Eastman Chemical Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Eastman operates in Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Sales | $2.720bn | $2.122bn | $7.782bn | $6.287bn |
| Gross profit | $662m | $501m | $1.941bn | $1.449bn |
| EBIT, GAAP | $370m | $243m | $703m | $665m |
| Adjusted EBIT | $445m | $310m | $1.299bn | $887m |
| Net earnings attributable to Eastman | $351m | $161m | $479m | $446m |
| Diluted EPS, GAAP | $2.57 | $1.18 | $3.49 | $3.27 |
| Adjusted diluted EPS | $2.46 | $1.57 | $7.05 | $4.45 |
Sales rose 28% in Q3 and 24% year to date, primarily on higher selling prices and volume. Reported gross margin was approximately 24.3% in Q3 versus 23.6%; year-to-date it was 24.9% versus 23.0%. Adjusted EBIT increased 44% in Q3 and 46% year to date. The Q3 GAAP tax provision was a $33m benefit, including a $65m benefit related to reductions in unrecognized tax positions; this contributed to reported earnings and makes adjusted and GAAP results diverge.
Segment sales increased across all four businesses. Q3/first-nine-month sales were AFP $997m/$2.793bn, AM $770m/$2.255bn, CI $731m/$2.072bn, and Fibers $222m/$662m. Year-to-date adjusted EBIT was AFP $430m (versus $330m), AM $432m (versus $310m), and CI $349m (versus $135m); Fibers EBIT was $114m (versus $140m). AFP’s reported year-to-date EBIT loss included the business-held-for-sale charge. Management cited strong volume and mix in specialty products, significant CI pricing gains, and cost inflation; AM’s Q3 performance was pressured by input costs and automotive production constraints.
Cash, liquidity, and debt
- Nine-month operating cash flow was $1.189bn, versus $1.049bn; capital expenditures were $315m, versus $278m. Company-defined free cash flow was $874m, versus $771m.
- Cash was $717m at September 30, 2021, compared with $564m at year-end 2020. Total borrowings were $5.488bn and net debt was $4.771bn, down from $5.054bn at year-end.
- Current assets were $4.875bn and current liabilities $3.113bn. A $1.50bn revolving credit facility was undrawn; the company reported compliance with its covenants.
- Nine-month dividends paid were $282m and share repurchases were $290m. Working-capital investment rose with improved business conditions. Eastman also sold $839m of receivables through its uncommitted factoring program during the first nine months.
Material changes, outlook, and items to monitor
- Divestitures: The rubber additives business sale closed November 1, 2021, after quarter-end. The company recorded a $555m loss on the disposal group in the first nine months, including $60m in Q3; reported current assets held for sale were $753m. On October 28, Eastman agreed to sell its adhesives resins business for $1bn, subject to closing adjustments.
- Guidance: Management expected 2021 adjusted EPS of $8.80–$9.00 and free cash flow approaching $1.1bn. It expected 2022 adjusted EPS of $9.50–$10.00. These are forward-looking estimates, not reported results; the filing says GAAP reconciliations are unavailable without unreasonable effort.
- Key outlook assumptions and headwinds included continued recovery, specialty-product growth, improved capacity utilization, and structural cost savings, offset by raw-material and energy inflation, logistics constraints, supply disruption, and automotive OEM component shortages. Management expected 2021 capex of about $550m and net-debt reduction of about $300m.
- Environmental remediation reserves were $284m; estimated undiscounted future remediation expenditures ranged from a best estimate of $256m to a maximum of $478m. In a Jefferson Hills, Pennsylvania proceeding, EPA and the state alleged environmental violations; the company said a civil penalty below $1m was not reasonably likely and intends to defend the allegations. Management did not expect pending legal matters overall to materially harm financial position, results, or cash flows.
- Other principal risks include volatile commodity and energy costs, supply-chain and transportation disruption, COVID-related uncertainty, automotive market weakness, global and currency exposure, manufacturing and cybersecurity incidents, growth-project execution, and environmental or climate-related regulation.
Important facts for investors to verify
- How much of earnings and cash generation is sustained by core operations after excluding the $555m disposal loss, tax benefits, and other adjustments.
- Whether price increases and specialty-product volume/mix continue to offset raw-material, energy, distribution, and logistics inflation.
- Closing proceeds and final adjustments for the rubber additives sale, and the timing, terms, and business impact of the proposed $1bn adhesives resins sale.
- Progress against the 2021 and 2022 adjusted EPS, free-cash-flow, capital-spending, and debt-reduction expectations.
- Working-capital needs and reliance on receivables factoring, plus upcoming debt maturities, including $300m due December 2021 and approximately $750m due August 2022.
- Developments in the Jefferson Hills proceeding and the scope, timing, and cost of environmental obligations.