Eastman Chemical Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Eastman is a diversified chemical company reporting four operating segments: Advanced Materials, Additives & Functional Products, Chemical Intermediates, and Fibers. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $2.412 billion | $2.714 billion | Down 11% |
| Gross profit | $529 million | $550 million | Down 4% |
| Gross margin | 21.9% | 20.3% | Up 1.6 percentage points |
| EBIT | $246 million | $333 million | Down 26% |
| Adjusted EBIT (non-GAAP) | $283 million | $366 million | Down 23% |
| Net earnings attributable to Eastman | $134 million | $235 million | Down 43% |
| Diluted EPS | $1.12 | $1.80 | Down 38% |
| Adjusted diluted EPS (non-GAAP) | $1.63 | $2.06 | Down 21% |
| Operating cash flow | $(2) million | $17 million | Down $19 million |
| Capital expenditures | $174 million | $112 million | Up $62 million |
Sales fell mainly because of lower volume and product mix (9 percentage points), the divested business (6 points), and foreign exchange (2 points), partly offset by higher prices (6 points). Lower net earnings also reflected a higher tax provision and interest expense. Reported EBIT margin was 10.2%, versus 12.3% a year earlier; adjusted EBIT margin was 11.7%, versus 13.5%.
Liquidity, debt, and capital
- At March 31, cash and equivalents were $599 million; total borrowings were $5.650 billion and net debt was $5.051 billion. Net debt was $4.658 billion at December 31, 2022.
- Current assets were $3.973 billion and current liabilities were $2.971 billion, a current ratio of approximately 1.34.
- Operating cash flow was slightly negative. Investing activities used $252 million, including $174 million of capital expenditures and $73 million for an acquisition. Financing activities provided $357 million; ending cash increased by $106 million.
- Eastman had $1.50 billion available under its revolving credit facility and no facility or commercial paper borrowings outstanding at quarter-end. The company reported compliance with applicable debt covenants.
- The company issued $500 million of 5.75% notes due 2033, receiving $496 million net of discounts and issuance costs, and borrowed $300 million under a term loan at a variable 6.07% rate. It expected to repay $816 million of 1.50% notes due May 2023 using available cash and debt proceeds.
- Capital expenditures are expected to be approximately $800 million for 2023. The quarterly dividend declared was $0.79 per share; no shares were repurchased during the quarter.
Material changes and segment performance
- Advanced Materials: Sales were $742 million, up 1%; EBIT was $86 million, up 41%. Pricing and lower manufacturing costs more than offset weaker volume and foreign exchange. Demand weakness and customer destocking affected specialty plastics, while automotive demand supported some product lines.
- Additives & Functional Products: Sales were $777 million, down 13%; EBIT was $124 million, down 26%. Lower volume, including customer destocking and softer demand, was the main pressure.
- Chemical Intermediates: Sales were $589 million, down 18%; EBIT was $42 million, down 63%. Lower volume and selling prices reflected weaker demand and competitive pressure.
- Fibers: Sales were $303 million, up 42%; EBIT was $65 million, versus $24 million. Higher acetate tow pricing drove the increase. Results included $22 million in impairment and restructuring charges and $23 million in accelerated depreciation related to a European acetate yarn facility closure.
- Reported sales in Q1 2022 included $160 million from a divested business; the comparable 2023 amount was $1 million. Segment results were recast for product-line transfers between AFP and CI in Q1 2023.
Outlook, commentary, and risks
- Management said operating cash flows, cash, and other liquidity sources are expected to be sufficient for known short- and long-term requirements, while noting that cash generation is exposed to demand, pricing, raw-material availability and costs, and capacity utilization.
- Growth investment includes the Kingsport plastic-to-plastic molecular recycling facility. Eastman acquired Dalian, a supplier of automotive and architectural films, for a preliminary purchase price of approximately $75 million net of cash acquired.
- Q1 unusual and non-core items included $22 million of impairment and restructuring charges, $23 million of accelerated depreciation, and a $23 million increase in state tax provision related to guidance on the 2017 Tax Reform Act. Q1 also included $8 million of net insurance proceeds related to the 2022 Kingsport steam-line incident.
- Environmental contingencies totaled $275 million, including $243 million of estimated future remediation costs at the best-estimate/minimum level; the disclosed maximum remediation estimate was $455 million. Management stated it did not expect environmental matters to materially affect overall financial position, results, or cash flows, while noting that resolution in a particular period could materially affect results.
- The company reported a tentative settlement in the Jefferson Hills environmental proceeding and did not expect it to have a material financial impact. It also described ordinary-course litigation and other risks, including economic and market uncertainty, foreign exchange, commodity and interest-rate movements, operational interruptions, and environmental obligations.
- No specific earnings or sales guidance was provided in the supplied filing text. Forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether demand and destocking improve, particularly in AFP, CI, and durables-related markets, and whether pricing offsets lower volume and costs.
- How the May 2023 maturity was refinanced or repaid, and the effect of higher variable interest rates on borrowing costs and net debt.
- Whether operating cash flow recovers as working capital normalizes; Q1 included higher working capital and $677 million of receivables sold through the factoring program.
- Execution, spending, and expected returns for the approximately $800 million 2023 capital program, including the Kingsport recycling investment.
- Progress and cash costs associated with the Fibers facility closure, restructuring actions, environmental remediation, and the Jefferson Hills settlement.