Eastman Chemical Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Amounts are in millions of dollars except per-share data. Eastman operates in Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Sales | $2,241 | $2,380; down 6% |
| Gross profit / margin | $577 / 25.7% | $574 / 24.1% |
| EBIT / margin | $368 / 16.4% | $320 / 13.4%; up 15% |
| Adjusted EBIT (non-GAAP) | $382 | $352; up 9% |
| Net earnings attributable to Eastman | $258 | $209 |
| Diluted EPS | $1.89 | $1.49 |
| Adjusted diluted EPS (non-GAAP) | $2.03 | $1.77 |
| Operating cash flow / free cash flow | $171 / $72 | $(5) / $(111) |
| Capital expenditures | $99 | $106 |
Sales fell mainly due to lower prices ($135 million impact) and foreign exchange ($17 million), partly offset by favorable volume/product mix ($13 million). Lower raw-material and energy costs, reduced SG&A and variable compensation, and segment-specific factors helped lift EBIT despite lower revenue. The effective tax rate was 18%, versus 21% a year earlier.
At March 31, cash and cash equivalents were $680, versus $204 at December 31, 2019. Total borrowings were $6,294, including $895 due within one year; long-term borrowings were $5,399. Net debt was approximately $5,614. Current assets were $3,851 and current liabilities $2,315. The company reported total equity of $6,192.
Segments and material changes
| Segment | Sales | EBIT | Year-over-year highlights |
|---|---|---|---|
| AFP | $822 | $143 | Sales down 4%; EBIT down 2%. Lower prices and less favorable mix outweighed higher volume. |
| AM | $615 | $100 | Sales down 7%; EBIT down 2%. Lower prices, weaker automotive-related demand and unfavorable mix; adjusted EBIT increased 5%. |
| CI | $592 | $80 | Sales down 9%, primarily from lower prices; EBIT increased 10%, helped by lower SG&A and variable compensation. |
| Fibers | $212 | $53 | Sales broadly flat; EBIT increased 26%, primarily on lower raw-material, energy and variable compensation costs. |
COVID-19 had a limited overall impact on Q1 results, with varying effects by business: demand weakened in automotive, aviation, coatings and some textile markets, while selected consumables, personal-care and health-related products benefited. Geographic sales fell across all reported regions, most notably Asia Pacific and Europe, Middle East and Africa, each down 10% and 8%, respectively.
Liquidity, outlook, risks and unusual items
- COVID-19 liquidity actions: Eastman borrowed $400 million under its revolving credit facility in March and an additional $250 million under a new 364-day term loan in April as a precaution against market volatility and commercial-paper availability. The A/R facility expired in April and was not renewed. The company reported covenant compliance at March 31.
- Cost and capital plans: Management planned approximately $150 million of net cost savings in 2020, reduced discretionary spending, deferred some maintenance, and lowered expected 2020 capital expenditures by approximately $100 million to $325–$375 million. It also expected working capital to provide more than $250 million of cash flow beyond prior expectations, aimed to reduce debt substantially more than its original $400 million target, and planned to limit repurchases to offset dilution.
- Guidance: Management withdrew its prior 2020 earnings and cash-flow forecasts because the pandemic’s effects on demand, operations, supply chains and markets were uncertain.
- Debt terms: April amendments adjusted maximum-debt covenants to reflect higher cash and anticipated COVID-19 effects. They also restrict share repurchases until June 30, 2021 if specified financial ratios are exceeded.
- Working-capital financing: Receivables sold without recourse under factoring agreements were $457 million in Q1 2020 versus $101 million in Q1 2019. The company estimated $250 million of sold receivables would otherwise have remained outstanding at March 31. This is a funding source whose capacity depends on eligible receivables and counterparties’ willingness to purchase them.
- Impairments and restructuring: Q1 charges were $14 million, including $9 million of asset impairments and $5 million of severance, versus $32 million in Q1 2019. Charges related to site optimization, customer relationships and planned product discontinuations.
- Impairment sensitivity: Management said tire-additives reporting-unit fair value only slightly exceeded carrying value after forecast reductions tied partly to COVID-19 automotive weakness; further deterioration could lead to impairment charges. It did not consider goodwill impairment more likely than not at March 31.
- Other exposures: Environmental loss-contingency reserves were $285 million. Management did not expect environmental liabilities, individually or in aggregate, to be material to financial position, results or cash flows, but noted resolution could materially affect results in the period recognized. The filing also describes ordinary-course litigation and a Trenton, Michigan EPA proceeding; management did not expect that proceeding to have a material financial impact.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter demand, plant operations, supply chains and the company’s ability to achieve its $150 million savings and working-capital targets.
- Whether operating cash flow remains adequate after considering the increased use of receivables factoring and the timing of working-capital movements.
- Debt maturities, refinancing needs, covenant headroom, and the effect of the April term loan and credit-agreement amendments.
- Whether the tire-additives unit or other assets require impairment charges if forecasts or market conditions weaken further.
- Execution and cash-flow effects of the capital-spending reduction, deferred maintenance, debt-reduction plan, dividend and limited share repurchases.
- Progress on environmental contingencies, the EPA matter and other legal claims, including any material change in estimated costs or timing.