Eastman Chemical Company — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless noted. Dollars are in millions except per-share data.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Sales | $1,564 | $1,129 |
| Gross profit / margin | $321 / 21% | $179 / 16% |
| Operating earnings | $182 | $25 |
| Net earnings | $101 | $2 |
| Diluted EPS | $1.37 | $0.03 |
| Operating cash flow | $(225) | $82 |
- Sales increased 39%, driven by improved demand and volume, favorable product mix, and higher selling prices, partly reflecting higher raw-material and energy costs.
- Operating margin was approximately 11.6%, versus 2.2%. Q1 2009 included $26 of restructuring charges; excluding those charges, 2009 operating earnings were $51 and net earnings were $18, or $0.25 per diluted share.
- Management attributed the earnings improvement mainly to higher volume and capacity utilization, lower unit costs, and favorable mix. Q1 2010 operating earnings included $12 of acetyl license revenue and were reduced by an estimated $25 from a Longview, Texas plant outage.
- Operating cash flow included a $200 reduction from adoption of revised receivables-transfer accounting. Excluding that presentation impact, operating cash flow was $(25), compared with $82 in Q1 2009. The company reported Q1 free cash flow of $(88), defined as adjusted operating cash flow less capital expenditures and dividends.
Liquidity, debt, and balance sheet
- Cash was $483 at March 31, down from $793 at December 31, 2009. The $310 decline reflected operating, investing, and financing outflows; working capital, particularly receivables, was a significant operating cash use.
- Total borrowings were $1,607, including $4 due within one year; long-term borrowings were $1,603. Cash less total borrowings was approximately $(1,124), calculated from reported balances.
- The company had no borrowings outstanding under its $700 revolving credit facility or $200 accounts-receivable facility and reported compliance with their financial covenants. The receivables facility expires in July 2010.
- Current assets were $1,877 and current liabilities $870. Trade receivables rose to $687 from $277 at year-end, reflecting higher sales and the accounting change; inventories increased to $588 from $531.
- Capital expenditures were $31. The company reported approximately $1 billion in purchase obligations over about 15 years, $91 in operating lease commitments, and $1,225 in post-employment obligations on the balance sheet.
Segments and material changes
- Sales and operating earnings improved across most segments. CASPI reported sales of $373 and operating earnings of $66; Fibers, $267 and $79; PCI, $482 and $37; Performance Polymers, $194 and a $(13) operating loss; Specialty Plastics, $248 and $21.
- Performance Polymers remained loss-making amid difficult North American PET market conditions, although improved South Carolina facility operations supported management’s expectation of smaller 2010 losses.
- Eastman completed its acquisition of the Korean acetate-tow facility for consideration of $111; $17 remained unpaid, primarily contingent on a future operating milestone. The facility began production and was expected to be integrated into Fibers operations in 2011.
- The company signed a definitive agreement to acquire Genovique Specialties, subject to regulatory and other closing conditions. Management expected the acquisition to be accretive to full-year EPS.
- On April 23, 2010, after quarter-end, Eastman announced a review of strategic options, including possible divestiture, for its PET business. Segment comparisons reflect a retrospective transfer of certain intermediates product lines from Performance Polymers to PCI.
Outlook, risks, and contingencies
- For full-year 2010, management forecast diluted EPS of $5.00–$5.25 excluding restructuring charges; positive free cash flow of $200–$300; capital spending of $250–$275; and a tax rate of approximately 33%. Free-cash-flow guidance excludes the $200 accounting-adoption impact and is defined as operating cash flow less capital spending and dividends.
- Management expected higher volumes, continued raw-material and energy price volatility and costs above 2009, slightly higher depreciation and pension expense, and higher net interest expense. It expected U.S. defined-benefit pension funding below $25.
- Key risks include economic weakness, raw-material and energy cost or supply disruptions, manufacturing interruptions, loss or financial weakness of major customers, execution and returns on growth initiatives, and rising environmental or regulatory compliance costs.
- Environmental reserves were $39 at March 31. The company disclosed environmental proceedings in Pennsylvania and Tennessee, each involving potential civil penalties it judged not reasonably likely to be below $100,000; management did not expect either matter to materially affect financial condition, results, or cash flows. Management also stated pending legal matters were not expected to have a material overall effect, while adverse developments could affect a particular period.
- Residual-value guarantees on leases totaled $160; management considered a material payment remote. No material changes in market risk from the 2009 Form 10-K were reported.
Important facts for investors to verify
- Whether the strong sales and earnings recovery continues, and how much depends on volume, pricing, mix, and the nonrecurring acetyl license revenue.
- Whether working-capital needs normalize and the company achieves its $200–$300 full-year free-cash-flow outlook, including the stated accounting adjustment.
- Progress and realized returns from the Korean facility, Tritan production, and the proposed Genovique acquisition, including regulatory approval and integration.
- Performance Polymers’ path to improved profitability and the outcome of the PET strategic-options review.
- Exposure to plant outages, commodity-price volatility, environmental matters, and the July 2010 expiration of the accounts-receivable facility.