CE-2012.9.30-10Q


 
 
 
 
 
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_______________________________________________________
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Commission File Number) 001-32410
CELANESE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
98-0420726
(I.R.S. Employer
Identification No.)
 
 
222 W. Las Colinas Blvd., Suite 900N
Irving, TX
(Address of Principal Executive Offices)
75039-5421
(Zip Code)
(972) 443-4000
(Registrant’s telephone number, including area code)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 the definitions 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 (Do not check if a smaller reporting company)
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 October 18, 2012 was 159,532,052.
 
 
 
 
 




CELANESE CORPORATION AND SUBSIDIARIES

Form 10-Q
For the Quarterly Period Ended September 30, 2012

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




Item 1. Financial Statements 
CELANESE CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In $ millions, except share and per share data)
Net sales
1,609

 
1,807

 
4,917

 
5,149

Cost of sales
(1,285
)
 
(1,406
)
 
(3,992
)
 
(3,987
)
Gross profit
324

 
401

 
925

 
1,162

Selling, general and administrative expenses
(121
)
 
(140
)
 
(379
)
 
(408
)
Amortization of intangible assets
(12
)
 
(17
)
 
(38
)
 
(50
)
Research and development expenses
(24
)
 
(24
)
 
(76
)
 
(72
)
Other (charges) gains, net
2

 
(24
)
 
(1
)
 
(39
)
Foreign exchange gain (loss), net
(4
)
 
1

 
(4
)
 
1

Gain (loss) on disposition of businesses and assets, net
(2
)
 
(1
)
 
(2
)
 
(1
)
Operating profit (loss)
163

 
196

 
425

 
593

Equity in net earnings (loss) of affiliates
50

 
57

 
163

 
146

Interest expense
(44
)
 
(54
)
 
(134
)
 
(166
)
Refinancing expense

 

 

 
(3
)
Interest income

 
1

 
1

 
2

Dividend income - cost investments
1

 
1

 
85

 
80

Other income (expense), net
3

 

 
4

 
9

Earnings (loss) from continuing operations before tax
173

 
201

 
544

 
661

Income tax (provision) benefit
(54
)
 
(34
)
 
(32
)
 
(151
)
Earnings (loss) from continuing operations
119

 
167

 
512

 
510

Earnings (loss) from operation of discontinued operations
(3
)
 

 
(3
)
 
3

Gain (loss) on disposition of discontinued operations

 

 

 

Income tax (provision) benefit from discontinued operations
1

 

 
1

 
(1
)
Earnings (loss) from discontinued operations
(2
)
 

 
(2
)
 
2

Net earnings (loss)
117

 
167

 
510

 
512

Net (earnings) loss attributable to noncontrolling interests

 

 

 

Net earnings (loss) attributable to Celanese Corporation
117

 
167

 
510

 
512

Cumulative preferred stock dividends

 

 

 

Net earnings (loss) available to common stockholders
117

 
167

 
510

 
512

Amounts attributable to Celanese Corporation
 

 
 

 
 

 
 

Earnings (loss) from continuing operations
119

 
167

 
512

 
510

Earnings (loss) from discontinued operations
(2
)
 

 
(2
)
 
2

Net earnings (loss)
117

 
167

 
510

 
512

Earnings (loss) per common share - basic
 

 
 

 
 

 
 

Continuing operations
0.75

 
1.07

 
3.24

 
3.27

Discontinued operations
(0.01
)
 

 
(0.01
)
 
0.01

Net earnings (loss) - basic
0.74

 
1.07

 
3.23

 
3.28

Earnings (loss) per common share - diluted
 

 
 

 
 

 
 

Continuing operations
0.74

 
1.05

 
3.21

 
3.21

Discontinued operations
(0.01
)
 

 
(0.01
)
 
0.01

Net earnings (loss) - diluted
0.73

 
1.05

 
3.20

 
3.22

Weighted average shares - basic
159,123,808

 
156,194,459

 
157,936,063

 
156,147,982

Weighted average shares - diluted
160,094,904

 
159,018,839

 
159,644,166

 
158,965,811


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

3



CELANESE CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In $ millions)
Net earnings (loss)
117

 
167

 
510

 
512

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

Unrealized gain (loss) on marketable securities

 

 

 

Foreign currency translation
28

 
(69
)
 
4

 
18

Unrealized gain (loss) on interest rate swaps
(2
)
 
5

 
(1
)
 
14

Pension and postretirement benefits
10

 
4

 
25

 
12

Total other comprehensive income (loss), net of tax
36

 
(60
)
 
28

 
44

Total comprehensive income (loss), net of tax
153

 
107

 
538

 
556

Comprehensive (income) loss attributable to noncontrolling interests

 

 

 

Comprehensive income (loss) attributable to Celanese Corporation
153

 
107

 
538

 
556


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


4



CELANESE CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions, except share data)
ASSETS
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
928

 
682

Trade receivables - third party and affiliates (net of allowance for doubtful accounts - 2012: $9; 2011: $9)
932

 
871

Non-trade receivables, net
188

 
235

Inventories
711

 
712

Deferred income taxes
106

 
104

Marketable securities, at fair value
56

 
64

Other assets
47

 
35

Total current assets
2,968

 
2,703

Investments in affiliates
775

 
824

Property, plant and equipment (net of accumulated depreciation - 2012: $1,454; 2011: $1,316)
3,295

 
3,269

Deferred income taxes
539

 
421

Other assets
446

 
344

Goodwill
768

 
760

Intangible assets, net
174

 
197

Total assets
8,965

 
8,518

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 

 
 

Short-term borrowings and current installments of long-term debt - third party and affiliates
141

 
144

Trade payables - third party and affiliates
685

 
673

Other liabilities
507

 
539

Deferred income taxes
19

 
17

Income taxes payable
43

 
12

Total current liabilities
1,395

 
1,385

Long-term debt
2,839

 
2,873

Deferred income taxes
131

 
92

Uncertain tax positions
189

 
182

Benefit obligations
1,354

 
1,492

Other liabilities
1,142

 
1,153

Commitments and Contingencies


 


Stockholders’ Equity
 

 
 

Preferred stock, $0.01 par value, 100,000,000 shares authorized (2012 and 2011: 0 issued and outstanding)

 

Series A common stock, $0.0001 par value, 400,000,000 shares authorized (2012: 183,002,903 issued and 159,228,221 outstanding; 2011: 179,385,105 issued and 156,463,811 outstanding)

 

Series B common stock, $0.0001 par value, 100,000,000 shares authorized (2012 and 2011: 0 issued and outstanding)

 

Treasury stock, at cost (2012: 23,774,682 shares; 2011: 22,921,294 shares)
(897
)
 
(860
)
Additional paid-in capital
731

 
627

Retained earnings
2,903

 
2,424

Accumulated other comprehensive income (loss), net
(822
)
 
(850
)
Total Celanese Corporation stockholders’ equity
1,915

 
1,341

Noncontrolling interests

 

Total equity
1,915

 
1,341

Total liabilities and equity
8,965

 
8,518


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

5



CELANESE CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF EQUITY
 
Nine Months Ended
 
September 30, 2012
 
Shares
 
Amount
 
(In $ millions, except share data)
Series A Common Stock
 

 
 

Balance as of the beginning of the period
156,463,811

 

Stock option exercises
3,515,105

 

Purchases of treasury stock
(853,388
)
 

Stock awards
102,693

 

Balance as of the end of the period
159,228,221

 

Treasury Stock
 

 
 

Balance as of the beginning of the period
22,921,294

 
(860
)
Purchases of treasury stock, including related fees
853,388

 
(37
)
Balance as of the end of the period
23,774,682

 
(897
)
Additional Paid-In Capital
 

 
 

Balance as of the beginning of the period
 

 
627

Stock-based compensation, net of tax
 

 
15

Stock option exercises, net of tax
 

 
89

Balance as of the end of the period
 

 
731

Retained Earnings
 

 
 

Balance as of the beginning of the period
 

 
2,424

Net earnings (loss) attributable to Celanese Corporation
 

 
510

Series A common stock dividends
 

 
(31
)
Balance as of the end of the period
 

 
2,903

Accumulated Other Comprehensive Income (Loss), Net
 

 
 

Balance as of the beginning of the period
 

 
(850
)
Other comprehensive income (loss)
 

 
28

Balance as of the end of the period
 

 
(822
)
Total Celanese Corporation stockholders’ equity
 

 
1,915

Noncontrolling Interests
 

 
 

Balance as of the beginning of the period
 

 

Net earnings (loss) attributable to noncontrolling interests
 

 

Balance as of the end of the period
 

 

Total equity
 

 
1,915


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



6



CELANESE CORPORATION AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
September 30,
 
2012
 
2011
 
(In $ millions)
Operating Activities
 

 
 

Net earnings (loss)
510

 
512

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
 

 
 

Other charges (gains), net of amounts used
(13
)
 
(8
)
Depreciation, amortization and accretion
236

 
231

Deferred income taxes, net
(96
)
 
7

(Gain) loss on disposition of businesses and assets, net
2

 

Refinancing expense

 
3

Other, net
85

 
49

Operating cash provided by (used in) discontinued operations

 
(9
)
Changes in operating assets and liabilities
 

 
 

Trade receivables - third party and affiliates, net
(62
)
 
(175
)
Inventories
1

 
(167
)
Other assets
15

 
3

Trade payables - third party and affiliates
58

 
77

Other liabilities
(75
)
 
(42
)
Net cash provided by (used in) operating activities
661

 
481

Investing Activities
 

 
 

Capital expenditures on property, plant and equipment
(270
)
 
(241
)
Acquisitions, net of cash acquired
(23
)
 
(8
)
Proceeds from sale of businesses and assets, net
1

 
6

Deferred proceeds from Kelsterbach plant relocation

 
158

Capital expenditures related to Kelsterbach plant relocation
(43
)
 
(174
)
Other, net
(62
)
 
(37
)
Net cash provided by (used in) investing activities
(397
)
 
(296
)
Financing Activities
 

 
 

Short-term borrowings (repayments), net
(7
)
 
(20
)
Proceeds from long-term debt

 
411

Repayments of long-term debt
(32
)
 
(562
)
Refinancing costs

 
(8
)
Purchases of treasury stock, including related fees
(37
)
 
(28
)
Stock option exercises
58

 
19

Series A common stock dividends
(31
)
 
(25
)
Preferred stock dividends

 

Other, net
28

 
(11
)
Net cash provided by (used in) financing activities
(21
)
 
(224
)
Exchange rate effects on cash and cash equivalents
3

 
3

Net increase (decrease) in cash and cash equivalents
246

 
(36
)
Cash and cash equivalents as of beginning of period
682

 
740

Cash and cash equivalents as of end of period
928

 
704


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


7



CELANESE CORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Basis of Presentation
Description of the Company
Celanese Corporation and its subsidiaries (collectively, the "Company") is a global technology and specialty 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.
Definitions
In this Quarterly Report, the term "Celanese" refers to Celanese Corporation, a Delaware corporation, and not its subsidiaries. The term "Celanese US" refers to the Company’s subsidiary, Celanese US Holdings LLC, a Delaware limited liability company, and not its subsidiaries.
Basis of Presentation
The unaudited interim consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 contained in this Quarterly Report on Form 10-Q ("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, comprehensive income (loss), cash flows and equity 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 Company’s consolidated financial statements as of and for the year ended December 31, 2011, filed on February 10, 2012 with the SEC as part of the Company’s Annual Report on Form 10-K.
Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire year.
In the ordinary course of business, the Company enters into contracts and agreements relative to a number of topics, including acquisitions, dispositions, joint ventures, supply agreements, product sales and other arrangements. The Company endeavors to describe those contracts or agreements that are material to its business, results of operations or financial position. The Company may also describe some arrangements that are not material but in which the Company believes investors may have an interest or which may have been included in a Form 8-K filing. Investors should not assume the Company has described all contracts and agreements relative to the Company’s business in this Quarterly Report.
For those consolidated subsidiaries in which the Company's ownership is less than 100%, the outside stockholders' interests are shown as noncontrolling interests.
The Company has reclassified certain prior period amounts to conform to the current period’s presentation.
Estimates and Assumptions
The preparation of unaudited interim 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 unaudited interim 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.

8



2. Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, an amendment to FASB Accounting Standards Codification ("ASC") Topic 350, Intangibles - Goodwill and Other ("FASB ASC Topic 350"). The update provides an entity with the option first to assess qualitative factors in determining whether it is more likely than not that the indefinite-lived intangible asset is impaired. After assessing the qualitative factors, if an entity determines that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. The ASU is effective for the Company for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The Company did not early adopt the provisions of this ASU; however, the Company does not expect the impact of adopting this ASU to be material to the Company's financial position, results of operations or cash flows.
3. Acquisitions, Dispositions, Ventures and Plant Closures
Acquisitions
On January 3, 2012, the Company completed the acquisition of certain assets from Ashland Inc., including two product lines, Vinac® and Flexbond®, to support the strategic growth of the Company's Emulsions business (Note 6). In February 2011, the Company acquired a business primarily consisting of emulsions process technology from Crown Paints Limited. Both of the acquired operations are included in the Industrial Specialties segment. Pro forma financial information since the respective acquisition dates has not been provided as the acquisitions did not have a material impact on the Company’s financial information.
The Company allocated the purchase price of the acquisitions to identifiable intangible assets acquired based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. Intangible assets were valued using the relief from royalty and discounted cash flow methodologies which are considered Level 3 measurements under FASB ASC Topic 820, Fair Value Measurement ("FASB ASC Topic 820"). The relief from royalty method estimates the Company’s theoretical royalty savings from ownership of the intangible asset. Key assumptions used in this model include discount rates, royalty rates, growth rates, sales projections and terminal value rates, all of which require significant management judgment and, therefore, are susceptible to change. The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. The Company, with the assistance of third-party valuation consultants, calculated the fair value of the intangible assets acquired to allocate the purchase price at the respective acquisition date.
Plant Closures
• Spondon, Derby, United Kingdom
In August 2010, the Company announced it would consolidate its global acetate manufacturing capabilities by closing its acetate flake and tow manufacturing operations in Spondon, Derby, United Kingdom. The Company expects to serve its acetate customers under this proposal by optimizing its global production network, which includes facilities in Lanaken, Belgium; Narrows, Virginia; and Ocotlan, Mexico, as well as the Company's acetate affiliate facilities in China. The Company expects the closure of the acetate flake and tow manufacturing operations in Spondon, Derby, United Kingdom to occur during the three months ending December 31, 2012. The Spondon, Derby, United Kingdom operations are included in the Consumer Specialties segment.

• Pardies, France
In July 2009, the Company completed the consultation process with the workers council on its "Project of Closure" and social plan related to the Company’s Pardies, France facility pursuant to which the Company ceased all manufacturing operations and associated activities in December 2009. The Pardies, France operations are included in the Acetyl Intermediates segment.

9



4. Marketable Securities, at Fair Value
The Company’s captive insurance companies and nonqualified trusts hold available-for-sale securities for capitalization and funding requirements, respectively.
The amortized cost, gross unrealized gain, gross unrealized loss and fair values for available-for-sale securities by major security type are as follows:
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Mutual Funds
 
 
 
Amortized cost
56

 
64

Gross unrealized gain

 

Gross unrealized loss

 

Fair value
56

 
64

See Note 16, Fair Value Measurements, for additional information regarding the fair value of the Company's marketable securities.
5. Inventories
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Finished goods
511

 
511

Work-in-process
40

 
38

Raw materials and supplies
160

 
163

Total
711

 
712

6. Goodwill and Intangible Assets, Net
Goodwill
 
Advanced
Engineered
Materials
 
Consumer
Specialties
 
Industrial
Specialties
 
Acetyl
Intermediates
 
Total
 
(In $ millions)
As of December 31, 2011
 

 
 

 
 

 
 

 
 

Goodwill
294

 
246

 
35

 
185

 
760

Accumulated impairment losses

 

 

 

 

Net book value
294

 
246

 
35

 
185

 
760

Acquisitions (Note 3)

 

 
7

 

 
7

Exchange rate changes

 
1

 

 

 
1

As of September 30, 2012
 
 
 
 
 
 
 
 
 
Goodwill
294

 
247

 
42

 
185

 
768

Accumulated impairment losses

 

 

 

 

Net book value
294

 
247

 
42

 
185

 
768

The Company assesses the recoverability of the carrying value of its reporting unit goodwill annually during the third quarter of its fiscal year using June 30 balances or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. In connection with the Company's annual goodwill impairment test, the Company did not record an impairment loss to goodwill during the nine months ended September 30, 2012.

10



Intangible Assets, Net
Finite-lived intangibles are as follows:
 
Licenses
 
Customer-
Related
Intangible
Assets
 
Developed
Technology
 
Covenants
Not to
Compete
and Other
 
Total
 
 
(In $ millions)
 
Gross Asset Value
 

 
 

 
 

 
 

 
 

 
As of December 31, 2011
32

 
513

 
27

 
22

 
594

 
Acquisitions (Note 3)

 
4

 
3

 
6

 
13

(1) 
Exchange rate changes

 

 

 

 

 
As of September 30, 2012
32

 
517

 
30

 
28

 
607

 
Accumulated Amortization
 
 
 
 
 
 
 
 
 
 
As of December 31, 2011
(13
)
 
(433
)
 
(14
)
 
(18
)
 
(478
)
 
Amortization
(2
)
 
(30
)
 
(2
)
 
(4
)
 
(38
)
 
Exchange rate changes

 

 

 

 

 
As of September 30, 2012
(15
)
 
(463
)
 
(16
)
 
(22
)
 
(516
)
 
Net book value
17

 
54

 
14

 
6

 
91

 
______________________________
(1)  
Weighted average amortization period of intangible assets acquired was 6 years.
Indefinite-lived intangibles are as follows:
 
Trademarks
and Trade Names
 
(In $ millions)
As of December 31, 2011
81

Acquisitions (Note 3)
2

Exchange rate changes

As of September 30, 2012
83

The Company’s trademarks and trade names have an indefinite life. Accordingly, no amortization expense is recorded on these intangible assets. For the nine months ended September 30, 2012, the Company did not renew or extend any intangible assets.
Estimated amortization expense for the succeeding five fiscal years is as follows:
 
(In $ millions)
2013
32

2014
21

2015
10

2016
7

2017
6

The Company assesses the recoverability of the carrying value of its indefinite-lived intangible assets annually during the third quarter of its fiscal year using June 30 balances or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. In connection with the Company's annual indefinite-lived intangible assets impairment test, the Company did not record an impairment loss to indefinite-lived intangible assets during the nine months ended September 30, 2012.


11



7. Current Other Liabilities
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Salaries and benefits
85

 
101

Environmental (Note 11)
19

 
25

Restructuring (Note 13)
37

 
44

Insurance
17

 
19

Asset retirement obligations
39

 
22

Derivatives (Note 15)
19

 
26

Current portion of benefit obligations
47

 
47

Interest
41

 
25

Sales and use tax/foreign withholding tax payable
23

 
16

Uncertain tax positions
64

 
70

Other
116

 
144

Total
507

 
539

8. Noncurrent Other Liabilities
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Environmental (Note 11)
83

 
71

Insurance
59

 
64

Deferred revenue
36

 
40

Deferred proceeds(1)
891

 
892

Asset retirement obligations
28

 
42

Derivatives (Note 15)
12

 
13

Income taxes payable
3

 
2

Other
30

 
29

Total
1,142

 
1,153

______________________________
(1) 
Primarily relates to proceeds received from the Frankfurt, Germany Airport as part of a settlement for the Company to cease operations and sell its Kelsterbach, Germany manufacturing site, included in the Advanced Engineered Materials segment (Note 20). Such proceeds will be deferred until the transfer of title to the Frankfurt, Germany Airport.
9. Debt
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Short-Term Borrowings and Current Installments of Long-term Debt - Third Party and Affiliates
 
 
 
Current installments of long-term debt
42

 
38

Short-term borrowings, including amounts due to affiliates
99

 
106

Total
141

 
144

The Company's weighted average interest rate on short-term borrowings, including amounts due to affiliates, was 4.4% as of September 30, 2012 compared to 4.3% as of December 31, 2011.

12



 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Long-Term Debt
 
 
 
Senior credit facilities - Term C loan due 2016
1,375

 
1,386

Senior unsecured notes due 2018, interest rate of 6.625%
600

 
600

Senior unsecured notes due 2021, interest rate of 5.875%
400

 
400

Pollution control and industrial revenue bonds, interest rates ranging from 5.7% to 6.7%, due at various dates through 2030
182

 
182

Obligations under capital leases due at various dates through 2054
237

 
248

Other bank obligations, interest rates ranging from 6.2% to 6.3%, due at various dates through 2017
87

 
95

Subtotal
2,881

 
2,911

Current installments of long-term debt
(42
)
 
(38
)
Total
2,839

 
2,873

Senior Notes
In September 2010, Celanese US completed the private placement of $600 million in aggregate principal amount of 6.625% senior unsecured notes due 2018 (the "6.625% Notes") under an indenture dated September 24, 2010 (the "Indenture") among Celanese US, Celanese, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee. In April 2011, Celanese US registered the 6.625% Notes under the Securities Act of 1933, as amended (the "Securities Act"). Celanese US pays interest on the 6.625% Notes on April 15 and October 15 of each year which commenced on April 15, 2011. The 6.625% Notes are redeemable, in whole or in part, at any time on or after October 15, 2014 at the redemption prices specified in the Indenture. Prior to October 15, 2014, Celanese US may redeem some or all of the 6.625% Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus a "make-whole" premium as specified in the Indenture. The 6.625% Notes are senior unsecured obligations of Celanese US and rank equally in right of payment with all other unsubordinated indebtedness of Celanese US. The 6.625% Notes are guaranteed on a senior unsecured basis by Celanese and each of the domestic subsidiaries of Celanese US that guarantee its obligations under its senior secured credit facilities (the "Subsidiary Guarantors").
The Indenture contains covenants, including, but not limited to, restrictions on the Company’s ability to incur indebtedness; grant liens on assets; merge, consolidate, or sell assets; pay dividends or make other restricted payments; engage in transactions with affiliates; or engage in other businesses.
In May 2011, Celanese US completed an offering of $400 million in aggregate principal amount of 5.875% senior unsecured notes due 2021 (the "5.875% Notes") in a public offering registered under the Securities Act. The 5.875% Notes are guaranteed on a senior unsecured basis by Celanese and the Subsidiary Guarantors.
The 5.875% Notes were issued under an indenture and a first supplemental indenture, each dated May 6, 2011 (the "First Supplemental Indenture") among Celanese US, Celanese, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee. Celanese US pays interest on the 5.875% Notes on June 15 and December 15 of each year which commenced on December 15, 2011. Prior to June 15, 2021, Celanese US may redeem some or all of the 5.875% Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus a "make-whole" premium as specified in the First Supplemental Indenture. The 5.875% Notes are senior unsecured obligations of Celanese US and rank equally in right of payment with all other unsubordinated indebtedness of Celanese US.
The First Supplemental Indenture contains covenants, including, but not limited to, restrictions on the Company’s ability to incur indebtedness; grant liens on assets; merge, consolidate, or sell assets; pay dividends or make other restricted payments; engage in transactions with affiliates; or engage in other businesses.
Senior Credit Facilities
In September 2010, Celanese US, Celanese, and certain of the domestic subsidiaries of Celanese US entered into an amendment agreement (the "Amendment Agreement") with the lenders under Celanese US’s existing senior secured credit facilities in order to amend and restate the corresponding Credit Agreement, dated as of April 2, 2007 (as previously amended,

13



the "Existing Credit Agreement", and as amended and restated by the Amendment Agreement, the "Amended Credit Agreement"). Our Amended Credit Agreement consists of the Term C loan facility, the Term B loan facility, a $600 million revolving credit facility terminating in 2015 and a $228 million credit-linked revolving facility terminating in 2014.
In May 2011, Celanese US, through its subsidiaries, prepaid its outstanding Term B loan facility under the Amendment Agreement set to mature in 2014 with an aggregate principal amount of $516 million using proceeds from the 5.875% Notes and cash on hand.
The margin for borrowings under the revolving credit facility is currently 2.5% above LIBOR or EURIBOR, as applicable, subject to increase or reduction in certain circumstances based on changes in the Company’s corporate credit ratings. Borrowings under the credit-linked revolving facility and the Term C loan facility bear interest at a variable interest rate based on LIBOR (for US dollars) or EURIBOR (for Euros), plus a margin which varies based on the Company's net leverage ratio.
The estimated net leverage ratio and margin are as follows:
 
As of September 30, 2012
 
Estimated Total Net
Leverage Ratio
 
Estimated
Margin
Credit-linked revolving facility
1.50

 
1.50
%
Term C
1.50

 
2.75
%
The margin on each facility may increase or decrease 0.25% based on the following:
Credit-Linked Revolving Facility
 
Term C Loan Facility
Total Net Leverage Ratio
Margin over LIBOR
or EURIBOR
 
Total Net Leverage Ratio
Margin over LIBOR
or EURIBOR
< = 2.25
1.50%
 
< = 1.75
2.75%
> 2.25
1.75%
 
> 1.75 and < = 2.25
3.00%
 
 
 
> 2.25
3.25%
Term loan borrowings under the Amended Credit Agreement are subject to amortization at 1% of the initial principal amount per annum, payable quarterly. In addition, the Company pays quarterly commitment fees on the unused portions of the revolving credit facility and credit-linked revolving facility of 0.25% and 1.50% per annum, respectively.
The Amended Credit Agreement is guaranteed by Celanese 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 (including for certain real property and certain shares of foreign subsidiaries), pursuant to the Guarantee and Collateral Agreement, dated as of April 2, 2007.
As a condition to borrowing funds or requesting letters of credit be issued under the revolving facility, the Company’s first lien senior secured leverage ratio (as calculated as of the last day of the most recent fiscal quarter for which financial statements have been delivered under the revolving facility) cannot exceed the threshold as specified below. Further, the Company’s first lien senior secured leverage ratio must be maintained at or below that threshold while any amounts are outstanding under the revolving credit facility.
The Company’s first lien senior secured leverage ratios and the borrowing capacity under the revolving credit facility are as follows:
 
As of September 30, 2012
 
First Lien Senior Secured Leverage Ratio
 
 
 
 
 
 
 
Estimate, if Fully
 
Borrowing
 
Maximum
 
Estimate
 
Drawn
 
Capacity
 
 
 
 
 
 
 
(In $ millions)
Revolving credit facility
3.90
 
1.15
 
1.63
 
600


14



The balances available for borrowing are as follows:
 
As of
 
September 30, 2012
 
(In $ millions)

Revolving Credit Facility
 

Borrowings outstanding

Letters of credit issued

Available for borrowing
600

Credit-Linked Revolving Facility
 
Letters of credit issued
70

Available for borrowing
158

The Amended Credit Agreement contains covenants including, but not limited to, restrictions on the Company’s ability to incur indebtedness; grant liens on assets; merge, consolidate, or sell assets; pay dividends or make other restricted payments; make investments; prepay or modify certain indebtedness; engage in transactions with affiliates; enter into sale-leaseback transactions or hedge transactions; or engage in other businesses.
The Amended Credit Agreement also maintains a number of events of default, including a failure to make any payment of principal or interest when due, a cross default to other debt of Celanese, Celanese US, or their subsidiaries, including the 6.625% Notes and 5.875% Notes, in an aggregate amount equal to more than $40 million and the occurrence of a change of control. Failure to comply with these covenants, or the occurrence of any other event of default, could result in acceleration of the borrowings and other financial obligations under the Amended Credit Agreement.
The Company is in compliance with all of the covenants related to its debt agreements as of September 30, 2012.
10. Benefit Obligations
The components of net periodic benefit costs are as follows:
 
Pension Benefits
 
Postretirement
Benefits
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
(In $ millions)
 
(In $ millions)
Service cost
7

 
7

 

 

 
21

 
21

 
1

 
1

Interest cost
42

 
45

 
3

 
3

 
127

 
136

 
9

 
9

Expected return on plan assets
(51
)
 
(50
)
 

 

 
(154
)
 
(151
)
 

 

Recognized actuarial (gain) loss
14

 
7

 

 
(1
)
 
43

 
22

 
(1
)
 
(2
)
Prior service credit

 
1

 

 

 
1

 
1

 

 

Curtailment (gain) loss

 

 

 

 

 
(1
)
 

 

Total
12

 
10

 
3

 
2

 
38

 
28

 
9

 
8

Commitments to fund benefit obligations during 2012 are as follows:
 
As of
 
 
 
 
September 30, 2012
 
Expected for 2012
 
 
(In $ millions)
 
Cash contributions to defined benefit pension plans(1)
119

 
144

 
Benefit payments to nonqualified pension plans
17

 
21

 
Benefit payments to other postretirement benefit plans
18

 
25

 
______________________________
(1) 
Includes $15 million of discretionary contributions as of September 30, 2012 and $15 million of expected discretionary contributions.

15



The Company’s estimates of its US defined benefit pension plan contributions reflect the provisions of the Pension Protection Act of 2006.
The Company participates in a multiemployer defined benefit plan in Germany covering certain employees. The Company’s contributions to the multiemployer defined benefit plan are based on specified percentages of employee contributions and totaled $4 million for the nine months ended September 30, 2012.
11. Environmental
General
The Company is subject to environmental laws and regulations worldwide that 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 the divestiture of certain businesses by the Company or one of its predecessor companies.
The components of environmental remediation reserves are as follows:
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Demerger obligations (Note 17)
34

 
34

Divestiture obligations (Note 17)
22

 
24

Active sites
28

 
20

US Superfund sites
15

 
14

Other environmental remediation reserves
3

 
4

Total
102

 
96

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 (as defined below). In addition, as part of the demerger agreement between the Company and Hoechst AG ("Hoechst"), a specified portion of the responsibility for environmental liabilities from a number of Hoechst divestitures was transferred to the Company (Note 17). The Company provides for such obligations when the event of loss is probable and reasonably estimable. The Company believes that environmental remediation costs will not have a material adverse effect on the financial position of the Company, but may have a material adverse effect on the results of operations or cash flows in any given period.
US Superfund Sites
In the US, the Company may be subject to substantial claims brought by US federal or state regulatory agencies or private individuals pursuant to statutory authority or common law. In particular, the Company has a potential liability under the US Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and related state laws (collectively referred to as "Superfund") for investigation and cleanup costs at certain sites. At most of these sites, numerous companies, including the Company, or one of its predecessor companies, have been notified that the 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 some of these proceedings is uncertain. Consequently, the Company cannot accurately determine its ultimate liability for investigation or cleanup costs at these sites.
As events progress at each site for which it has been named a PRP, the Company accrues, 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.

16



One such site is the Lower Passaic River Study Area. The Company and 70 other companies are parties to a May 2007 Administrative Order on Consent with the US Environmental Protection Agency ("EPA") to perform a Remedial Investigation/Feasibility Study ("RI/FS") of the contaminants in the lower 17-mile stretch known as the Lower Passaic River Study Area. The RI/FS is ongoing and may take several more years to complete. The Company is among a group of settling parties to a June 2012 Administrative Order on Consent with the EPA to perform a removal action within a small section of the river. The Company has also been named as a third-party defendant along with more than 200 other entities in an action initially brought by the New Jersey Department of Environmental Protection ("NJDEP") in the Supreme Court of New Jersey against Occidental Chemical Corporation and several other companies. This suit by the NJDEP seeks recovery of past and future clean-up costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other forms of relief arising from alleged discharges into the Lower Passaic River. 
In 2007, the EPA issued a draft study that evaluated alternatives for early remedial action of a portion of the Passaic River at an estimated cost of $900 million to $2.3 billion. Several parties commented on the draft study, and to date, the EPA has not taken further action. The contamination allegedly released by the Company is likely an insignificant aspect of the final remedy, which would consequently limit the ultimate contribution from the Company. Because the RI/FS is still ongoing, and the EPA has not finalized its study or the scope of requested cleanup, and the Company's assessment that the contamination allegedly released by the Company is likely an insignificant aspect of the final remedy, the Company cannot reliably estimate its portion of the final remedial costs for this matter at this time. However, the Company currently believes that its portion of the costs would be less than approximately 1% to 2%. The Company is vigorously defending these and all related matters.
12. Stockholders’ Equity
Common Stock
The Company’s Board of Directors follows a policy of declaring, subject to legally available funds, a quarterly cash dividend on each share of the Company’s Series A Common Stock, par value $0.0001 per share ("Common Stock") unless the Company’s Board of Directors, in its sole discretion, determines otherwise. The amount available to pay cash dividends is restricted by the Company’s Amended Credit Agreement, the 6.625% Notes and the 5.875% Notes.
On April 23, 2012, the Company announced that its Board of Directors approved a 25% increase in the Company's quarterly Common Stock cash dividend. The Board of Directors increased the quarterly dividend rate from $0.06 to $0.075 per share of Common Stock on a quarterly basis and $0.24 to $0.30 per share of Common Stock on an annual basis beginning in August 2012.
Treasury Stock
The Company’s Board of Directors authorized the repurchase of Common Stock as follows:
 
Authorized Amount
 
(In $ millions)
February 2008
400

October 2008
100

April 2011
129

As of September 30, 2012
629

The authorization gives management discretion in determining the timing and conditions under which shares may be repurchased. The share repurchase activity pursuant to this authorization is as follows:
 
Nine Months Ended
 
Total From
February 2008 Through
 
September 30,
 
 
2012
 
2011
 
September 30, 2012
Shares repurchased
853,388

 
591,356

 
12,936,196

Average purchase price per share
$
43.19

 
$
47.37

 
$
38.12

Amount spent on repurchased shares (in millions)
$
37

 
$
28

 
$
493

The purchase of treasury stock reduces 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 stockholders’ equity.

17



Other Comprehensive Income (Loss), Net
 
Three Months Ended September 30,
 
2012
 
2011
 
Gross
Amount
 
Income
Tax
(Provision)
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Provision)
Benefit
 
Net
Amount
 
(In $ millions)
Unrealized gain (loss) on marketable securities

 

 

 

 

 

Foreign currency translation
28

 

 
28

 
(69
)
 

 
(69
)
Unrealized gain (loss) on interest rate swaps
(2
)
 

 
(2
)
 
7

 
(2
)
 
5

Pension and postretirement benefits
15

 
(5
)
 
10

 
6

 
(2
)
 
4

Total
41

 
(5
)
 
36

 
(56
)
 
(4
)
 
(60
)
 
Nine Months Ended September 30,
 
2012
 
2011
 
Gross
Amount
 
Income
Tax
(Provision)
Benefit
 
Net
Amount
 
Gross
Amount
 
Income
Tax
(Provision)
Benefit
 
Net
Amount
 
(In $ millions)
Unrealized gain (loss) on marketable securities

 

 

 

 

 

Foreign currency translation
4

 

 
4

 
18

 

 
18

Unrealized gain (loss) on interest rate swaps
(1
)
 

 
(1
)
 
22

 
(8
)
 
14

Pension and postretirement benefits
41

 
(16
)
 
25

 
19

 
(7
)
 
12

Total
44

 
(16
)
 
28

 
59

 
(15
)
 
44

Adjustments to Accumulated other comprehensive income (loss) are as follows:
 
 
 
Unrealized
Gain (Loss) on
Marketable
Securities
 
Foreign
Currency
Translation
 
Unrealized
Gain (Loss)
on Interest
Rate Swaps
 
Pension and
Postretire-
ment
Benefits
 
Accumulated
Other
Comprehensive
Income
(Loss), Net
 
 
 
(In $ millions)
As of December 31, 2011
(1
)
 
(28
)
 
(57
)
 
(764
)
 
(850
)
Current period change

 
4

 
(1
)
 
41

 
44

Income tax (provision) benefit

 

 

 
(16
)
 
(16
)
As of September 30, 2012
(1
)
 
(24
)
 
(58
)
 
(739
)
 
(822
)
13. Other (Charges) Gains, Net
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In $ millions)
Employee termination benefits
(1
)
 
(5
)
 
(2
)
 
(18
)
Kelsterbach plant relocation (Note 20)
(3
)
 
(14
)
 
(5
)
 
(43
)
Plumbing actions (Note 17)
4

 
2

 
4

 
6

Commercial disputes
2

 
(7
)
 
2

 
15

Other

 

 

 
1

Total
2

 
(24
)
 
(1
)
 
(39
)
2012
No significant Other (charges) gains, net were incurred during the nine months ended September 30, 2012.

18



2011
As a result of the Company's Pardies, France Project of Closure and the planned closure of the Company's Spondon, Derby, United Kingdom facility (Note 3), the Company recorded $4 million and $3 million, respectively, of employee termination benefits during the nine months ended September 30, 2011. Additionally, the Company recorded $5 million of employee termination benefits during the nine months ended September 30, 2011 related to the relocation of the Company's polyacetal ("POM") operations located in Kelsterbach, Germany (Note 20).
During the nine months ended September 30, 2011, the Company received consideration of $17 million in connection with the settlement of a claim against a bankrupt supplier (Note 17). In addition, the Company also recovered an additional $4 million from the settlement of an unrelated commercial dispute. These commercial dispute resolutions are included in the Acetyl Intermediates segment.
The changes in the restructuring reserves by business segment are as follows:
 
Advanced
Engineered
Materials
 
Consumer
Specialties
 
Industrial
Specialties
 
Acetyl
Intermediates
 
Other
 
Total
 
(In $ millions)
Employee Termination Benefits
 

 
 

 
 

 
 

 
 

 
 

As of December 31, 2011
8

 
18

 

 
5

 
11

 
42

Additions

 
4

 

 

 

 
4

Cash payments
(2
)
 
(1
)
 

 
(3
)
 
(3
)
 
(9
)
Other changes

 

 

 

 
(2
)
 
(2
)
Exchange rate changes

 
1

 

 

 

 
1

As of September 30, 2012
6

 
22

 

 
2

 
6

 
36

Plant/Office Closures
 

 
 

 
 

 
 

 
 

 
 

As of December 31, 2011

 

 

 
1

 
1

 
2

Additions

 

 

 

 

 

Cash payments

 

 

 

 

 

Other changes

 

 

 

 
(1
)
 
(1
)
Exchange rate changes

 

 

 

 

 

As of September 30, 2012

 

 

 
1

 

 
1

Total
6

 
22

 

 
3

 
6

 
37

14. Income Taxes
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Effective income tax rate
31
%
 
17
%
 
6
%
 
23
%
For the three months ended September 30, 2012, the higher effective tax rate is primarily due to changes in uncertain tax positions and increases in losses in jurisdictions not providing tax benefits. The lower effective rate for the nine months ended September 30, 2012 is primarily due to foreign tax credit carryforwards partially offset by deferred tax charges related to changes in assessment regarding permanent reinvestment of certain foreign earnings.
During the three months ended March 31, 2012, the Company determined that it was beneficial to amend certain prior year income tax returns to recognize the benefit of available foreign tax credit carryforwards. As a result, the Company recognized a tax benefit of $142 million. The available foreign tax credits are subject to a ten year carryforward period and expire beginning 2014 through 2021. The Company expects to fully utilize the credits within the prescribed carryforward period.
On February 15, 2012, the Company amended its existing joint venture and other related agreements with its venture partner in Polyplastics Co., Ltd ("Polyplastics"). The amended agreements ("Agreements"), among other items, modified certain dividend rights, resulting in a cash dividend payment to the Company of $72 million during the three months ended March 31, 2012. In addition, as a result of the Agreements, Polyplastics is required to pay certain annual dividends to the venture partners. 

19



Consequently, Polyplastics' undistributed earnings will no longer be invested indefinitely. Accordingly, the Company recognized a deferred tax liability of $38 million that was recorded to Income tax provision (benefit) in the unaudited interim consolidated statement of operations during the three months ended March 31, 2012, related to the taxable outside basis difference of its investment in Polyplastics.
The Company's US tax returns for the years 2009 and 2010 are currently under audit by the US Internal Revenue Service and certain of the Company's subsidiaries are under audit in jurisdictions outside of the US. In addition, certain statutes of limitations are scheduled to expire in the near future. It is reasonably possible that a further change in the unrecognized tax benefits may occur within the next twelve months related to the settlement of any of these audits or the lapse of applicable statutes of limitations. Such amounts have been reflected as the current portion of uncertain tax positions (Note 7).
15. Derivative Financial Instruments
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 its variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges and fix the LIBOR portion of the Company’s US-dollar denominated variable rate borrowings (Note 9). If an interest rate swap agreement is terminated prior to its maturity, the amount previously recorded in Accumulated other comprehensive income (loss), net is recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in Accumulated other comprehensive income (loss), net are recognized into earnings immediately.
US-dollar interest rate swap derivative arrangements are as follows:
As of September 30, 2012
Notional Value
 
Effective Date
 
Expiration Date
 
Fixed Rate (1)
(In $ millions)
 
 
 
 
 
 
1,100

 
January 2, 2012
 
January 2, 2014
 
1.71
%
500

 
January 2, 2014
 
January 2, 2016
 
1.02
%
______________________________
(1) 
Fixes the LIBOR portion of the Company's US-dollar denominated variable rate borrowings (Note 9).
As of December 31, 2011
Notional Value
 
Effective Date
 
Expiration Date
 
Fixed Rate (1)
(In $ millions)
 
 
 
 
 
 
800

 
April 2, 2007
 
January 2, 2012
 
4.92
%
400

 
January 2, 2008
 
January 2, 2012
 
4.33
%
200

 
April 2, 2009
 
January 2, 2012
 
1.92
%
1,100

 
January 2, 2012
 
January 2, 2014
 
1.71
%
______________________________
(1) 
Fixes the LIBOR portion of the Company's US-dollar denominated variable rate borrowings (Note 9).
Foreign Exchange Risk Management
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company also enters into foreign currency forwards and swaps to minimize its exposure to foreign currency fluctuations. Through these instruments, the Company mitigates its foreign currency exposure on transactions with third party entities as well as intercompany transactions. The foreign currency forwards and swaps are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging ("FASB ASC Topic 815"). Gains and losses on foreign currency forwards and swaps entered into to offset foreign exchange impacts on intercompany balances are classified as Other income (expense), net, in the unaudited interim consolidated statements of operations. Gains and losses on foreign currency forwards and swaps entered into to offset foreign exchange impacts on all other assets and liabilities are classified as Foreign exchange gain (loss), net, in the unaudited interim consolidated statements of operations.

20



Gross notional values of the foreign currency forwards and swaps are as follows:
 
As of
 
As of
 
September 30,
2012
 
December 31,
2011
 
(In $ millions)
Total
858

 
896


Commodity Risk Management
The Company has exposure to the prices of commodities in its procurement of certain raw materials. The Company manages its exposure to commodity risk primarily through the use of long-term supply agreements, multi-year purchasing and sales agreements and forward purchase contracts. The Company regularly assesses its practice of using forward purchase contracts and other raw material hedging instruments in accordance with changes in economic conditions. Forward purchases and swap contracts for raw materials are principally settled through physical delivery of the commodity. For qualifying contracts, the Company has elected to apply the normal purchases and normal sales exception of FASB ASC Topic 815 based on the probability at the inception and throughout the term of the contract that the Company would not settle net and the transaction would result in the physical delivery of the commodity. As such, realized gains and losses on these contracts are included in the cost of the commodity upon the settlement of the contract.
In addition, the Company occasionally enters into financial derivatives to hedge a component of a raw material or energy source. Typically, these types of transactions do not qualify for hedge accounting. These instruments are marked to market at each reporting period and gains (losses) are included in Cost of sales in the unaudited interim consolidated statements of operations. The Company recognized no gain or loss from these types of contracts during nine months ended September 30, 2012 and 2011. As of September 30, 2012, the Company did not have any open financial derivative contracts for commodities.

Information regarding changes in the fair value of the Company’s derivative arrangements is as follows:
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2012
 
September 30, 2011
 
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Recognized in
Earnings (Loss)
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Recognized in
Earnings (Loss)
 
 
(In $ millions)
Derivatives Designated as Cash Flow Hedges
 

 
 

 
 

 
 

 
Interest rate swaps
(6
)
 
(4
)
(1) 
(9
)
(2) 
(15
)
(1) 
Derivatives Not Designated as Hedges
 

 
 

 
 

 
 

 
Interest rate swaps

 

(3) 

 
1

(3) 
Foreign currency forwards and swaps

 
(13
)
(4) 

 
17

(4) 
Total
(6
)
 
(17
)
 
(9
)
 
3

 
______________________________
(1) 
Amount represents reclassification from Accumulated other comprehensive income (loss), net and is included in Interest expense in the unaudited interim consolidated statements of operations.
(2) 
Amount excludes $2 million of gains associated with the Company's equity method investments' derivative activity and $2 million of tax expense recognized in Other comprehensive income (loss).
(3) 
Included in Interest expense in the unaudited interim consolidated statements of operations.
(4) 
Included in Foreign exchange gain (loss), net for operating activity or Other income (expense), net for non-operating activity in the unaudited interim consolidated statements of operations.

21



 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2012
 
September 30, 2011
 
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Recognized in
Earnings (Loss)
 
Gain (Loss)
Recognized in
Other
Comprehensive
Income (Loss)
 
Gain (Loss)
Recognized in
Earnings (Loss)
 
 
(In $ millions)
Derivatives Designated as Cash Flow Hedges
 

 
 

  
 

 
 

 
Interest rate swaps
(12
)
 
(11
)
(1) 
(26
)
(2) 
(45
)
(1) 
Derivatives Not Designated as Hedges
 

 
 

 
 

 
 

 
Interest rate swaps

 

(3) 

 
(2
)
(3) 
Foreign currency forwards and swaps

 

(4) 

 
2

(4) 
Total
(12
)
 
(11
)
 
(26
)
 
(45
)
 
______________________________
(1) 
Amount represents reclassification from Accumulated other comprehensive income (loss), net and is included in Interest expense in the unaudited interim consolidated statements of operations.
(2) 
Amount excludes $1 million of gains associated with the Company's equity method investments' derivative activity and $8 million of tax expense recognized in Other comprehensive income (loss).
(3) 
Included in Interest expense in the unaudited interim consolidated statements of operations.
(4) 
Included in Foreign exchange gain (loss), net for operating activity or Other income (expense), net for non-operating activity in the unaudited interim consolidated statements of operations.
See Note 16, Fair Value Measurements, for additional information regarding the fair value of the Company’s derivative arrangements.
16. Fair Value Measurements
The Company follows the provisions of FASB ASC Topic 820 for financial assets and liabilities. FASB ASC Topic 820 establishes a three-tiered fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.
The three levels of inputs are defined as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company
Level 2 - inputs that are observable in the marketplace other than those inputs classified as Level 1
Level 3 - inputs that are unobservable in the marketplace and significant to the valuation
The Company’s financial assets and liabilities are measured at fair value on a recurring basis and include securities available for sale and derivative financial instruments. Securities available for sale include mutual funds. Derivative financial instruments include interest rate swaps and foreign currency forwards and swaps.
Marketable Securities. Where possible, the Company utilizes quoted prices in active markets to measure equity securities; such items are classified as Level 1 in the hierarchy and include mutual funds. Mutual funds are valued at the net asset value per share or unit multiplied by the number of shares or units held as of the measurement date.
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.

22



Assets and liabilities measured at fair value on a recurring basis are as follows:
 
 
 
Fair Value Measurement Using
 
Balance Sheet Classification
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Total
 
 
 
(In $ millions)
Mutual funds
Marketable securities, at fair value
 
56

 

 
56

Derivatives Not Designated as Hedges
 
 
 
 
 
 
 
Foreign currency forwards and swaps
Current other assets
 

 
1

 
1

Total assets as of September 30, 2012
 
56

 
1

 
57

Derivatives Designated as Cash Flow Hedges
 
 
 

 
 

 
 

Interest rate swaps
Current other liabilities
 

 
(15
)
 
(15
)
Interest rate swaps
Noncurrent other liabilities
 

 
(12
)
 
(12
)
Derivatives Not Designated as Hedges
 
 
 
 
 
 
 
Foreign currency forwards and swaps
Current other liabilities
 

 
(4
)
 
(4
)
Total liabilities as of September 30, 2012
 

 
(31
)
 
(31
)
 
 
 
 
 
 
 
 
Mutual funds
Marketable securities, at fair value
 
64

 

 
64

Derivatives Not Designated as Hedges
 
 


 


 


Foreign currency forwards and swaps
Current other assets
 

 
9

 
9

Total assets as of December 31, 2011
 
64

 
9

 
73

Derivatives Designated as Cash Flow Hedges
 
 
 

 
 

 
 

Interest rate swaps
Current other liabilities
 

 
(21
)
 
(21
)
Interest rate swaps
Noncurrent other liabilities
 

 
(13
)
 
(13
)
Derivatives Not Designated as Hedges
 
 
 
 
 
 
 
  Interest rate swaps
Current other liabilities
 

 
(2
)
 
(2
)
Foreign currency forwards and swaps
Current other liabilities
 

 
(3
)
 
(3
)
Total liabilities as of December 31, 2011
 

 
(39
)
 
(39
)

23



Carrying values and fair values of financial instruments that are not carried at fair value are as follows:
 
 
 
Fair Value Measurement Using
 
Carrying Amount
 
Significant Other
Observable Inputs
(Level 2)
 
Unobservable Inputs
(Level 3)
 
Total
 
 
 
(In $ millions)
As of September 30, 2012
 
 
 
 
 
 
 
Cost investments
155

 

 

 

Insurance contracts in nonqualified trusts
66

 
66

 

 
66

Long-term debt, including current installments of long-term debt
2,881

 
2,749

 
237

 
2,986

As of December 31, 2011
 
 
 
 
 
 
 
Cost investments
147

 

 

 

Insurance contracts in nonqualified trusts
69

 
69

 

 
69

Long-term debt, including current installments of long-term debt
2,911

 
2,719

 
248

 
2,967

In general, the cost investments included in the table above are not publicly traded and their fair values are not readily determinable; however, the Company believes the carrying values approximate or are less than the fair values. Insurance contracts in nonqualified trusts consist of long-term fixed income securities, which are valued using independent vendor pricing models with observable inputs in the active market and therefore represent a Level 2 measurement. The fair value of long-term debt is based on valuations from third-party banks and market quotations and is classified as Level 2 in the hierarchy. The fair value of obligations under capital leases is based on lease payments and discount rates, which are not observable in the market and therefore represents a Level 3 measurement.
As of September 30, 2012 and December 31, 2011, the fair values of cash and cash equivalents, receivables, trade payables, short-term borrowings and the current installments of long-term debt approximate carrying values due to the short-term nature of these instruments. These items have been excluded from the table with the exception of the current installments of long-term debt. Additionally, certain noncurrent receivables, principally insurance recoverables, are carried at net realizable value.
17. Commitments and Contingencies
The Company is involved in legal and regulatory proceedings, lawsuits and claims incidental to the normal conduct of business, relating to such matters as product liability, land disputes, contracts, antitrust, intellectual property, workers' compensation, chemical exposure, asbestos exposure, prior acquisitions and divestitures, past waste disposal practices and release of chemicals into the environment. The Company is actively defending those matters where the Company is named as a defendant. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, the Company's litigation accruals and estimates of possible loss or range of possible loss ("Possible Loss") may not represent the ultimate loss to the Company from legal proceedings. For reasonably possible loss contingencies that may be material and when determinable, the Company estimates its Possible Loss, considering that the Company could incur no loss in certain matters. Thus, the Company's exposure and ultimate losses may be higher or lower, and possibly materially so, than the Company's litigation accruals and estimates of Possible Loss. For some matters, the Company is unable, at this time, to estimate its Possible Loss that is reasonably possible of occurring. Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the more difficult for the Company to estimate the Possible Loss that it is reasonably possible the Company could incur. The Company may disclose certain information related to a plaintiff's claim against the Company alleged in the plaintiff's pleadings or otherwise publicly available. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent the Company's estimate of reasonably possible or probable loss. Some of the Company's exposure in legal matters may be offset by applicable insurance coverage. The Company does not consider the possible availability of insurance coverage in determining the amounts of any accruals or any estimates of Possible Loss.
Plumbing Actions
CNA Holdings LLC ("CNA Holdings"), a US subsi