Eastman Chemical Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars except per-share data. The filing is unaudited. Eastman reports four operating segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Sales | $2,709 | $2,720 | $8,207 | $7,782 |
| Gross profit | $541 | $662 | $1,761 | $1,941 |
| EBIT | $324 | $370 | $1,083 | $703 |
| Net earnings attributable to Eastman | $301 | $351 | $792 | $479 |
| Diluted EPS | $2.46 | $2.57 | $6.26 | $3.49 |
| Adjusted EBIT (non-GAAP) | $333 | $445 | $1,168 | $1,299 |
| Adjusted diluted EPS (non-GAAP) | $2.05 | $2.46 | $6.94 | $7.05 |
Q3 gross margin was approximately 20.0%, versus 24.3% a year earlier; reported EBIT margin was 12.0%, versus 13.6%. For the first nine months, gross margin was 21.5%, versus 24.9%; EBIT margin was 13.2%, versus 9.0%. Adjusted EBIT margin for the first nine months was approximately 14.2%, versus 16.7%. Adjusted measures are management-defined non-GAAP measures and should be considered alongside GAAP results.
Q3 sales were essentially flat: higher pricing was offset by foreign exchange and divested-business effects; volume was broadly unchanged. Nine-month sales rose 5%, primarily on higher prices, partly offset by divestitures, lower volume, and currency. Q3 adjusted EBIT fell 25%; nine-month adjusted EBIT fell 10%.
Cash flow, debt, and liquidity
- First-nine-month operating cash flow was $518, down from $1,189 in 2021. Capital expenditures were $408; operating cash flow less capex was approximately $110.
- Investing cash flow was positive $598, including $998 of proceeds from business sales. Financing cash use was $1,098, including $902 of treasury-stock purchases and $290 of dividends paid.
- At September 30, total borrowings were $5,065 and cash was $461; net debt, as defined by the company, was $4,604. Total borrowings were $5,159 at year-end 2021.
- Current assets were $4,105 and current liabilities $3,207. Inventory increased to $1,975 from $1,504 at year-end 2021. The company had $355 of commercial paper outstanding and $1.50 billion available under its revolving credit facility; it reported compliance with debt covenants.
- Eastman sold $1,839 of receivables through its uncommitted, without-recourse factoring program in the first nine months; it estimated $452 of receivables would otherwise have remained outstanding at September 30.
Material changes and segment developments
- Q3 sales pricing increased 14%, while exchange rates reduced sales 3%; the divested-business effect was also unfavorable. Nine-month pricing increased 15%, with lower volume, foreign exchange, and divestitures partly offsetting the increase.
- Q3 segment EBIT was lower in AFP ($126 versus $130), CI ($85 versus $130), and Fibers ($21 versus $32), while AM increased to $131 from $125. Nine-month EBIT increased in AFP and CI but declined in AM and Fibers.
- The company completed the sale of its adhesives resins business on April 1, 2022, for estimated consideration of $957, recognizing a $5 gain. Its rubber additives business had been sold in November 2021 for estimated consideration of $687 and resulted in a $552 loss. Divested-business results are reported in “Other” for comparability.
- Eastman recorded $42 of net costs from the January 2022 Kingsport steam-line incident in the first nine months, excluded from adjusted results. Impacted areas were operational by March 31. A separate Kingsport power outage in July and logistics constraints affected Q3 volumes.
Outlook, commentary, and risks
Management forecast Q4 2022 adjusted EPS of $1.10–$1.40, full-year adjusted EPS of $8.05–$8.35, and full-year operating cash flow of $1.0–$1.2 billion. It expected approximately $600 of full-year capital expenditures, an adjusted effective tax rate of about 15%, and approximately $100 of Q4 share repurchases. These are forward-looking, non-GAAP expectations; the filing says a reconciliation to projected GAAP earnings is unavailable without unreasonable effort.
Management cited inflation in raw materials, energy, and distribution; strong-dollar effects; customer destocking, especially in building and construction and industrial markets; seasonal declines; and softer demand in some markets. It anticipated resilient demand in certain end markets and improvement in automotive, while noting Russia/Ukraine-related energy pressures in Europe, China COVID-related demand uncertainty, and continuing supply-chain constraints. Other material risks include manufacturing interruptions, commodity and currency volatility, growth-project execution, environmental and regulatory costs, and global economic and geopolitical uncertainty.
Environmental remediation reserves were $274, with estimated undiscounted future remediation expenditures ranging from $246 to $461. Eastman disclosed an environmental proceeding concerning its former Jefferson Hills facility; it retained responsibility for any civil penalty, and the company and subsidiary are defending against the allegations. Management stated that currently known pending legal matters were not expected to materially adversely affect overall financial position, results, or cash flows.
Important facts for investors to verify
- Whether Q4 and full-year adjusted EPS and operating-cash-flow guidance was achieved, and how it reconciled to reported GAAP results.
- Whether weaker demand, destocking, utilization, inflation, energy costs, and foreign exchange continued to pressure margins and cash generation.
- The quality and sustainability of operating cash flow, including working-capital movements, higher inventories, and reliance on receivables factoring.
- Debt and liquidity developments, including commercial paper, variable-rate borrowing costs, and upcoming maturities.
- Actual costs or liabilities from the Kingsport incidents, environmental remediation, and the Jefferson Hills proceeding, as well as progress and returns from growth and circular-economy investments.