Eastman Chemical Company 2017 Form 10-K Summary
Business context and reporting period. Eastman is a global advanced materials and specialty additives company, operating through Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. This audited Form 10-K covers the fiscal year ended December 31, 2017; comparisons are primarily with 2016.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Sales | $9.549 billion | $9.008 billion |
| Gross profit | $2.454 billion; 25.7% margin | $2.350 billion; 26.1% margin |
| Operating earnings | $1.532 billion; 16.0% margin | $1.383 billion; 15.4% margin |
| Net earnings attributable to Eastman | $1.384 billion | $854 million |
| Diluted EPS | $9.47 | $5.75 |
| Adjusted net earnings / diluted EPS | $1.112 billion / $7.61 | $1.003 billion / $6.76 |
| Cash from operating activities | $1.657 billion | $1.385 billion |
| Capital expenditures | $649 million | $626 million |
| Cash and cash equivalents at year-end | $191 million | $181 million |
| Total borrowings at year-end | $6.540 billion | $6.594 billion |
Margins above are calculated from reported sales and earnings. Adjusted measures are non-GAAP and exclude specified non-core and unusual items. Net earnings growth was materially influenced by the 2017 tax benefit described below.
Current assets were $3.143 billion and current liabilities were $1.982 billion at year-end 2017. The company reported approximately $866 million available under its credit and accounts-receivable facilities, subject to a financial-ratio covenant, and was in compliance with covenants. Management said available cash, operating cash flow, and other liquidity sources should be sufficient for foreseeable needs. Operating, investing, and financing cash flows were respectively $1.657 billion, negative $643 million, and negative $1.006 billion.
Material changes versus 2016
- Sales increased 6% ($541 million), reflecting 4% higher volume/product mix and 2% higher prices. Growth in AFP, CI, and AM more than offset Fibers’ decline.
- Adjusted operating earnings rose 6% to $1.631 billion. Reported operating earnings included $112 million of net coal-gasification incident costs and a $21 million pension mark-to-market gain; adjusted comparisons exclude these and other identified items.
- AFP sales rose 12% to $3.343 billion; AM rose 5% to $2.572 billion; CI rose 8% to $2.728 billion; Fibers fell 14% to $852 million. Fibers was pressured by lower acetate-tow pricing and volume, especially in China.
- Operating cash flow increased $272 million, principally from higher earnings and lower pension contributions. Financing cash use increased, including $350 million of share repurchases and $296 million of dividends paid.
- Borrowings edged down, while stockholders’ equity increased to $5.403 billion from $4.532 billion. Declared dividends were $2.09 per share, up from $1.89.
Outlook, commentary, risks, and unusual items
- 2018 outlook: Management expected adjusted EPS to increase 8%–12% from 2017 adjusted EPS of $7.61; operating cash flow of approximately $1.6 billion; capital spending of approximately $550 million; and a reported-earnings effective tax rate of 18%–20%, excluding non-core, unusual, or non-recurring items. Earnings were expected to benefit from specialty-market growth and a modestly lower tax rate, and face higher growth-initiative and maintenance costs and volatile commodity, raw-material, and energy prices.
- Coal gasification incident: An October 2017 explosion at the Kingsport site disrupted manufacturing, principally affecting CI and Fibers. The company recognized $112 million of net disruption, repair, and reconstruction costs in 2017. Management estimated the total earnings impact, net of insurance recoveries, at $25 million–$50 million across 2017 and 2018, and expected 2018 insurance recoveries to more than offset incident costs recognized in 2018.
- Tax item: 2017 included a provisional $339 million net tax benefit, primarily from the Tax Reform Act and an international entity reorganization. The reported effective tax rate was negative 8%, versus an adjusted 20%. Certain tax accounting remained provisional and could change as the company finalized its analysis and tax filings.
- Investment and portfolio: 2017 capital spending funded manufacturing expansions and modernization; management expected major Tritan capacity additions and the Kuantan PVB facility to support growth. Eastman continued to consider divesting or monetizing excess ethylene capacity and certain commodity olefin lines.
- Key risks: Raw-material and energy price volatility or supply interruptions; chemical manufacturing hazards and operational outages; global economic, currency, and political risks; customer concentration; execution and cost risks in growth projects; and regulatory, environmental, litigation, and pension exposures. Environmental loss-contingency reserves totaled $304 million at year-end.
- The auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether reported 2018 results and tax expense differ materially from the provisional tax accounting and the 18%–20% outlook.
- The final insurance recoveries, repair costs, operating effects, and earnings impact from the Kingsport incident.
- Whether expected 2018 adjusted EPS growth, operating cash flow, and $550 million capital-spending plans were achieved.
- Fibers’ acetate-tow pricing, capacity utilization, China demand, and the segment’s continuing earnings and cash-flow trend.
- Debt maturities, covenant headroom, and the effect of dividends and the newly authorized $2 billion repurchase program on liquidity and leverage.
- Progress, completion costs, qualification, and commercial utilization of the announced capacity expansions; and any outcome of the ethylene/commodity-olefin portfolio review.