Eastman Chemical Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results compare with the corresponding 2019 periods. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Sales | $2,122 | $2,325 | $6,287 | $7,068 |
| Gross profit | $501 | $574 | $1,449 | $1,737 |
| Gross margin | 23.6% | 24.7% | 23.0% | 24.6% |
| GAAP EBIT | $243 | $367 | $665 | $1,058 |
| Adjusted EBIT | $310 | $369 | $887 | $1,110 |
| Net earnings attributable to Eastman | $161 | $266 | $446 | $733 |
| Diluted EPS | $1.18 | $1.93 | $3.27 | $5.27 |
| Adjusted diluted EPS | $1.57 | $1.94 | $4.45 | $5.70 |
Sales fell 9% in Q3 and 11% year to date. Q3 sales reflected a 5% decline each from volume/product mix and price, partly offset by a 1% favorable currency effect. GAAP EBIT declined 34% in Q3 and 37% year to date. Adjusted EBIT, which excludes specified non-core items, declined 16% and 20%, respectively. Adjusted measures are company-defined non-GAAP metrics and should be considered alongside GAAP results.
Q3 2020 gross margin was approximately 23.6%, versus 24.7% a year earlier; year-to-date gross margin was approximately 23.0%, versus 24.6%. Management attributed weaker adjusted EBIT chiefly to lower volumes, reduced capacity utilization, and less favorable product mix, partly offset by cost reductions.
Cash flow, debt and liquidity
- First-nine-month operating cash flow was $1,049, up from $833 in 2019; capital expenditures were $278, producing company-defined free cash flow of $771, versus $525.
- Cash was $650 at September 30, 2020, compared with $204 at December 31, 2019. Total borrowings were $5,865; net debt was $5,215, down $363 from year-end 2019.
- Current assets were $3,534 and current liabilities $1,789. The company had $185 of commercial paper outstanding and no borrowings under its $1.50 billion revolving credit facility; it reported covenant compliance.
- The $250 million term loan taken as a precautionary COVID-19 liquidity measure was repaid in Q3. The $185 million 4.5% notes due January 2021 were repaid in October 2020 using available cash.
- Dividends declared were $0.66 per share in Q3 and $1.98 per share for the first nine months. Treasury stock purchases were $60 year to date; no shares were repurchased in Q3.
Material changes and segment results
COVID-19 weakened demand in transportation and other affected markets, while certain consumables, personal care, medical, and wellness applications showed resilience. Management said sales volumes recovered during Q3 to 5% below 2019 levels, with demand improving in some COVID-affected end markets and moderating in certain resilient markets.
| Segment | Q3 sales change | Q3 EBIT | Year-to-date sales change | Year-to-date EBIT |
|---|---|---|---|---|
| Additives & Functional Products | -11% | $107 | -10% | $194 |
| Advanced Materials | -4% | $129 | -10% | $293 |
| Chemical Intermediates | -13% | $31 | -16% | $131 |
| Fibers | -5% | $41 | -2% | $140 |
Year-to-date results included $215 of impairment and restructuring charges, compared with $52 in 2019. These included $123 of tire-additives tradename impairments, principally attributed to COVID-related transportation demand weakness and increased competitive capacity, plus restructuring and site-closure costs. Q3 also included $7 of accelerated depreciation for an advanced-interlayers facility closure and $1 of early debt-extinguishment costs. Adjusted results exclude specified items; investors should review the filing’s reconciliations.
Outlook, risks and contingencies
- Management withdrew its prior 2020 earnings and cash-flow forecasts because COVID-19’s effects remained uncertain. Its stated full-year objectives were approximately $150 of COVID-response cost reductions, free cash flow above $1 billion, and net-debt reduction exceeding $600, excluding currency translation. At September 30, net debt had fallen $363.
- Assuming recent demand continued, management expected Q4 2020 adjusted EPS to be similar to Q4 2019 adjusted EPS of $1.42. It expected 2020 capital expenditures of $350–$375 and limited share repurchases to dilution offset, with none in the second half.
- Planned Singapore product discontinuations carried expected restructuring charges of up to $50 through 2020–2021 and an estimated annual earnings benefit of about $25, mostly beginning in 2021. The advanced-interlayers closure was expected to incur up to $30 of charges in 2020–2021 and provide an estimated annual earnings benefit of $5–$10 beginning in 2021.
- Goodwill for the tire-additives reporting unit was $721, and management said its estimated fair value approximated carrying value; further market or forecast deterioration could trigger impairment. The company had already impaired tire-additives tradenames by $123.
- Environmental loss-contingency reserves totaled $287. Estimated undiscounted future remediation expenditures ranged from a best estimate/minimum of $260 to a maximum of $504. Management did not expect environmental liabilities, individually or together, to materially affect overall financial position, results, or cash flows, but recognized resolution could materially affect results in a period.
- Key risks include continuing pandemic-related demand, operating and supply-chain disruption, raw-material and energy volatility, customer concentration, manufacturing and cyber incidents, international and trade exposures, environmental regulation, and possible further impairment. The company reported no material change in market risks from its prior annual filing.
- Accounts-receivable factoring was $1.20 billion in the first nine months, versus $460 in 2019; the program is uncommitted and depends on eligible receivables and financial-institution participation. The filing also describes a voluntary supplier finance program.
Important facts for investors to verify
- Whether Q4 demand and the assumption underpinning adjusted EPS of approximately $1.42 were achieved, and how results reconcile to GAAP.
- Whether the company met its full-year free-cash-flow and net-debt-reduction objectives, and the quality and sustainability of cash flow, including working-capital changes and receivables factoring.
- Whether tire-additives forecasts, goodwill and intangible-asset valuations, or COVID-related market conditions led to further impairment charges.
- Actual restructuring costs and realized earnings benefits from the Singapore and advanced-interlayers actions.
- Debt maturities, covenant headroom, liquidity availability, and any constraints on share repurchases; the filing states repurchases could be restricted through June 30, 2021 if certain financial ratios are exceeded.
- Developments in environmental remediation estimates, legal proceedings, and other contingencies.