UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-Q

 

 

 

(Commission File Number) 001-32410

 

CELANESE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

(Registrant’s telephone number, including area code)

(972) 443-4000

 

 

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 þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ  Accelerated Filer o  Non-accelerated Filer o  Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of outstanding shares of the registrant’s Series A common stock, $0.0001 par value, as of April 18, 2008 was 150,978,631.

 

CELANESE CORPORATION

Form 10-Q
For the Quarterly Period Ended March 31, 2008

TABLE OF CONTENTS

 

CELANESE CORPORATION AND SUBSIDIARIES

 

 

See the accompanying notes to the unaudited interim consolidated financial statements.

CELANESE CORPORATION AND SUBSIDIARIES

 

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

See the accompanying notes to the unaudited interim consolidated financial statements.

CELANESE CORPORATION AND SUBSIDIARIES

 

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

 

 

See the accompanying notes to the unaudited interim consolidated financial statements.

CELANESE CORPORATION AND SUBSIDIARIES

 

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See the accompanying notes to the unaudited interim consolidated financial statements.

CELANESE CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

Description of the Company

 

Celanese Corporation and its subsidiaries (collectively the “Company”) is a leading global integrated chemical and advanced materials company. The Company’s business involves processing chemical raw materials, such as methanol, carbon monoxide and ethylene, and natural products, including wood pulp, into value-added chemicals, thermoplastic polymers and other chemical-based products.

 

Basis of Presentation

 

In this Quarterly Report on Form 10-Q, the term “Celanese US” refers to the Company’s subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, and not its subsidiaries. The term “Purchaser” refers to the Company’s subsidiary, Celanese Europe Holding GmbH & Co. KG, a German limited partnership, and not its subsidiaries, except where otherwise indicated. The term “Advisor” refers to Blackstone Management Partners, an affiliate of The Blackstone Group. The term “CAG” refers to Celanese GmbH, formerly known as Celanese AG, its consolidated subsidiaries, its non-consolidated subsidiaries, ventures and other investments. With respect to CAG shareholder and similar matters where the context indicates, “CAG” only refers to Celanese GmbH.

 

The unaudited interim consolidated financial statements for the three months ended March 31, 2008 and 2007 contained in this Quarterly Report were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for all periods presented. The unaudited interim consolidated financial statements and other financial information included in this Quarterly Report, unless otherwise specified, have been presented to separately show the effects of discontinued operations.

 

In the opinion of management, the accompanying unaudited consolidated balance sheets and related unaudited interim consolidated statements of operations, cash flows and shareholders’ equity and comprehensive income (loss) include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with US GAAP. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the Celanese Corporation and Subsidiaries consolidated financial statements as of and for the year ended December 31, 2007, as filed on February 29, 2008 with the SEC as part of the Company’s Annual Report on Form 10-K (the “2007 Form 10-K”).

 

Operating results for the three months ended March 31, 2008 and 2007 are not necessarily indicative of the results to be expected for the entire year.

 

Estimates and Assumptions

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues, expenses and allocated charges during the reporting period. Significant estimates pertain to impairments of goodwill, intangible assets and other long-lived assets, purchase price allocations, restructuring costs and other (charges) gains, net, income taxes, pension and other postretirement benefits, asset retirement obligations, environmental liabilities and loss contingencies, among others. Actual results could differ from those estimates.

 

Reclassifications

 

The Company has reclassified certain prior period amounts to conform to the current period’s presentation.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

The domination and profit and loss transfer agreement (the “Domination Agreement”) was approved at the CAG extraordinary shareholders’ meeting on July 31, 2004. The Domination Agreement between CAG and the Purchaser became effective on October 1, 2004 and cannot be terminated by the Purchaser in the ordinary course of business until September 30, 2009. The Company’s subsidiaries, Celanese International Holdings Luxembourg S.à r.l. (“CIH”), and Celanese US, 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 obligation to compensate CAG for any statutory annual loss incurred by CAG during the term of the Domination Agreement. If CIH and/or Celanese US are obligated to make payments under such guarantees or other security to the Purchaser, the Company may not have sufficient funds for payments on its indebtedness when due. The Company has not had to compensate CAG for an annual loss for any period during which the Domination Agreement has been in effect. See additional discussion in the 2007 Form 10-K.

 

 

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about a company’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. The Company is currently evaluating the impact of adopting SFAS No. 161.

 

4. Acquisitions, Ventures and Divestitures

 

Acquisitions

 

On January 31, 2007, the Company completed the acquisition of the cellulose acetate flake, tow and film businesses of Acetate Products Limited (“APL”), a subsidiary of Corsadi B.V. The purchase price for the transaction was approximately £57 million ($112 million), in addition to direct acquisition costs of approximately £4 million ($7 million). As contemplated prior to closing of the acquisition, in September 2007, the Company closed the acquired tow production plant at Little Heath, United Kingdom. In accordance with the Company’s sponsor services agreement dated January 26, 2005, as amended, the Company paid the Advisor $1 million in connection with the acquisition. The acquired business is included in the Company’s Consumer Specialties segment.

 

On April 6, 2004, the Company acquired 84% of CAG. During 2005, the Company acquired an additional 14% of CAG. As a result of the effective registration of the Squeeze-Out (as defined in Note 11) in the commercial register in Germany in December 2006, the Company acquired the remaining 2% of CAG in January 2007. The Company’s current ownership percentage in CAG is 100%.

 

Ventures

 

In March 2007, the Company entered into a strategic partnership with Accsys Technologies PLC (“Accsys”), and its subsidiary, Titan Wood, to become the exclusive supplier of acetyl products to Titan Wood’s technology licensees for use in wood acetylation. In conjunction with this partnership, in May 2007, the Company acquired 8,115,883 shares of Accsys’ common stock representing approximately 5.45% of the total voting shares of Accsys

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

for €22 million ($30 million). The investment is treated as an available-for-sale security and is included as a component of current Marketable securities on the Company’s unaudited consolidated balance sheet. In November 2007, the Company and Accsys announced that they agreed to amend their business arrangements so that each company will have a nonexclusive “at-will” trading and supply relationship to give both companies greater flexibility. As part of this amendment, the Company has the ability to sell its common stock ownership in Accsys through an orderly placement of the Company’s Accsys shares. As of March 31, 2008, the Company has sold a total of 3,989,162 shares of Accsys’ common stock for approximately €11 million ($16 million), which resulted in a gain of less than $1 million.

 

Divestitures/Discontinued Operations

 

In connection with the Company’s strategy to optimize its portfolio and divest non-core operations, the Company announced on December 13, 2006 its agreement to sell its Acetyl Intermediates segment’s oxo products and derivatives businesses, including European Oxo GmbH (“EOXO”), a 50/50 venture between CAG and Degussa AG (“Degussa”), to Advent International, for a purchase price of €480 million ($636 million) subject to final agreement adjustments and the successful exercise of the Company’s option to purchase Degussa’s 50% interest in EOXO. On February 23, 2007, the option was exercised and the Company acquired Degussa’s interest in the venture for a purchase price of €30 million ($39 million), in addition to €22 million ($29 million) paid to extinguish EOXO’s debt upon closing of the transaction. The Company completed the sale of its oxo products and derivatives businesses, including the acquired 50% interest in EOXO, on February 28, 2007. The sale included the oxo and derivatives businesses at the Oberhausen, Germany, and Bay City, Texas facilities as well as portions of its Bishop, Texas facility. Also included were EOXO’s facilities within the Oberhausen and Marl, Germany plants. The former oxo and derivatives businesses acquired by Advent International was renamed Oxea. Taking into account agreed deductions by the buyer for pension and other employee benefits and various costs for separation activities, the Company received proceeds of approximately €443 million ($585 million) at closing. The transaction resulted in the recognition of a $47 million pre-tax gain, which includes certain working capital and other adjustments, in 2007. Due to certain lease-back arrangements between the Company and the buyer and related environmental obligations of the Company, approximately $51 million of the transaction proceeds attributable to the fair value of the underlying land at Bay City ($1 million) and Oberhausen (€36 million) is included in deferred proceeds in long-term Other liabilities, and divested land with a book value of $14 million (€10 million at Oberhausen and $1 million at Bay City) remains on the Company’s unaudited consolidated balance sheet.

 

Third party sales of $5 million for the three months ended March 31, 2007 would have been eliminated upon consolidation were the divestiture not accounted for as a discontinued operation.

 

In accordance with the Company’s sponsor services agreement dated January 26, 2005, as amended, the Company paid the Advisor $6 million in connection with the sale of the oxo products and derivatives businesses.

 

There were no sales and gross profit for discontinued operations for the three months ended March 31, 2008. Net sales and gross profit for discontinued operations for the three months ended March 31, 2007 were $191 million and $142 million, respectively.

 

Asset Sale

 

In July 2007, the Company reached an agreement with Babcock & Brown, a worldwide investment firm, which specializes in real estate and utilities development, to sell the Company’s Pampa, Texas, facility. The Company will maintain its chemical operations at the site until at least 2009. Proceeds received upon certain milestone events will be treated as deferred proceeds and included in long-term Other liabilities until the transaction is complete (expected to be in 2010), as defined in the sales agreement.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

Cost Method Investments

 

In February 2007, the Company wrote-off its remaining €1 million ($1 million) cost investment in European Pipeline Development Company B.V. (“EPDC”) and expensed €7 million ($9 million) associated with contingent liabilities that became payable due to the Company’s decision to exit the pipeline development project. The investment in EPDC related to the construction of a pipeline system, solely dedicated to the transportation of propylene, which was to connect Rotterdam via Antwerp, Netherlands, with the Company’s Oberhausen and Marl production facilities in Germany. However, on February 15, 2007, EPDC shareholders voted to cease the pipeline project as originally envisaged and go into liquidation. The Company was a 12.5% shareholder of EPDC.

 

 

 

 

Goodwill

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

Other Intangible Assets, Net

 

 

 

 

Aggregate amortization expense for intangible assets with finite lives during the three months ended March 31, 2008 and 2007 totaled $19 million and $18 million, respectively.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

 

Senior Credit Facility

 

The Company’s senior credit agreement consists of $2,280 million of US dollar-denominated and €400 million of Euro-denominated term loans due 2014, a $650 million revolving credit facility terminating in 2013 and a $228 million credit-linked revolving facility terminating in 2014. Borrowings under the senior credit agreement bear interest at a variable interest rate based on LIBOR (for US dollars) or EURIBOR (for Euros), as applicable, or, for US dollar-denominated loans under certain circumstances, a base rate, in each case plus an applicable margin. The applicable margin for the term loans and any loans under the credit-linked revolving facility is 1.75%, subject to potential reductions as defined in the senior credit agreement. As of March 31, 2008, the applicable margin was 1.5% and continues to be subject to potential adjustments as defined in the senior credit agreement. The term loans under the senior credit agreement are subject to amortization at 1% of the initial principal amount per annum, payable quarterly, commencing in July 2007. The remaining principal amount of the term loans is due on April 2, 2014.

 

As of March 31, 2008, there were $129 million of letters of credit issued under the credit-linked revolving facility and $99 million remained available for borrowing. As of March 31, 2008, there were no outstanding borrowings or letters of credit issued under the revolving credit facility; accordingly, $650 million remained available for borrowing.

 

The senior credit agreement is guaranteed by Celanese Holdings LLC and certain domestic subsidiaries of Celanese US, and is secured by a lien on substantially all assets of Celanese US and such guarantors, subject to certain agreed exceptions, pursuant to the Guarantee and Collateral Agreement, dated as of April 2, 2007, by and

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

among Celanese Holdings LLC, Celanese US, certain subsidiaries of Celanese US and Deutsche Bank AG, New York Branch, as Administrative Agent and as Collateral Agent.

 

The Company is in compliance with all of the covenants related to its debt agreements as of March 31, 2008.

 

Interest Rate Risk Management

 

To reduce the interest rate risk inherent in the Company’s variable rate debt, the Company utilizes interest rate swap agreements to convert a portion of the variable rate debt to a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges. In March 2007, the Company entered into various US dollar and Euro interest rate swap agreements, which became effective on April 2, 2007, with notional amounts of $1.6 billion and €150 million, respectively. Effective January 2, 2008, the notional amount of the existing $1.6 billion US dollar swap decreased by $400 million. On November 16, 2007, the Company entered into an additional US dollar interest rate swap with a notional amount of $400 million, which became effective on January 2, 2008.

 

 

The components of current Other liabilities are as follows:

 

 

The components of long-term Other liabilities are as follows:

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

The components of net periodic benefit costs recognized are as follows:

 

 

The Company expects to contribute $40 million to its defined benefit pension plans in 2008. As of March 31, 2008, $8 million of contributions have been made. The Company’s estimates of its US defined benefit pension plan contributions reflect the provisions of the Pension Funding Equity Act of 2004 and the Pension Protection Act of 2006.

 

The Company expects to make benefit payments of $34 million under the provisions of its other postretirement benefit plans in 2008. As of March 31, 2008, $8 million of benefit payments have been made.

 

The Company participates in multiemployer defined benefit plans in Europe covering certain employees. The Company’s contributions to the multiemployer defined benefit plans are based on specified percentages of employee contributions and aggregate $2 million and $2 million for the three months ended March 31, 2008 and 2007, respectively.

 

As a result of the sale of the oxo products and derivatives businesses in February 2007 (see Note 4), there was a reduction of approximately 1,076 employees triggering a settlement and remeasurement of the affected pension plans due to certain changes in actuarial valuation assumptions. The settlement and remeasurement resulted in a net increase in the projected benefit obligation of $44 million with an offset to Accumulated other comprehensive income (loss), net (net of tax of $1 million) and a settlement gain of $11 million (included in Gain on disposal of discontinued operations) for the pension plan during the three months ended March 31, 2007.

 

 

On February 8, 2008, the Company’s Board of Directors authorized the repurchase of up to $400 million of the Company’s Series A common stock. The authorization gives management discretion in determining the conditions under which shares may be repurchased. During the three months ended March 31, 2008, the Company repurchased 1,581,700 shares of its Series A common stock at an average purchase price of $37.91 per share for a total of approximately $60 million pursuant to this authorization.

 

Purchases of treasury stock reduce the number of shares outstanding and the repurchased shares may be used by the Company for compensation programs utilizing the Company’s stock and other corporate purposes. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of Shareholders’ equity.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) totaled $(33) million and $(40) million, respectively, for the three months ended March 31, 2008 and 2007. These amounts were net of tax benefit of $0 million and $1 million, respectively, for the three months ended March 31, 2008 and 2007.

 

 

The Company is involved in a number of legal proceedings, lawsuits and claims incidental to the normal conduct of business, relating to such matters as product liability, antitrust, 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, the Company believes, based on the advice of legal counsel, that adequate provisions have been made although the ultimate outcomes may have a material adverse effect on the financial position, results of operations or cash flows in any given accounting period.

 

The following disclosure should be read in conjunction with the 2007 Form 10-K.

 

Plumbing Actions

 

As of both March 31, 2008 and December 31, 2007, the Company has remaining accruals of $65 million for cases related to the plumbing actions, of which $3 million is included in current Other liabilities. The Company believes that the plumbing actions are adequately provided for in the Company’s consolidated financial statements and that the plumbing actions will not have a material adverse effect on its financial position. However, if the Company were to incur an additional charge for this matter, such a charge would not be expected to have a material adverse effect on its financial position, but may have a material adverse effect on the Company’s results of operations or cash flows in any given accounting period. The Company continuously monitors this matter and assesses the adequacy of this reserve. The Company has reached final settlements with CNA Holdings’ insurers for their responsibility related to these claims.

 

Plumbing Insurance Indemnifications

 

CAG entered into agreements with insurance companies related to product liability settlements associated with Celcon^® plumbing claims. These agreements, except those with insolvent insurance companies, require the Company to indemnify and/or defend these insurance companies in the event that third parties seek additional monies for matters released in these agreements. The indemnifications in these agreements do not provide for time limitations.

 

In certain of the agreements, CAG received a fixed settlement amount. The indemnities under these agreements generally are limited to, but in some cases are greater than, the amount received in settlement from the insurance company. The maximum exposure under these indemnifications is $95 million. Other settlement agreements have no stated limits.

 

There are other agreements whereby the settling insurer agreed to pay a fixed percentage of claims that relate to that insurer’s policies. The Company has provided indemnifications to the insurers for amounts paid in excess of the settlement percentage. These indemnifications do not provide for monetary or time limitations.

 

The Company has reserves associated with these product liability claims.

 

Sorbates Antitrust Actions

 

Based on the advice of external counsel and a review of the existing facts and circumstances relating to the sorbates antitrust matters, including the status of government investigations, as well as civil claims filed and settled, the Company has remaining accruals as of March 31, 2008 of $183 million, included in current Other liabilities. As

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

of December 31, 2007, the accrual was $170 million. The change in the accrual amounts is primarily due to fluctuations in the currency exchange rate between the US dollar and the Euro. Although the outcome of this matter cannot be predicted with certainty, the Company’s best estimate of the range of possible additional future losses and fines (in excess of amounts already accrued), including any that may result from the above noted governmental proceedings, as of March 31, 2008 is between $0 and $9 million. The estimated range of such possible future losses is based on the advice of external counsel taking into consideration potential fines and claims, both civil and criminal that may be imposed or made in other jurisdictions.

 

Pursuant to the Demerger Agreement with Hoechst AG (“Hoechst”), CAG was assigned the obligation related to the sorbates antitrust matter. However, Hoechst, and its legal successors, agreed to indemnify CAG for 80% of any costs CAG may incur relative to this matter. Accordingly, CAG has recognized a receivable from Hoechst and a corresponding contribution of capital, net of tax, from this indemnification. As of March 31, 2008 and December 31, 2007, the Company has receivables, recorded within current Other assets, relating to the sorbates indemnification from Hoechst totaling $147 million and $137 million, respectively.

 

Shareholder Litigation

 

Several minority shareholders of CAG initiated special award proceedings seeking the court’s review of the amounts of the fair cash compensation and of the guaranteed annual payment offered under the Domination Agreement. On March 14, 2005, the Frankfurt District Court 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 ruled on appeal that the claims were admissible, and the proceedings would therefore continue in the lower court. On December 12, 2006, the Frankfurt District Court appointed an expert to help determine the value of CAG. In the first quarter of 2007, certain minority shareholders that received €66.99 per share as fair cash compensation also filed award proceedings challenging the amount they received as fair cash compensation.

 

As a result of the special proceedings discussed above, amounts paid as fair cash compensation to certain minority shareholders of CAG could be increased by the court such that minority shareholders could be awarded amounts in excess of the fair cash compensation they have previously received.

 

Guarantees

 

The Company has agreed to guarantee or indemnify third parties for environmental and other liabilities pursuant to a variety of agreements, including asset and business divestiture agreements, leases, settlement agreements, and various agreements with affiliated companies. Although many of these obligations contain monetary and/or time limitations, others do not provide such limitations.

 

The Company has accrued for all probable and reasonably estimable losses associated with all known matters or claims that have been brought to its attention.

 

These known obligations include the following:

 

Demerger Obligations

 

The Company has obligations to indemnify Hoechst, and its legal successors, for various liabilities under the Demerger Agreement as follows:

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

The Company’s obligation to indemnify Hoechst, and its legal successors, is subject to the following thresholds:

 

 

The aggregate maximum amount of environmental indemnifications under the remaining divestiture agreements that provide for monetary limits is approximately €750 million. Three of the divested agreements do not provide for monetary limits.

 

Based on the estimate of the probability of loss under this indemnification, the Company has environmental reserves recorded in long-term Other liabilities of $27 million and $27 million as of March 31, 2008 and December 31, 2007, respectively, for this contingency. Where the Company is unable to reasonably determine the probability of loss or estimate such loss under an indemnification, the Company has not recognized any related liabilities (see Note 18).

 

The Company has also undertaken in the Demerger Agreement to indemnify Hoechst, and its legal successors, to the extent that Hoechst is required to discharge liabilities, including tax liabilities, associated with businesses that were included in the demerger where such liabilities were not demerged, due to legal restrictions on the transfers of such items. These indemnities do not provide for any monetary or time limitations. The Company has not provided for any reserves associated with this indemnification. The Company has not made any payments to Hoechst, and its legal successors, during the three months ended March 31, 2008 and 2007, respectively, in connection with this indemnification.

 

Divestiture Obligations

 

The Company and its predecessor companies agreed to indemnify third-party purchasers of former businesses and assets for various pre-closing conditions, as well as for breaches of representations, warranties and covenants. Such liabilities also include environmental liability, product liability, antitrust and other liabilities. These indemnifications and guarantees represent standard contractual terms associated with typical divestiture agreements and, other than environmental liabilities, the Company does not believe that they expose the Company to any significant risk.

 

The Company has divested numerous businesses, investments and facilities, through agreements containing indemnifications or guarantees to the purchasers. Many of the obligations contain monetary and/or time limitations, ranging from one year to thirty years. The aggregate amount of guarantees provided for under these agreements is approximately $2.5 billion as of March 31, 2008. Other agreements do not provide for any monetary or time limitations.

 

Based on historical claims experience and its knowledge of the sites and businesses involved, the Company believes that it is adequately reserved for these matters. As of March 31, 2008 and December 31, 2007, the Company has environmental reserves recorded in long-term Other liabilities in the aggregate of $25 million and $27 million, respectively, for these matters.

 

Polyester Staple Antitrust Litigation

 

CNA Holdings, the successor in interest to Hoechst Celanese Corporation (“HCC”), Celanese Americas Corporation and CAG (collectively, the “Celanese Entities”) and Hoechst, the former parent of HCC, were named as defendants in two actions (involving 25 individual participants) filed in September 2006 by US purchasers of polyester staple fibers manufactured and sold by HCC. The actions allege that the defendants participated in a

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

conspiracy to fix prices, rig bids and allocate customers of polyester staple sold in the United States. These actions were consolidated for pre-trial discovery by a Multi-District Litigation Panel in the United States District Court for the Western District of North Carolina and are styled In re Polyester Staple Antitrust Litigation, MDL 1516. Already pending in that consolidated proceeding were five other actions commenced by five other alleged US purchasers of polyester staple fibers manufactured and sold by the Celanese Entities, which also allege the defendants’ participation in the conspiracy. The Company’s motions for summary judgment related to these cases were denied in April 2008. Mandatory mediation is set for May 13, 2008 and a trial is scheduled for June 2, 2008.

 

In 1998, HCC sold its polyester staple business as part of its sale of its Film & Fibers Division to KoSa, Inc. In a complaint now pending against the Celanese Entities and Hoechst in the United States District Court for the Southern District of New York, Koch Industries, Inc., KoSa B.V. (“KoSa”), Arteva Specialties, S.à r.l. (“Arteva Specialties”) and Arteva Services, S.à r.l. seek, among other things, indemnification under the asset purchase agreement pursuant to which KoSa and Arteva Specialties agreed to purchase the defendants’ polyester business for all damages related to the defendants’ participation in, and failure to disclose, the alleged conspiracy, or alternatively, rescission of the agreement. No trial date has been set for this case.

 

The Company does not believe that the Celanese Entities engaged in any conduct that should result in liability in these actions. However, the outcome of the foregoing actions cannot be predicted with certainty.

 

Other Obligations

 

The Company is secondarily liable under a lease agreement which the Company assigned to a third party. The lease expires on April 30, 2012. The lease liability for the period from April 1, 2008 to April 30, 2012 is estimated to be approximately $32 million.

 

The Company has agreed to indemnify various insurance carriers, for amounts not in excess of the settlements received, from claims made against these carriers subsequent to such settlement. The aggregate amount of guarantees under these settlements, which is unlimited in term, is approximately $10 million.

 

As indemnification obligations often depend on the occurrence of unpredictable future events, the future costs associated with them cannot be determined at this time.

 

Other Matters

 

As of March 31, 2008, Celanese Ltd. and/or CNA Holdings, Inc., both US subsidiaries of the Company, are defendants in approximately 631 asbestos cases. During the three months ended March 31, 2008, 27 new cases were filed against the Company, 24 cases were resolved and two cases were added to the count after further analysis by outside counsel. Because many of these cases involve numerous plaintiffs, the Company is subject to claims significantly in excess of the number of actual cases. The Company has reserves for defense costs related to claims arising from these matters. The Company believes that there is not significant exposure related to these matters.

 

 

On January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”) for financial assets and liabilities. SFAS No. 157 became effective for financial assets and liabilities on January 1, 2008. On January 1, 2009, the Company will apply the provisions of SFAS No. 157 for non-recurring fair value measurements of non-financial assets and liabilities, such as goodwill, indefinite-lived intangible assets, property, plant and equipment and asset retirement obligations. SFAS No. 157 defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

SFAS No. 157 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

 

 

SFAS No. 157 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.

 

The Company’s financial assets and liabilities measured at fair value on a recurring basis include securities available for sale and derivative financial instruments. Securities available for sale include US government and corporate bonds, mortgage-backed securities and equity securities. Derivative financial instruments include interest rate swaps and foreign currency forwards and swaps.

 

Marketable Securities.  Where possible, the Company utilizes quoted market prices to measure debt and equity securities; such items are classified as Level 1 in the hierarchy and include equity securities and US government bonds. When quoted market prices for identical assets are unavailable, varying valuation techniques are used. Common inputs in valuing these assets include, among others, benchmark yields, issuer spreads, forward mortgage-backed securities trade prices and recently reported trades. Such assets are classified as Level 2 in the hierarchy and typically include mortgage-backed securities, corporate bonds and other US government securities.

 

Derivatives.  Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs such as interest rates and foreign currency exchange rates. These market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps and foreign currency forwards and swaps are observable in the active markets and are classified as Level 2 in the hierarchy.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis:

 

 

 

The components of Other (charges) gains, net are as follows:

 

 

Employee termination benefits relate primarily to the Company’s continued strategy to simplify and optimize its business portfolio. Plant/office closures includes accelerated depreciation expense primarily related to the planned shutdown of the Company’s Pampa, Texas plant.

 

Employee termination benefits recorded as Other (charges) gains, net are recorded as additions to the restructuring reserves. The changes in the restructuring reserves from December 31, 2007 through March 31, 2008 are as follows:

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

Included in the restructuring reserves are $2 million and $5 million as of March 31, 2008 and December 31, 2007, respectively, of reserves recorded in long-term Other liabilities.

 

 

The Company’s effective income tax rate for the three months ended March 31, 2008 was 33% compared to 29% for the three months ended March 31, 2007. The effective income tax rate increased over the period ended March 31, 2007 primarily due to the US income tax effect on increased foreign earnings and dividends and an increase to FASB Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (“FIN 48”) liabilities for unrecognized tax benefits and related interest. This increase was partially offset by earnings in lower tax jurisdictions.

 

FIN 48 liabilities for unrecognized tax benefits and related interest and penalties are recorded as long-term Income taxes payable.

 

 

 

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

 

 

 

In 2007, the Company finalized a settlement agreement with the Frankfurt, Germany, Airport (“Fraport”) to relocate the Kelsterbach, Germany business, resolving several years of legal disputes related to the planned Frankfurt airport expansion. As a result of the settlement, the Company will transition Ticona’s operations from Kelsterbach to the Hoechst Industrial Park in the Rhine Main area in Germany by mid-2011. Over a five-year period, Fraport will pay Ticona a total of €670 million to offset the costs associated with the transition of the business from its current location and the closure of the Kelsterbach plant. The amount received from Fraport has been accounted for as deferred proceeds and is included in long-term Other liabilities in the unaudited consolidated balance sheets as of March 31, 2008 and December 31, 2007.

 

Below is a summary of the financial statement impact associated with the Ticona Kelsterbach plant relocation:

 

 

 

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

 

 

General — The Company is subject to environmental laws and regulations worldwide which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with all applicable environmental laws and regulations. The Company is also subject to retained environmental obligations specified in various contractual agreements arising from divestiture of certain businesses by the Company or one of its predecessor companies. The Company’s environmental reserves for remediation matters were $111 million and $115 million as of March 31, 2008 and December 31, 2007, respectively.

 

Remediation — Due to its industrial history and through retained contractual and legal obligations, the Company has the obligation to remediate specific areas on its own sites as well as on divested, orphan or US Superfund sites. In addition, as part of the demerger agreement between the Company and Hoechst, a specified portion of the responsibility for environmental liabilities from a number of Hoechst divestitures was transferred to the Company. The Company provides for such obligations when the event of loss is probable and reasonably estimable. The Company believes that environmental remediation costs will not have a material adverse effect on the financial position of the Company, but may have a material adverse effect on the results of operations or cash flows in any given accounting period.

 

US Superfund Sites — In the US, the Company may be subject to substantial claims brought by US federal or state regulatory agencies or private individuals pursuant to statutory authority or common law. In particular, the Company has a potential liability under the US Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and related state laws (collectively referred to as “Superfund”) for investigation and cleanup costs at approximately 50 sites. At most of these sites, numerous companies, including certain companies comprising the Company, or one of its predecessor companies, have been notified that the Environmental Protection Agency, state governing bodies or private individuals consider such companies to be potentially responsible parties (“PRP”) under Superfund or related laws. The proceedings relating to these sites are in various stages. The cleanup process has not been completed at most sites and the status of the insurance coverage for most of these proceedings is uncertain. Consequently, the Company cannot determine accurately its ultimate liability for investigation or cleanup costs at these sites. As of both March 31, 2008 and December 31, 2007, the Company had provisions totaling $13 million for US Superfund sites.

 

As events progress at each site for which it has been named a PRP, the Company accrues, as appropriate, a liability for site cleanup. Such liabilities include all costs that are probable and can be reasonably estimated. In establishing these liabilities, the Company considers its shipment of waste to a site, its percentage of total waste shipped to the site, the types of wastes involved, the conclusions of any studies, the magnitude of any remedial actions that may be necessary and the number and viability of other PRPs. Often the Company joins with other PRPs to sign joint defense agreements that settle, among PRPs, each party’s percentage allocation of costs at the site. Although the ultimate liability may differ from the estimate, the Company routinely reviews the liabilities and revises the estimate, as appropriate, based on the most current information available.

 

Additional information relating to environmental remediation activity is contained in the footnotes to the Company’s consolidated financial statements included in the 2007 Form 10-K.

 

 

On April 4, 2008, the Company declared a cash dividend on its 4.25% convertible perpetual preferred stock amounting to approximately $2 million and a cash dividend of $0.04 per share on its Series A common stock amounting to approximately $6 million. Both cash dividends are for the period February 1, 2008 to April 30, 2008 and will be paid on May 1, 2008 to holders of record as of April 15, 2008.

 

CELANESE CORPORATION AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)

 

In April 2008, the Company sold 1,375,573 shares of Accsys’ common stock for approximately €3 million ($4 million), which resulted in a loss of approximately $1 million (see Note 4).

 

On April 16, 2008, the Company announced that it intends to permanently shut down its emulsions production site at Koper, Slovenia, pending approval by the shareholders of the local legal entity, which is expected in May 2008. The decision to shut down the site will result in the separation of employees located at the site. The Company will provide assistance to all employees affected by the shutdown, in compliance with legal requirements, and will assess the feasibility to transfer many of the products to its other sites in order to continue to support customers and minimize the impact to them. The Company does not expect the shut down of the site to have a material adverse effect on its results of operations or cash flows.

 

In this Quarterly Report on Form 10-Q, the term “Celanese” refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The terms the “Company,” “we,” “our” and “us,” refer to Celanese and its subsidiaries on a consolidated basis. The term “Celanese US” refers to our subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, formally known as 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, and not its subsidiaries, except where otherwise indicated.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and other parts of this Quarterly Report on Form 10-Q contain certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “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. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Factors That May Affect Future Results and Financial Condition” below. The following discussion should be read in conjunction with our 2007 Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 29, 2008 and the unaudited interim consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Overview

 

We are a leading global integrated producer of chemicals and advanced materials. We are one of the world’s largest producers of acetyl products, which are intermediate chemicals for nearly all major industries, as well as a leading global producer of high-performance engineered polymers that are used in a variety of high-value end-use applications. As an industry leader, we hold geographically balanced global positions and participate in diversified end-use markets. Our operations are primarily located in North America, Europe and Asia. We combine a demonstrated track record of execution, strong performance built on shared principles and objectives, and a clear focus on growth and value creation.

Results of Operations

 

Financial Highlights

 

 

 

Summary of Consolidated Results for the Three Months Ended March 31, 2008 compared to the Three Months Ended March 31, 2007

 

Net Sales

 

Net sales for the three months ended March 31, 2008 increased 19% compared to the same period in 2007. Higher prices and favorable foreign currency impacts (primarily related to the Euro across all segments) increased net sales 12% and 7%, respectively. Higher prices were primarily driven by a tight global supply of acetyl, polyvinyl alcohol (“PVOH”) and emulsions products and higher raw material prices, which we were able to pass on to our customers. Increased volumes also contributed to an increase in net sales but were equally offset by the absence of net sales in the first quarter of 2008 from the divested AT Plastics’ Films business. Volume increases due to increased market penetration from several of Advanced Engineered Materials’ key products and strong demand in Asia for acetyl products coupled with the startup of our acetic acid unit in Nanjing, China in mid-2007, were partially offset by decreased volumes resulting from the transfer of flake production to our China ventures, the slowing of the US economy and the residual effects of both planned and unplanned outages in the chemicals industry during 2007.

Gross Profit

 

Gross profit as a percentage of net sales remained relatively flat for the three months ended March 31, 2008 (22.6%) compared to the same period in 2007 (23.1%). Higher energy and raw material costs more than offset the increase in net sales, causing a slight decrease in gross profit as a percentage of net sales.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $20 million for the three months ended March 31, 2008 compared to the same period in 2007. The increase is primarily due to spending on finance improvement initiatives of $9 million and expenses related to restricted stock units of $2 million. The restricted stock unit program was launched in April 2007.

 

Other (Charges) Gains, Net

 

The components of Other (charges) gains, net are as follows:

 

 

Employee termination benefits relate primarily to our continued strategy to simplify and optimize our business portfolio. Plant/office closures includes accelerated depreciation expense primarily related to the planned shutdown of our Pampa, Texas plant.

 

Operating Profit

 

Operating profit increased 14% for the three months ended March 31, 2008 compared to the same period in 2007. This increase is principally driven by the increase in gross profit during the first quarter of 2008 partially offset by the increase in Selling, general and administrative expenses and Other (charges) gains, net described above.

 

Interest Expense

 

Interest expense decreased $5 million for the three months ended March 31, 2008 compared to the same period in 2007. The decrease is primarily related to lower interest rates on our senior credit agreement compared to the interest rates on the senior discount notes and senior subordinated notes, which were fully repaid by May 2007. The decrease was partially offset by an increase in interest expense due to China financing activities in 2008.

 

Equity in Net Earnings of Affiliates

 

Equity in net earnings of affiliates decreased $8 million for the three months ended March 31, 2008 compared to the same period in 2007. The decrease primarily relates to decreased earnings at our Advanced Engineered Materials’ affiliates due to unfavorable price and volume fluctuations.

 

Income Taxes

 

Our effective income tax rate for the three months ended March 31, 2008 was 33% compared to 29% for the three months ended March 31, 2007. The effective income tax rate increased over the period ended March 31, 2007 primarily due to the US income tax effect on increased foreign earnings and dividends and an increase to Financial Accounting Standards Board (“FASB”) Interpretation 48, Accounting for Uncertainty in Income Taxes —  an

interpretation of FASB Statement No. 109 liabilities for unrecognized tax benefits and related interest. This increase was partially offset by earnings in lower tax jurisdictions.

 

Expansion in China

 

The acetic acid facility located in our Nanjing, China complex has been running at full production rates since June 2007 and we commenced production of vinyl acetate emulsions at the complex during the fourth quarter of 2007. During the first quarter of 2008, we commissioned the startup of our Celstran^® long fiber-reinforced thermoplastic unit in Nanjing. Operations for four other plants at the complex are expected to begin by 2009.

 

The complex brings world-class scale to one site for the production of acetic acid, vinyl acetate monomer (“VAM”), acetic anhydride, emulsions, Celstran^® long fiber-reinforced thermoplastic, UHMW-PE (“GUR”), an ultra-high molecular weight polyethylene and compounding. We believe the Nanjing complex will further enhance our capabilities to better meet the growing needs of our customers in a number of industries across Asia.

Selected Data by Business Segment