company had open swaps with a notional amount of $5 million as of December 31, 2003.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statementsconsolidated financial statements are based on the selection and application of significant accounting policies. The preparation of these financial statements and application of these policies requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses 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 polices 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 noteNote 4 to the Consolidated Financial Statementsconsolidated financial statements for a more comprehensive discussion of the significant accounting policies.
Recoverability of Long-Lived Assets
Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. At December 31, 20042005 and 2003,2004, the carrying amount of property, plant and equipment was $1,702$2,040 million and $1,710$1,702 million, respectively. As discussed in noteNote 4 to the Consolidated Financial Statements,consolidated financial statements, we and the Predecessor assess the recoverability of property, plant and equipment to be held and used by a comparison of the carrying amount of an asset or group of assets to the future net undiscounted cash flows expected to be generated by the asset or group of assets. If such assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
In December 2004, we approved a plan to dispose of the COC business included within the Ticona segment. This decision resulted in $25 million and $32 million of asset impairment charges recorded as a special charge related to the COC business.business in the year ended December 31, 2005 and the nine months ended December 31, 2004, respectively.
As a result of the planned consolidation of tow production and the termination of filament production, the Acetate Products segment recorded impairment charges of $50 million associated with plant and equipment in the nine months ended December 31, 2004.
We assess the recoverability of the carrying value of our goodwill and other intangible assets with indefinite useful lives at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Recoverability of goodwill is measured at the reporting unit level based on a two-step approach. First, the carrying amount of the reporting unit is compared to the fair value as estimated by the future net discounted cash flows expected to be generated by the reporting unit. To the extent, that the carrying value of the reporting unit exceeds the fair value
of the reporting unit, a second step is performed, wherein the reporting unit'sunit’s assets and liabilities are fair valued. The implied fair value of goodwill is calculated as the fair value of the reporting unit in excess of the fair value of all non-goodwill assets and liabilities allocated to the reporting unit. To the extent that the reporting unit'sunit’s carrying value of goodwill exceeds its implied fair value, impairment exists and must be recognized. As of December 31, 2005 and 2004, the Companywe had $1,430 million and $1,147 million, respectively, of goodwill and other intangible assets, net.
During 2003, the Predecessor performed the annual impairment test of goodwill and determined that there was no impairment. As a result of the tender offer price of €32.50 per share announced on
December 16, 2003, which would place an implicit value on CAG at an amount below book value of the net assets, the Predecessor initiated an impairment analysis in accordance with SFAS No. 142. The impairment analysis was prepared on a reporting unit level and utilized the most recent cash flow, discount rate and growth rate assumptions. Based on the resulting analysis, the Predecessor's management concluded that goodwill was not impaired as of December 31, 2003.
As of December 31, 2004,2005, no significant changes in the underlying business assumptions or circumstances that drive the impairment analysis led management to believe goodwill might have been impaired. We will continue to evaluate the need for impairment if changes in circumstances or available information indicate that impairment may have occurred. In the future, we expect toWe perform the required impairment tests at least annually on eachduring the third quarter of our fiscal year using June 30 balances unless circumstances dictate more frequent testing. During 2005, we performed the impairment test and determined that there was no impairment of goodwill.
A prolonged general economic downturn and, specifically, a continued downturn in the chemical industry as well as other market factors could intensify competitive pricing pressure, create an imbalance of industry supply and demand, or otherwise diminish volumes or profits. Such events, combined with changes in interest rates, could adversely affect our estimates of future net cash flows to be generated by our long-lived assets. Consequently, it is possible that our future operating results could be materially and adversely affected by additional impairment charges related to the recoverability of our long-lived assets.
Restructuring and Special Charges(Charges) Gains
Special charges(charges) gains include provisions for restructuring and other expenses and income incurred outside the normal ongoing course of operations. Restructuring provisions represent costs related to severance and other benefit programs related to major activities undertaken to fundamentally redesign our operations as well as costs incurred in connection with a decision to exit non-strategic businesses. These measures are based on formal management decisions, establishment of agreements with the employees'employees’ representatives or individual agreements with the affected employees as well as the public announcement of the restructuring plan. The related reserves reflect certain estimates, including those pertaining to separation costs, settlements of contractual obligations and other closure costs. We reassess the reserve requirements to complete each individual plan under our restructuring program at the end of each reporting period. Actual experience has been and may continue to be different from these estimates. See(See Note 2120 to the Consolidated Financial Statements.consolidated financial statements).
Environmental Liabilities
We manufacture and sell a diverse line of chemical products throughout the world. Accordingly, the businesses'businesses’ 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 is reasonably estimated. If the event of loss is neither probable nor reasonably estimable, but is reasonably possible, the Company provideswe provide appropriate disclosure in the notes to its Consolidated Financial Statements if the contingency is material.consolidated financial statements.
Total reserves for environmental liabilities were $143$124 million and $159$143 million at December 31, 20042005 and 2003,2004, respectively. Measurement of environmental reserves is based on the evaluation of currently available information with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations and prior experience in remediation of contaminated sites. An environmental reserve related to cleanup of a contaminated site might include, for example, 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 reserves do not take into account any claims or recoveries from insurance. There are no pending insurance claims for any environmental liability that are expected to be material. The measurement of environmental liabilities is based on a range of management'smanagement’s periodic estimate of what it will cost to perform each of the elements of the remediation effort. We use our best estimate within the range to establish our environmental reserves. We utilize third parties to assist in the management and the
development of our 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. We accrue for legal fees related to litigation matters when the costs associated with defense can be reasonably estimated and are probable to occur. All other fees are expensed as incurred. See(See Note 1918 to the Consolidated Financial Statements.consolidated financial statements).
Asset Retirement Obligations
Total reserves for asset retirement obligations were $52$54 million and $47$52 million at December 31, 20042005 and 2003,2004, respectively. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred.incurred and Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 ("FIN No. 47") provides guidelines as to when a company is required to record a conditional asset retirement obligation. The liability is measured at the discounted fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset'sasset’s remaining useful life. Management has identified but not recognized asset retirement obligations related to substantially all 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, operations at these facilities are expected to continue indefinitely and therefore a reasonable estimate of fair value cannot be determined at this time. In the future, we will assess strategies of the businesses acquired and may support decisions that differ from past decisions of management regarding the continuing operations of existing facilities. Asset retirement obligations will be recorded if these strategies are changed and probabilities of closure are assigned to existing facilities. If certain operating facilities were to close, the related asset retirement obligations could significantly affect our results of operations and cash flows.
In accordance with SFAS No. 143, the Acetate Products segment recorded a charge of $8 million, included within 2003 depreciation expense, related to potential asset retirement obligations, asAs a result of a worldwide assessment of our acetateAcetate production capacity.capacity, the Acetate Products segment recorded a charge to depreciation expense of $8 million in 2003 related to potential asset retirement obligations. The assessment concluded that there was a probability that certain facilities would be closed in the latter half of the decade. In October 2004 we announced plans to consolidate flake and tow production by early 2007 and to discontinue production of filament before the end of 2005. In the fourth quarter of 2005, the operations of filament were discontinued and we disposed of two Acetate properties. As a result of the sales, we recorded a gain of $23 million primarily resulting from the reversal of liabilities assumed by mid-2005. The restructuring will result in the discontinuance of acetate production at two sites. As such,purchaser. For the nine months ended December 31, 2004, we recorded a charge of $12 million included within depreciation expense, of which $8 million was recorded by the Acetate Products segment and $4 million by the Chemical Products segment, for the nine months ended December 31, 2004.Products.
Realization of Deferred Tax Assets
Total net deferred tax assets (liabilities) were ($151) million and $555 million at December 31, 2004 and 2003, respectively. Management regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on historical taxable income, projected future taxable income, 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 that some portion or all of the deferred tax assets will not be realized. Such evaluations require significant management judgments. Valuation allowances have been established primarily for U.S. federal and state net operating losses carryforwards, certain German income tax loss carryforwards, Mexican net operating loss carryforwards and Canadian deferred tax assets. See(See Note 2221 to the Consolidated Financial Statements.consolidated financial statements).
On April 6, 2004, the closing date of the acquisition of CAG, the Predecessor had approximately $576 millionTax Contingencies
The Company has accruals for taxes and associated interest that may become payable in net deferred tax assets, of which $531 million were in the U.S., including $172 million arising from U.S. net operating loss ("NOL") carryforwards. Under U.S. tax law, the utilization of deferred tax assets related to NOL carryforwards is subject to an annual limitation if there is a more than 50 percentage point change in shareholder ownership. The acquisition of CAG triggered this limitation. As a result of this limitation and the Restructuring, $153 million of the $172 million NOL was written off and a valuation allowance was established against the remaining $19 million. In addition,future years as a result of audits by tax authorities. The Company accrues for tax contingencies when it is probable that a liability to a taxing authority has been incurred and the Restructuring, includingamount of the transfer of CAC to BCP Crystal, we determinedcontingency can be reasonably estimated. Although the Company believes that the positions taken on previously filed tax returns are reasonable, it was no longer more likely than notnevertheless has established tax and interest reserves in recognition that we would realize our other net U.S. deferred tax assets. Accordingly, we recorded a full valuation allowance on our $351 million of other net pre-acquisition U.S. deferred tax assets (reduced by deferred tax liabilities) with a corresponding increase in goodwill. In addition, the valuation allowancevarious taxing
on U.S. deferred assets was increasedauthorities may challenge the positions taken by $33 million through a charge to tax expense during the nine months ended December 31, 2004 related to activity subsequent toCompany resulting in additional liabilities for taxes and interest. These amounts are reviewed as circumstances warrant and adjusted as events occur that affect the closing dateCompany's potential liability for additional taxes, such as lapsing of the acquisitionapplicable statutes of CAG.
As a result of thelimitations, conclusion of an income tax examination for theaudits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering of a court decision affecting a particular tax audit period ending December 31, 2000 and the receipt of the final tax and interest assessment, management reversed accrued income tax reserves attributable to that period. This resulted in a decrease in income taxes payable and a decrease in goodwill of $113 million as it was a purchase accounting adjustment.issue.
Benefit Obligations
Pension and other postretirement benefit plans covering substantially all employees who meet eligibility requirements are sponsored by CAC.requirements. CAC sponsors pension and other postretirement benefit plans. With respect to its U.S. qualified defined benefit pension plan, minimum funding requirements are determined by the Employee Retirement Income Security Act. For the periods presented, the Predecessor or the Company had not been required to contribute under these minimum funding requirements. However, the Predecessor chose to contribute to the U.S. defined benefit pension plan $33 million and $130 million and $100 million for the three months ended March 31, 2004 and for the yearsyear ended December 31, 2003, and 2002, respectively. The Successor chose to contribute to the U.SU.S. qualified defined benefit pension plan $0 million and $300 million for the year ended December 31, 2005 and the nine months ended December 31, 2004.2004, respectively. Contributions to the German pension plans for the year ended December 31, 2005 and the nine months ended December 31, 2004 were $5 million and $105 million.million, respectively. Benefits are generally based on years of service and/or compensation. Various assumptions are used in the calculation of the actuarial valuation of the employee benefit plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels, expected long-term rates of return on plan assets and increases or trends in health care costs. In addition to the above mentioned assumptions, actuarial consultants use subjective 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 pension expense recorded in future periods.
The amounts recognized in the Consolidated Financial Statementsconsolidated financial statements related to pension and other postretirement benefits are determined on an actuarial basis. A significant assumption used in determining our pension expense is the expected long-term rate of return on plan assets. At December 31, 2005 and 2004, we assumed an expected long-term rate of return on plan assets of 8.5% for the U.S. qualified defined benefit pension plan, which represents greater than 85 percent85% and 80 percent75% of pension plan assets and liabilities, respectively. On average, the actual return on plan assets over the long-term (15 to 20 years) has exceeded 9.0%. However, forFor the nine monthsyear ended December 31, 2004,2005, the U.S. qualified defined benefit pension plan assets actual return was 50 basis points less than the expected long-term rate of return of plan assets. The Company had loweredHowever, for the expected long-term rate of return on U.S. qualified defined benefit pension plan assets from 9.0% to 8.5% as it expects lower future returns considering the lower inflationary environment.
For the nine monthsyear ended December 31, 2004, the actual return was 400 basis points higher than the long-term return on plan assets. Based on our expectedinvestment strategy, we believe that 8.5% is a reasonable long-term rate of return assumption for our U.S. plans was 8.5%, reflecting the generally expected moderation of long-term rates of return in the financial markets. return.
We estimate a 25 basis point decline in the expected long-term rate of return for the U.S. qualified defined benefit pension plan to increase pension expense by an estimated $5$5.5 million in 2004.2005. Another estimate that affects our pension and other postretirement benefit expense is the discount rate used in the annual actuarial valuations of pension and other postretirement benefit plan obligations. At the end of each year, we determine the appropriate discount rate, which represents the interest rate that should be used to determine 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. At December 31, 2004,2005, we lowered the discount rate to 5.88%5.63% from 6.25%5.88% at December 31, 20032004 for the U.S. plans. We estimate that a 50 basis point decline in the discount rate for the U.S. pension and postretirement medical plans will increase pension and other postretirement benefit annual expenses by an estimated $5$10 million and less than $1 million, respectively, and our benefit obligations by approximately $130$173 million and approximately $13$12 million, respectively.
Over the past severaltwo years, CAG hadwe have experienced significant increases (in excess of $400$300 million) in unrecognized net actuarial pension losses. The losses were mainly due to asset losses resulting from asset returns that were less than the assumed rate of return and increasesdecline in the projected benefit obligation.discount rate utilized to reflect current market conditions.
Other postretirement benefit plans plans provide medical and life insurance benefits to retirees who meet minimum age and service requirements. The postretirement benefit cost for the year ended December 31, 2005, the nine months ended December 31, 2004 and the three months ended March 31, 2004, and the year ended December 31, 2003, includes $25 million, $21 million $8 million, and $35$8 million, respectively, and the accrued post-retirement liability was $406$408 million and $320$406 million as of December 31, 20042005 and 2003,2004, respectively, in other noncurrent liabilities. The key determinants of the accumulated postretirement benefit obligation ("APBO"(‘‘APBO’’) are the discount rate and the healthcare cost trend rate. The healthcare cost trend rate has a significant effect on the reported amounts of APBO and related expense. For example, increasing the healthcare cost trend rate by one percentage point in each year would increase the APBO at December 31, 2004,2005, and the 20042005 postretirement benefit cost by approximately $2$5 million and less than $1 million, respectively, and decreasing the healthcare cost trend rate by one percentage point in each year would decrease the APBO at September 30, 2004December 31, 2005 and the 20042005 postretirement benefit cost by approximately $2$5 million and less than $1 million, respectively. See(See Note 17 to the Consolidated Financial Statements.consolidated financial statements).
Accounting for Commitments and Contingencies
The Company isWe are subject to a number of legal proceedings, lawsuits, claims, and investigations, incidental to the normal conduct of itsour business, relating to and including product liability, patent and intellectual property, commercial, contract, antitrust, past waste disposal practices, release of chemicals into the environment and employment matters, which are handled and defended in the ordinary course of business. See Note 27 to the Consolidated Financial Statements. Management routinely assesses the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable and reasonably estimable losses. Reasonable estimates involve judgments made by management after considering a broad range of information including: notifications, demands, settlements which have been received from a regulatory authority or private party, estimates performed by independent consultants and outside counsel, available facts, identification of other potentially responsible parties and their ability to contribute, as well as prior experience. A determination of the amount of loss contingency required, if any, is assessed in accordance with SFAS No. 5 "‘‘Contingencies and Commitments"’’ and recorded if probable and estimable after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter and as additional information becomes available. See(See Note 2725 to the Consolidated Financial Statements.consolidated financial statements).
CNA Holdings, Inc. ("CNA Holdings"), a U.S. subsidiary of ours and the Predecessor, which includesincluded the U.S. business now conducted by the Ticona segment, along with Shell ChemicalOil Company ("Shell"(‘‘Shell’’) and E. I. du Pont de Nemours ("DuPont"and Company (‘‘DuPont’’), among and others, havehas been the defendantsa defendant in a series of lawsuits, including a number of class actions, alleging that plastics manufactured by these companies that were utilized in the production of plumbing systems for residential property were defective or caused such plumbing systems to fail. CNA Holdings has accrued its best estimate of its share of the plumbing actions. At December 31, 20042005 and 2003,2004, accruals were $73$68 million and $76$73 million, respectively, for this matter, of which $11$6 million and $14$11 million, respectively, are included in current liabilities. Management believes that the plumbing actions are adequately provided for in the consolidated financial statements. However, if we were to incur an additional charge for this matter, such a charge would not be expected to have a material adverse effect on the financial position, but may have a material adverse effect on our results of operations or cash flows in any given accounting period. The Predecessor'sPredecessor’s receivables relating to the anticipated recoveries from third party insurance carriers for this product liability matter are based on the probability of collection on the settlement agreements reached with a majority of the insurance carriers whose coverage level exceeds the receivables and based on the status of current discussions with other insurance carriers. As of December 31, 20042005 and 2003,2004, insurance claims receivables were $75$22 million and $63$75 million, respectively. Collectibility could vary depending on the financial status of the insurance carriers.
Nutrinova Inc., a U.S. subsidiary of Nutrinova Nutrition Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of ours and the Predecessor, is party to various legal proceedings in the United States, Canada and Europe alleging Nutrinova Inc. engaged in unlawful anticompetitive behavior which affected the sorbates markets while it was a wholly-owned subsidiary of Hoechst. In accordance with the
demerger agreement between Hoechst and Celanese AG,CAG, which became effective October 1999, CAG, the successor to Hoechst'sHoechst’s sorbates business, was assigned the obligation related to these matters. However, Hoechst agreed to indemnify Celanese AGCAG for 80 percent80% of payments for such obligations. Expenses related to this
matter are recorded gross of any such recoveries from Hoechst while the recoveries from Hoechst, which represents 80 percent80% of such expenses, are recorded directly to shareholders'shareholders’ equity, net of tax, as a contribution of capital.
Based on the advice of external counsel and a review of the existing facts and circumstances relating to the sorbates matter, including the status of governmentalgovernment investigations, as well as civil claims filed and settled, we and the Predecessor hadhas remaining accruals of $145$129 million and $137$145 million at December 31, 20042005 and 2003,2004, respectively, for the estimated loss relative to this matter. This amount is included in current liabilities at December 31, 2005. Although the outcome of this matter cannot be predicted with certainty, management'smanagement’s best estimate of the range of possible additional future losses and fines, including any that may result from governmental proceedings, as of December 31, 20042005 is between $0 million and $9 million. The estimated range of such possible future losses is management'smanagement’s best estimate based on advice of external counsel taking into consideration potential fines and claims, both civil and criminal, that may be imposed or made in other jurisdictions. At December 31, 2005 and 2004, and 2003, we and the Predecessor had receivables, recorded within current assets, relating to the sorbates indemnification from Hoechst of $116$103 million and $110$116 million, respectively.
On February 7, 2001, Celanese International Corporation (‘‘CIC) filed a private criminal action for patent infringement against China Petrochemical Development Corporation, or CPDC, alleging that CPDC infringed CIC's patent covering the manufacture of acetic acid. CIC also filed a supplementary civil brief which, in view of changes in Taiwanese patent laws, was subsequently converted to a civil action alleging damages against CPDC based on a period of infringement of ten years, 1991-2000, and based on CPDC's own data and as reported to the Taiwanese securities and exchange commission. CIC's patent was held valid by the Taiwanese patent office. On August 31, 2005 a Taiwanese court held that CPDC infringed CIC’s acetic acid patent and awarded CIC approximately $28 million for the period of 1995 through 1999. The judgment has been appealed. We will not record income associated with this favorable judgment until cash is received.
CAG, the Purchaser, as well as a former member of CAG’s board of management, are defendants in various lawsuits in Germany instituted by minority shareholders relating to the Purchaser’s acquisition of the CAG Shares. While many of these lawsuits request to set aside shareholders’ resolutions in connection with the Domination Agreement, several minority shareholders had initiated special award proceedings (Spruchverfahren) to increase the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) offered under the Domination Agreement. As a result of these proceedings, the amount of the fair cash consideration and the guaranteed fixed annual payment offered under the Domination Agreement could be increased by the court so that all minority shareholders, including those who have already tendered their shares into the mandatory offer and have received the fair cash compensation, could claim the respective higher amounts. Although the court dismissed all of these proceedings in March 2005 on the grounds of inadmissibility, the dismissal has been appealed.
Based upon the information available as of the date of this annual report, the outcome of the foregoing proceedings cannot be predicted with certainty. A determination of the amount of loss contingency required, if any, is assessed in accordance with SFAS No. 5 ‘‘Contingencies and Commitments’’ and recorded if probable and estimable after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter and as additional information becomes available.
Business combinationsCombinations
Upon closing an acquisition, the Company estimateswe estimate the fair values of assets and liabilities acquired and consolidates the acquisition as soon as practicable. Given the time it takes to obtain pertinent information to finalize the acquired company'scompany’s balance sheet (frequently with implications for the purchase price of the acquisition), then to adjust the acquired company'scompany’s accounting policies, procedures, books and records to our standards, it is often several quarters before the Company iswe are able to finalize those initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised. The judgements made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact netNet earnings (loss).
In valuing (See Notes 1 and 2 to the acquisition of CAG, the Company utilized various valuation methods with the assistance from valuation specialists. The significant assets and liabilities valued include property, plant and equipment, intangible assets and cost and equity method investments.consolidated financial statements).
In connection with the acquisition of CAG, at the acquisition date, the Company began formulating a plan to exit or restructure certain activities. The Company has not completed this analysis, but has recorded initial liabilities of $60 million, primarily for employee severance and related costs in connection with the preliminary plan, as well as approving the continuation of all existing Predecessor restructuring and exit plans. As the Company finalizes its plans to exit or restructure activities, it may record additional liabilities for, among other things, severance and severance related costs, which would also increase the goodwill recorded.
Captive Insurance Companies
The Company consolidatesWe consolidate two wholly owned insurance companies (the "Captives"‘‘Captives’’). The Captives are a key component of the Company'sour global risk management program as well as a form of self-insurance for property, liability and workers compensation risks. The Captives issue insurance policies to the Company'sour subsidiaries to provide consistent coverage amid fluctuating costs in the insurance market and to lower long-term insurance costs by avoiding or reducing commercial carrier overhead and regulatory fees. The Captives issue insurance policies and coordinate claims handling services with third party service providers. They retain risk at levels approved by management and obtain reinsurance coverage from third parties to limit the net risk retained. One of the Captives also insures certain third party risks.
The assets of the Captives consist primarily of marketable securities and reinsurance receivables. Marketable securities values are based on quoted market prices or dealer quotes. The carrying value of the amounts recoverable under the reinsurance agreements approximate fair value due to the short-term nature of these items.
The liabilities recorded by the Captives relate to the estimated risk of loss recorded by the Captives, which is based on management estimates and actuarial valuations, and unearned premiums, which represent the portion of the premiums written applicable to the terms of the policies in force. The establishment of the provision for outstanding losses is based upon known facts and interpretation of circumstances influenced by a variety of factors. In establishing a provision, management considers facts currently known and the current state of laws and litigation where applicable. Liabilities are recognized for known claims when sufficient information has been developed to indicate involvement of a specific policy and management can reasonably estimate their liability. In addition, liabilities have been established to cover additional exposure on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly. It is possible that actual results could differ significantly from the recorded liabilities.
The Captives use reinsurance arrangements to reduce their risk of loss. Reinsurance arrangements however do not relieve the Captives from their obligations to policyholders. Failure of the reinsurers to honor their obligations could result in losses to the Captives. The Captives evaluate the financial condition of their reinsurers and monitor concentrations of credit risk to minimize their exposure to significant losses from reinsurer insolvencies and establish allowances for amounts deemed non-collectable.
Premiums written are recognized based on the terms of the policies. Capitalization of the Captives is determined by regulatory guidelines. As of December 31, 2004 and 2003, the net retained concurrent aggregate risk of all policies written by the Captives, after reinsuring higher tier risks with third party insurance companies, net of established reserves, amounted to approximately $498 million and $484 million, respectively.
Forward-Looking Statements May Prove Inaccurate
This Annual Report contains 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. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures, and assumptions and other statements contained in this prospectus that are not historical facts. When used in this document, words such as "anticipate," "believe," "estimate," "expect," "intend," "plan"‘‘anticipate,’’ ‘‘believe,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘plan’’ and "project"‘‘project’’ and similar expressions, as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.
Many factors could cause our actual results, performance or achievements to be materially different from any future 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, 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 fuel oil, natural gas, coal, electricity and petrochemicals such as ethylene, propylene and butane, including changes in production quotas in OPEC countries and the deregulation of the natural gas transmission industry in Europe; |
• | 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 and expansions; |
• | the ability to reduce production costs and improve productivity by implementing technological improvements to existing plants; |
• | the existence of temporary industry surplus production capacity resulting from the integration and start-up of new world-scale plants; |
• | increased price competition and the introduction of competing products by other companies; |
• | the ability to develop, introduce and market innovative products, product grades and applications, particularly in the Ticona and Performance Products segments of our business; |
• | changes in the degree of patent and other legal protection afforded to our products; |
• | compliance costs and potential disruption or interruption of production due to accidents or other unforeseen events or delays in construction of facilities; |
• | potential liability for remedial actions under existing or future environmental regulations; |
• | potential liability resulting from pending or future litigation, 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; |
• | changes in the composition or restructuring of us or our subsidiaries and the successful completion of acquisitions, divestitures and venture activities; |
• | inability to successfully integrate current and future acquisitions; |
• | pending or future challenges to the Domination Agreement; and |
• | various other factors, both referenced and not referenced in this |
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.
RISK FACTORS
Many factors could have an effect on Celanese's financial condition, cash flows and results of operations. We are subject to various risks resulting from changing economic, environmental, political, industry, business and financial conditions. The principal factors are described below.
Risks Related to the Acquisition of Celanese AG
If the Domination Agreement ceases to be operative, the Company's managerial control over Celanese AG is limited.
We own 100% of the outstanding shares of CAC and approximately 84% of the outstanding shares of CAG. Our access to cash flows of, and our control of, CAG is subject to the continuing effectiveness of the Domination Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Domination Agreement."
The Domination Agreement is subject to legal challenges instituted by dissenting shareholders. Minority shareholders have filed nine actions against CAG in the Frankfurt District Court (Landgericht), seeking, among other things, to set aside the shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004 based, among other things, on the alleged violation of procedural requirements and information rights of the shareholders, to declare the Domination Agreement and the change in the fiscal year void and to prohibit CAG from performing its obligations under the Domination Agreement. Pursuant to German law, the time period for the filing of such challenges has expired. Further, several additional minority shareholders have joined the proceedings via third party intervention in support of the plaintiffs. The Purchaser has joined the proceedings via third party intervention in support of CAG. In addition, a German court could revoke the registration of the Domination Agreement in the commercial register. On August 2, 2004, two minority shareholders instituted public register proceedings with the Königstein Local Court (Amtsgericht) and the Frankfurt District Court, both with a view to have the registration of the Domination Agreement in the Commercial Register deleted (Amtslöschungsverfahren). See "Legal Proceedings."
If the Domination Agreement ceases to be operative, the Purchaser's ability, and thus our ability to control the board of management decisions of CAG, will be significantly limited by German law. As a result, we may not be able to ensure that our strategy for the operation of our business can be fully implemented. In addition, our access to the operating cash flow of CAG in order to fund payment requirements on our indebtedness will be limited, which could have a material adverse effect on the value of our stock.
If the Domination Agreement ceases to be operative, certain actions taken under the Domination Agreement might have to be reversed.
If legal challenges of the Domination Agreement by dissenting shareholders of CAG are successful, some or all actions taken under the Domination Agreement, including the Restructuring, may be required to be reversed and the Purchaser may be required to compensate CAG for damages caused by such actions. Any such event could have a material adverse effect on our ability to make payments on our indebtedness and on the value of our stock.
Minority shareholders may interfere with CAG's future actions, which may prevent us from causing CAG to take actions which may have beneficial effects for our shareholders.
The Purchaser currently owns approximately 84% of the CAG Shares. Shareholders unrelated to us hold the remainder of the outstanding CAG Shares. German law provides certain rights to minority shareholders, which could have the effect of delaying, or interfering with, corporate actions (including those requiring shareholder approval), such as the potential application for revocation of admission of the CAG Shares to the Frankfurt Stock Exchange, the squeeze-out and the potential conversion of CAG from its current legal form of a stock corporation into a limited partnership (Kommanditgesellschaft, KG) or a limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) in accordance with the
provisions of the German Transformation Act (Umwandlungsgesetz, UmwG). Minority shareholders may be able to delay or prevent the implementation of CAG's corporate actions irrespective of the size of their shareholding. Any challenge by minority shareholders to the validity of a corporate action may be subject to judicial resolution that may substantially delay or hinder the implementation of such action. Such delays of, or interferences with, corporate actions as well as related litigation may limit our access to CAG's cash flows and make it difficult or impossible for us to take or implement corporate actions which may be desirable in view of our operating or financial requirements, including actions which may have beneficial effects for our shareholders.
CAG's board of management may refuse to comply with instructions given by the Purchaser pursuant to the Domination Agreement, which may prevent us from causing CAG to take actions which may have beneficial effects for our shareholders.
Under the Domination Agreement, the Purchaser is entitled to give instructions directly to the board of management of CAG, including, but not limited to, instructions that are disadvantageous to CAG, as long as such disadvantageous instructions benefit the Purchaser or the companies affiliated with either the Purchaser or CAG. CAG's board of management is required to comply with any such instruction, unless, at the time when such instruction is given, (i) it is, in the opinion of the board of management of CAG, obviously not in the interests of the Purchaser or the companies affiliated with either the Purchaser or CAG, (ii) in the event of a disadvantageous instruction, the negative consequences to CAG are disproportionate to the benefits to the Purchaser or the companies affiliated with either the Purchaser or CAG, (iii) compliance with the instruction would violate legal or statutory restrictions, (iv) compliance with the instruction would endanger the existence of CAG or (v) it is doubtful whether the Purchaser will be able to fully compensate CAG, as required by the Domination Agreement, for its annual loss (Jahresfehlbetrag) incurred during the fiscal year in which such instruction is given. The board of management of CAG remains ultimately responsible for making the executive decisions for CAG and the Purchaser, despite the Domination Agreement, is not entitled to act on behalf of, and has no power to legally bind, CAG. The CAG board of management may delay the implementation of, or refuse to implement, any of the Purchaser's instructions despite its general obligation to follow such instructions (with the exceptions mentioned above). Such delays of, or interferences with, compliance with the Purchaser's instructions by the board of management of CAG may make it difficult or impossible for the Purchaser to implement corporate actions which may be desirable in view of our operating or financial requirements, including actions which may have beneficial effects for our shareholders.
The Purchaser will be required to ensure that CAG pays a guaranteed fixed annual payment to the minority shareholders of CAG, which may reduce the funds the Purchaser can otherwise make available to us.
As long as the Purchaser does not own 100% of the outstanding CAG Shares, the Domination Agreement requires, among other things, the Purchaser to ensure that CAG makes a gross guaranteed fixed annual payment (Ausgleich) to minority shareholders of €3.27 per CAG share less certain corporate taxes in lieu of any future dividend. Taking into account the circumstances and the tax rates at the time of the entering into of the Domination Agreement, the net guaranteed fixed annual payment is €2.89 per share for a full fiscal year. As of December 31, 2004, there were approximately 8 million CAG Shares held by minority shareholders. The net guaranteed fixed annual payment may, depending on applicable corporate tax rates, in the future be higher, lower or the same as €2.89. The amount of this guaranteed fixed annual payment was calculated in accordance with applicable German law. Such guaranteed fixed annual payments will be required regardless of whether the actual distributable profits per share of CAG are higher, equal to, or lower than the amount of the guaranteed fixed annual payment per share. The guaranteed fixed annual payment will be payable for so long as there are minority shareholders of CAG and the Domination Agreement remains in place. No dividends for the period after effectiveness of the Domination Agreement, other than the guaranteed fixed annual payment effectively paid by the Purchaser, are expected to be paid by CAG. These requirements may reduce the funds the Purchaser can make available to Celanese and its subsidiaries and, accordingly, diminish our ability to make payments, on our respective indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Domination Agreement."
The amounts of the fair cash compensation and of the guaranteed fixed annual payment offered under the Domination Agreement may be increased, which may further reduce the funds the Purchaser can otherwise make available to us.
Several minority shareholders of CAG have initiated special award proceedings (Spruchverfahren) seeking the court's review of the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) offered under the Domination Agreement. As a result of these proceedings, the amounts of the fair cash compensation (Abfindung) and of the guaranteed fixed annual payment (Ausgleich) could be increased by the court, and the Purchaser would be required to make such payments within the two months after the publication of the court's ruling. Any such increase may be substantial. All minority shareholders including those who have already received the fair cash compensation would be entitled to claim the respective higher amounts. This may reduce the funds the Purchaser can make available to Celanese and its subsidiaries and, accordingly, diminish our ability to make payments on our indebtedness. See "Legal Proceedings."
The Purchaser may be required to compensate CAG for annual losses, which may reduce the funds the Purchaser can otherwise make available to Celanese.
Under the Domination Agreement, the Purchaser is required, among other things, to compensate CAG for any annual loss incurred, determined in accordance with German accounting requirements, by CAG at the end of the fiscal year in which the loss was incurred. This obligation to compensate CAG for annual losses will apply during the entire term of the Domination Agreement. If CAG incurs losses during any period of the operative term of the Domination Agreement and if such losses lead to an annual loss of CAG at the end of any given fiscal year during the term of the Domination Agreement, the Purchaser will be obligated to make a corresponding cash payment to CAG to the extent that the respective annual loss is not fully compensated for by the dissolution of profit reserves (Gewinnrücklagen) accrued at the level of CAG during the term of the Domination Agreement. The Purchaser may be able to reduce or avoid cash payments to CAG by off-setting against such loss compensation claims by CAG any valuable counterclaims against CAG that the Purchaser may have. If the Purchaser was obligated to make cash payments to CAG to cover an annual loss, we may not have sufficient funds to make payments on our indebtedness when due and, unless the Purchaser is able to obtain funds from a source other than annual profits of CAG, the Purchaser may not be able to satisfy its obligation to fund such shortfall. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Domination Agreement."
Two of our subsidiaries have agreed to guarantee the Purchaser's obligation under the Domination Agreement, which may diminish our ability to make payments on our indebtedness.
Our subsidiaries, BCP Caylux and BCP Crystal, have each agreed to provide the Purchaser with financing to strengthen the Purchaser's ability to fulfill its obligations under, or in connection with, the Domination Agreement and to ensure that the Purchaser will perform all of its obligations under, or in connection with, the Domination Agreement when such obligations become due, including, without limitation, the obligations to make a guaranteed fixed annual payment to the outstanding minority shareholders, to offer to acquire all outstanding CAG Shares from the minority shareholders in return for payment of fair cash consideration and to compensate CAG for any annual loss incurred by CAG during the term of the Domination Agreement. If BCP Caylux and/or BCP Crystal are obligated to make payments under such guarantees or other security to the Purchaser and/or the minority shareholders, we may not have sufficient funds for payments on our indebtedness when due.
Even if the minority shareholders' challenges to the Domination Agreement are unsuccessful and the Domination Agreement continues to be operative, we may not be able to receive distributions from CAG sufficient to pay our obligations.
Even if the minority shareholders' challenges to the Domination Agreement are unsuccessful and the Domination Agreement continues to be operative, we are limited in the amount of distributions we may receive in any year from CAG. Under German law, the amount of distributions to the Purchaser will be
determined based on the amount of unappropriated earnings generated during the term of the Domination Agreement as shown in the unconsolidated annual financial statements of CAG, prepared in accordance with German accounting principles and as adopted and approved by resolutions of the CAG board of management and supervisory board, which financial statements may be different from Celanese's consolidated financial statements under U.S. GAAP. Our share of these earnings, if any, may not be in amounts and at times sufficient to allow us to pay our indebtedness as it becomes due, which could have a material adverse effect on the value of the stock.
We must rely on payments from our subsidiaries to fund payments on our preferred stock and certain of our subsidiaries must rely on payments from their own subsidiaries to fund payments on their indebtedness. Such funds may not be available in certain circumstances.
We must rely on payments from our subsidiaries to fund dividend, redemption and other payments on our preferred stock. In addition, our subsidiaries, BCP Crystal and Crystal US Holdings 3 L.L.C. ("Crystal LLC"), are holding companies and all of their operations are conducted through their subsidiaries. Therefore, they depend on the cash flow of their subsidiaries, including CAG, to meet their obligations, including obligations of approximately $3.7 billion of our indebtedness (after giving effect to the Concurrent Financings and excluding $242 million to be drawn down from our amended and restated credit facilities to fund the Acetex acquisition). If the Domination Agreement ceases to be operative, such subsidiaries may be unable to meet their obligations under such indebtedness. Although the Domination Agreement became operative on October 1, 2004, it is subject to legal challenges instituted by dissenting shareholders. In August 2004, minority shareholders filed nine actions against CAG in the Frankfurt District Court (Landgericht) seeking, among other things, to set aside the shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004 based, among other things, on the alleged violation of procedural requirements and information rights of the shareholders, to declare the Domination Agreement and the change in the fiscal year void and to prohibit CAG from performing its obligations under the Domination Agreement. Pursuant to German law, the time period for the filing of such challenges has expired. Further, several additional minority shareholders have joined the proceedings via third party intervention in support of the plaintiffs. The Purchaser has joined the proceedings via third party intervention to support CAG. In addition, a German court could revoke the registration of the Domination Agreement in the commercial register. On August 2, 2004, two minority shareholders instituted public register proceedings with the Königstein Local Court (Amtsgericht) and the Frankfurt District Court, both with a view to have the registration of the Domination Agreement in the Commercial Register deleted (Amtslöschungsverfahren). See "Legal Proceedings." The ability of our subsidiaries to make distributions to us, BCP Crystal and Crystal LLC by way of dividends, interest, return on investments, or other payments (including loans) or distributions is subject to various restrictions, including restrictions imposed by the senior credit facilities and indentures governing their indebtedness, and the terms of future debt may also limit or prohibit such payments. In addition, the ability of the subsidiaries to make such payments may be limited by relevant provisions of German and other applicable laws.
Our internal controls over financial reporting may not be effective and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are evaluating our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are currently performing the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with management certification and auditor attestation requirements of Section 404. The management certification and auditor attestation requirements of Section 404 will initially apply to Celanese as of December 31, 2006 and to CAG as of September 30, 2006. In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that may need improvement, and plan to design enhanced processes and controls to address these and any other issues that might be identified through this review. Currently,
none of the identified areas that need improvement have been categorized as significant deficiencies or material weaknesses, individually or in the aggregate. However, as we are still in the evaluation process, we may identify conditions that may result in significant deficiencies or material weaknesses in the future. In 2004, certain members of our accounting staff identified two significant deficiencies and our auditors identified two material weaknesses, in addition to, and separate from, our Section 404 evaluation process. As a result of the material weaknesses that were identified, Celanese concluded that as of December 31, 2004, its "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) were not effective for recording, processing, summarizing and reporting the material information Celanese is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the rules and forms of the Commission. These deficiencies and material weaknesses are discussed in detail in the immediately subsequent risk factor and Item 9A—"Controls and Procedures".
We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results.
We expect to incur expenses of an aggregate of approximately $9 million to $14 million in 2005 in connection with our compliance with Section 404.
We have in the past identified significant deficiencies and material weaknesses in our internal controls, and the identification of any significant deficiencies or material weaknesses in the future could affect our ability to ensure timely and reliable financial reports.
In addition to, and separate from, our evaluation of internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 and any areas requiring improvement that we identify as part of that process, we previously identified two significant deficiencies and two material weaknesses in our internal controls. The Public Company Accounting Oversight Board ("PCAOB") defines a significant deficiency as a control deficiency, or a combination of control deficiencies, that adversely affects the company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company's annual or interim financial statements that is more than inconsequential will not be prevented or detected. The PCAOB defines a material weakness as a single deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
We are in the process of implementing changes to strengthen our internal controls. In addition, while we have taken actions to address these deficiencies and weaknesses, additional measures may be necessary and these measures along with other measures we expect to take to improve our internal controls may not be sufficient to address the issues identified by us or ensure that our internal controls are effective. For a description of these deficiencies and weaknesses, see Item 9A — "Controls and Procedures." If we are unable to correct deficiencies or weaknesses in internal controls in a timely manner, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities.
Risks Related to Our Indebtedness
Our high level of indebtedness could diminish our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or the chemicals industry and prevent us from meeting obligations under our indebtedness.
We are highly leveraged. Our total indebtedness totals approximately $3.7 billion (after giving effect to the Concurrent Financings and excluding $242 million to be drawn down from our credit facilities to fund the Acetex acquisition). Our substantial debt could have important consequences for you, including:
Despite our current high leverage, we and our subsidiaries may be able to incur substantially more debt. This could further exacerbate the risks of our high leverage.
We may be able to incur substantial additional indebtedness in the future. The terms of our existing debt do not fully prohibit us from doing so. The revolving credit facilities provide commitments of up to $2.8 billion. As of December 31, 2004, there were no outstanding borrowings under the revolving credit facilities and availability of $401 million (taking into account letters of credit issued under the revolving credit facilities). We also expect to incur an additional $242 million of indebtedness under our amended and restated senior credit facilities to finance the acquisition of Acetex. If new debt is added to our current debt levels, the related risks that we now face could intensify.
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 satisfy our cash needs depends on cash on hand, receipt of additional capital, including possible additional borrowings, and receipt of cash from our subsidiaries by way of distributions, advances or cash payments. Our total indebtedness totals approximately $3.7 billion (after giving effect to the Concurrent Financings and excluding $242 million to be drawn down from our credit facilities to fund the Acetex acquisition). Debt service requirements, excluding the $242 million to be drawn down from our credit facilities to fund the Acetex acquisition, consist of principal repayments aggregating $285 million in the next five years and $3,386 million thereafter (including $211 million of accreted value on the senior discount notes) and average annual cash interest payments of approximately $197 million in each of the next five years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Contractual Obligations."
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 is subject to prevailing economic and competitive conditions and to certain 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 (including the CAG Shares), 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. The senior credit facilities and the indentures governing our indebtedness restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which 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 instruments may limit our ability to engage in certain transactions and may diminish our ability to make payments on our indebtedness.
The senior credit facilities and the indentures governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of Crystal LLC, BCP Crystal and their restricted subsidiaries to, among other things, incur additional indebtedness or issue preferred stock, pay dividends on or make other distributions on or repurchase their capital stock or make other restricted payments, make investments, and sell certain assets.
In addition, the senior credit facilities contain covenants that require Celanese Holdings LLC ("Celanese Holdings") to maintain specified financial ratios and satisfy other financial condition tests. Celanese Holdings' ability to meet those financial ratios and tests can be affected by events beyond its control, and it may not be able to meet those tests at all. A breach of any of these covenants could result in a default under the senior credit facilities. Upon the occurrence of an event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding under the senior credit facilities to be immediately due and payable and terminate all commitments to extend further credit. If Celanese Holdings were unable to repay those amounts, the lenders under the senior credit facilities could proceed against the collateral granted to them to secure that indebtedness. Celanese Holdings has pledged a significant portion of its assets as collateral under the senior credit facilities. If the lenders under the senior credit facilities accelerate the repayment of borrowings, Celanese Holdings may not have sufficient assets to repay the senior credit facilities and its other indebtedness, which could have a material adverse effect on the value of our stock.
The terms of the senior credit facilities prohibit BCP Crystal and its subsidiaries from paying dividends or otherwise transferring their assets to us.
Our operations are conducted through our subsidiaries and our ability to pay dividends is dependent on the earnings and the distribution of funds from our subsidiaries. However, the terms of the senior credit facilities prohibit BCP Crystal and its subsidiaries from paying dividends or otherwise transferring their assets to us. Accordingly, under the terms of the senior credit facilities, BCP Crystal and its subsidiaries may not make dividends to us to enable us to pay dividends on our stock.
Risks Related to Our Business
We are an international company and are exposed to general economic, political and regulatory conditions and risks in the countries in which we have significant operations.
We operate in the global market and have customers in many countries. During the period covered by this Annual Report, we had major facilities located in North America, Europe and Asia, including facilities in Germany, China, Japan, Korea and Saudi Arabia operated through ventures. Our principal customers are similarly global in scope, and the prices of our most significant products are typically world market prices. Consequently, our business and financial results are affected directly and indirectly by world economic, political and regulatory conditions.
Conditions such as the uncertainties associated with war, terrorist activities, epidemics, pandemics or political instability in any of the countries in which we operate could affect us by causing delays or losses
in the supply or delivery of raw materials and products as well as increased security costs, insurance premiums and other expenses. These conditions could also result in or lengthen economic recession in the United States, Europe, Asia or elsewhere. Moreover, changes in laws or regulations, such as unexpected changes in regulatory requirements (including import or export licensing requirements), or changes in the reporting requirements of United States, German or European Union governmental agencies, could increase the cost of doing business in these regions. Any of these conditions may have an effect on our business and financial results as a whole and may result in volatile current and future prices for our securities, including the stock.
Cyclicality in the industrial chemicals industry has in the past and may in the future result in reduced operating margins or in operating losses.
Consumption of the basic chemicals that we manufacture, in particular those in acetyl products, such as methanol, formaldehyde, acetic acid and vinyl acetate monomer, has increased significantly over the past 30 years. Despite this growth in consumption, producers have experienced alternating periods of inadequate capacity and excess capacity for these products. Periods of inadequate capacity, including some due to raw material shortages, have usually resulted in increased selling prices and operating margins. This has often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates, selling prices and operating margins. We expect that these cyclical trends in selling prices and operating margins relating to capacity shortfalls and additions will likely persist in the future, principally due to the continuing combined impact of five factors:
We believe that the basic chemicals industry, particularly in the commodity chemicals manufactured by our Chemical Products segment, is currently characterized by overcapacity, and that there may be further capacity additions in the next few years.
The length and depth of product and industry business cycles of our markets, particularly in the automotive, electrical, construction and textile industries, may result in reduced operating margins or in operating losses.
Some of the markets in which our customers participate, such as the automotive, electrical, construction and textile industries, are cyclical in nature, thus posing a risk to us which is beyond our control. These markets are highly competitive, to a large extent driven by end-use markets, and may experience overcapacity, all of which may affect demand for and pricing of our products.
We are subject to risks associated with the increased volatility in raw materials prices and the availability of key raw materials.
We purchase significant amounts of natural gas, ethylene, butane, and propylene from third parties for use in our production of basic chemicals in the Chemical Products segment, principally methanol, formaldehyde, acetic acid, vinyl acetate monomer, as well as oxo products. We use a portion of our output
of these chemicals, in turn, as inputs in the production of further products in all our segments. We also purchase significant amounts of cellulose or wood pulp for use in our production of cellulose acetate in the Acetate Products segment. We purchase significant amounts of natural gas, electricity, coal and fuel oil to supply the energy required in our production processes.
Prices of natural gas, oil and other hydrocarbons have increased dramatically in 2004. To the extent this trend continues and we are unable to pass through these price increases to our customers, our operating profit and results of operations may be less favorable than expected.
We are exposed to any volatility in the prices of our raw materials and energy. Although we have agreements providing for the supply of natural gas, ethylene, propylene, wood pulp, electricity, coal and fuel oil, the contractual prices for these raw materials and energy vary with market conditions and may be highly volatile. Factors which have caused volatility in our raw material prices in the past and which may do so in the future include:
We strive to improve profit margins of many of our products through price increases when warranted and accepted by the market; however, our operating margins may decrease if we cannot pass on increased raw material prices to customers. Even in periods during which raw material prices decline, we may suffer decreasing operating profit margins if raw material price reductions occur at a slower rate than decreases in the selling prices of our products.
A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply/demand fundamentals change. We manage our exposure through the use of derivative instruments and forward purchase contracts for commodity price hedging, entering into long-term supply agreements, and multi-year purchasing and sales agreements. Management's policy for the majority of its natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. As of December 31, 2004, there were no derivative contracts outstanding. In 2003, there were forward contracts covering approximately 35% of the Company's Chemical Products segment North American requirements. Management regularly assesses its practice of purchasing a portion of its commodity requirements forward and the utilization of a variety of other raw material hedging instruments, in addition to forward purchase contracts, in accordance with changes in market conditions. Management capped its exposure on approximately 20% of its U.S. natural gas requirements during the months of August and September of 2004. The fixed price natural gas forward contracts and any premium associated with the purchase of a price cap are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap or cap contracts correlate to the actual purchases of the commodity and have the effect of securing or limiting predetermined prices for the underlying commodity. Although these contracts were structured to limit exposure to increases in commodity prices, certain swaps may also limit the potential benefit the Company might have otherwise received from decreases in commodity prices. These cash-settled swap or cap contracts were accounted for as cash flow hedges.
We have a policy of maintaining, when available, multiple sources of supply for raw materials. However, some of our individual plants may have single sources of supply for some of their raw materials, such as carbon monoxide and acetaldehyde. We may not be able to obtain sufficient raw materials due to unforeseen developments that would cause an interruption in supply. Even if we have multiple sources of supply for a raw material, these sources may not make up for the loss of a major supplier. Nor can there be any guarantee that profitability will not be affected should we be required to qualify additional sources of supply in the event of the loss of a sole or a major supplier.
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, especially in our Performance Products and Technical Polymers Ticona segments, depend significantly on the development of commercially viable new products, product grades
and applications, as well as production technologies. If we are unsuccessful in developing new products, applications and production processes in the future, our competitive position and operating results will be negatively affected. Likewise, we have undertaken and are continuing to undertake initiatives in all 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.
Frankfurt airport expansion could require us to reduce production capacity of, limit expansion potential of, or incur relocation costs for our Kelsterbach plant which would lead to significant additional costs.
The Frankfurt airport's expansion plans include the construction of an additional runway. One of the three sites under consideration, the northwest option, would be located in close proximity to our Kelsterbach production plant. The construction of this particular runway could have a negative effect on the plant's current production capacity and future development. While the government of the state of Hesse and the owner of the Frankfurt airport promote the expansion of the northwest option, it is uncertain whether this option is in accordance with applicable laws. Although the government of the state of Hesse expects the plan approval for the airport expansion in 2007 and the start of operations in 2009-2010, neither the final outcome of this matter nor its timing can be predicted at this time.
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 concerning, and potential obligations with respect to, contaminated sites may have a significant negative impact on our operating results. These include obligations related to sites currently or formerly owned or operated by us, or where waste from our operations was disposed. We also have obligations related to the indemnity agreement contained in the demerger and transfer agreement between CAG and Hoechst, also referred to as the demerger agreement, for environmental matters arising out of certain divestitures that took place prior to the demerger. Our accruals for environmental remediation obligations, $143 million as of December 31, 2004, may be insufficient if the assumptions underlying those accruals prove incorrect or if we are held responsible for currently undiscovered contamination. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Environmental Liabilities," and Notes 19 and 27 to the Consolidated Financial Statements.
Our operations are subject to extensive international, national, state, local, and other supranational 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 them, 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, regulations and enforcement policies could result in substantial costs and liabilities to us or limitations on our operations and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than at present. Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities and our business and operating results may be less favorable than expected. Due to new air regulations in the United States, management expects that there will be a temporary increase in compliance costs that will total approximately $30 million to $45 million through 2007. For example, the Miscellaneous Organic National Emissions Standards for Hazardous Air Pollutants (NESHAP) regulations, and various approaches to regulating boilers and incinerators, including the NESHAPs for Industrial/Commercial/Institutional Boilers and Process Heaters, will impose additional requirements on our operations. Although some of these rules have been finalized, a significant portion of the NESHAPs for Industrial/Commercial/Institutional Boilers and Process Heaters regulation that provides for a low risk alternative method of compliance for hydrogen chloride emissions has been challenged in federal court. We cannot predict the outcome of this challenge, which could, if successful, increase our costs by, according to our estimates, approximately $50 million above the $30 million to $45 million noted above through 2007 to comply with this regulation. As another example, recent European Union regulations require a trading system for carbon dioxide emissions to have been in place by January 1, 2005. Accordingly, an emission trading system came into
effect at the start of 2005. This regulation will affect our power plants at the Kelsterbach and Oberhausen sites, as well as power plants operated by other InfraServ entities. We and the InfraServ entities may be required to develop additional cost-effective methods to reduce carbon dioxide emissions further, which could result in increased capital expenditures.
We are also involved in several claims, lawsuits and administrative proceedings relating to environmental matters. An adverse outcome in any of them may negatively affect our earnings and cash flows in a particular reporting period.
Changes in environmental, health and safety regulatory requirements could lead to a decrease in demand for our products.
New or revised governmental regulations relating to health, safety and the environment may also affect demand for our products. Pursuant to the European Union regulation on Risk Assessment of Existing Chemicals, the European Chemicals Bureau of the European Commission has been conducting risk assessments on approximately 140 major chemicals. Some of the chemicals initially being evaluated include vinyl acetate monomer or VAM, which we produce. These risk assessments entail a multi-stage process to determine to what extent the European Commission should classify the chemical as a carcinogen and, if so, whether this classification and related labeling requirements should apply only to finished products that contain specified threshold concentrations of a particular chemical. In the case of VAM, we currently do not expect a final ruling until mid-2005. We and other VAM producers are participating in this process with detailed scientific analyses supporting the industry's position that VAM is not a probable human carcinogen and that labeling of final products should not be required. If labeling is required, then it should depend on relatively high parts per million of residual VAM in these end products. We cannot predict the outcome or effect of any final ruling.
Several recent studies have investigated possible links between formaldehyde exposure and various end points including leukemia. The International Agency for Research on Cancer or IARC recently reclassified formaldehyde from Group 2A (probable human carcinogen) to Group 1 (known human carcinogen) based on studies linking formaldehyde exposure to nasopharyngeal cancer, a rare cancer in humans. IARC also concluded that there is insufficient evidence for a causal association between leukemia and occupational exposure to formaldehyde, although it also characterized evidence for such an association as strong. The results of IARC's review will be examined by government agencies with responsibility for setting worker and environmental exposure standards and labeling requirements. We are a producer of formaldehyde and plastics derived from formaldehyde. We are participating together with other producers and users in the evaluations of these findings. We cannot predict the final effect of IARC's reclassification.
Other recent initiatives will potentially require toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. These initiatives include the Voluntary Children's Chemical Evaluation Program and High Production Volume Chemical Initiative in the United States, as well as various European Commission programs, such as the new European Environment and Health Strategy, commonly known as SCALE, as well as the Proposal for the Registration, Evaluation, Authorization and Restriction of Chemicals or REACH. REACH, which the European Commission proposed in October 2003, will establish a system to register and evaluate chemicals manufactured in, or imported to, the European Union. Depending on the final ruling, additional testing, documentation and risk assessments will occur for the chemical industry. This will affect European producers of chemicals as well as all chemical companies worldwide that export to member states of the European Union. The final ruling has not yet been decided.
The above-mentioned assessments in the United States and Europe may result in heightened concerns about the chemicals involved and in additional requirements being placed on the production, handling, labeling or use of the subject chemicals. Such concerns and additional requirements could 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.
Our production facilities handle the processing of some volatile and hazardous materials that subject us to operating risks that could have a negative effect on our operating results.
Our operations are subject to operating risks associated with chemical manufacturing, including the related storage and transportation of raw materials, products and wastes. These hazards include, among other things:
These operating risks can cause personal injury, property damage 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 and our operating results and cash flows.
We maintain property, business interruption and casualty insurance which we believe is in accordance with customary industry practices, but we cannot predict whether this insurance will be adequate to fully cover all potential hazards incidental to our business.
Our significant non-U.S. operations expose us to global exchange rate fluctuations that could impact our profitability.
We are exposed to market risk through commercial and financial operations. Our market risk consists principally of exposure to fluctuations in currency exchange and interest rates.
As we conduct a significant portion of our operations outside the United States, fluctuations in currencies of other countries, especially the euro, may materially affect our operating results. For example, changes in currency exchange rates may affect:
We use financial instruments to hedge our exposure to foreign currency fluctuations. The net notional amounts under such foreign currency contracts outstanding at December 31, 2004 were $288 million. The hedging activity of foreign currency denominated intercompany net receivables resulted in a cash inflow of approximately $24 million and less than $1 million for the nine months ended December 31, 2004 and the three months ended March 31, 2004, respectively. These positive effects may not be indicative of future effects.
A substantial portion of our net sales is denominated in currencies other than the U.S. dollar. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international sales, earnings, assets and liabilities will be reduced because the local currency will translate into fewer U.S. dollars. We estimate that the translation effects of changes in the value of other currencies against the U.S. dollar increased net sales by approximately 3% for the nine months ended December 31, 2004, 6% for the three months ended March 31, 2004, 7% for the year ended December 31, 2003 and increased net sales by approximately 2% in 2002. We estimate that the translation effects of changes in the value of other currencies against the U.S. dollar increased total assets by approximately 3% for the nine months ended December 31, 2004, decreased total assets by approximately 1% for the three months ended March 31, 2004 and increased total assets by approximately 5% in 2003.
In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a currency different from the operating subsidiary's functional currency. Given the volatility of exchange rates, we may not be able to manage our currency transaction and/or translation risks effectively, or volatility in currency exchange rates may expose our financial condition or results of operations to a significant additional risk. Since a
portion of our indebtedness is and will be denominated in currencies other than U.S. dollars, a weakening of the U.S. dollar could make it more difficult for us to repay our indebtedness.
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.
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 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 can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. A change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost of the following fiscal years. As of December 31, 2004, our underfunded position related to our defined benefit pension plans was $636 million. During the nine months ended December 31, 2004, we contributed approximately $434 million to the plans. During the three months ended March 31, 2004, we contributed approximately $39 million to the plans.
We have preliminarily recorded a significant amount of goodwill and other identifiable intangible assets, and we may never realize the full value of our intangible assets.
In connection with the Transactions, we have recorded a significant amount of goodwill and other identifiable intangible assets. Goodwill and other net identifiable intangible assets were approximately $1,147 million as of December 31, 2004, or 15% of our total assets based on preliminary purchase accounting. Goodwill and net identifiable intangible assets are recorded at fair value on the date of acquisition and, in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, will be reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of a significant portion of goodwill or other identifiable intangible assets would have an adverse effect on our financial condition and results of operations.
CAG may be required to make payments to Hoechst.
Under its 1999 demerger agreement with Hoechst, CAG agreed to indemnify Hoechst for environmental liabilities that Hoechst may incur with respect to CAG's German production sites, which were transferred from Hoechst to CAG in connection with the demerger. CAG also has an obligation to indemnify Hoechst against liabilities for environmental damages or contamination arising under certain divestiture agreements entered into by Hoechst prior to the demerger. As the indemnification obligations depend on the occurrence of unpredictable future events, the costs associated with them are not yet determinable and may materially affect operating results. CAG's obligation to indemnify Hoechst against liabilities for environmental contamination in connection with the divestiture agreements is subject to the following thresholds (translated into U.S. dollars using the December 31, 2004 exchange rate):
CAG has made payments through December 31, 2004 of $38 million for environmental contamination liabilities in connection with the divestiture agreements, and may be required to make additional payments in the future. As of December 31, 2004, we have reserves of approximately $46 million for this contingency, and may be required to record additional reserves in the future.
Also, CAG has undertaken in the demerger agreement to indemnify Hoechst to the extent that Hoechst is required to discharge liabilities, including tax liabilities, in relation to assets included in the demerger, where such liabilities have not been demerged due to transfer or other restrictions. CAG did not make any payments to Hoechst in 2004 and did not make any payments in either 2003 or 2002 in connection with this indemnity.
Under the demerger agreement, CAG will also be responsible, directly or indirectly, for all of Hoechst's obligations to past employees of businesses that were demerged to CAG. Under the demerger agreement, Hoechst agreed to indemnify CAG from liabilities (other than liabilities for environmental contamination) stemming from the agreements governing the divestiture of Hoechst's polyester businesses, which were demerged to CAG, insofar as such liabilities relate to the European part of that business. Hoechst has also agreed to bear 80 percent of the financial obligations arising in connection with the government investigation and litigation associated with the sorbates industry for price fixing described in "Legal Proceedings—Sorbates Antitrust Actions" and Note 27 to the Consolidated Financial Statements and CAG has agreed to bear the remaining 20 percent.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly and affect our operating results.
Certain of our borrowings, primarily borrowings under the senior credit facilities, are at variable rates of interest and expose us to interest rate risk. If interest rates increase, which we expect to occur, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease. As of December 31, 2004, we had approximately $1.1 billion of variable rate debt. A 1% increase in interest rates would increase annual interest expense by approximately $11 million.
We may enter into interest rate swap agreements to reduce the exposure of interest rate risk inherent in our debt portfolio. We have, in the past, used swaps for hedging purposes only.
Because our Sponsor controls us, the influence of our public shareholders over significant corporate actions will be limited, and conflicts of interest between our Sponsor and us or you could arise in the future.
Our Sponsor (as defined in this document) beneficially owns approximately 63% of our outstanding common stock. As a result, our Sponsor, through its control over the composition of our board of directors and its control of the majority of the voting power of our common stock, has effective control over our decisions to enter into any corporate transaction and will have the ability to prevent any transaction that requires the approval of equityholders regardless of whether or not other equityholders or noteholders believe that any such transactions are in their own best interests. For example, our Sponsor effectively could cause us to make acquisitions that increase our indebtedness or sell revenue-generating assets. Additionally, our Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our Sponsor continues to own a significant amount of our equity, even if such amount is less than 50%, it will continue to be able to significantly influence or effectively control our decisions. Under the amended and restated shareholders' agreement between us and the Original Shareholders which are affiliates of the Sponsor, such Original Shareholders will be entitled to designate all nominees for election to our board of directors for so long as they hold at least 25% of the total voting power of our common stock. Thereafter, although our Sponsor will not have an explicit contractual right to do so, it may still nominate directors in its capacity as a stockholder.
Our amended and restated certificate of incorporation renounces any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities.
Our amended and restated certificate of incorporation provides that none of the Original Shareholders (including the Sponsor) or their affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates has any duty to refrain from (i) engaging in a corporate opportunity in the same or similar lines of business in which we or our affiliates now engage or propose to engage or (ii) otherwise competing with us. In addition, in the event that any of the Original Shareholders (including the Sponsor) or any non-employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates and for us or our affiliates, such Original Shareholder or non-employee director has no duty to communicate or offer such transaction or business opportunity to us and may take any such opportunity for themselves or offer it to another person or entity.
We are a "controlled company" within the meaning of The New York Stock Exchange rules and, as a result, are exempt from certain corporate governance requirements.
Our Sponsor controls a majority of the voting power of our outstanding common stock. As a result, we are a "controlled company" within the meaning of the New York Stock Exchange corporate governance standards. Under the New York Stock Exchange rules, a company of which more than 50% of the voting power is held by another company is a "controlled company" and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that the nominating committee be composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities, (3) the requirement that the compensation committee be composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities and (4) the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees. We utilize these exemptions. As a result, we do not have a majority of independent directors nor do our nominating and compensation committees consist entirely of independent directors. Accordingly, our shareholders do not have the same protections afforded to shareholders of companies that are subject to all of the New York Stock Exchange corporate governance requirements.
Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could reduce our ability to maintain our market position and our margins.
We attach great importance to patents, trademarks, copyrights and product designs in order to protect our investment in research and development, manufacturing and marketing. Our policy is to seek the widest possible protection for significant product and process developments in its major markets. Patents may cover products, processes, intermediate products and product uses. Protection for individual products extends for varying periods in accordance with the date of patent application filing and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. Our continued growth strategy may bring us to regions of the world where intellectual property protection may be limited and difficult to enforce.
As patents expire, the products and processes described and claimed in those patents become generally available for use by the public. Our European and U.S. patents for making Sunett, an important product in our Performance Products segment, expired at the end of the first quarter of 2005, which will reduce our ability to realize revenues from making Sunett due to increased competition and potential limitations and will result in our results of operations and cash flows relating to the product being less favorable than today.
We also seek to register trademarks extensively as a means of protecting the brand names of our products, which brand names become more important once the corresponding patents have expired. If we are not successful in protecting our trademark rights, our revenues, results of operations and cash flows may be adversely affected.
The market price of our common stock and BCP Crystal's public debt may be volatile, which could cause the value of our shareholders' investment and the debt holders' investment, respectively, to decline.
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common stock and BCP Crystal's public debt in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock and BCP Crystal's public debt could decrease significantly.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as any shareholders' rights plan, may discourage a takeover attempt.
Provisions contained in our amended and restated certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. Provisions of our amended and restated certificate of incorporation and bylaws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our shareholders. Thus, our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our Series A common stock. These rights may have the effect of delaying or deterring a change of control of our company. In addition, a change of control of our company may be delayed or deterred as a result of our having three classes of directors (each class elected for a three year term). In addition, we would be required to issue additional shares of our Series A common stock to holders of the preferred stock who convert following a fundamental change. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risks
We are exposed to market risk through commercial and financial operations. Our market risk consists principally of exposure to currency exchange rates, interest rates and commodity prices. The Predecessor hadWe have in place policies of hedging against changes in currency exchange rates, interest rates and commodity prices as described below. Contracts to hedge exposures are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 148, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. See(See Note 2624 to the Consolidated Financial Statements.consolidated financial statements).
Foreign Exchange Risk Management
We and the Predecessor have receivables and payables denominated in currencies other than the functional currencies of the various subsidiaries, which create foreign exchange risk. For the purposes of this document, the Predecessor'sPredecessor’s reporting currency is the U.S. dollar, and the functional reporting currency of Celanese AGCAG continues to be the euro. The U.S. dollar, the euro, Mexican peso, Japanese yen, British pound sterling, and Canadian dollar are the most significant sources of currency risk. Accordingly, we
enter into foreign currency forwards and swaps to minimize our exposure to foreign currency fluctuations. The foreign currency contracts are designated for recognized assets and liabilities and forecasted transactions. The terms of these contracts are generally under one year. Our centralized hedging strategy states that foreign currency denominated receivables or liabilities recorded by the operating entities will be internally hedged, only the remaining net foreign exchange position will then be hedged externally with banks. As a result, foreign currency forward contracts relating to this centralized strategy did not meet the criteria of SFAS No. 133 to qualify for hedge accounting. Net foreign currency transaction gains or losses are recognized on the underlying transactions, which are offset by losses and gains related to foreign currency forward contracts.
On June 16, 2004, as part of itsour currency risk management, the Companywe entered into a currency swap with certain financial institutions. Under the terms of the swap arrangement, the Companywe will pay
approximately €13 million in interest and receive approximately $16 million in interest on each June 15 and December 15 (with interest for the first period prorated). Upon maturity of the swap agreement on June 16, 2008, the Companywe will pay approximately €276 million and receive approximately $333 million. The CompanyWe designated the swap, thepart of its senior euro term loan and a euro note as a net investment hedge (for accounting purposes) in the fourth quarter of 2004. The loss related to the swap was $21 million for the nine months endedAt December 31, 2004, of which $14 million is related to the ineffectiveness, of the net investment hedge. During the nine months ended December 31,2005 and 2004, the effects of the swap resulted in an increase in total liabilities of $4 million and a decrease in shareholder's equity of $57 million, respectively. The loss related to the swap was $18 million and $36$21 million respectively.for the year ended December 31, 2005 and the nine months ended December 31, 2004, of which $3 million in 2005 and $14 million in 2004 is related to the ineffectiveness of the net investment hedge.
Contracts with notional amounts totaling approximately $288$564 million and $765$288 million at December 31, 20042005 and 2003,2004, respectively, are predominantly in U.S. dollars,Euros, British pound sterling, Japanese yen, and Canadian dollars. The Company recognizesMost of the our foreign currency forward contracts did not meet the criteria of SFAS No. 133 to qualify for hedge accounting. We recognize net foreign currency transaction gains or losses, on the underlying transactions, which arewere offset by losses and gains related to foreign currency forward contracts. At December 31, 2005 our foreign currency forward contracts resulted in an decrease in total assets of $4 million and a decrease in total liabilities of $4 million. For the year ended December 31, 2004, the Company'sour foreign currency forward contracts resulted in a decrease in total assets and an increase in total liabilities of $42 million and $2 million, respectively. As of December 31, 2005 and 2004, these contracts, in addition to natural hedges, hedged approximately 100% of the Company'sour net receivables held in currencies other than the entities'entities’ functional currency for the Company'sour European operations. Related to the unhedged portion during the year,period, a net gain (loss) of approximately $20 million, ($2) million and $4 million from foreign exchange gains or losses was recorded to other income (expense), net for the six months ended December 31, 2005, for the nine months ended December 31, 2004 and the three months ended March 31, 2004.2004, respectively. During 2003, the Predecessor'sPredecessor’s foreign currency forward contracts resulted in a decrease in total assets and of $8 million and an increase in total liabilities of $1 million. As of December 31, 2003, these contracts hedged a portion (approximately 85%) of the Predecessor'sPredecessor’s U.S. dollar denominated intercompany net receivables held by euro denominated entities. Related to the unhedged portion, a net loss of approximately $14 million from foreign exchange gains or losses was recorded to other income (expense), net in 2003. During the year ended December 31, 2002, the Predecessor hedged all of its U.S. dollar denominated intercompany net receivables held by euro denominated entities. Therefore, there was no material net effect from foreign exchange gains or losses. Receivables yielded cash flows from operating activities of approximately $24 million, less than $1 million. Hedging activities primarily related to intercompany net receivables yielded cash flows from operating activities of approximately $17 million, $180 million and $95 million for the nine months ended December 31, 2004, year ended December 31, 2003 and 2002, respectively.
A substantial portion of our assets, liabilities, revenues and expenses is denominated in currencies other than U.S. dollar, principally the euro. Fluctuations in the value of these currencies against the U.S. dollar, particularly the value of the euro, can have, and in the past have had, a direct and material impact on the business and financial results. For example, a decline in the value of the euro versus the U.S. dollar, results in a decline in the U.S. dollar value of our sales denominated in euros and earnings due to translation effects. Likewise, an increase in the value of the euro versus the U.S. dollar would result in an opposite effect. The Company estimatesWe estimate that the translation effects of changes in the value of other currencies against the U.S. dollar increased net sales by approximately 0% and decreased total assets by approximately 6% for the year ended December 31, 2005, increased net sales by approximately 3% and increased total assets by approximately 3% for the nine months ended December 31, 2004. Net sales increased by approximately 7% for the year ended December 31, 2003. The Predecessor estimated that the translation effects of changes in the value of other currencies against the U.S. dollar increased net sales by approximately 6% for the three months ended March 31, 2004 and by approximately 7% for the year ended December 31, 2003 and by approximately 2% in 2002.2003. The Predecessor also estimated that the translation effects of changes in the value of other
currencies against the U.S. dollar decreased total assets by approximately 1% for the three months ended March 31, 2004 and increased total assets by approximately 5% in 2003. Exposure to transactional effects is further reduced by a high degree of overlap between the currencies in which sales are denominated and the currencies in which the raw material and other costs of goods sold are denominated.
As of December 31, 2004,2005, we had total debt of $3,387$3,437 million, of which approximately $610$614 million (€447520 million) is euro denominated debt. A 1% increase in foreign exchange rates would increase the euro denominated debt by $6 million. As of December 31, 2005, we had total cash of $390 million, of which approximately $79 million (€67 million) is euro denominated cash. A 1% decrease in foreign exchange rates would decrease the euro denominated cash by $1 million. For the year ended December 31, 2005, the euro denominated cash was reduced substantially by the purchase of the additional CAG shares from two shareholders, including other considerations, as well as the acquisition of Vinamul and Acetex and the redemption of Acetex’s debt.
Interest Rate Risk Management
The CompanyWe may enter into interest rate swap agreements to reduce the exposure of interest rate risk inherent in the Company'sour outstanding debt by locking in borrowing rates to achieve a desired level of fixed/floating rate debt depending on market conditions. At December 31, 2005, the Successor had an interest rate swap with a notional amount of $300 million. At December 31, 2004, the Successor had no interest rate swap agreements in place. The Predecessor had open interest rate swaps with a notional amount of $200 million at December 31, 2003. In the second quarter of 2004, the Successor recorded a loss of less than $1 million in otherOther income (expense), net associated with the early termination of its $200 million interest rate swap. During 2003, the Predecessor recorded a loss of $7 million in otherOther income (expense), net, associated with the early termination of one of its interest rate swaps. The Successor recognized net interest expense from hedging activities relating to interest rate swaps of $3 million and $1 million for the year ended December 31, 2005 and the nine months ended December 31, 2004.2004, respectively. The Predecessor recognized net interest expense from hedging activities relating to interest rate swaps of $2 million $11 million and $12$11 million for the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, and 2002. During 2003, the Predecessor's interest rate swaps, designated as cash flow hedges, resulted in a decrease in total assets and total liabilities and an increase in shareholders' equity of $4 million, $14 million and $7 million, net of related income tax of $4 million, respectively. The Predecessor recorded a net gain (loss) of less than ($1) million and $2 million and ($3) million in otherOther income (expense), net of the ineffective portion of the interest rate swaps, during the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, and 2002, respectively.
On a pro forma basis after giving effect to the Concurrent Financings, as of December 31, 2004,2005, we had approximately $1,900 million of variable rate debt. A 1% increase in interest rates would increase annual interest expense by approximately $19 million.
Commodity Risk Management
The Company'sOur policy for the majority of our natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. Fixed price natural gas forward contracts are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap contracts correlate to the actual purchases of the commodity and have the effect of securing predetermined prices for the underlying commodity. Although these contracts are structured to limit our exposure to increases in commodity prices, they can also limit the potential benefit we might have otherwise received from decreases in commodity prices. These cash-settled swap contracts are accounted for as cash flow hedges. Realized gains and losses on these contracts are included in the cost of the commodity upon settlement of the contract. The Successor recognized losses of less than $1 million from natural gas swaps and butane contracts for the year ended December 31, 2005 and the nine months ended December 31, 2004. The Predecessor recognized losses of $1 million $3 million and less than $1$3 million from natural gas swaps and butane contracts for the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, and 2002, respectively. There was no material impact on the balance sheet at December 31, 20042005 and December 31, 2003.2004. There were no unrealized gains and losses associated with the cash-settled swap contracts as of December 31, 20042005 and December 31, 2003. The Company2004. We did not have any open commodity swaps as of December 31, 2005 and 2004. The Company had open swaps with a notional amount of $5 million as of December 31, 2003.
Item 8. Financial Statements and Supplementary Data
The Company'sCompany’s consolidated financial statements and supplementary data are included in pages F-2 through F-94F-93 of this Annual Report on Form 10-K. See accompanying "Item‘‘Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K"Schedules" and Index to the Consolidated Financial Statementsconsolidated financial statements on page F-1.
Quarterly Financial Information
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Predecessor | Successor | |||||||||||||||||
Three Months Ended March 31, 2004 | Three Months Ended June 30, 2004 | Three Months Ended September 30, 2004 | Three Months Ended December 31, 2004 | |||||||||||||||
(in $ millions except for share and per share data) | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
Net sales | 1,243 | 1,229 | 1,265 | 1,332 | ||||||||||||||
Cost of sales | (1,002 | ) | (1,058 | ) | (1,005 | ) | (1,029 | ) | ||||||||||
Selling, general and administrative expenses | (137 | ) | (125 | ) | (153 | ) | (220 | ) | ||||||||||
Research and development expenses | (23 | ) | (22 | ) | (23 | ) | (22 | ) | ||||||||||
Special charges: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | — | 2 | (1 | ) | — | |||||||||||||
Restructuring, impairment and other special charges, net | (28 | ) | (1 | ) | (58 | ) | (33 | ) | ||||||||||
Foreign exchange loss | — | — | (2 | ) | (1 | ) | ||||||||||||
Gain (loss) on disposition of assets | (1 | ) | — | 2 | 1 | |||||||||||||
Operating profit | 52 | 25 | 25 | 28 | ||||||||||||||
Equity in net earnings of affiliates | 12 | 18 | 17 | 1 | ||||||||||||||
Interest expense | (6 | ) | (130 | ) | (98 | ) | (72 | ) | ||||||||||
Interest income | 5 | 7 | 8 | 9 | ||||||||||||||
Other income (expense), net | 9 | (24 | ) | 17 | (5 | ) | ||||||||||||
Earnings from continuing operations before tax and minority interests | 72 | (104 | ) | (31 | ) | (39 | ) | |||||||||||
Income tax provision | (17 | ) | (10 | ) | (48 | ) | (12 | ) | ||||||||||
Earnings (loss) from continuing operations before minority interests | 55 | (114 | ) | (79 | ) | (51 | ) | |||||||||||
Minority interests | — | (10 | ) | 8 | (6 | ) | ||||||||||||
Earnings (loss) from continuing operations | 55 | (124 | ) | (71 | ) | (57 | ) | |||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Loss from operation of discontinued operations | (5 | ) | — | — | — | |||||||||||||
Gain (loss) on disposal of discontinued operations | 14 | (1 | ) | — | (1 | ) | ||||||||||||
Income tax benefit | 14 | — | — | 1 | ||||||||||||||
Earnings (loss) from discontinued operations | 23 | (1 | ) | — | — | |||||||||||||
Net earnings (loss) | 78 | (125 | ) | (71 | ) | (57 | ) | |||||||||||
Net earnings (loss) per common share – basic | 1.58 | (1.26 | ) | (0.71 | ) | 0.57 | ||||||||||||
Net earnings (loss) per common share – diluted | 1.57 | (1.26 | ) | (0.71 | ) | 0.57 | ||||||||||||
Weighted average shares – basic: | 49,321,468 | 99,377,884 | 99,377,884 | 99,377,884 | ||||||||||||||
Weighted average shares – diluted: | 49,712,421 | 99,377,884 | 99,377,884 | 99,377,884 | ||||||||||||||
Successor | ||||||||||||||||||
Three Months Ended March 31, 2005 | Three Months Ended June 30, 2005 | Three Months Ended September 30, 2005 | Three Months Ended December 31, 2005 | |||||||||||||||
(in $ millions except for share and per share data) | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
Net sales | 1,478 | 1,506 | 1,535 | 1,551 | ||||||||||||||
Cost of sales | (1,106 | ) | (1,165 | ) | (1,251 | ) | (1,251 | ) | ||||||||||
Gross margin | 372 | 341 | 284 | 300 | ||||||||||||||
Selling, general and administrative expenses | (159 | ) | (135 | ) | (144 | ) | (124 | ) | ||||||||||
Research and development expenses | (23 | ) | (23 | ) | (22 | ) | (23 | ) | ||||||||||
Special charges: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | — | 4 | — | 30 | ||||||||||||||
Restructuring, impairment and other special charges | (38 | ) | (31 | ) | (24 | ) | (14 | ) | ||||||||||
Foreign exchange gain (loss), net | 3 | (1 | ) | (2 | ) | — | ||||||||||||
Gain (loss) on disposition of assets | 1 | (3 | ) | 1 | (9 | ) | ||||||||||||
Operating profit | 156 | 152 | 93 | 160 | ||||||||||||||
Equity in net earnings of affiliates | 15 | 12 | 21 | 13 | ||||||||||||||
Interest expense | (176 | ) | (68 | ) | (72 | ) | (71 | ) | ||||||||||
Interest income | 15 | 9 | 7 | 7 | ||||||||||||||
Other income, net | 3 | 18 | 26 | 42 | ||||||||||||||
Earnings from continuing operations before tax and minority interests | 13 | 123 | 75 | 151 | ||||||||||||||
Income tax benefit (provision) | (8 | ) | (43 | ) | (26 | ) | 20 | |||||||||||
Earnings from continuing operations before minority interests | 5 | 80 | 49 | 171 | ||||||||||||||
Minority interests | (25 | ) | (13 | ) | (3 | ) | 4 | |||||||||||
Earnings (loss) from continuing operations | (20 | ) | 67 | 46 | 175 | |||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Income (loss) from operation of discontinued operations | 10 | — | (1 | ) | — | |||||||||||||
Gain (loss) on disposal of discontinued operations | — | — | — | — | ||||||||||||||
Income tax benefit (provision) | — | — | — | — | ||||||||||||||
Earnings (loss) from discontinued operations | 10 | — | (1 | ) | — | |||||||||||||
Cumulative effect of changes in accounting principles, net of income tax | — | — | — | |||||||||||||||
Net earnings (loss) | (10 | ) | 67 | 45 | 175 | |||||||||||||
Cumulative declared and undeclared preferred stock dividend | (2 | ) | (2 | ) | (3 | ) | (3 | ) | ||||||||||
Net earnings (loss) available to common shareholders | (12 | ) | 65 | 42 | 172 | |||||||||||||
Earnings (loss) per common share – basic: | ||||||||||||||||||
Continuing operations | (0.15 | ) | 0.41 | 0.27 | 1.08 | |||||||||||||
Discontinued operations | 0.07 | — | (0.01 | ) | — | |||||||||||||
Net earnings (loss) available to common shareholders | (0.08 | ) | 0.41 | 0.26 | 1.08 | |||||||||||||
Earnings (loss) per common share – diluted: | ||||||||||||||||||
Continuing operations | (0.15 | ) | 0.39 | 0.27 | 1.02 | |||||||||||||
Discontinued operations | 0.07 | — | (0.01 | ) | — | |||||||||||||
Net earnings (loss) available to common shareholders | (0.08 | ) | 0.39 | 0.26 | 1.02 | |||||||||||||
Weighted average shares – basic | 141,742,428 | 158,530,391 | 158,546,594 | 158,560,625 | ||||||||||||||
Weighted average shares – diluted: | 141,742,428 | 170,530,397 | 171,930,270 | 171,528,594 | ||||||||||||||
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Predecessor | ||||||||||||||||||
Three Months Ended March 31, 2003 | Three Months Ended June 30, 2003 | Three Months Ended September 30, 2003 | Three Months Ended December 31, 2003 | |||||||||||||||
(in $ millions except for share and per share data) | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
Net sales | 1,137 | 1,168 | 1,143 | 1,155 | ||||||||||||||
Cost of sales | (935 | ) | (980 | ) | (966 | ) | (1,002 | ) | ||||||||||
Selling, general and administrative expenses | (108 | ) | (130 | ) | (146 | ) | (126 | ) | ||||||||||
Research and development expenses | (20 | ) | (23 | ) | (23 | ) | (23 | ) | ||||||||||
Special charges: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | — | 102 | 4 | 1 | ||||||||||||||
Sorbates antitrust matters | — | (11 | ) | (84 | ) | — | ||||||||||||
Restructuring, impairment and other special charges, net | (1 | ) | — | (1 | ) | (15 | ) | |||||||||||
Foreign exchange loss | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||||
Gain on disposition of assets | — | — | 5 | 1 | ||||||||||||||
Operating profit (loss) | 72 | 125 | (69 | ) | (10 | ) | ||||||||||||
Equity in net earnings of affiliates | 10 | 9 | 10 | 6 | ||||||||||||||
Interest expense | (12 | ) | (12 | ) | (12 | ) | (13 | ) | ||||||||||
Interest income | 6 | 23 | 6 | 9 | ||||||||||||||
Other income (expense), net | 12 | 20 | 11 | 5 | ||||||||||||||
Earnings from continuing operations before tax | 88 | 165 | (54 | ) | (3 | ) | ||||||||||||
Income tax benefit (provision) | (24 | ) | (55 | ) | 18 | 8 | ||||||||||||
Earnings (loss) from continuing operations | 64 | 110 | (36 | ) | 5 | |||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Loss from operation of discontinued operations | (8 | ) | — | 1 | 6 | |||||||||||||
Gain (loss) on disposal of discontinued operations | (2 | ) | (1 | ) | — | 10 | ||||||||||||
Income tax (provision) benefit | 3 | — | — | (3 | ) | |||||||||||||
Earnings (loss) from discontinued operations | (7 | ) | (1 | ) | 1 | 13 | ||||||||||||
Cumulative effect of changes in accounting principles in 2003 and 2002, respectively | (1 | ) | — | — | — | |||||||||||||
Net earnings (loss) | 56 | 109 | (35 | ) | 18 | |||||||||||||
Net earnings (loss) per common share – basic(1) | 1.12 | 2.21 | (0.71 | ) | 0.36 | |||||||||||||
Net earnings (loss) per common share – diluted(1) | 1.12 | 2.21 | (0.71 | ) | 0.36 | |||||||||||||
Weighted average shares – basic | 49,817,234 | 49,330,478 | 49,321,468 | 49,321,468 | ||||||||||||||
Weighted average shares – diluted: | 49,817,234 | 49,330,478 | 49,321,468 | 49,321,468 | ||||||||||||||
Predecessor | Successor | |||||||||||||||||
Three Months Ended March 31, 2004 | Three Months Ended June 30, 2004 | Three Months Ended September 30, 2004 | Three Months Ended December 31, 2004 | |||||||||||||||
(in $ millions except for share and per share data) | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
Net sales | 1,218 | 1,202 | 1,239 | 1,303 | ||||||||||||||
Cost of sales | (983 | ) | (1,035 | ) | (985 | ) | (1,006 | ) | ||||||||||
Gross margin | 235 | 167 | 254 | 297 | ||||||||||||||
Selling, general and administrative expenses | (136 | ) | (125 | ) | (153 | ) | (219 | ) | ||||||||||
Research and development expenses | (23 | ) | (22 | ) | (23 | ) | (22 | ) | ||||||||||
Special charges: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | — | 2 | (1 | ) | — | |||||||||||||
Restructuring, impairment and other special charges, net | (28 | ) | (1 | ) | (49 | ) | (33 | ) | ||||||||||
Foreign exchange loss | — | — | (2 | ) | (1 | ) | ||||||||||||
Gain (loss) on disposition of assets | (1 | ) | — | 2 | 1 | |||||||||||||
Operating profit | 47 | 21 | 28 | 23 | ||||||||||||||
Equity in net earnings of affiliates | 12 | 18 | 17 | 1 | ||||||||||||||
Interest expense | (6 | ) | (130 | ) | (98 | ) | (72 | ) | ||||||||||
Interest income | 5 | 7 | 8 | 9 | ||||||||||||||
Other income (expense), net | 9 | (24 | ) | 17 | (5 | ) | ||||||||||||
Earnings from continuing operations before tax and minority interests | 67 | (108 | ) | (28 | ) | (44 | ) | |||||||||||
Income tax provision | (15 | ) | (10 | ) | (48 | ) | (12 | ) | ||||||||||
Earnings (loss) from continuing operations before minority interests | 52 | (118 | ) | (76 | ) | (56 | ) | |||||||||||
Minority interests | — | (10 | ) | 8 | (6 | ) | ||||||||||||
Earnings (loss) from continuing operations | 52 | (128 | ) | (68 | ) | (62 | ) | |||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Loss from operation of discontinued operations | — | 3 | (4 | ) | 6 | |||||||||||||
Gain (loss) on disposal of discontinued operations | 14 | — | — | (1 | ) | |||||||||||||
Income tax benefit | 12 | — | 1 | — | ||||||||||||||
Earnings (loss) from discontinued operations | 26 | 3 | (3 | ) | 5 | |||||||||||||
Net earnings (loss) | 78 | (125 | ) | (71 | ) | (57 | ) | |||||||||||
Net earnings (loss) per common share – basic | 1.58 | (1.26 | ) | (0.71 | ) | 0.57 | ||||||||||||
Net earnings (loss) per common share – diluted | 1.57 | (1.26 | ) | (0.71 | ) | 0.57 | ||||||||||||
Weighted average shares – basic: | 49,321,468 | 99,377,884 | 99,377,884 | 99,377,884 | ||||||||||||||
Weighted average shares – diluted: | 49,712,421 | 99,377,884 | 99,377,884 | 99,377,884 | ||||||||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
In 2004, certain members of our accounting staff identified two significant deficiencies in internal controls in the computation of certain accounting adjustments. These deficiencies were discovered in addition to, and separate from, the evaluation process we are conducting in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, which is further described below. The first deficiency was identified during the quarter ended June 30, 2004 by members of our corporate financial reporting group and related to the qualifications and ability of certain accounting managers to initially calculate the change from the LIFO (last-in, first-out) method of accounting for inventories to FIFO (first-in, first-out) and the resulting failure of such employees to correctly make such calculations. The second was identified during the quarter ended June 30, 2004 by one of our financial accounting managers and related to an omitted employee benefit accrual due to the failure to provide the applicable employment contracts to the actuary prior to the cut-off date for the December 31, 2003 pension valuation. Corrective actions taken by us included an internal audit review, the development of enhanced guidelines, the termination and reassignment of responsible persons and an elevation of the issues to the Supervisory Board of Celanese AG. The significant deficiencies noted were identified and corrected in the quarter ended September 30, 2004 and thus did not exist as of December 31, 2004.
On March 30, 2005, we received a letter from KPMG LLP ("KPMG"), our independent auditors, identifying two material weaknesses. These material weaknesses were determined in the course of the audit of our financial statements as of and for the nine months ended December 31, 2004.2004, we identified a material weakness in our internal controls for the same period. On March 30, 2005, we received a letter from KPMG, our independent auditors, who also identified the same material weakness and a second material weakness in the course of their audit. The firstadditional material weakness identified by KPMG related to several deficiencies in the assessment of hedge effectiveness and documentation of derivative financial instruments.documentation. The required adjustments were made in the proper accounting period, and we do not believe they had any material impact on previously reported financial information.except for one immaterial hedging transaction adjusted during the quarter ended June 30, 2005. The second material weakness was foridentified by KPMG and the same period andCompany related to conditions preventing ourits ability to adequately research, document, review and draw conclusions on accounting and reporting matters, which had previously resulted in adjustments that had to be recorded to prevent our financial statements from being materially misleading.misstated. The conditions largely related to significant increases in the frequency of, and the limited amountnumber of time and technical accounting resourcespersonnel available to address, complex accounting matters and transactions and as a result of the consummation of simultaneous debtdebts and equity offerings during the year-end closing process. We do not believe that the adjustments made in connection with these material weaknesses had any material impact on previously reported financial information. In response to the letter from KPMG with respect to the first material weakness identified above, we are increasingorganized a team responsible for the resources within our finance organizationidentification and documentation of potential derivative accounting transactions and commenced and concluded formal training for team members specifically related to include experts inderivative accounting. With respect to the second material weakness identified above, we hired certain qualified accounting for derivative financial instruments and in financial reporting, including tax accounting issues. We are also taking steps topersonnel which should ensure that adequate time is made available for company personnelwe will be able to adequately research, document, review and conclude on accounting and reporting matters. These initiativesBoth material weaknesses were identified during our December 31, 2004 year-end closing process and we believe that we have materially affected or are reasonably likely to affect materially ourremediated these material weaknesses as of December 31, 2005.
In September 2005 we identified a significant deficiency in internal controls over financial reporting.relating to sales to countries and other parties that are or have previously been subject to sanctions and embargoes imposed by the U.S. government. This significant deficiency was identified as a result of an internal investigation that was intiated in connection with the SEC review of a registration statement. We have taken immediate corrective actions which include a directive to senior business leaders stating that they are prohibited from selling products into certain countries subject to these trade restrictions, as well as making accounting systems modifications that prevent the initiation of purchase orders and shipment of products to these countries. Also, we plan to enhance the business conduct policy training in the area of export control. Although as of December 31, 2005 this significant deficiency has not been fully remediated, we believe that we have taken remediation measures that, once fully implemented, will be effective in eliminating this deficiency.
Celanese Corporation ("Celanese"), under the supervision and with the participation of Celanese'sCelanese’s management, including the chief executive officer (CEO) and chief financial officer (CFO), performed an evaluation of the effectiveness of Celanese's "disclosureCelanese’s ‘‘disclosure controls and procedures"procedures’’ (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended).amended (the ‘‘34 Act’’)) as of December 31, 2005. Disclosure controls and procedures are defined as controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange34 Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on this evaluation, and as a result of the foregoingremediation of the material weaknesses that were identified, Celanese'scompleted during the period covered by this Annual Report, Celanese’s CEO and CFO concluded that, as of December 31, 2004,2005, the end of the period covered by this Annual Report, Celanese'sCelanese’s disclosure controls and procedures were not effective for gathering, analyzing and disclosing the material information Celanese is required to disclose in the reports it files under the Securities Exchange34 Act, of 1934, within the time periods specified in the rules and forms of the Securities and Exchange Commssion. Except as discussed above, there have been no significant changes in Celanese's "internalCelanese’s ‘‘internal controls over financial reporting"reporting’’ (as defined in Rule 13a-15(f) under the Securities Exchange34 Act, of 1934, as amended)
during the period covered by this Annual Report that hashave materially affected, or isare reasonably likely to materially affect, internal controls over financial reporting.
We are in the process of implementing changes to strengthen our internal controls. In addition, while we have taken actions to address these deficiencies and weaknesses, additional measures may be necessary and these measures along with other measures we expect to take to improve our internal controls may not be sufficient to address the issues identified by us or ensure that our internal controls are effective. If we are unable to correct existing or future deficiencies or weaknesses in internal controls in a timely manner, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities. In addition, there could be a negative reaction in the financial markets due to a loss of confidence in reliability of future financial statements and SEC filings.
Beginning with the fiscal year ending December 31, 2006, Section 404 of the Sarbanes-Oxley Act will require us to include an internal control report of management with our Annual Report on Form 10-K. The internal control report must contain (1) a statement of management'smanagement’s responsibility for establishing and maintaining adequate
internal control over financial reporting for us, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management'smanagement’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on management'smanagement’s assessment of our internal control over financial reporting.
In connection therewith, we are currently performing the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with the management certification and auditor attestation requirements of Section 404. In the course of our ongoing Section 404 evaluation, we have identified areas of internal controls that may need improvement, and plan to design enhanced processes and controls to address these and any other issues that might be identified through this review. As we are still in the evaluation process, we may identify other conditions that may result in significant deficiencies or material weaknesses in the future.
We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance or our independent auditors are not able to certify as to the effectiveness of our internal control over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results.
We expect to incur expenses in an aggregate of approximately $9 million to $14 million in the 2005 fiscal year in connection with our preparation for compliance with Section 404.
Item 9B. Other Information
NoneOn March 30, 2006, Celanese Corporation entered into Amendment No. 2 to the Third Amended and Restated Shareholders' Agreement, dated as of October 31, 2005, as amended (the "Agreement"), by and among Celanese Corporation, Blackstone Capital Partners (Cayman) Ltd. 1 ("BCP 1"), Blackstone Capital Partners (Cayman) Ltd. 2 ("BCP 2"), Blackstone Capital Partners (Cayman) Ltd. 3 ("BCP 3" and, together with BCP 1 and BCP 2 and their respective successors and permitted assigns, the "Blackstone Entities") and BA Capital Investors Sidecar Fund, L.P., a Cayman Islands limited partnership ("BACI") pursuant to which, among other things, the parties agreed to remove BACI as a party to such agreement and to terminate the proxy previously granted by BACI to BCP 1 to vote the shares of Series A Common Stock owned by BACI in all matters to be acted upon by stockholders of Celanese Corporation and requirement for notice regarding changes in ownership obligation. Accordingly, BCP 1 no longer has any right to vote the shares of Series A Common Stock owned by BACI. To the knowledge of Celanese Corporation, the number of shares of Series A Common Stock held by the Blackstone Entities and BACI has not changed since the filing of the most recent amendment to the Schedule 13D or as a result of entering into the Agreement. The Agreement is filed as an exhibit to this report.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated herein by reference from the section captioned "Corporate Governance"‘‘Corporate Governance’’, "Our Management Team," and "Section‘‘Section 16(a) Beneficial Ownership Reporting Compliance"Compliance’’ of the Company'sCompany’s definitive proxy statement for the 20052006 annual meeting of stockholders to be filed not later than April 30, 20052006 with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "2005‘‘2006 Proxy Statement"Statement’’).
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference from the section captioned "Executive Compensation"‘‘Executive Compensation’’ of the 20052006 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference from the section captioned "Stock‘‘Stock Ownership Information"Information’’ of the 20052006 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is incorporated by reference from the section captioned "Certain‘‘Certain Relationships and Related Party Transactions"Transactions’’ of the 20052006 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference from the section captioned "Ratification‘‘Ratification of Independent Auditors – Auditors—Audit and Related Fees"Fees’’ of the 20052006 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements. The reports of our independent registered public accounting firm and our consolidated financial statements are listed below and begin on page F-1 of this Annual Report on Form 10-K.
Page Number | ||||||||
Reports of Independent Registered Public | ||||||||
Accounting Firm | F-2 | |||||||
Consolidated Statements of Operations | F-4 | |||||||
Consolidated Balance Sheets | F-5 | |||||||
Consolidated Statements of | F-6 | |||||||
Consolidated Statements of Cash Flows | F-7 | |||||||
Notes to Consolidated Financial Statements | F-8 | |||||||
2. | Financial Statement |
The financial statement schedules required by this item are included as an Exhibit to this Annual Report on Form 10-K.
3. | Exhibit |
See Index to Exhibits following our consolidated financial statements contained in this Annual Report on Form 10-K.
PLEASE NOTE: It is inappropriate for readers to assume the accuracy of, or rely upon any covenants, representations or warranties that may be contained in agreements or other documents filed as Exhibits to, or incorporated by reference in, this Annual Report. Any such covenants, representations or warranties may have been qualified or superseded by disclosures contained in separate schedules or exhibits not filed with or incorporated by reference in this Annual Report, may reflect the parties'parties’ negotiated risk allocation in the particular transaction, may be qualified by materiality standards that differ from those applicable for securities law purposes, and may not be true as of the date of this Annual Report or any other date and may be subject to waivers by any or all of the parties. Where exhibits and schedules to agreements filed or incorporated by reference as Exhibits hereto are not included in these exhibits, such exhibits and schedules to agreements are not included or incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
CELANESE CORPORATION | ||||||||||||||
By: | / | |||||||||||||
Name: | David N. Weidman | |||||||||||||
Title: | Chief Executive Officer, President and Director | |||||||||||||
Date: | March 31, | |||||||||||||
POWER OF ATTORNEY
Know all persons by their presents, that each of the directors of Celanese Corporation whose signature appears below hereby constitutes and appoints Corliss J. Nelson his true and lawful attorney-in-fact and agent, with full power of substitution, with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this Annual Report on Form 10-K, and to perform any acts necessary to be done in order to file such amendment, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall 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 by the following persons in the capacities and on the dates indicatedindicated.
Signature | Title | Date | ||
/s/ Chinh E. Chu | Chairman of the Board of Directors | March 31, | ||
Chinh E. Chu | ||||
/s/ David N. Weidman | Chief Executive Officer (Principal Executive Officer), President, | March 31, | ||
David N. Weidman | ||||
/s/ | Executive Vice President, Financial Officer (Principal Financial | March 31, 2006 | ||
John J. Gallagher III | ||||
/s/ Steven M. Sterin | Vice President, Controller (Principal Accounting Officer) | March 31, | ||
/s/ John M. Ballbach | Director | March 31, | ||
John M. Ballbach | ||||
/s/ James E. Barlett | Director | March 31, | ||
James E. Barlett | ||||
/s/ Benjamin J. Jenkins | Director | March 31, | ||
Benjamin J. Jenkins | ||||
/s/ William H. Joyce | Director | March 31, | ||
William H. Joyce | ||||
/s/ Anjan Mukherjee | Director | March 31, | ||
Anjan Mukherjee | ||||
/s/ Paul H. | Director | March 31, | ||
Paul H. | ||||
/s/ Hanns Ostmeier | Director | March 31, | ||
Hanns Ostmeier | ||||
/s/ James | Director | March 31, | ||
James | ||||
/s/ Daniel S. Sanders | Director | March 31, | ||
Daniel S. Sanders | ||||
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE | ||||||||
ANNUAL CELANESE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS | ||||||||
Reports of Independent Registered Public Accounting | F-2 | |||||||
Consolidated Statements of Operations for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004, and the | F-4 | |||||||
Consolidated Balance Sheets as of December 31, | F-5 | |||||||
Consolidated Statements of Shareholders' Equity (Deficit) for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004, and the | F-6 | |||||||
Consolidated Statements of Cash Flows for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004, and the | F-7 | |||||||
Notes to Consolidated Financial Statements | F-8 | |||||||
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Celanese Corporation:
We have audited the accompanying consolidated balance sheetsheets of Celanese Corporation and subsidiaries ("Successor"(‘‘Successor’’) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders'shareholders’ equity (deficit), and cash flows for the year ended December 31, 2005 and the nine-month period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celanese Corporation and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the nine-month period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, effective April 1, 2004 (a convenience date for the April 6, 2004 acquisition date), a subsidiary of Celanese Corporation acquired 84.3% of the outstanding stock of Celanese AG in a business combination. As a result of the acquisition, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.
/s/ KPMG LLPShort Hills, New JerseyMarch 30, 2005
Report of Independent Registered Public Accounting Firm
To the Supervisory BoardCelanese AG:
We have audited the accompanying consolidated balance sheet of Celanese AG and subsidiaries ("Predecessor") as of December 31, 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for the period from January 1, 2004 to March 31, 2004 and for the years ended December 31, 2003 and 2002 ("Predecessor periods"). These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celanese AGCorporation and subsidiaries as of December 31, 2003,2005 and 2004, and the results of their operations and their cash flows for the year ended December 31, 2005 and the nine-month period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, effective April 1, 2004 (a convenience date for the April 6, 2004 acquisition date), a subsidiary of Celanese Corporation acquired 84.3% of the outstanding stock of Celanese AG in a business combination. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.
/s/ KPMG LLP
Short Hills, New Jersey
March 30, 2006
Report of Independent Registered Public Accounting Firm
To the Supervisory Board
Celanese AG:
We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of Celanese AG and subsidiaries (‘‘Predecessor’’) for the three-month period ended March 31, 2004 and the year ended December 31, 2003 (‘‘Predecessor periods’’). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Celanese AG and subsidiaries for the Predecessor periods, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, Celanese AG and subsidiaries changed from using the last-in, first-out or LIFO method of determining cost of inventories at certain locations to the first-in, first-out or FIFO method.
As discussed in Note 5 to the consolidated financial statements, Celanese AG and subsidiaries adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", effective January 1, 2003.
As discussed in Note 5 to the consolidated financial statements, Celanese AG and subsidiaries adopted Financial Accounting Standards Board Interpretation No. 46 (Revised), "Consolidation‘‘Consolidation of Variable Interest Entities—an interpretation of ARB No. 51"51’’, effective December 31, 2003.
As discussed in Note 5 to the consolidated financial statements, Celanese AG and subsidiaries adopted SFAS No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002.
As discussed in Note 5 to the consolidated financial statements, Celanese AG and subsidiaries have early adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", effective October 1, 2002.
As discussed in Note 17 to the consolidated financial statements, Celanese AG and subsidiaries changed the actuarial measurement date for their Canadian and U.S. pension and other postretirement benefit plans in 2003 and 2002, respectively.
We also have reported separately on the consolidated financial statements of Celanese AG and subsidiaries as of December 31, 2003 and for the yearsyear ended December 31, 2003 and 2002.2003. Those financial statements were presented using the euro as the reporting currency.
/s/KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft
Frankfurt am Main, Germany
March 30, 2005, except as to Notes 4 (cash flows from discontinued operation (revised)) and 6 (acetate filament discontinued operations), which are as of March 31, 2006
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||
(in $ millions, except for share and per share data) | ||||||||||||||||||
Net sales | 3,826 | 1,243 | 4,603 | 3,836 | ||||||||||||||
Cost of sales | (3,092 | ) | (1,002 | ) | (3,883 | ) | (3,171 | ) | ||||||||||
Selling, general and administrative expenses | (498 | ) | (137 | ) | (510 | ) | (446 | ) | ||||||||||
Research and development expenses | (67 | ) | (23 | ) | (89 | ) | (65 | ) | ||||||||||
Special charges: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | 1 | — | 107 | — | ||||||||||||||
Sorbates antitrust matters | — | — | (95 | ) | — | |||||||||||||
Restructuring, impairment and other special charges, net | (92 | ) | (28 | ) | (17 | ) | 5 | |||||||||||
Foreign exchange gain (loss) | (3 | ) | — | (4 | ) | 3 | ||||||||||||
Gain (loss) on disposition of assets | 3 | (1 | ) | 6 | 11 | |||||||||||||
Operating profit | 78 | 52 | 118 | 173 | ||||||||||||||
Equity in net earnings of affiliates | 36 | 12 | 35 | 21 | ||||||||||||||
Interest expense | (300 | ) | (6 | ) | (49 | ) | (55 | ) | ||||||||||
Interest income | 24 | 5 | 44 | 18 | ||||||||||||||
Other income (expense), net | (12 | ) | 9 | 48 | 23 | |||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | (174 | ) | 72 | 196 | 180 | |||||||||||||
Income tax provision | (70 | ) | (17 | ) | (53 | ) | (57 | ) | ||||||||||
Earnings (loss) from continuing operations before minority interests | (244 | ) | 55 | 143 | 123 | |||||||||||||
Minority interests | (8 | ) | — | — | — | |||||||||||||
Earnings (loss) from continuing operations | (252 | ) | 55 | 143 | 123 | |||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Loss from operation of discontinued operations | — | (5 | ) | (1 | ) | (43 | ) | |||||||||||
Gain (loss) on disposal of discontinued operations | (2 | ) | 14 | 7 | 14 | |||||||||||||
Income tax benefit | 1 | 14 | — | 56 | ||||||||||||||
Earnings (loss) from discontinued operations | (1 | ) | 23 | 6 | 27 | |||||||||||||
Cumulative effect of changes in accounting principles, net of income tax of $1 million and $5 million in 2003 and 2002, respectively | — | — | (1 | ) | 18 | |||||||||||||
Net earnings (loss) | (253 | ) | 78 | 148 | 168 | |||||||||||||
Earnings (loss) per common share – basic: | ||||||||||||||||||
Continuing operations | (2.54 | ) | 1.12 | 2.89 | 2.44 | |||||||||||||
Discontinued operations | (0.01 | ) | 0.46 | 0.12 | 0.54 | |||||||||||||
Cumulative effect of changes in accounting principles | — | — | (0.02 | ) | 0.36 | |||||||||||||
Net earnings (loss) | (2.55 | ) | 1.58 | 2.99 | 3.34 | |||||||||||||
Earnings (loss) per common share – diluted: | ||||||||||||||||||
Continuing operations | (2.54 | ) | 1.11 | 2.89 | 2.44 | |||||||||||||
Discontinued operations | (0.01 | ) | 0.46 | 0.12 | 0.54 | |||||||||||||
Cumulative effect of changes in accounting principles | — | — | (0.02 | ) | 0.36 | |||||||||||||
Net earnings (loss) | (2.55 | ) | 1.57 | 2.99 | 3.34 | |||||||||||||
Weighted average shares – basic: | 99,377,884 | 49,321,468 | 49,445,958 | 50,329,346 | ||||||||||||||
Weighted average shares – diluted: | 99,377,884 | 49,712,421 | 49,457,145 | 50,329,346 | ||||||||||||||
Successor | Predecessor | |||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||
(in $ millions, except for share and per share data) | ||||||||||||||||||
Net sales | 6,070 | 3,744 | 1,218 | 4,485 | ||||||||||||||
Cost of sales | (4,773 | ) | (3,026 | ) | (983 | ) | (3,795 | ) | ||||||||||
Gross margin | 1,297 | 718 | 235 | 690 | ||||||||||||||
Selling, general and administrative expenses | (562 | ) | (497 | ) | (136 | ) | (504 | ) | ||||||||||
Research and development expenses | (91 | ) | (67 | ) | (23 | ) | (89 | ) | ||||||||||
Special (charges) gains: | ||||||||||||||||||
Insurance recoveries associated with plumbing cases | 34 | 1 | — | 107 | ||||||||||||||
Sorbates antitrust matters | — | — | — | (95 | ) | |||||||||||||
Restructuring, impairment and other special (charges) gains | (107 | ) | (83 | ) | (28 | ) | (17 | ) | ||||||||||
Foreign exchange gain (loss), net | — | (3 | ) | — | (4 | ) | ||||||||||||
Gain (loss) on disposition of assets, net | (10 | ) | 3 | (1 | ) | 6 | ||||||||||||
Operating profit | 561 | 72 | 47 | 94 | ||||||||||||||
Equity in net earnings of affiliates | 61 | 36 | 12 | 35 | ||||||||||||||
Interest expense | (387 | ) | (300 | ) | (6 | ) | (49 | ) | ||||||||||
Interest income | 38 | 24 | 5 | 44 | ||||||||||||||
Other income (expense), net | 89 | (12 | ) | 9 | 48 | |||||||||||||
Earnings (loss) from continuing operations before tax and minority interests | 362 | (180 | ) | 67 | 172 | |||||||||||||
Income tax provision | (57 | ) | (70 | ) | (15 | ) | (45 | ) | ||||||||||
Earnings (loss) from continuing operations before minority interests | 305 | (250 | ) | 52 | 127 | |||||||||||||
Minority interests | (37 | ) | (8 | ) | — | — | ||||||||||||
Earnings (loss) from continuing operations | 268 | (258 | ) | 52 | 127 | |||||||||||||
Earnings (loss) from discontinued operations: | ||||||||||||||||||
Earnings (loss) from operation of discontinued operations | 9 | 5 | — | 23 | ||||||||||||||
Gain (loss) on disposal of discontinued operations | — | (1 | ) | 14 | 7 | |||||||||||||
Income tax benefit (provision) | — | 1 | 12 | (8 | ) | |||||||||||||
Earnings (loss) from discontinued operations | 9 | 5 | 26 | 22 | ||||||||||||||
Cumulative effect of change in accounting principle, net of income tax of $1 million in 2003 | — | — | — | (1 | ) | |||||||||||||
Net earnings (loss) | 277 | (253 | ) | 78 | 148 | |||||||||||||
Cumulative declared and undeclared preferred stock dividend | (10 | ) | — | — | — | |||||||||||||
Net earnings (loss) available to common shareholders | 267 | (253 | ) | 78 | 148 | |||||||||||||
Earnings (loss) per common share – basic: | ||||||||||||||||||
Continuing operations | 1.67 | (2.60 | ) | 1.05 | 2.57 | |||||||||||||
Discontinued operations | 0.06 | 0.05 | 0.53 | 0.44 | ||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.02 | ) | |||||||||||||
Net earnings (loss) available to common shareholders | 1.73 | (2.55 | ) | 1.58 | 2.99 | |||||||||||||
Earnings (loss) per common share – diluted: | ||||||||||||||||||
Continuing operations | 1.61 | (2.60 | ) | 1.05 | 2.57 | |||||||||||||
Discontinued operations | 0.06 | 0.05 | 0.52 | 0.44 | ||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | (0.02 | ) | |||||||||||||
Net earnings (loss) available to common shareholders | 1.67 | (2.55 | ) | 1.57 | 2.99 | |||||||||||||
Weighted average shares – basic: | 154,402,575 | 99,377,884 | 49,321,468 | 49,445,958 | ||||||||||||||
Weighted average shares – diluted: | 166,200,048 | 99,377,884 | 49,712,421 | 49,457,145 | ||||||||||||||
See the accompanying notes to the consolidated financial statements.
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Successor | ||||||||||
As of December 31, 2005 | As of December 31, 2004 | |||||||||
(in $ millions, except share amounts) | ||||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | 390 | 838 | ||||||||
Receivables: | ||||||||||
Trade receivables, net | 918 | 843 | ||||||||
Other receivables | 480 | 670 | ||||||||
Inventories | 661 | 604 | ||||||||
Deferred income taxes | 37 | 71 | ||||||||
Other assets | 91 | 86 | ||||||||
Assets of discontinued operations | 2 | 39 | ||||||||
Total current assets | 2,579 | 3,151 | ||||||||
Investments | 775 | 833 | ||||||||
Property, plant and equipment, net | 2,040 | 1,702 | ||||||||
Deferred income taxes | 139 | 54 | ||||||||
Other assets | 482 | 523 | ||||||||
Goodwill | 949 | 747 | ||||||||
Intangible assets, net | 481 | 400 | ||||||||
Total assets | 7,445 | 7,410 | ||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | ||||||||||
Current liabilities: | ||||||||||
Short-term borrowings and current installments of long-term debt – third party and affiliates | 155 | 144 | ||||||||
Trade payables – third party and affiliates | 810 | 716 | ||||||||
Other current liabilities | 784 | 888 | ||||||||
Deferred income taxes | 36 | 20 | ||||||||
Income taxes payable | 225 | 214 | ||||||||
Liabilities of discontinued operations | 3 | 13 | ||||||||
Total current liabilities | 2,013 | 1,995 | ||||||||
Long-term debt | 3,282 | 3,243 | ||||||||
Deferred income taxes | 285 | 256 | ||||||||
Benefit obligations | 1,126 | 1,000 | ||||||||
Other liabilities | 440 | 510 | ||||||||
Minority interests | 64 | 518 | ||||||||
Commitments and contingencies | ||||||||||
Shareholders' equity (deficit): | ||||||||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized and 9,600,000 issued and outstanding as of December 31, 2005 | — | — | ||||||||
Series A common stock, $0.0001 par value, 400,000,000 shares authorized and 158,562,161 and 0 shares issued and outstanding as of December 31, 2005 and 2004, respectively | — | — | ||||||||
Series B common stock, $0.0001 par value, 100,000,000 shares authorized and 0 and 99,377,884 shares issued and outstanding as of December 31, 2005 and 2004, respectively | — | — | ||||||||
Additional paid-in capital | 337 | 158 | ||||||||
Retained earnings (accumulated deficit) | 24 | (253 | ) | |||||||
Accumulated other comprehensive income (loss), net | (126 | ) | (17 | ) | ||||||
Total shareholders' equity (deficit) | 235 | (112 | ) | |||||||
Total liabilities and shareholders' equity (deficit) | 7,445 | 7,410 | ||||||||
See the accompanying notes to the consolidated financial statements.
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity (Deficit) | |||||||||||||||||||||
(in $ millions, except per share data) | ||||||||||||||||||||||||||
Predecessor | ||||||||||||||||||||||||||
Balance at December 31, 2001 | 153 | 2,677 | (266 | ) | (497 | ) | (113 | ) | 1,954 | |||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
Net earnings | — | — | 168 | — | — | 168 | ||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||
Unrealized gain on securities(1) | — | — | — | 3 | — | 3 | ||||||||||||||||||||
Foreign currency translation | — | — | — | 192 | — | 192 | ||||||||||||||||||||
Unrealized loss on derivative contracts(2) | — | — | — | (5 | ) | — | (5 | ) | ||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | (220 | ) | — | (220 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | (30 | ) | — | (30 | ) | ||||||||||||||||||
Comprehensive income | — | — | — | — | — | 138 | ||||||||||||||||||||
Amortization of deferred compensation | — | 3 | — | — | — | 3 | ||||||||||||||||||||
Indemnification of demerger liability | — | 7 | — | — | — | 7 | ||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||||||
Retirement of treasury stock | (3 | ) | (22 | ) | — | — | 25 | — | ||||||||||||||||||
Balance at December 31, 2002 | 150 | 2,665 | (98 | ) | (527 | ) | (94 | ) | 2,096 | |||||||||||||||||
Comprehensive income, net of tax: | ||||||||||||||||||||||||||
Net earnings | — | — | 148 | — | — | 148 | ||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized gain on securities(1) | — | — | — | 4 | — | 4 | ||||||||||||||||||||
Foreign currency translation | — | — | — | 307 | — | 307 | ||||||||||||||||||||
Unrealized gain on derivative contracts(2) | — | — | — | 6 | — | 6 | ||||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | 12 | — | 12 | ||||||||||||||||||||
Other comprehensive income | — | — | — | 329 | — | 329 | ||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 477 | ||||||||||||||||||||
Dividends ($0.48 per share) | — | — | (25 | ) | — | — | (25 | ) | ||||||||||||||||||
Amortization of deferred compensation | — | 5 | — | — | — | 5 | ||||||||||||||||||||
Indemnification of demerger liability(4) | — | 44 | — | — | — | 44 | ||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (15 | ) | (15 | ) | ||||||||||||||||||
Balance at December 31, 2003 | 150 | 2,714 | 25 | (198 | ) | (109 | ) | 2,582 | ||||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
Net earnings | — | — | 78 | — | — | 78 | ||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||
Unrealized gain on securities(1) | — | — | — | 7 | — | 7 | ||||||||||||||||||||
Foreign currency translation | — | — | — | (46 | ) | — | (46 | ) | ||||||||||||||||||
Other comprehensive loss | — | — | — | (39 | ) | — | (39 | ) | ||||||||||||||||||
Comprehensive income | — | — | — | — | — | 39 | ||||||||||||||||||||
Amortization of deferred compensation | — | 1 | — | — | — | 1 | ||||||||||||||||||||
Balance at March 31, 2004 | 150 | 2,715 | 103 | (237 | ) | (109 | ) | 2,622 | ||||||||||||||||||
Successor | ||||||||||||||||||||||||||
Contributed Capital | — | 641 | — | — | — | 641 | ||||||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
Net loss | — | — | (253 | ) | — | — | (253 | ) | ||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||
Unrealized loss on securities(1) | — | — | — | (7 | ) | — | (7 | ) | ||||||||||||||||||
Foreign currency translation | — | — | — | 7 | — | 7 | ||||||||||||||||||||
Unrealized gain on derivative contracts(2) | — | — | — | 2 | — | 2 | ||||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | (19 | ) | — | (19 | ) | ||||||||||||||||||
Other comprehensive income | — | — | — | (17 | ) | — | (17 | ) | ||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (270 | ) | |||||||||||||||||||
Indemnification of demerger liability | — | 3 | — | — | — | 3 | ||||||||||||||||||||
Distribution to original shareholders | — | (500 | ) | — | — | — | (500 | ) | ||||||||||||||||||
Management compensation | — | 14 | — | — | — | 14 | ||||||||||||||||||||
Balance at December 31, 2004 | — | 158 | (253 | ) | (17 | ) | — | (112 | ) | |||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Shareholders' Equity (Deficit) | ||||||||||||||||||||||||
(in $ millions, except per share data) | ||||||||||||||||||||||||||||||
Predecessor | ||||||||||||||||||||||||||||||
Balance at December 31, 2002 | — | 150 | 2,665 | (98 | ) | (527 | ) | (94 | ) | 2,096 | ||||||||||||||||||||
Comprehensive income, net of tax: | ||||||||||||||||||||||||||||||
Net earnings | — | — | — | 148 | — | — | 148 | |||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||
Unrealized gain (loss) on securities(1) | — | — | — | — | 4 | — | 4 | |||||||||||||||||||||||
Foreign currency translation | — | — | — | — | 307 | — | 307 | |||||||||||||||||||||||
Unrealized gain on derivative contracts(2) | — | — | — | — | 6 | — | 6 | |||||||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | — | 12 | — | 12 | |||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 329 | — | 329 | |||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | 477 | |||||||||||||||||||||||
Dividends ($0.48 per share) | — | — | — | (25 | ) | — | — | (25 | ) | |||||||||||||||||||||
Amortization of deferred compensation | — | — | 5 | — | — | — | 5 | |||||||||||||||||||||||
Indemnification of demerger liability(4) | — | — | 44 | — | — | — | 44 | |||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (15 | ) | (15 | ) | |||||||||||||||||||||
Balance at December 31, 2003 | — | 150 | 2,714 | 25 | (198 | ) | (109 | ) | 2,582 | |||||||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||
Net earnings | — | — | — | 78 | — | — | 78 | |||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||
Unrealized gain (loss) on securities(1) | — | — | — | — | 7 | — | 7 | |||||||||||||||||||||||
Foreign currency translation | — | — | — | — | (46 | ) | — | (46 | ) | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (39 | ) | — | (39 | ) | |||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | 39 | |||||||||||||||||||||||
Amortization of deferred compensation | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||
Balance at March 31, 2004 | — | 150 | 2,715 | 103 | (237 | ) | (109 | ) | 2,622 | |||||||||||||||||||||
Successor | ||||||||||||||||||||||||||||||
Contributed Capital | — | — | 641 | — | — | — | 641 | |||||||||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||
Net loss | — | — | — | (253 | ) | — | — | (253 | ) | |||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||
Unrealized loss on securities(1) | — | — | — | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | 7 | — | 7 | |||||||||||||||||||||||
Unrealized gain on derivative contracts(2) | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | — | (19 | ) | — | (19 | ) | |||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (17 | ) | — | (17 | ) | |||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | (270 | ) | ||||||||||||||||||||||
Indemnification of demerger liability | — | — | 3 | — | — | — | 3 | |||||||||||||||||||||||
Dividend to original shareholders | — | — | (500 | ) | — | — | — | (500 | ) | |||||||||||||||||||||
Management compensation | — | — | 14 | — | — | — | 14 | |||||||||||||||||||||||
Balance at December 31, 2004 | — | — | 158 | (253 | ) | (17 | ) | (112 | ) | |||||||||||||||||||||
Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||
Net earnings | — | — | — | 277 | — | — | 277 | |||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||
Unrealized gain (loss) on securities(1) | — | — | — | — | 3 | — | 3 | |||||||||||||||||||||||
Unrealized gain on derivative contracts(2) | — | — | — | — | — | — | — | |||||||||||||||||||||||
Additional minimum pension liability(3) | — | — | — | — | (117 | ) | — | (117 | ) | |||||||||||||||||||||
Foreign currency translation | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (109 | ) | — | (109 | ) | |||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | 168 | |||||||||||||||||||||||
Indemnification of demerger liability | — | — | 5 | — | — | — | 5 | |||||||||||||||||||||||
Common stock dividends | — | — | (13 | ) | — | — | — | (13 | ) | |||||||||||||||||||||
Preferred stock dividends | — | — | (8 | ) | — | — | — | (8 | ) | |||||||||||||||||||||
Net proceeds from issuance of common stock | — | — | 752 | — | — | — | 752 | |||||||||||||||||||||||
Net proceeds from issuance of preferred stock | — | — | 233 | — | — | — | 233 | |||||||||||||||||||||||
Net proceeds from issuance of discounted common stock | — | — | 12 | — | — | — | 12 | |||||||||||||||||||||||
Stock based compensation | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||||
Special cash dividend to original shareholders | — | — | (804 | ) | — | — | — | (804 | ) | |||||||||||||||||||||
Balance at December 31, 2005 | — | — | 337 | 24 | (126 | ) | — | 235 | ||||||||||||||||||||||
(1) | Net of tax (benefit) expense of |
(2) | Net of tax (benefit) expense of |
(3) | Net of tax (benefit) expense of |
(4) | Net of tax expense of $33 million in 2003. |
See the accompanying notes to the consolidated financial statements.
CELANESE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor | Predecessor | |||||||||||||||||
Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | |||||||||||||||
(in $ millions) | ||||||||||||||||||
Operating activities from continuing operations: | ||||||||||||||||||
Net earnings (loss) | (253 | ) | 78 | 148 | 168 | |||||||||||||
(Earnings) loss from discontinued operations, net | 1 | (23 | ) | (6 | ) | (27 | ) | |||||||||||
Cumulative effect of changes in accounting principles | — | — | 1 | (18 | ) | |||||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||
Special charges, net of amounts used | 37 | 20 | 91 | (60 | ) | |||||||||||||
Stock based compensation | — | 2 | 65 | 5 | ||||||||||||||
Depreciation and amortization | 184 | 72 | 294 | 247 | ||||||||||||||
Amortization of deferred financing fees | 98 | — | — | — | ||||||||||||||
Change in equity of affiliates | (14 | ) | 3 | (12 | ) | 40 | ||||||||||||
Deferred income taxes | 19 | (12 | ) | 79 | 2 | |||||||||||||
(Gain) on disposition of assets, net | (3 | ) | — | (9 | ) | (11 | ) | |||||||||||
Write-downs of investments | — | — | 4 | 15 | ||||||||||||||
Loss (gain) on foreign currency | 19 | (26 | ) | 155 | 121 | |||||||||||||
Minority interests | 8 | — | — | — | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||
Trade receivables, net – third party and affiliates | (19 | ) | (89 | ) | — | (90 | ) | |||||||||||
Other receivables | 109 | (42 | ) | 22 | (18 | ) | ||||||||||||
Prepaid expenses | (8 | ) | 14 | (50 | ) | (10 | ) | |||||||||||
Inventories | (18 | ) | (11 | ) | (11 | ) | 11 | |||||||||||
Trade payables – third party and affiliates | 95 | (6 | ) | (41 | ) | 7 | ||||||||||||
Benefit obligations and other liabilities | (356 | ) | (118 | ) | (165 | ) | (4 | ) | ||||||||||
Income taxes payable | 10 | 38 | (195 | ) | (4 | ) | ||||||||||||
Loss on extinguishment of mandatorily redeemable preferred shares | 21 | — | — | — | ||||||||||||||
Other, net | 7 | (7 | ) | 31 | (11 | ) | ||||||||||||
Net cash provided by (used in) operating activities | (63 | ) | (107 | ) | 401 | 363 | ||||||||||||
Investing activities from continuing operations: | ||||||||||||||||||
Capital expenditures on property, plant and equipment | (166 | ) | (44 | ) | (211 | ) | (203 | ) | ||||||||||
Acquisition of Celanese AG, net of cash acquired | (1,564 | ) | — | — | — | |||||||||||||
Fees associated with acquisition of Celanese AG | (69 | ) | — | — | — | |||||||||||||
Acquisition of businesses | — | — | (18 | ) | (131 | ) | ||||||||||||
Net proceeds (outflow) on sale of assets | 31 | — | 10 | (12 | ) | |||||||||||||
Net proceeds from disposal of discontinued operations | — | 139 | 10 | 206 | ||||||||||||||
Proceeds from sale of marketable securities | 132 | 42 | 202 | 201 | ||||||||||||||
Purchases of marketable securities | (173 | ) | (42 | ) | (265 | ) | (223 | ) | ||||||||||
Distributions from affiliates | — | — | — | 39 | ||||||||||||||
Other, net | (1 | ) | 1 | (3 | ) | (16 | ) | |||||||||||
Net cash provided by (used in) investing activities | (1,810 | ) | 96 | (275 | ) | (139 | ) | |||||||||||
Financing activities from continuing operations: | ||||||||||||||||||
Initial capitalization | 641 | — | — | — | ||||||||||||||
Distribution to original shareholders | (500 | ) | — | — | — | |||||||||||||
Issuance of mandatorily redeemable preferred shares | 200 | — | — | — | ||||||||||||||
Repayment of mandatorily redeemable preferred shares | (221 | ) | — | — | — | |||||||||||||
Borrowings under bridge loans | 1,565 | — | — | — | ||||||||||||||
Repayment of bridge loans | (1,565 | ) | — | — | — | |||||||||||||
Proceeds from long-term debt | — | — | 61 | 50 | ||||||||||||||
Proceeds from issuance of senior subordinated and discount notes | 1,988 | — | — | — | ||||||||||||||
Proceeds from floating rate term loan | 350 | — | — | — | ||||||||||||||
Borrowings under senior credit facilities | 608 | — | — | — | ||||||||||||||
Short-term borrowings (repayments), net | 36 | (16 | ) | (20 | ) | (141 | ) | |||||||||||
Payments of long-term debt | (254 | ) | (27 | ) | (109 | ) | (53 | ) | ||||||||||
Issuance/(purchase) of Celanese AG treasury stock | 29 | — | (15 | ) | (6 | ) | ||||||||||||
Issuance of preferred stock by consolidated subsidiary | 15 | — | — | — | ||||||||||||||
Fees associated with financing | (205 | ) | — | — | — | |||||||||||||
Dividend payments by Celanese AG | (1 | ) | — | (25 | ) | — | ||||||||||||
Net cash provided by (used in) financing activities | 2,686 | (43 | ) | (108 | ) | (150 | ) | |||||||||||
Exchange rate effects on cash | 25 | (1 | ) | 6 | 7 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 838 | (55 | ) | 24 | 81 | |||||||||||||
Cash and cash equivalents at beginning of period | — | 148 | 124 | 43 | ||||||||||||||
Cash and cash equivalents at end of period | 838 | 93 | 148 | 124 | ||||||||||||||
Net cash provided by (used in) discontinued operations: | ||||||||||||||||||
Operating activities | 1 | (139 | ) | (12 | ) | 16 | ||||||||||||
Investing activities | (1 | ) | 139 | 12 | (17 | ) | ||||||||||||
Financing activities | — | — | — | (2 | ) | |||||||||||||
Net cash used in discontinued operations | — | — | — | (3 | ) | |||||||||||||
Successor | Predecessor | |||||||||||||||||
Year Ended December 31, 2005 | Nine Months Ended December 31, 2004 | Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||||||||
(in $ millions) | ||||||||||||||||||
Operating activities: | ||||||||||||||||||
Net earnings (loss) | 277 | (253 | ) | 78 | 148 | |||||||||||||
Cumulative effect of changes in accounting principles | — | — | — | 1 | ||||||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||
Special (charges) gains, net of amounts used | 30 | 47 | 20 | 91 | ||||||||||||||
Stock based compensation | — | — | 2 | 65 | ||||||||||||||
Depreciation | 218 | 140 | 67 | 271 | ||||||||||||||
Amortization of intangible and other assets | 68 | 41 | 3 | 18 | ||||||||||||||
Amortization of deferred financing fees | 41 | 98 | — | — | ||||||||||||||
Change in equity of affiliates | 5 | (14 | ) | 4 | (12 | ) | ||||||||||||
Deferred income taxes | (85 | ) | 19 | (14 | ) | 71 | ||||||||||||
(Gain) loss on disposition of assets, net | 7 | (3 | ) | — | (9 | ) | ||||||||||||
Write-downs of investments | — | — | — | 4 | ||||||||||||||
(Gain) loss on foreign currency transactions | 70 | 19 | (26 | ) | 155 | |||||||||||||
Minority interests | 37 | 8 | — | — | ||||||||||||||
Loss on extinguishment of debt | 74 | 21 | — | — | ||||||||||||||
Guaranteed annual payment | 22 | 8 | — | — | ||||||||||||||
Operating cash provided by (used in) discontinued operations (Revised, See Note 4) | (10 | ) | 4 | (147 | ) | (5 | ) | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||
Trade receivables, net – third party and affiliates | 30 | (23 | ) | (89 | ) | (9 | ) | |||||||||||
Other receivables | 33 | 109 | (42 | ) | 22 | |||||||||||||
Prepaid expenses | (65 | ) | (8 | ) | 14 | (50 | ) | |||||||||||
Inventories | 21 | (25 | ) | (11 | ) | (7 | ) | |||||||||||
Trade payables – third party and affiliates | 18 | 96 | (6 | ) | (36 | ) | ||||||||||||
Benefit obligations and other liabilities | (141 | ) | (364 | ) | 7 | (153 | ) | |||||||||||
Income taxes payable | 17 | 10 | 38 | (195 | ) | |||||||||||||
Other, net | 47 | 7 | (5 | ) | 31 | |||||||||||||
Net cash provided by (used in) operating activities | 714 | (63 | ) | (107 | ) | 401 | ||||||||||||
Investing activities from continuing operations: | ||||||||||||||||||
Capital expenditures on property, plant and equipment | (212 | ) | (166 | ) | (44 | ) | (211 | ) | ||||||||||
Acquisition of CAG, net of cash acquired | (473 | ) | (1,564 | ) | — | — | ||||||||||||
Fees associated with acquisitions | (29 | ) | (69 | ) | — | — | ||||||||||||
Acquisition of Vinamul, net of cash reimbursed | (198 | ) | — | — | — | |||||||||||||
Acquisition of Acetex, net of cash acquired | (216 | ) | — | — | — | |||||||||||||
Acquisition of other businesses | — | — | — | (18 | ) | |||||||||||||
Net proceeds on sale of businesses and assets | 48 | 31 | — | 10 | ||||||||||||||
Net proceeds from disposal of discontinued operations | 75 | — | 139 | 10 | ||||||||||||||
Proceeds from sale of marketable securities | 217 | 132 | 42 | 202 | ||||||||||||||
Purchases of marketable securities | (137 | ) | (173 | ) | (42 | ) | (265 | ) | ||||||||||
Other, net | 5 | (1 | ) | 1 | (3 | ) | ||||||||||||
Net cash provided by (used in) investing activities | (920 | ) | (1,810 | ) | 96 | (275 | ) | |||||||||||
Financing activities from continuing operations: | ||||||||||||||||||
Initial capitalization | — | 641 | — | — | ||||||||||||||
Dividend to Original Shareholders | (804 | ) | (500 | ) | — | — | ||||||||||||
Issuance of mandatorily redeemable preferred shares | — | 200 | — | — | ||||||||||||||
Repayment of mandatorily redeemable preferred shares | — | (221 | ) | — | — | |||||||||||||
Proceeds from issuance of Series A common stock, net | 752 | — | — | — | ||||||||||||||
Proceeds from issuance of preferred stock, net | 233 | — | — | — | ||||||||||||||
Proceeds from issuance of discounted Series A common stock | 12 | — | — | — | ||||||||||||||
Borrowings under bridge loans | — | 1,565 | — | — | ||||||||||||||
Repayment of bridge loans | — | (1,565 | ) | — | — | |||||||||||||
Redemption of senior subordinated notes, including related premium | (572 | ) | — | — | — | |||||||||||||
Repayment of floating rate term loan, including related premium | (354 | ) | — | — | — | |||||||||||||
Proceeds from long-term debt | — | — | — | 61 | ||||||||||||||
Proceeds from issuance of senior subordinated and discount notes | — | 1,988 | — | — | ||||||||||||||
Proceeds from floating rate term loan | — | 350 | — | — | ||||||||||||||
Borrowings under senior credit facilities, net | 1,135 | 608 | — | — | ||||||||||||||
Short-term borrowings (repayments), net | 22 | 36 | (16 | ) | (20 | ) | ||||||||||||
Payments of long-term debt | (36 | ) | (254 | ) | (27 | ) | (109 | ) | ||||||||||
Proceeds from long-term debt | 16 | — | — | — | ||||||||||||||
Settlement of lease obligations | (31 | ) | — | — | — | |||||||||||||
Redemption of senior discount notes, including related premium | (207 | ) | — | — | — | |||||||||||||
Redemption of Acetex bonds | (280 | ) | — | — | — | |||||||||||||
Issuance/(purchase) of CAG treasury stock | — | 29 | — | (15 | ) | |||||||||||||
Issuance of preferred stock by consolidated subsidiary | — | 15 | — | — | ||||||||||||||
Fees associated with financing | (9 | ) | (205 | ) | — | — | ||||||||||||
Dividend payments on preferred stock | (8 | ) | — | — | — | |||||||||||||
Dividend payments on common stock | (13 | ) | — | — | — | |||||||||||||
Dividend payments by CAG | — | (1 | ) | — | (25 | ) | ||||||||||||
Net cash provided by (used in) financing activities | (144 | ) | 2,686 | (43 | ) | (108 | ) | |||||||||||
Exchange rate effects on cash | (98 | ) | 25 | (1 | ) | 6 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (448 | ) | 838 | (55 | ) | 24 | ||||||||||||
Cash and cash equivalents at beginning of period | 838 | — | 148 | 124 | ||||||||||||||
Cash and cash equivalents at end of period | 390 | 838 | 93 | 148 | ||||||||||||||
See the accompanying notes to the consolidated financial statements.
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Change in Ownership
Description of the Company
Celanese Corporation and its subsidiaries (collectively the "Company"‘‘Company’’ or the "Successor"‘‘Successor’’) is a global industrial chemicals company, representing the former business of Celanese AG and its subsidiaries ("CAG"(‘‘CAG’’ or the "Predecessor"‘‘Predecessor’’). The Company's business involves processing chemical raw materials, such as ethylene and propylene, and natural products, including natural gas and wood pulp, into value-added chemicals and chemical-based products.
On November 3, 2004, Blackstone Crystal Holdings Capital Partners (Cayman) IV Ltd., reorganized as a Delaware corporation and changed its name to Celanese Corporation. Additionally, BCP Crystal Holdings Ltd. 2, a subsidiary of Celanese Corporation, was reorganized as a Delaware limited liability company and changed its name to Celanese Holdings LLC.
Basis of Presentation
The financial position, results of operations and cash flows and related disclosures for periods prior to April 1, 2004 (a convenience date for the April 6, 2004 acquisition date), the effective date of the transactionacquisition of Celanese AG (the "Effective Date"‘‘Effective Date’’), are presented as the results of the Predecessor. The financial position, results of operations and cash flows subsequent to the Effective Date, are presented as those of the resultsSuccessor.
The consolidated financial statements of the Successor as of and for the nine monthsyear ended December 31, 2004.
The consolidated financial statements of the Successor2005 and as of and for the nine months ended December 31, 2004 reflect the acquisition of CAG under the purchase method of accounting in accordance with Financial Accounting Standards Board ("FASB"(‘‘FASB’’) Statement of Financial Accounting Standards ("SFAS"(‘‘SFAS’’) No. 141, Business Combinations.
The results of the Successor are not comparable to the results of the Predecessor due to the difference in the basis of presentation of purchase accounting as compared to historical cost. Furthermore, the Successor and the Predecessor have different accounting policies with respect to certain matters (See Note 4). The consolidated financial statements for the three months ended March 31, 2004 and the year ended December 31, 2003 have been prepared in accordance with CAG'sCAG’s accounting policies (see(See Note 4) and the requirements for interim financial reporting in accordance with Accounting Principles Board ("APB"(‘‘APB’’) No. 28, Interim Financial Reporting.
Change in Ownership
Pursuant to a voluntary tender offer commenced in February 2004, Celanese Europe Holding GmbH & Co. KG, formerly known as BCP Crystal Acquisition GmbH & Co. KG (the "Purchaser"‘‘Purchaser’’), an indirect wholly owned subsidiary of Celanese Corporation, on April 6, 2004 acquired approximately 84% of the ordinary shares of Celanese AG, excluding treasury shares, (the "CAG Shares"‘‘CAG Shares’’) for a purchase price of $1,693 million, including direct acquisition costs of approximately $69 million (the "Acquisition"‘‘Acquisition’’). During the year ended December 31, 2005 and the nine months ended December 31, 2004, the Purchaser acquired additional CAG shares for $473 million and $33 million, respectively, including direct acquisition costs of Celanese AG for a purchase price$4 million and less than $1 million, respectively. The additional CAG shares were acquired pursuant to either i) the mandatory offer (See Note 2) which commenced in September 2004 and has been extended such that it will expire on April 1, 2006, unless further extended or ii) the acquisition of $33 million. As theadditional CAG shares primarily represented exercised employee stock options, the Purchaser's ownership percentage remained at approximately 84% as of December 31, 2004.
Funding for the Acquisition included equity investments of $641 million from Blackstone Capital Partners (Cayman) Ltd. 1, Blackstone Capital Partners (Cayman) Ltd. 2, and Blackstone Capital Partners (Cayman) Ltd. 3 (collectively, "Blackstone") and BA Capital Investors Sidecar Fund, L.P. (and together with Blackstone, the "Original Shareholders"), term loan facilities of approximately $608 million, $1,565 million in borrowings under senior subordinated bridge loan facilities as well as the issuance of mandatorily redeemable preferred stock totaling $200 million. In June 2004, BCP Caylux Holdings Luxembourg S.C.A. ("BCP Caylux"), an indirect subsidiary of Celanese Corporation, used the proceedsdescribed below.
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
from its offerings of $1,000 million and €200 million ($244 million) principal amount of its senior subordinated notes due 2014, together with available cash and borrowings under a $350 million senior secured floating rate term loan to repay the senior subordinated bridge loan facilities, plus accrued interest, and to pay related fees and expenses. See Notes 16, 18 and 20 for further description of financings.Domination Agreement
Following the completion of the Acquisition, the CAG Shares were delisted from the New York Stock Exchange on June 2, 2004. In addition,On October 1, 2004, a domination and profit and loss transfer agreement (the "Domination Agreement"‘‘Domination Agreement’’) between Celanese AGCAG and the Purchaser was approved by the necessary majority of shareholders at the extraordinary general meeting held on July 30 and 31, 2004, registered in the Commercial Register on August 2, 2004, and became operative on October 1, 2004.operative. When the Domination Agreement became operative, the Purchaser became obligated to offer to acquire all outstanding CAG Sharesshares from the minority shareholders of Celanese AGCAG in return for payment of fair cash compensation. The amount of this fair cash compensation has beenwas determined to be €41.92 per share, plus interest, in accordance with applicable German law. The total amount of funds necessary to purchase all of the remaining CAG Shares as of December 31, 2004, assuming all such shares were tendered on or prior to that date that the Domination Agreement became operative would be at least €334 million. The Purchaser may elect, or be required, to pay a purchase price in excess of €41.92 to acquire the remaining outstanding CAG Shares.shares. Any minority shareholder who elects not to sell its shares to the Purchaser will be entitled to remain a shareholder of CAG and to receive from the Purchaser a gross guaranteed fixed annual payment on its shares of €3.27 per CAG Shareshare less certain corporate taxes in lieu of any future dividend. Beginning October 1, 2004, takingTaking into account the circumstances and the tax rates at the time of entering into the Domination Agreement, the net guaranteed fixed annual payment would beis €2.89 per share for a full fiscal year. The net guaranteed fixed annual payment may, depending on applicable corporate tax rates, in the future be higher, lower or the same as €2.89 per share. InFor the fourth quarter ofyear ended December 31, 2005 and the nine months ended December 31, 2004, a charge of approximately $7€19 million ($22 million) and €6 million ($8 million), respectively, was recorded in Other income (expense), net for the anticipated guaranteed payment. As a result of the acquisition of CAG shares during 2005, the remaining liability at December 31, 2005 to be paid in 2006 for CAG's 2005 fiscal year is €3 million ($4 million).
Beginning October 1, 2004, under the terms of the Domination Agreement, the Purchaser, as the dominating entity, among other things, is required to compensate Celanese AGCAG for any statutory annual loss incurred by Celanese AG,CAG, the dominated entity, on a non-consolidated basis, at the end of the fiscal year when the loss was incurred. This obligation to compensate Celanese AGCAG for annual losses will apply during the entire term of the Domination Agreement.
There is no assurance that the Domination Agreement will remain operative in its current form. If the Domination Agreement ceases to be operative, the Company will not be able to directly give instructions to the Celanese AGCAG board of management. The Domination Agreement cannot be terminated by the Purchaser in the ordinary course until September 30, 2009. However, irrespective of whether a domination agreement is in place between the Company and Celanese AG,CAG, under German law Celanese AGCAG is effectively controlled by the Company because of the Company's approximate 84%more than 95% ownership of the outstanding shares of Celanese AG.CAG shares. The Company does have the ability, through a variety of means, to utilize its controlling rights as an owner of approximately 84% of the outstanding shares of Celanese AG, to, among other things, (1) ultimately cause a domination agreement to become operative; (2) use its ability, through its approximately 84%more than 95% voting power at any shareholders' meetings of Celanese AG,CAG, to elect the shareholder representatives on the supervisory board and to thereby effectively control the appointment and removal of the members of the Celanese AGCAG board of management; and (3) effect all decisions that an approximately 84%a majority shareholder who owns more than 95% is permitted to make under German law. The controlling rights of the Company constitute a controlling financial interest for accounting purposes and result in the Company being required to consolidate CAG as of the date of acquisition. In addition as long as the Domination Agreement remains effective, the Company is entitled to give instructions directly to the management board of CAG, including, but not limited to, instructions that are disadvantageous to CAG, as long as such disadvantageous instructions benefit the Company or the companies affiliated with either the Company or CAG.
The Domination Agreement is subject to legal challenges instituted by dissenting shareholders. During August 2004, nine actions were brought by minority shareholders against CAG in the Frankfurt District Court (Landgericht), all of which were consolidated in September 2004. Several minority shareholders joined these proceedings via a third party intervention in support of the plaintiffs. The Company joined the proceedings via a third party intervention in support of CAG. Among other things, these actions request the court to set aside shareholder resolutions passed at the extraordinary general meeting held on July 30 and 31, 2004 based on allegations that include the alleged violation of procedural requirements and information rights of the shareholders.
Twenty-seven minority shareholders filed lawsuits in May and June of 2005 in the Frankfurt District Court (Landgericht) contesting the shareholder resolutions passed at the annual general meeting held
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 19-20, 2005, which confirmed the resolutions passed at the July 30-31, 2004 extraordinary general meeting approving the Domination Agreement and a change in CAG’s fiscal year. In conjunction with the acquisition of 5.9 million ordinary shares of CAG from two shareholders in August 2005, two of those lawsuits were withdrawn.
If legal challenges of the Domination Agreement by dissenting shareholders of CAG are successful, some or all actions taken under the Domination Agreement, including the transfer of Celanese Americas Corporation (‘‘CAC’’), an indirect subsidiary of CAG, (see Organizational Restructuring below for discussion regarding CAC's transfer) may be required to be reversed and the Company may be required to compensate CAG for damages caused by such actions, which could have a material impact on the Company’s financial position, results of operations and cash flows.
Acquisition of Additional CAG Shares
On August 24, 2005, the Company acquired 5.9 million, or approximately 12%, of the outstanding CAG shares from two shareholders for €302 million ($369 million). The Company also paid to such shareholders €12 million ($15 million) in consideration for the settlement of certain claims and for such shareholders agreeing to, among other things, (1) accept the shareholders' resolutions passed at the extraordinary general meeting of CAG held on July 30 and 31, 2004 and the annual general meeting of CAG held on May 19 and 20, 2005, (2) acknowledge the legal effectiveness of the domination and profit and loss transfer agreement, (3) irrevocably withdraw and abandon all actions, applications and appeals each brought or joined in legal proceedings related to, among other things, challenging the effectiveness of the domination and profit and loss transfer agreement and amount of fair cash compensation offered by the Purchaser in the mandatory offer required by Section 305(1) of the German Stock Corporation Act, (4) refrain from acquiring any CAG shares or any other investment in CAG, and (5) refrain from taking any future legal action with respect to shareholder resolutions or corporate actions of CAG. The Company paid the aggregate consideration of €314 million ($384 million) for the additional CAG shares using available cash.
The Company also made a limited offer to purchase from all other shareholders any remaining outstanding CAG shares for €51 per share (plus interest on €41.92 per share) against waiver of the shareholders’ rights to participate in an increase of the offer consideration as a result of the pending award proceedings. In addition, all shareholders who tendered their shares pursuant to the September 2004 mandatory offer of €41.92 per share, were entitled to claim the difference between the increased offer and the mandatory offer. The limited offer period ran from August 30, 2005 through September 29, 2005, inclusive. For shareholders who did not accept the limited offer on or prior to the September 29, 2005 expiration date, the terms of the original mandatory offer continue to apply. The mandatory offer will remain open for two months following final resolution of the award proceedings (Spruchverfahren) by the German courts.
As of December 31, 2005 and 2004, the Company's ownership interest in CAG was approximately 98% and 84%, respectively. On November 3, 2005, the Company’s Board of Directors approved commencement of the process for effecting a squeeze-out of the remaining shareholders, as defined below.
Squeeze-Out
Because the Company owns shares representing more than 95% of the registered ordinary share capital (excluding treasury shares) of CAG, the Company has decided to exercise its right, as permitted under German law, to the transfer of the shares owned by the outstanding minority shareholders of CAG in exchange for fair cash compensation (the ‘‘Squeeze-Out’’). The Squeeze-Out will require the approval by the affirmative vote of the majority of the votes cast at CAG’s annual general meeting in May 2006 and will become effective upon its registration in the commercial register. If the Company is successful in effecting the Squeeze-Out, the Company must pay the then remaining minority shareholders of CAG fair
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cash compensation, in exchange for their shares. The amount of the fair cash compensation per share may be equal to, higher or lower than the tender offer price or the fair cash compensation offered pursuant to the Domination Agreement. The amount to be paid to the minority shareholders as fair cash compensation in exchange for their CAG shares in connection with the Squeeze-Out will be determined on the basis of the fair value of CAG, determined by the Company in accordance with applicable German legal requirements, as of the date of the applicable resolution of CAG's shareholders’ meeting, and examined by a duly qualified auditor chosen and appointed by the Frankfurt District Court (Landgericht).
The Squeeze-Out would require approval by the shareholders of CAG. While it is expected that the Company will have the requisite majority in such meeting to assure shareholder approval of such measures, minority shareholders, irrespective of the size of their shareholding, may, within one month from the date of any such shareholder resolution, file an action with the court to have such resolution set aside. While such action would only be successful if the resolution were passed in violation of applicable laws and cannot be based on the unfairness of the amount to be paid to the minority shareholders, a shareholder action may substantially delay the implementation of the challenged shareholder resolution pending final resolution of the action. If such action proved to be successful, the action could prevent the implementation of the Squeeze-Out. Accordingly, there can be no assurance that the Squeeze-Out can be implemented timely or at all.
Organizational Restructuring
In October 2004, Celanese Corporation and certain of its subsidiaries completed an organizational restructuring (the ‘‘Organizational Restructuring’’) pursuant to which the Purchaser effected, by giving a corresponding instruction under the Domination Agreement, the transfer of all of the shares of CAC from Celanese Holding GmbH, a wholly owned subsidiary of CAG, to BCP Caylux Holdings Luxembourg S.C.A (‘‘BCP Caylux’’), which resulted in BCP Caylux owning 100% of the equity of CAC and, indirectly, all of its assets, including subsidiary stock. This transfer was affected by CAG selling all outstanding shares in CAC for a €291 million note. This note eliminates in consolidation.
Following the transfer of CAC to BCP Caylux, (1) Celanese Holdings contributed substantially all of its assets and liabilities (including all outstanding capital stock of BCP Caylux) to BCP Crystal US Holdings Corp. (‘‘BCP Crystal’’) in exchange for all outstanding capital stock of BCP Crystal and (2) BCP Crystal assumed certain obligations of BCP Caylux, including all rights and obligations of BCP Caylux under the senior credit facilities, the floating rate term loan and the senior subordinated notes. BCP Crystal, at its discretion, may subsequently cause the liquidation of BCP Caylux.
As a result of these transactions, BCP Crystal holds 100% of CAC's equity and, indirectly, all equity owned by CAC in its subsidiaries. In addition, BCP Crystal holds, indirectly, all of the CAG shares held by the Purchaser and all of the wholly owned subsidiaries of the Company that guarantee BCP Caylux's obligations under the senior credit facilities to guarantee the senior subordinated notes issued on June 8, 2004 and July 1, 2004 (See Note 16) on an unsecured senior subordinated basis.
2. Acquisition of CelaneseCAG
Original Acquisition of CelaneseCAG
As described further in Note 1, in April 2004, the Purchaser, a consolidated subsidiary of the Company, acquired financial control of CAG. The Company has allocated the purchase price on the basis of its current estimate of the fair value of the underlying assets acquired and liabilities assumed. The assets acquired and liabilities assumed areon the Effective Date were reflected at fair value for the approximate 84% portion acquired and at historical basis for the remaining minority interest of approximately 16%. Upon completion of the organizational restructuring in October 2004 (See Note 31),Organizational Restructuring, the assets acquired and liabilities assumed of Celanese Americas Corporation and its subsidiaries ("CAC") CAC
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are reflected at fair value for the 100% portion acquired. The excess of the purchase price over the amounts allocated to specific assets and liabilities is included in goodwill. The purchase price allocation iswas as follows:
As of April 1, 2004 | ||||||||||
(in $ millions) | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | 93 | |||||||||
Receivables | 1,468 | |||||||||
Inventories | 568 | |||||||||
Other current assets. | 125 | |||||||||
Investments | ||||||||||
Property plant and equipment | 1,726 | |||||||||
Other non-current assets | ||||||||||
Intangible assets | 433 | |||||||||
Goodwill | 747 | |||||||||
Total assets acquired | 6,455 | |||||||||
Current liabilities: | ||||||||||
Short-term borrowings and current installments of long-term debt | 279 | |||||||||
Accounts payable and accrued liabilities | 599 | |||||||||
Other current liabilities | 1,166 | |||||||||
Long term debt | 306 | |||||||||
Benefit obligations | 1,370 | |||||||||
Other long term liabilities | 558 | |||||||||
Total | 4,278 | |||||||||
Minority interest | 451 | |||||||||
Net assets acquired | 1,726 | |||||||||
Cash and cash equivalents, receivables, other current assets, accounts payable and accrued liabilities and other current liabilities were stated at their historical carrying values, which approximates fair value, given the short term nature of these assets and liabilities.
The estimated fair value of inventory, as of the Effective Date, has been allocatedwas calculated based on management's computations. The consolidated statement of operations for the nine months ended December 31, 2004 includes $53 million in cost of sales representing the capitalized manufacturing profit in inventory on hand as of the Effective Date. The capitalized manufacturing profit was recorded in purchase accounting and the inventory was subsequently sold during the nine months ended December 31, 2004.
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes have beenwere provided in the consolidated balance sheet based on the Company's estimate of the tax versus book basis of the assets acquired and liabilities assumed. Valuation allowances have beenwere established against those assets for which realization is not likely, primarily in the U.S. (See Note 22)21).
The Company's estimate of pension and other postretirement benefit obligations has beenwere reflected in the allocation of purchase price at the projected benefit obligation less plan assets at fair market value.
The Company's estimates of the fair values of property, plant and equipment, customer and vendor contracts, other intangible assets, debt, cost and equity method investments and other assets and liabilities have beenwere reflected in the Company's financial statements as of December 31, 2004. Included in other non-current assets above is investments accounted for under the cost method of accounting whose fair value approximated $220 million at the acquisition date.Effective Date. The estimated remaining useful lives of the CAG property, plant and equipment and intangible assets acquired are as follows:
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Land improvements | 1-20 years | |||||
Buildings and building improvements | 1-30 years | |||||
Machinery and equipment | 1-20 years | |||||
Trademarks and tradenames | Indefinite | |||||
Customer related intangible assets | 5-11 years | |||||
Developed technology | 1-11 years | |||||
Leasehold improvements are amortized over 10 years or the remaining term of the respective lease, whichever is shorter. Assets acquired in business combinations are recorded at their fair values and depreciated over the assets' estimated remaining useful life.
In connection with the Acquisition, at the acquisition date, the Company began formulating a planimplementing plans to exit or restructure certain activities. The Company has not completed this analysis, but has recorded initial liabilities of $60 million, primarily for employee severance and related costs in connection with the preliminary plan, as well as approving the continuation of all existing Predecessor restructuring and exit plans. As the Company finalizes its plans to exit or restructure activities, it may record additional liabilities for, among other things, severance and severance related costs, which would also increase the goodwill recorded.
The primary reasons for the Acquisition and the primary factors that contributecontributed to a purchase price that resultsresulted in recognition of goodwill include:
• | leading market position as a global producer of acetic acid and the world's largest producer of vinyl acetate monomer. |
• | competitive cost structures, which are based on economies of scale, vertical integration, technical know-how and the use of advanced technologies. |
• | global reach, with major operations in North America, Europe and Asia and its extensive network of ventures, is a competitive advantage in anticipating and meeting the needs of its global and local customers in well-established and growing markets, while its geographic diversity mitigates the potential impact of volatility in any individual country or region. |
• | broad range of products into a variety of different end-use markets, which helps to mitigate the potential impact of volatility in any individual end-use market. |
Other considerations affecting the value of goodwill include:included:
• | the potential to reduce production and raw material costs further through advanced process control projects that will help to generate significant savings in energy and raw materials while increasing yields in production units. |
• | the potential to increase |
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• | the ability of the assembled workforce to continue to deliver value-added solutions and develop new products and industry leading production technologies that solve customer problems. |
• | the potential to optimize the value of the |
• | the application of purchase accounting, particularly for items such as pension and other postretirement benefits and restructuring activities for which significant reserve balances were |
Acquisition of Additional CAG Shares
Upon the acquisition of the additional CAG shares during the second half of 2005 (See Note 1), the assets and liabilities of CAG were adjusted in the consolidated financial statements to fair value for the additional 14% acquired. The primary amounts allocated to assets and liabilities related to the additional ownership percentage acquired resulted in an increase in inventory of $8 million, which was subsequently charged to cost of goods sold, an increase in property, plant and equipment of $15 million, an increase in
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
intangible assets of $65 million and a decrease in goodwill of $54 million, attributable to the carrying value of the minority interest acquired being greater than the price paid.
Pro Forma Information
The following pro forma information for the years ended December 31, 2005, 2004 and 2003 was prepared as if the Acquisition and the subsequent acquisition of additional CAG shares during 2005 had occurred as of the beginning of such period:
Years Ended December 31, | ||||||||||
2004 | 2003 | |||||||||
(in $ millions) | ||||||||||
Net sales | 5,069 | 4,603 | ||||||||
Operating profit | 234 | 158 | ||||||||
Net loss | (77 | ) | (69 | ) | ||||||
Year Ended December 31, | ||||||||||||||
2005 | 2004 | 2003 | ||||||||||||
(in $ millions) | ||||||||||||||
Net sales | 6,070 | 4,962 | 4,485 | |||||||||||
Operating profit | 563 | 217 | 128 | |||||||||||
Net earnings (loss) | 272 | (76 | ) | (54 | ) | |||||||||
Pro forma adjustments include adjustments for (1) purchase accounting, including (i) the elimination of $53 million in cost of sales recorded in the year ended December 31, 2004 as a result of the fair value adjustment to inventory that was subsequently sold and (ii) the application of purchase accounting to pension and other postretirement obligations (iii)(ii) the application of purchase accounting to property, plant and equipment and intangible assets, (2) adjustments for items directly related to the transaction, including (i) the impact of the additional pension contribution, (ii) the Advisor monitoring fee (see(See Note 6)28), (iii) fees incurred by the Company related to the Acquisition, and (iv) adjustments to interest expense to reflect the Company's new capital structure as a result of the Acquisition including the reversal of $89 million of accelerated amortization expense of deferred financing costs recorded in the year ended December 31, 2004, and (3) corresponding adjustments to income tax expense.
The pro forma information is not necessarily indicative of the results that would have occurred had the Acquisition occurred as of the beginning of the periods presented, nor is it necessarily indicative of future results.
3. Initial Public Offering and Concurrent Financings
In January 2005, the Company completed an initial public offering of 50,000,000 shares of Series A common stock and received net proceeds of $752 million after deducting underwriters'underwriters’ discounts and estimated offering expenses of $760$48 million. Concurrently, the Company received net proceeds of $233 million from the offering of its convertible perpetual preferred stock. A portion of the proceeds of the share offerings were used to redeem $188 million of senior discount notes and approximately $521 million of senior subordinated notes, which excludesexcluding early redemption premiums of $19 million and $51 million, respectively.
Subsequent to the closing of the initial public offering, the Company borrowed an additional $1,135 million under the amended and restated senior credit facilities;facilities, a portion of which was used to repay a $350 million of a floating rate term loan, which excludes a $4 million early redemption premium, and $200 million of which was primarily used to financeas the primary financing for the February 2005 acquisition of the Vinamul emulsion business (see(See Notes 76 and 16). See Note 16 for significant terms ofAdditionally, the amended and restated Senior Credit Facilities.senior credit facilities included a $242 million delayed draw term loan, which expired unutilized in July 2005.
On March 9, 2005, the Company issued a 7,500,000 Series A common stock dividend to the Original Shareholders (See Note 19) of its Series B common stock.
On April 7, 2005, the Company expects to useused the remaining proceeds of the initial public offering and concurrent financings to pay a special cash dividend declared on March 8, 2005 to holders of the Company'sCompany’s Series B common
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock of $804 million which was declared March 8, 2005. In addition, on March 8, 2005, the Company issued a 7,500,000 Series A common stock dividend to the Original Shareholders of its Series B common stock.million. Upon payment of the $804 million dividend, all of the outstanding shares of Series B common stock convertconverted automatically to shares of Series A common stock.
As a result of the offering in January 2005, the Company now has $240 million aggregate liquidation preference of outstanding preferred stock. Holders of the preferred stock are entitled to receive, when, as and if, declared by the Company's board of directors, out of funds legally available therefor, cash dividends at the rate of 4.25% per annum of liquidation preference, payable quarterly in arrears, commencing on May 1, 2005. Dividends on the preferred stock are cumulative from the date of initial issuance. Accumulated but unpaid dividends accumulate at an annual rate of 4.25%. The preferred stock is convertible, at the option of the holder, at any time into one share of Series A common stock per $25.00 liquidation preference of preferred stock and will be recorded in shareholders' equity.
Upon completion of the initial public offering, the Company terminated its advisor monitoring agreement and paid the Advisor a $35 million termination fee (See Note 6).
Prior to the completion of the initial public offering, the Company effected a 152.772947 for 1 stock split of the outstanding shares of Series B common stock.
4. Summary of Accounting Policies
• | Consolidation principles |
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("(‘‘U.S. GAAP"GAAP’’) for all periods presented and include the accounts of the Company and its majority owned subsidiaries over which the Company exercises control as well as variable interest entities where the Company is deemed the primary beneficiary (See Note 5). All significant intercompany accounts and transactions have been eliminated in consolidation.
• | Business combinations |
Upon closing an acquisition, the Company estimates the fair values of assets and liabilities acquired and consolidate the acquisition as soon as practicable. Given the time it takes to obtain pertinent information to finalize the acquired company'scompany’s balance sheet (frequently with implications for the purchase price of the acquisition), then to adjust the acquired company'scompany’s accounting policies, procedures, books and records to ourthe Company’s standards, it is often several quarters before the Company is able to finalize those initial fair value estimates. Accordingly, it is not uncommon for the initial estimates to be subsequently revised.revised and finalized within twelve months of an acquisition.
• | Estimates and assumptions |
The preparation of consolidated financial statements in conformity with U.S. 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 revenues, expenses and allocated charges during the reporting period. The more significant estimates pertain to purchase price allocations, impairments of intangible assets and other long-lived assets, restructuring costs and other special charges,(charges) gains, income taxes, pension and other postretirement benefits, asset retirement obligations, environmental liabilities, and loss contingencies. Actual results could differ from those estimates.
The Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products, and provided four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Should changes in conditions cause
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management to determine revenue recognition criteria are not met for certain transactions, revenue recognition would be delayed until such time that the transactions become realizable and fully earned. Payments received in advance of revenue recognition are recorded as deferred revenue.
• | Cash and cash equivalents |
All highly liquid investments with original maturities of three months or less are considered cash equivalents.
• | Inventories |
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out or FIFO method. Cost includes raw materials, direct labor and manufacturing overhead. Stores and supplies are valued at cost or market, whichever is lower. Cost is generally determined by the average cost method.
Upon Acquisition, the Predecessor changed its inventory valuation method of accounting for its U.S. subsidiaries from the last-in, first-out or LIFO method to the first-in, first-out method or FIFO method to be consistent with the Successor's accounting policy. This change will more closely represent the physical flow of goods resulting in ending inventory which will better represent the current cost of the inventory and the costs in income will more closely match the flow of goods. The financial statements of the Predecessor have been adjusted for all periods presented to reflect this change. The impact of this change on the Predecessor's reported net earnings and earnings per share for the three months ended March 31, 2004 and the year ended December 31, 2003 is as follows:
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Predecessor | ||||||||||
Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | |||||||||
(in $ millions, except per share data) | ||||||||||
Net earnings prior to restatement | 67 | 147 | ||||||||
Change in inventory valuation method | 17 | 1 | ||||||||
Income tax effect of change | (6 | ) | — | |||||||
Net earnings as restated | 78 | 148 | ||||||||
Basic earnings per share:(1) | ||||||||||
Prior to restatement | 1.36 | 2.97 | ||||||||
Change in inventory valuation method, net of tax | 0.22 | 0.02 | ||||||||
As restated | 1.58 | 2.99 | ||||||||
Diluted earnings (loss) per share:(1) | ||||||||||
Prior to restatement | 1.35 | 2.97 | ||||||||
Change in inventory valuation method, net of tax | 0.22 | 0.02 | ||||||||
As restated | 1.57 | 2.99 | ||||||||
(1) | Per-share data are based on weighted average shares outstanding in each period. |
• | Investments in marketable securities |
The Company has classified its investments in debt and equity securities as "available-for-sale"‘‘available-for-sale’’ and has reported those investments at their fair or market values in the balance sheet as otherOther assets. Unrealized gains or losses, net of the related tax effect on available-for-sale securities, are excluded from earnings and are reported as a component of accumulatedAccumulated other comprehensive income (loss) until realized. The cost of securities sold is determined by using the specific identification method.
A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investee.
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments (see Note 26). As a matter of principle, the Company does not use derivative financial instruments for trading purposes. The Company has been party to interest rate swaps as well as foreign currency forward contracts in the management of its interest rate and foreign currency exchange rate exposures. The Company generally utilizes interest rate derivative contracts in order to fix or limit the interest paid on existing variable rate debt. The Company utilizes foreign currency derivative financial instruments to eliminate or reduce the exposure of its foreign currency denominated receivables and payables, which includes the Company's exposure on its dollar denominated intercompany net receivables held by euro denominated entities. Additionally, the Company has utilized derivative instruments to reduce the exposure of its commodity prices and stock compensation expense.
The Company also uses derivative and non-derivative financial instruments that may give rise to foreign currency transaction gains or losses, to hedge the foreign currency exposure of a net investment in a foreign operation. The effective portion of the gain or loss on the derivative and the foreign currency gain or loss on the non-derivative financial instrument is recorded as a currency translation adjustment in other comprehensive income (loss).
Differences between amounts paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the hedged obligation. Gains and losses on instruments not meeting the criteria for cash flow hedge accounting treatment, or that cease to meet hedge accounting criteria, are included as income or expense.
If a swap is terminated prior to its maturity, the gain or loss is recorded to other income (expense), net and recognized over the remaining original life of the swap if the item hedged remains outstanding, or immediately, if the item hedged does not remain outstanding. If the swap is not terminated prior to maturity, but the underlying hedged item is no longer outstanding, the interest rate swap is marked to market and any unrealized gain or loss is recognized immediately.
Gains and losses on derivative instruments as well as the offsetting losses and gains on the hedged items are reported in earnings in the same accounting period. Gains and losses relating to the ineffective
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
portion of hedges are recorded in other income (expense), net. Foreign exchange contracts designated as hedges for anticipated exposures are accounted for as cash flow hedges. The effective portion of unrealized gains and losses associated with the contracts are deferred as a component of accumulated other comprehensive income (loss) until the underlying hedged transactions affect earnings. Derivative instruments that are not designated as hedges are marked-to-market at the end of each accounting period with the results included in earnings.
The Company's risk management policy for the majority of its natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. As of December 31, 2004, there were no derivative contracts outstanding. In 2003, there were forward contracts covering approximately 35% of the Company's Chemical Products segment North American requirements. Management regularly assesses its practice of purchasing a portion of its commodity requirements forward and the utilization of a variety of other raw material hedging instruments, in addition to forward purchase contracts, in accordance with changes in market conditions. The fixed price natural gas forward contracts and any premium associated with the purchase of a price cap are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap or cap contracts correlate to the actual purchases of the commodity and have the effect of securing or limiting predetermined prices for the underlying commodity. Although these contracts were structured to limit exposure to increases in commodity prices, certain swaps may also limit the potential benefit the Company might have otherwise received from decreases in commodity prices. These cash-settled swap contracts were accounted for as cash flow hedges. Realized gains and losses on these contracts are included in the cost of the commodity upon settlement of the contract. The effective portion of unrealized gains and losses associated with the cash-settled swap contracts are deferred as a component of accumulated other comprehensive income (loss) until the underlying hedged transactions affect earnings.
The Predecessor selectively used call options to offset some of the exposure to variability in expected future cash flows attributable to changes in the Company's stock price related to its stock appreciation rights plans. The options are designated as cash flow hedging instruments. The Predecessor excluded the time value component from the assessment of hedge effectiveness. The change in the call option's time value is reported each period in interest expense. The intrinsic value of the option contracts is deferred as a component of accumulated other comprehensive income (loss) until the compensation expense associated with the underlying hedged transactions affect earnings.
Financial instruments which could potentially subject the Company to concentrations of credit risk are primarily receivables concentrated in various geographic locations and cash equivalents. The Company performs ongoing credit evaluations of its customers' financial condition. Generally, collateral is not required from customers. Allowances are provided for specific risks inherent in receivables.
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out or FIFO method. Cost includes raw materials, direct labor and manufacturing overhead. Stores and supplies are valued at cost or market, whichever is lower. Cost is generally determined by the average cost method.
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon Acquisition, the Predecessor changed its inventory valuation method of accounting for its U.S. subsidiaries from the last-in, first-out or LIFO method to the first-in, first-out method or FIFO method to be consistent with the Successor's accounting policy. This change will more closely represent the physical flow of goods resulting in ending inventory which will better represent the current cost of the inventory and the costs in income will more closely match the flow of goods. The financial statements of the Predecessor have been adjusted for all periods presented to reflect this change. The impact of this change on the Predecessor's reported net earnings and earnings per share for the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002 is as follows:
Predecessor | ||||||||||||||
Three Months Ended March 31, 2004 | Year Ended December 31, 2003 | Year Ended December 31, 2002 | ||||||||||||
in $ millions, except per share data | ||||||||||||||
Net earnings prior to restatement | 67 | 147 | 181 | |||||||||||
Change in inventory valuation method | 17 | 1 | (19 | ) | ||||||||||
Income tax effect of change | (6 | ) | — | 6 | ||||||||||
Net earnings as restated | 78 | 148 | 168 | |||||||||||
Basic earnings per share:(1) | ||||||||||||||
Prior to restatement | 1.36 | 2.97 | 3.60 | |||||||||||
Change in inventory valuation method, net of tax | 0.22 | 0.02 | (0.26 | ) | ||||||||||
As restated | 1.58 | 2.99 | 3.34 | |||||||||||
Diluted earnings (loss) per share:(1) | ||||||||||||||
Prior to restatement | 1.35 | 2.97 | 3.60 | |||||||||||
Change in inventory valuation method, net of tax | 0.22 | 0.02 | (0.26 | ) | ||||||||||
As restated | 1.57 | 2.99 | 3.34 | |||||||||||
The Company capitalizes direct costs incurred to obtain debt financings and amortizes these costs over the terms of the related debt. Upon the extinguishment of the related debt, any unamortized capitalized debt financing costs are immediately expensed. For the nine months ended December 31, 2004, the Successor recorded amortization of deferred financing costs, which is classified in interest expense, of $98 million, of which $89 million related to accelerated amortization of deferred financing costs associated with the $1,565 million bridge loans and the $200 million mandatorily redeemable preferred stock. As of December 31, 2004, the Successor has $105 million of deferred financing costs included within long term other assets. As of December 31, 2003, the Predecessor had $5 million of deferred financing costs included within long-term other assets.
• | Investments and equity in net earnings of affiliates |
Accounting Principles Board ("APB"(‘‘APB’’) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, stipulates that the equity method should be used to account for investments in corporate joint ventures and certain other companies whenwhereby an investor has "the‘‘the ability to exercise significant influence over operating and financial policies of an investee".investee’’, but does not exercise control. APB Opinion No. 18 generally considers an investor to have the ability to exercise significant influence when it owns 20 percent20% or more of the voting stock of an investee. FASB Interpretation No. 35, Criteria for Applying the Equity Method of Accounting for Investments in Common Stock, which was issued to clarify the criteria for applying the equity method of accounting to 50 percent50% or less owned companies, lists circumstances under which, despite 20 percent20% ownership, an investor may not be able to exercise significant influence. Certain investments where the Company owns greater than a 20 percent20% ownership and can not exercise
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
significant influence or control are accounted for under the cost method. Such investments aggregate $186 million and $76 million as of December 31, 2004 and December 31, 2003, respectively, and are included within long-term other assets.method (See Note 10).
In accordance with Statement of Financial Accounting Standards ("SFAS")SFAS No. 142, adopted by the Predecessor effective January 1, 2002, the excess of cost over underlying equity in net assets acquired is no longer amortized.
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company assesses the recoverability of the carrying value of its investments whenever events or changes in circumstances indicate a loss in value that is other than a temporary decline. See "Impairment‘‘Impairment of property, plant and equipment"equipment’’ for explanation of the methodology utilized.
• | Property, plant and equipment |
Property, plant and equipment are capitalized at cost. Depreciation is calculated on a straight-line basis, generally over the following estimated useful lives of the assets.
Land Improvements | 20 years | |||||
Buildings and Building 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. Assets acquired in business combinations are recorded at their fair values and depreciated over the assets'assets’ remaining useful lifelives or the Company’s policy lives, whichever is shorter. Effective January 1, 2005, the Company revised the estimated useful lives of certain machinery and equipment purchased subsequent to that date. The asset depreciation lives of machinery and equipment that were previously ten years were increased to twenty years and the useful lives of buildings and building improvements increased from ten to thirty years.
Leasehold improvements are amortized over ten years or the remaining life of the Company's policy,respective lease considering renewals that are reasonably assured, whichever is shorter.
Repair and maintenance costs, including costs for planned maintenance turnarounds, that do not extend the useful life of the asset are charged against earnings as incurred. Major replacements, renewals and significant improvements are capitalized.
Interest costs incurred during the construction period of assets are applied to the average value of constructed assets using the estimated weighted average interest rate incurred on borrowings outstanding during the construction period. The interest capitalized is amortized over the life of the asset.
Impairment of property, plant and equipment – the Company assesses the recoverability of the carrying value of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The estimate of fair value may be determined as the amount at which the asset could be bought or sold in a current transaction between willing parties. If this information is not available, fair value is determined based on the best information available in the circumstances. This frequently involves the use of a valuation technique including the present value of expected future cash flows, discounted at a rate commensurate with the risk involved, or other acceptable valuation techniques. Impairment of property, plant and equipment to be disposed of is determined in a similar manner, except that fair value is reduced by the costs to dispose of the assets (See Note 12)11).
• |
Beginning in 2002, thePatents, customer related intangible assets and other intangibles with finite lives are amortized on a straight-line basis over their estimated economic lives. The weighted average amortization period is 8.5 years. The excess of the purchase price over fair value of net identifiable assets and liabilities of an acquired business ("goodwill"(‘‘goodwill’’) and other intangible assets with indefinite useful lives are not amortized, but instead arerather tested for impairment, at least annually. Patents, trademarks and other intangibles with finite lives are amortized on a straight-line basis over their estimated economic lives.The Company tests for impairment during the third quarter of its fiscal year using June 30 balances.
Impairment of goodwill and other intangible assets – the Company assesses the recoverability of the carrying value of its goodwill and other intangible assets with indefinite useful lives annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable.
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recoverable. Recoverability of goodwill is measured at the reporting unit level based on a two-step approach. First, the carrying amount of the reporting unit is compared to the fair value as estimated by the future net discounted cash flows expected to be generated by the reporting unit. To the extent that the carrying value of the reporting unit exceeds the fair value of the reporting unit, a second step is performed, wherein the reporting unit's assets and liabilities are fair valued. To the extent that the reporting unit's carrying value of goodwill exceeds its implied fair value of goodwill, impairment exists and must be recognized. The implied fair value of goodwill is calculated as the fair value of the reporting unit in excess of the fair value of all non-goodwill assets and liabilities allocated to the reporting unit. The estimate of fair value may be determined as the amount at which the asset could be bought or sold in a current transaction between willing parties. If this information is not available, fair value is determined based on the best information available in the circumstances. This frequently involves the use of a valuation technique including the present value of expected future cash flows, discounted at a rate commensurate with the risk involved, or other acceptable valuation techniques.
Recoverability of other intangible assets with indefinite useful lives is measured by a comparison of the carrying amount of the intangible assets to the fair value of the respective intangible assets. Any excess of the carrying value of the intangible assets over the fair value of the intangible assets is recognized as an impairment loss. The estimate of fair value is determined similar to that for goodwill outlined above.
The Company assesses the recoverability of intangible assets with finite lives in the same manner as for property, plant and equipment. See "Impairment‘‘Impairment of property, plant and equipment"equipment’’.
• | Financial instruments |
The Company addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments (See Note 24). As a matter of principle, the Company does not use derivative financial instruments for trading purposes. The Company has been party to interest rate swaps as well as foreign currency forward contracts in the management of its interest rate and foreign currency exchange rate exposures. The Company generally utilizes interest rate derivative contracts in order to fix or limit the interest paid on existing variable rate debt. The Company utilizes foreign currency derivative financial instruments to eliminate or reduce the exposure of its foreign currency denominated receivables and payables, which includes the Company's exposure on its dollar denominated intercompany net receivables and payables held by euro denominated entities. Additionally, the Company has utilized derivative instruments to reduce the exposure of its commodity prices and stock compensation expense.
The Company also uses derivative and non-derivative financial instruments that may give rise to foreign currency transaction gains or losses, to hedge the foreign currency exposure of a net investment in a foreign operation. The effective portion of the gain or loss on the derivative and the foreign currency gain or loss on the non-derivative financial instrument is recorded as a currency translation adjustment in Accumulated other comprehensive income (loss).
Differences between amounts paid or received on interest rate swap agreements are recognized as adjustments to interest expense over the life of each swap, thereby adjusting the effective interest rate on the hedged obligation. Gains and losses on instruments not meeting the criteria for cash flow hedge accounting treatment, or that cease to meet hedge accounting criteria, are included as income or expense.
If a swap is terminated prior to its maturity, the gain or loss is recorded to Other income (expense), net and recognized over the remaining original life of the swap if the item hedged remains outstanding, or immediately, if the item hedged does not remain outstanding. If the swap is not terminated prior to maturity, but the underlying hedged item is no longer outstanding, the interest rate swap is marked to market and any unrealized gain or loss is recognized immediately.
Gains and losses on derivative instruments as well as the offsetting losses and gains on the hedged items are reported in earnings in the same accounting period. Gains and losses relating to the ineffective portion of hedges are recorded in Other income (expense), net. Foreign exchange contracts designated as
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
hedges for anticipated exposures are accounted for as cash flow hedges. The effective portion of unrealized gains and losses associated with the contracts are deferred as a component of Accumulated other comprehensive income (loss) until the underlying hedged transactions affect earnings. Derivative instruments that are not designated as hedges are marked-to-market at the end of each accounting period with the results included in earnings.
The Company's risk management policy for the majority of its natural gas and butane requirements allows entering into supply agreements and forward purchase or cash-settled swap contracts. As of December 31, 2005 and 2004, there were no derivative contracts outstanding related to raw materials. In 2003, there were forward contracts covering approximately 35% of the Predecessor’s Chemical Products segment North American requirements. Management regularly assesses its practice of purchasing a portion of its commodity requirements forward and the utilization of a variety of other raw material hedging instruments, in addition to forward purchase contracts, in accordance with changes in market conditions. The fixed price natural gas forward contracts and any premium associated with the purchase of a price cap are principally settled through actual delivery of the physical commodity. The maturities of the cash-settled swap or cap contracts correlate to the actual purchases of the commodity and have the effect of securing or limiting predetermined prices for the underlying commodity. Although these contracts were structured to limit exposure to increases in commodity prices, certain swaps may also limit the potential benefit the Company might have otherwise received from decreases in commodity prices. These cash-settled swap contracts were accounted for as cash flow hedges. Realized gains and losses on these contracts are included in the cost of the commodity upon settlement of the contract. The effective portion of unrealized gains and losses associated with the cash-settled swap contracts are deferred as a component of Accumulated other comprehensive income (loss) until the underlying hedged transactions affect earnings.
The Predecessor selectively used call options to offset some of the exposure to variability in expected future cash flows attributable to changes in its stock price related to its stock appreciation rights plans. The options are designated as cash flow hedging instruments. The Predecessor excluded the time value component from the assessment of hedge effectiveness. The change in the call option's time value was reported each period in interest expense. The intrinsic value of the option contracts was deferred as a component of Accumulated other comprehensive income (loss) until the compensation expense associated with the underlying hedged transactions affected earnings.
Financial instruments which could potentially subject the Company to concentrations of credit risk are primarily receivables concentrated in various geographic locations and cash equivalents. The Company performs ongoing credit evaluations of its customers' financial condition. Generally, collateral is not required from customers. Allowances are provided for specific risks inherent in receivables.
• | Deferred financing costs |
The Company capitalizes direct costs incurred to obtain debt financings and amortizes these costs using the straight-line method over the terms of the related debt. Upon the extinguishment of the related debt, any unamortized capitalized debt financing costs are immediately expensed. For the year ended December 31, 2005 and the nine months ended December 31, 2004, the Successor recorded amortization of deferred financing costs, which is classified in Interest expense, of $41 million and $98 million, respectively, of which $28 million and $89 million, respectively, related to accelerated amortization of deferred financing costs. As of December 31, 2005 the Company has $73 million of net deferred financing costs included within long term other assets. As of December 31, 2004, the Company had $105 million of net deferred financing costs included within long term other assets.
• | 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
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 is reasonably estimated. All other fees are expensed as incurred. If the event of loss is neither probable nor reasonably estimable, but is reasonably possible, the Company provides appropriate disclosure in the notes to the consolidated financial statements if the contingency is considered material. 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. Environmental liabilities for which the remediation period is fixed and associated costs are readily determinable are recorded at their net present value. Recoveries of environmental costs from other parties are recorded as assets when their receipt is deemed probable.
An environmental reserve 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 reserves do not take into account any claims or recoveries from insurance. There are no pending insurance claims for any environmental liability that are expected to be material. The measurement of environmental liabilities is based on a range of management’s periodic estimate of what it will cost to perform each of the elements of the remediation effort. The Company uses its best estimate within the range to establish its environmental reserves. 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. See Note 18 to the consolidated financial statements.
• | Legal Fees |
The Company accrues for legal fees related to litigation matters when the costs associated with defending these matters can be reasonably estimated and are probable of occurring. All other legal fees are expensed as incurred.
• | Revenue recognition |
The Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products, and provided that four basic criterion are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Should changes in conditions cause management to determine revenue recognition criteria are not met for certain transactions, revenue recognition would be delayed until such time that the transactions become realizable and fully earned. Payments received in advance of revenue recognition are recorded as deferred revenue.
• | Stock-based compensation |
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation (‘‘SFAS No. 123’’), the Successor accounts for employee stock-based compensation in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (‘‘APB No. 25’’), using an intrinsic value approach to measure compensation expense, if any.
For the three months ended March 31, 2004, and the year ended December 31, 2003, the Predecessor accounted for stock options and similar equity instruments under the fair value method, which requires compensation cost to be measured at the grant date based on the value of the award. The fair value of stock options is determined using the Black-Scholes option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility and the expected dividends of the underlying stock, and the risk-free interest rate over the expected life of the option. Compensation expense based on the fair value of stock options is recorded over the vesting period of the options and has been recognized in the Predecessor's consolidated financial statements. The CAG stock options did not contain changes in control provisions, which would have resulted in accelerated vesting, as a result of the Acquisition (See Note 22).
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Compensation expense for stock appreciation rights, either partially or fully vested, is recorded based on the difference between the base unit price at the date of grant and the quoted market price of CAG's common stock on the Frankfurt Stock Exchange at the end of the period proportionally recognized over the vesting period and adjusted for previously recognized expense (See Note 22).
The following table illustrates the effect on net earnings (loss) and related per share amounts if the Successor had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
For the Year Ended December 31, 2005 | For the Nine Months Ended December 31, 2004 | |||||||||||||||||||||||||
Net Earnings (Loss) | Basic Earnings (Loss) Per Common Share | Diluted Earnings (Loss) Per Common Share | Net Earnings (Loss) | Basic Earnings (Loss) Per Common Share | Diluted Earnings (Loss) Per Common Share | |||||||||||||||||||||
(in $ millions, except per share information) | ||||||||||||||||||||||||||
Net earnings, available to common shareholders, as reported | 267 | 1.73 | 1.67 | (253 | ) | (2.55 | ) | (2.55 | ) | |||||||||||||||||
Add: stock-based employee compensation expense included in reported net earnings, net of the related tax effects | 1 | 0.01 | 0.01 | — | — | — | ||||||||||||||||||||
Less: stock-based compensation under SFAS No. 123, net of the related tax effects | (9 | ) | (0.06 | ) | (0.05 | ) | (6 | ) | (0.06 | ) | (0.06 | ) | ||||||||||||||
Pro forma net earnings available to common shareholders | 259 | 1.68 | 1.63 | (259 | ) | (2.61 | ) | (2.61 | ) | |||||||||||||||||
The weighted-average fair value of the options granted during the year ended December 31, 2005 was estimated to be $5.28 per option, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2005 | ||||||
Expected dividend yield | 0.78% | |||||
Risk-free interest rate | 4.0% | |||||
Expected stock price volatility | 26.2% | |||||
Expected life (years) | 7.5 | |||||
See Note 5 for additional information.
• | Research and development |
The costs of research and development are charged as an expense in the period in which they are incurred.
• | Insurance loss reserves |
The Company has two wholly owned insurance companies (the ‘‘Captives’’) that are used as a form of self insurance for property, liability and workers compensation risks. One of the Captives also insures certain third party risks. The liabilities recorded by the Captives relate to the estimated risk of loss which is based on management estimates and actuarial valuations, and unearned premiums , which represent the portion of the third party premiums written applicable to the unexpired terms of the policies in-force. Liabilities are recognized for known claims when sufficient information has been developed to indicate involvement of a specific policy and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposure on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly. It is possible that actual results could differ significantly from the recorded liabilities. Premiums written are recognized as revenue based on the terms of the policies. Capitalization of the Captives is determined by regulatory guidelines. Total assets and liabilities for the Captives after elimination of all intercompany activity was $386 million and $238 million,
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respectively, as of December 31, 2005 and $496 million and $271 million, respectively, as of December 31, 2004. Included in total liabilities are third party reserves of $31 million and $63 million at December 31, 2005 and 2004, respectively. Third party premiums were $23 million, $29 million, $6 million and $25 million for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004 and the year ended December 31, 2003, respectively.
• | Reinsurance receivables |
The Captives enter into reinsurance arrangements to reduce their risk of loss. The reinsurance arrangements do not relieve the Captives from its obligation to policyholders. Failure of the reinsurers to honor their obligations could result in losses to the Captives. The Captives evaluate the financial condition of its reinsurers and monitor concentrations of credit risk to minimize their exposure to significant losses from reinsurer insolvencies and to establish allowances for amounts deemed non-collectible.
• | Income taxes |
The provision for income taxes has been 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 carry forwards. 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, 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 that some portion or all of the deferred tax assets will not be realized.
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 it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the event of a loss is neither probable nor reasonably estimable, but is reasonably possible, the Company provides appropriate disclosure in the notes to its consolidated financial statements if the contingency is material. The Company estimates environmental liabilities on a case-by-case basis using the most current status of available facts, existing technology and presently enacted laws and regulations. Environmental liabilities for which the remediation period is fixed and associated costs are readily determinable are recorded at their net present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable (See Note 19).
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accrues for legal fees related to litigation matters when the costs associated with defending these matters can be reasonably estimated and are probable of occurring. All other legal fees are expensed as incurred.
• | Minority interests |
Minority interests in the equity and results of operations of the entities consolidated by the Company are shown as a separate line item in the consolidated financial statements. As a result of the Company's ownership interest in Celanese AG, the Successor recorded approximately 16% of the equity and results of operations of Celanese AG as minority interest as of, and for the nine months ended December 31, 2004. In addition to the Company's ownership interest in Celanese AG, additionalThe entities included in the consolidated financial statements that have minority interests at December 31, 2004 are as follows:
Ownership Percentage | ||||||||||
December 31, 2005 | December 31, 2004 | |||||||||
Celanese AG | 98 | % | 84 | % | ||||||
InfraServ GmbH & Co. Oberhausen KG | 98 | % | 84 | % | ||||||
Celanese Polisinteza d.o.o. | 76 | % | 73 | % | ||||||
Synthesegasanlage Ruhr GmbH | 50 | % | 50 | % | ||||||
Pemeas GmbH | 0 | % | 41 | % | ||||||
Dacron GmbH | 0 | % | 0 | % | ||||||
The Company has a 60 percent60% voting interest and the right to appoint a majority of the board of management of Synthesegasanlage Ruhr GmbH, which results in the Company controlling this entity and, accordingly, the Predecessor and Successor are consolidating this entity in their consolidated financial statements.
In December 2005, the Company sold the majority of its interests in its cyclo-olefin copolymer ("COC") business, which includes Dacron GmbH, andas well as its common share interest in Pemeas GmbH are variable interest entities as defined under FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities. The Company is deemed the primary beneficiary of these variable interest entities and, accordingly, consolidatesGmbH. As such, these entities in itsare no longer consolidated financial statementsas of December 31, 2005. (See Note 5).
On October 22, 1999, Celanese AG was demerged from Hoechst AG ("Hoechst"). In accordance with the demerger agreement between Hoechst and Celanese AG, Celanese AG then new owner to Hoechst's sorbates business, was assigned the obligation related to the Sorbates matters. However, Hoechst agreed to indemnify Celanese AG for 80 percent of payments for such obligations. Expenses related to this matter are recorded gross of any such recoveries from Hoechst, and its legal successors, in the consolidated statement of operations. Recoveries from Hoechst, and its legal successors, which represent 80 percent of such expenses, are recorded directly to shareholders' equity (deficit), net of tax, as a contribution of capital in the consolidated balance sheet.
The costs of research and development are charged as an expense in the period in which they are incurred.
For the Company's international operations where the functional currency is other than the U.S. 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)6).
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Purchaser's acquisition of voting control of Celanese AG, the Predecessor financial statements are reported in U.S. dollars to be consistent with Successor's reporting requirements. For Celanese AG reporting requirements, the euro continues to be the reporting currency. (Continued)
• | Earnings per share |
Basic earnings per share is based on the net earnings divided by the weighted average number of common shares outstanding during the period. Diluted earnings per shares is based on the net earnings divided by the weighted average number of common shares outstanding during the period adjusted to give effect to common stock equivalents, if dilutive.
• |
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"On October 22, 1999, CAG was demerged from Hoechst AG (‘‘Hoechst’’), the Successor accounts for employee stock-based compensation in. In accordance with APB Opinion No. 25, Accountingthe demerger agreement between Hoechst and CAG, CAG was assigned the obligation related to the Sorbates matters. However, Hoechst agreed to indemnify CAG for Stock Issued80% of payments for such obligations. Expenses related to Employees ("APB No. 25"), using an intrinsic value approach to measure compensation expense, if any.
For the three months ended March 31, 2004,this matter are recorded gross of any such recoveries from Hoechst, and the years ended December 31, 2003 and 2002, the Predecessor accounted for stock options and similar equity instruments under the fair value method, which requires compensation cost to be measured at the grant date based on the value of the award. The fair value of stock options is determined using the Black-Scholes option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility and the expected dividends of the underlying stock, and the risk-free interest rate over the expected life of the option. Compensation expense based on the fair value of stock options is recorded over the vesting period of the options and has been recognizedits legal successors, in the Predecessor consolidated financial statements. The Celanese AG stock options do not contain changes in control provisions,statement of operations. Recoveries from Hoechst, and its legal successors, which would have resulted in accelerated vesting,represent 80% of such expenses, are recorded directly to Shareholders' equity (deficit), net of tax, as a resultcontribution of capital in the Acquisition (See Note 23).consolidated balance sheet.
Compensation expense for stock appreciation rights, either partially or fully vested, is recorded based on the difference between the base unit price at the date of grant and the quoted market price of Celanese AG's common stock on the Frankfurt Stock Exchange at the end of the period proportionally recognized over the vesting period and adjusted for previously recognized expense (See Note 23).
The following table illustrates the effect on net earnings (loss) if the Successor had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the nine months ended December 31, 2004:
• | Accounting for purchasing agent agreements |
CPO Celanese Aktiengesell Schaft & Co. Procurment Olefin KG, Franfurt AmMain ("CPO"Frankfurt Am Main (‘‘CPO’’), a subsidiary of the Company, acts as a purchasing agent on behalf of the Company, as well as third parties. CPO arranges sale and purchase agreements for raw materials on a commission basis. Accordingly, the commissions earned on these third party sales are classified as a reduction to selling,Selling, general and administrative expense. Commissions amounted to $9 million, $6 million, $2 million and $8 million and $5 million for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, and 2002, respectively. The raw material sales volume commissioned by CPO for third parties amounted to $880 million, $512 million, $149 million and $560 million and $441 million for the year ended December 31, 2005, the nine months ended December 31, 2004, the three months ended March 31, 2004 and the yearsyear ended December 31, 2003, respectively.
• | Functional and reporting currencies |
For the Company's international operations where the functional currency is other than the U.S. dollar, assets and 2002, respectively.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).
As a result of the Purchaser's acquisition of voting control of CAG, the Predecessor financial statements are reported in U.S. dollars to be consistent with Successor's reporting requirements. For CAG reporting requirements, the euro continues to be the reporting currency.
• | Reclassifications |
The Company has reclassified certain prior period amounts to conform to current year’s presentation. The reclassifications had no effect on the consolidated statements of operations or Shareholders’ equity as previously reported.
• | Cash flows from discontinued operations (revised) |
The Company has revised its presentation of cash flows related to discontinued operations. The cash flows of continuing operations and discontinued operations are presented together, with separate captions for the operating, investing and financing activities of discontinued operations. In prior periods, the Company presented the cash flows of discontinued operations within certain captions of operating, investing and financing cash flows together with those of continuing operations. Accordingly, the category totals for operating, investing and financing activities have not changed.
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain reclassifications have been made to prior year balances in order to conform to current year presentation. (Continued)
5. Accounting Changeschanges and Pronouncementsrecent accounting pronouncements
Accounting Changes Adopted in 2004
During 2004, the Predecessor changed its inventory valuation method of accounting for its USU.S. subsidiaries from the LIFO method to the FIFO method to conform with the Successor's accounting policy. The Predecesor'sPredecessor’s financial statements have been restated for all periods presented to reflect this change (See Note 4).
In January 2003, and subsequently revised in December 2003, the FASB issued FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities and FIN No. 46 Revised (collectively "FIN‘‘FIN No. 46"46’’). FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "‘‘Consolidation of Financial Statements"’’ requiring the consolidation of certain variable interest entities ("VIEs"(‘‘VIEs’’) which are defined as entities having equity that is not sufficient to permit such entity to finance its activities without additional subordinate financial support or whose equity holders lack certain characteristics of a controlling financial interest. The company deemed to be the primary beneficiary is required to consolidate the VIE. FIN No. 46 requiresrequired VIEs that meetmet the definition of a special purpose entity to be consolidated by the primary beneficiary as of December 31, 2003. For pre-existing VIEs that dodid not meet the definition of a special purpose entity, consolidation iswas not required until March 31, 2004. At MarchDecember 31, 2004,2003, upon adoption of FIN No. 46, the Predecessor did not identify any VIEs other than the VIE disclosed below. As of December 31, 2005, the Successor did not have any significant VIEs.
The Company hashad a lease agreement for its cyclo-olefin copolymer ("COC")COC plant with Dacron GmbH, a special purpose entity.GmbH. This special purpose entity was created primarily for the purpose of constructing and subsequently leasing the COC plant to the Company. This arrangement qualifiesqualified as a VIE. Based upon the terms of the lease agreement and the residual value guarantee Celanesethe Company provided to the lessors, the Company iswas deemed the primary beneficiary of the VIE. At December 31, 2003,During the Predecessor recorded $44 million of additional assets and liabilities from the consolidation of this special purpose entity.
In April 2004,period the Company and a group of investors led by Conduit Ventures Ltd. entered into a venture, which was named Pemeas GmbH. This venture was formed in order to advance the commercialization of the Company's fuel cell technology. Pemeas GmbH is considered a variable interest entity as defined underadopted FIN No. 46. The Company is deemed46, the primary beneficiary of this variable interest entity and, accordingly, consolidates this entity in its consolidated financial statements. The consolidation of this entity did not have a material impact on the Company's financial position, or results of operations and cash flows forflows. In December 2005, the nine months ended December 31, 2004.
In March 2004,Company sold the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-01, Other than Temporary Impairment, which outlines the basic model to be used to evaluate whether an investment is impaired and sets the disclosure requirements for such investments. EITF Issue No. 03-1 is to be applied prospectivelymajority of its interest in periods beginning after June 15, 2004. The Company has applied the provisions of EITF Issue No. 03-01 in the current reporting period with no material impact on the Company's financial position or results of operations and cash flows for the nine months ended December 31, 2004.COC.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare Act"‘‘Medicare Act’’) was signed into law. The Medicare Act introduces a prescription drug benefit under Medicare ("(‘‘Medicare Part D"D’’) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As of March 31, 2004, as permitted by FASB Staff Position ("FSP"(‘‘FSP’’) 106-1, Accounting and Disclosure Requirements Related to the
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company deferred accounting for the effects of the Act in the measurement of its Accumulated Postretirement Benefit Obligation (APBO)("APBO") and the effect to net periodic postretirement benefit costs. Specific guidance with respect to accounting for the effects of the Act was recently issued in FSP No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, and the Company has adopted the provisions of FSP No. 106-2 as of the Effective Date, and included any impact in the overall measurement of the liabilities of the U.S. postretirement medical plans in purchase accounting.
Accounting Changes Adopted in 2003
The Predecessor adopted SFAS No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The liability is measured at its discounted fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset and depreciated over the asset's useful life. On January 1, 2003, the Predecessor recognized transition amounts for existing asset retirement obligation liabilities, associated capitalized costs and accumulated depreciation. An after-tax transition charge of $1 million was recorded as the cumulative effect of an accounting change. The ongoing expense on an annual basis resulting from the initial adoption of SFAS No. 143 is immaterial (See Note 15). The effect of the adoption of SFAS No. 143 on proforma net income and proforma earnings per share for prior periods presented is not material.
In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into after June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 is intended to result in more consistent reporting of contracts as either freestanding derivative instruments subject to SFAS No. 133 in their entirety, or as hybrid instruments with debt host contracts and embedded derivative features. In addition, SFAS No. 149 clarifies the definition of a derivative by providing guidance on the meaning of initial net investments related to derivatives. This statement is effective for contracts entered into or modified after June 30, 2003.Date. The adoption of SFASFSP No. 149106-2 did not have a material effectimpact on the Predecessor's consolidatedCompany’s financial position, or results of operations.
In May 2003, the EITF reached a consensus on Issue No. 01-8, Determining Whether an Arrangement Contains a Lease. EITF Issue No. 01-8 provides guidance on identifying leases contained in contracts or other arrangements that sell or purchase products or services. This consensus is effective prospectively for contracts entered into or significantly modified after May 28, 2003. The impact of EITF Issue No. 01-8 did not have a material effect on the Company's consolidated financial position or results of operations. The impact of EITF Issue No. 01-8 on the Company's future results of operations and financial position will depend on the terms contained in contracts signed or contracts amended in the future.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") 104, Revenue Recognition. The SAB updates portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make the guidance consistent with current authoritative accounting literature. The principal revisions relate to the incorporation of certain sections of the staff's frequently asked questions document on revenue recognition into Topic 13. The adoption of SAB 104 did not have an effect on the Predecessor's consolidated financial position or results of operations.
In December 2003, the FASB issued SFAS No. 132 (revised), Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 (revised) prescribes employers' disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of those plans. The statement retains and revises the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The statement generally is effective for fiscal years ending after December 15, 2003. The Company's disclosures in Note 17 incorporate the requirements of SFAS No. 132 (revised).
Accounting Changes Adopted in 2002
In 2002, the Predecessor recorded income of $18 million for the cumulative effect of two accounting changes. This amount consisted of income of $9 million ($0.18 per share) from the implementation of SFAS No. 142, as disclosed below, and income of $9 million ($0.18 per share), net of income taxes of $5 million, as a result of the change in the measurement date of the Predecessor's U.S. benefit plans (See Note 17).
Effective January 1, 2002, the Predecessor adopted SFAS No. 142, Goodwill and Other Intangible Assets, and accordingly applied the standards of the statement prospectively. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and provides that goodwill and some intangibles no longer be amortized on a recurring basis. Instead, goodwill and intangible assets with an indefinite life are subject to an initial impairment test within six months of adoption of SFAS No. 142 and at least annually thereafter.
As of January 1, 2002, the Predecessor had goodwill with a net carrying value of $1,024 million that was subject to the transition provisions of SFAS No. 142. During the first half of 2002, the Predecessor performed the required impairment tests of goodwill as of January 1, 2002 and determined that there was no impairment. Other intangible assets with finite lives continue to be amortized over their useful lives and reviewed for impairment.
Additionally, SFAS No. 142 requires that any unamortized negative goodwill (excess of fair value over cost) on the balance sheet be written off immediately and classified as a cumulative effect of change in accounting principle in the consolidated statement of operations. As a result, income of $9 million was recorded to cumulative effect of changes in accounting principles in the Predecessor's consolidated statement of operations in the first quarter of 2002 (See Note 13).
The Predecessor adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, on January 1, 2002, and accordingly applied the statement prospectively. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement also supersedes APB No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement establishes a single accounting model to test impairment, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements in SFAS No. 121 related to the recognition of impairment of long-lived assets to be held and used. Additionally, SFAS No. 144 extends the applicability to discontinued operations, and broadens the presentation of discontinued operations to include a component of an entity. The adoption of SFAS No. 144 did not have a material effect on the Predecessor's consolidated financial statements.
Effective October 2002, the Predecessor early adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and accordingly applied the Statement prospectively to exit or disposal activities initiated after September 30, 2002. The statement nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to the criteria for recognition of a liability for a cost associated with an exit or disposal activity.
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 146 requires recognition only when the liability is incurred. In contrast, under EITF Issue No. 94-3, a liability was recognized when the Company committed to an exit plan. Additionally, SFAS No. 146 stipulates that the liability be measured at fair value and be adjusted for changes in cash flow estimates.
In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. These disclosure requirements are included in Note 27. FIN No. 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified subsequent to adoption.
FIN No. 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, this is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of a liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. As noted above, the Predecessor has adopted the disclosure requirements of FIN No. 45 and applied the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.
Recent Accounting Pronouncementsflows.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, amendment to ARB No. 43 Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage).and requires that such items be recognized as current-period charges regardless of whether they meet the ‘‘so abnormal’’ criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of ‘‘normal capacity’’ and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is in the process of assessing the impact ofcurrently implementing SFAS No. 151 and does not believe that it will have a material impact on its futurefinancial position, results of operations and financial position.or cash flows.
In December 2004, the FASB revised SFAS No. 123, Accounting for Stock Based Compensation, which requires that the cost from all share-based payment transactions be recognized in the financial statements. SFAS No. 123 (revised) is effective for the first interim or annual period beginning after June 15, 2005.(R), Share Based Payment, (‘‘SFAS No. 123 (R)’’) requires companies to
CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
measure all employee stock-based compensation awards using a fair-value method and record such expense in their consolidated financial statements. The Company is currently evaluating the potential impactadoption of SFAS No. 123 (revised), although it(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. The Company is anticipated thatallowed to select either of two alternative transition methods. Under the first method, the Modified Prospective Application method, SFAS 123 (R) applies to new awards and modified awards after the effective date, and to any unvested awards as service is rendered on or after the effective date. Under the second method, the Modified Retrospective Application method, SFAS No. 123 (R) applies to either all prior years for which SFAS No. 123 was effective or only to prior interim periods in the year of adoption. The Company plans to adopt SFAS No. 123 (R) using the Modified Prospective Application method. SFAS No. 123 (R) is effective beginning in the first quarter of 2006, and SFAS 123 (R) will apply to all outstanding and unvested option awards at adoption will havedate. The Company has completed a negative impact on resultspreliminary evaluation of operations.the effect of adoption of SFAS 123 (R). The adoption of SFAS 123 (R) is expected to increase Selling, general and administrative expenses by approximately $11 million in 2006 based upon options outstanding as of December 31, 2005.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The Company is currently evaluating the potential impact of this statement.
In October 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. Three of the more significant provisions of the Act relate tostatement and does not believe that it will have a one-time opportunity to repatriate foreign earnings at a reduced rate, manufacturing benefits for qualified production activity income and new requirements with respect to deferred compensation plans. The Company has not yet determined thematerial impact if any, of this Act on its futurefinancial position, results of operations or cash flows. Additionally, under new Section 409A
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 (‘‘FIN No. 47’’). FIN No. 47 provides guidelines as to when a company is required to record a conditional asset retirement obligation. In general, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the Internal Revenue Code, created in connection withliability can be reasonably estimated. The fair value of a liability for the Act,conditional asset retirement obligation should be recognized when incurred—generally upon acquisition, construction, or development and (or) through the U.S. Treasury Departmentnormal operation of the asset. FIN No. 47 is directed to issue regulations providing guidanceeffective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN No. 47 did not have a material impact on the Company’s financial position, results of operations and provide a limited period during which deferred compensation plans may be amended to comply with the requirements of Section 409A. When the regulations are issued, the Company may be required to make modifications to certain compensation plans to comply with Section 409A.
CELANESE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTScash flows.
6. |
The Company is a party to various transactions with affiliated companies. Companies in which the Company has an investment accounted for under the cost or equity method of accounting, are considered Affiliates; any transactions or balances with such companies are considered Affiliate transactions. The following tables represent the Company's transactions with Affiliates for the periods presented: