Eastman Chemical Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Amounts are in millions of U.S. dollars except per-share data. Results include businesses acquired during 2014, notably Taminco and Commonwealth, so year-over-year comparisons reflect acquisitions as well as underlying performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $2,443 | $2,305 | +6% |
| Gross profit | $656 | $595 | +10% |
| Operating earnings | $311 | $361 | -14% |
| Net earnings attributable to Eastman | $171 | $233 | -27% |
| Diluted EPS | $1.14 | $1.52 | -25% |
| Cash from operating activities | $91 | $(30) | Improved $121 |
Reported gross margin was approximately 26.9%, versus 25.8% a year earlier; reported operating margin was approximately 12.7%, versus 15.7%. Excluding the company’s specified non-core or non-recurring items, operating earnings were $435 million versus $383 million, and diluted EPS was $1.84 versus $1.61. These are non-GAAP measures and are not directly comparable to GAAP results without considering the reconciliations in the filing.
Sales rose $138 million, primarily from acquired businesses (+$393 million) and were partly offset by lower volume (-$71 million), lower prices (-$135 million), and unfavorable currency effects (-$49 million). Management attributed adjusted operating earnings growth to acquired businesses and improved spreads as raw material and energy costs fell more than selling prices. Reported earnings were weighed down by impairment and restructuring charges.
Segments and unusual items
- Additives & Functional Products: Sales $609 million (+44%); operating earnings $120 million (+28%), with growth primarily from acquired Taminco businesses.
- Adhesives & Plasticizers: Sales $320 million (-7%); operating earnings $53 million (+13%). Lower prices and currency reduced sales; lower input costs supported earnings.
- Advanced Materials: Sales $561 million (-3%); operating earnings $68 million (+11%). Excluding acquired-inventory costs and prior-year charges, operating earnings were $75 million versus $71 million.
- Fibers: Sales $284 million (-20%); operating loss $7 million, including $97 million of impairment and restructuring charges. Excluding those charges, earnings were $90 million versus $117 million, reflecting lower acetate tow volume and utilization.
- Specialty Fluids & Intermediates: Sales $657 million (+9%); operating earnings $102 million (+59%), supported by acquired businesses and improved spreads.
- Restructuring: The company recorded $109 million of net impairment and restructuring charges, including $81 million of Fibers asset impairments and $16 million of Fibers restructuring costs related to closing the Workington, U.K. acetate tow facility. Closure was expected to be completed in Q3 2015. A discontinued growth initiative generated an additional $12 million of charges.
Cash flow, balance sheet and liquidity
- Operating cash flow was $91 million, versus cash used of $30 million in Q1 2014. Management cited earnings and a lower-than-usual first-quarter working-capital increase, partly reflecting lower inventory costs.
- Capital expenditures were $125 million. Investing cash outflow was $122 million; financing cash inflow was $17 million. Cash declined $18 million to $196 million.
- Total borrowings were $7.644 billion at March 31, 2015, versus $7.549 billion at year-end 2014. Long-term borrowings were $7.293 billion and borrowings due within one year were $351 million. Net interest expense rose to $66 million from $42 million, primarily due to debt used to finance acquisitions.
- Current assets were $3.166 billion and current liabilities $1.764 billion (current ratio approximately 1.79). The company reported $1.172 billion of availability under its revolving credit and receivables facilities; it had no outstanding borrowings under either facility. The company reported compliance with financial covenants.
- Stockholders’ equity was $3.522 billion. Other comprehensive loss included a $212 million adverse currency translation adjustment, partly offset by derivative gains.
Outlook, risks and contingencies
- For 2015, management expected operating results to benefit from acquisitions, organic growth and product mix. It forecast operating cash flow of approximately $1.6 billion and capital spending of $700–$725 million.
- Management expected full-year reported-earnings effective tax rate of 26%–27%, excluding non-core or non-recurring items, and expected adjusted 2015 EPS to exceed adjusted 2014 EPS of $7.07. This is an outlook, not a guarantee.
- Management expected global growth of approximately 3% (U.S. approximately 3%, Europe approximately 1%, China below 7%). It cautioned that a strong U.S. dollar could continue to hurt results and that commodity price declines would not fully lower input costs because hedges, particularly propane hedges, were expected to offset much of the benefit.
- Commodity hedge positions included $348 million of accumulated pre-tax losses at quarter-end; $107 million of net losses were expected to be reclassified into earnings over the next 12 months if realized. Hedging can limit the benefit of falling input prices.
- Environmental contingency reserves totaled $340 million, including $317 million of estimated remediation costs; reasonably possible remediation costs were estimated up to $544 million. Management did not expect these matters, individually or together, to be material to consolidated financial position or cash flows, but said resolution could materially affect results in the period recognized.
- Other disclosed risks include global economic and customer weakness, raw-material availability and price volatility, manufacturing disruption and cyber risks, acquisition integration and leverage, growth-project execution, and regulatory and environmental costs. The company said ordinary-course legal matters were not expected, based on currently available facts, to materially adversely affect overall financial condition, results or cash flows.
Important facts for investors to verify
- Whether acquired-business contributions and the company’s non-GAAP adjustments support sustainable earnings growth; review the reconciliation to reported results.
- Progress, costs and earnings effects of the Workington closure, and whether Fibers volume and utilization recover.
- Debt repayment, interest expense and liquidity as the company integrates Taminco and pursues its stated cash-flow and capital-spending plans.
- Actual realization and timing of commodity hedge losses, and the effect of currency and input-price changes on margins.
- Actual environmental remediation spending and any changes to estimated liabilities or legal contingencies.