Eastman Chemical Company — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; includes unaudited fourth-quarter results. Amounts are in U.S. dollars. Per-share amounts reflect the October 2011 two-for-one stock split.
Business context and financial performance
Eastman manufactures specialty and commodity chemicals, plastics, and fibers through four segments: CASPI, Fibers, PCI, and Specialty Plastics. It reported the sale of its PET business as discontinued operations; continuing-operations comparisons exclude that business.
| Metric | 2011 | 2010 |
|---|---|---|
| Sales | $7.178 billion | $5.842 billion |
| Gross profit / gross margin | $1.640 billion / 23% | $1.474 billion / 25% |
| Operating earnings | $1.021 billion | $862 million |
| Continuing-operations earnings | $657 million | $425 million |
| Diluted continuing-operations EPS | $4.59 | $2.88 |
| Net earnings | $696 million | $438 million |
| Operating cash flow | $625 million | $575 million |
| Capital expenditures | $457 million | $243 million |
Sales increased 23%: volume contributed 7%, price 14%, and mix 2%. Higher prices reflected higher raw-material and energy costs; volume gains came primarily from PCI plasticizers, the restarted Longview cracker, stronger CASPI demand, and growth initiatives. Gross margin declined despite higher gross profit. Management attributed improved operating earnings mainly to pricing that more than offset input-cost inflation, stronger volume, and better utilization. Operating earnings included $17 million of costs from an unplanned Longview cracker outage.
Segment sales and operating earnings were: CASPI $1.844 billion and $331 million; Fibers $1.279 billion and $346 million; PCI $2.860 billion and $289 million; Specialty Plastics $1.195 billion and $105 million. PCI led sales growth, up 37%, supported by price, volume, and plasticizer acquisitions. Specialty Plastics sales rose 15%, but volume declined 2% amid softer copolyester demand.
Cash flow, balance sheet, debt, and capital allocation
- Reported operating cash flow was $625 million. Excluding the $110 million PET-sale tax payment and adjusting for the 2010 receivables-accounting change, operating cash flow was $735 million versus $775 million in 2010. Management cited higher working capital and pension and incentive payments.
- Company-defined free cash flow—operating cash flow less capital expenditures and dividends—was $142 million in 2011, excluding the PET-sale tax payment, versus $405 million in 2010. The definition and adjustments are non-GAAP.
- Year-end cash and cash equivalents were $577 million, plus $200 million in short-term time deposits. Total borrowings were $1.598 billion, including $153 million due within one year. Stockholders’ equity was $1.870 billion.
- Eastman had no outstanding borrowings under its $750 million revolving credit facility or $200 million receivables facility and reported compliance with their covenants. It paid $136 million in dividends and repurchased $316 million of shares during 2011.
- Capital expenditures rose to $457 million, primarily for growth projects. U.S. defined-benefit pension contributions were $102 million; post-employment obligations totaled $1.411 billion on the balance sheet.
Material changes, outlook, and risks
- Eastman sold its PET business on January 31, 2011 for $615 million and recognized a $30 million after-tax disposal gain. Discontinued operations also contributed $8 million of earnings in 2011.
- 2011 acquisitions included Sterling and Scandiflex in PCI, Dynaloy in CASPI, and TetraVitae Bioscience. Sterling’s idle plasticizer unit was being retrofitted; the first phase was expected online in the first half of 2012. Capacity expansions for Tritan copolyester, CHDM, and cellulose triacetate were also planned for 2012.
- On January 26, 2012, Eastman agreed to acquire Solutia for approximately $4.7 billion, including assumed debt. Closing was expected mid-2012, subject to shareholder and regulatory approvals and other conditions. Eastman arranged a $3.5 billion bridge facility and terms for up to $1.25 billion of term loans. The filing cites substantial financing, integration, synergy, and transaction-completion risks; shareholder lawsuits seeking to enjoin the transaction were filed in February 2012.
- Excluding Solutia, management forecast 2012 diluted EPS of approximately $5, excluding acquisition-related costs and charges; free cash flow of $250–$300 million; capital spending of $400–$425 million; and U.S. pension funding of $100 million. Management expected modest global growth, continued input-cost volatility, and a 2012 effective tax rate near 33% excluding Solutia.
- Key risks include economic weakness, volatile or disrupted raw-material and energy supplies, manufacturing interruptions, customer concentration, execution and cost risks in growth projects and acquisitions, and environmental regulation. Potential boiler-emissions rules could materially increase environmental capital spending; the timing and amount were uncertain. Environmental reserves were $39 million, with estimated remediation expenditures ranging from $11 million to $29 million.
Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether 2012 guidance and free-cash-flow expectations are achieved, particularly given 2011’s lower free cash flow and working-capital use.
- Solutia’s final closing terms, financing mix, incremental debt burden, integration costs, and realized synergies.
- Demand recovery and capacity utilization in Specialty Plastics, and execution and customer uptake for Tritan, non-phthalate plasticizers, and other expansion projects.
- Whether raw-material and energy inflation can continue to be passed through in prices, and the effect of outages or economic weakness on margins.
- Actual pension funding needs and the cost and timing of environmental compliance, especially any final boiler-emissions requirements.