Eastman Chemical Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; dollar amounts in millions except per-share data.
Business context
Eastman operates through Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. The quarter included a January 31 steam-line failure at the Kingsport site, which disrupted production, chiefly in AM. All impacted areas were operational by March 31. The adhesives resins business was classified as held for sale and its sale closed April 1, 2022. Rubber additives had been sold in November 2021.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Sales | $2,714 | $2,409 |
| Gross profit | $550 | $598 |
| EBIT | $333 | $389 |
| Net earnings attributable to Eastman | $235 | $274 |
| Diluted EPS | $1.80 | $1.99 |
| Cash provided by operating activities | $17 | $216 |
Sales rose 13%, primarily on higher prices: price effect +19%, volume/product mix -5%, and foreign exchange -1%. Gross margin was approximately 20.3%, versus 24.8%; EBIT margin was approximately 12.3%, versus 16.2%. Adjusted EBIT, excluding specified non-core and unusual items, was $366 million versus $400 million; adjusted diluted EPS was $2.06 versus $2.13. These are non-GAAP measures.
Operating cash flow fell $199 million, mainly due to higher variable-compensation payments and lower net earnings. Investing cash outflow was $117 million, including $112 million of capital expenditures; financing provided $129 million. Cash ended the quarter at $487 million. Total borrowings were $5.363 billion and net debt was $4.876 billion. Current borrowings were $984 million, including $748 million of notes due August 2022. Eastman had no revolver borrowings and $1.50 billion available under its revolving facility; it was compliant with applicable covenants. Current assets were $4.929 billion and current liabilities $3.136 billion.
Changes by segment and other material developments
- AFP: Sales rose 32% to $805 million and EBIT rose 36% to $145 million, supported by pricing and volume.
- AM: Sales increased 3% to $737 million, but EBIT fell 58% to $61 million. The steam-line incident constrained specialty plastics volume and increased manufacturing costs.
- CI: Sales rose 32% to $799 million and EBIT rose 94% to $134 million, primarily on higher selling prices.
- Fibers: Sales declined 2% to $213 million and EBIT fell 47% to $24 million, reflecting lower volume and higher costs.
Management identified approximately $125 million of total first-quarter financial impact from the Kingsport incident: about $50 million of accelerated costs and an estimated $75 million of lost sales opportunity. Separately, $25 million of incident costs net of insurance proceeds was excluded from adjusted EBIT. Q1 also included $9 million of transaction costs for the divestiture and held-for-sale businesses, net of a $3 million divestiture gain.
The adhesives resins business was sold for an announced $1 billion, subject to working-capital and other adjustments. Eastman’s 2021 rubber-additives divestiture had estimated consideration of $687 million and resulted in a $552 million loss in 2021; up to $75 million of additional contingent consideration was possible based on performance through December 2023.
Outlook, risks, and contingencies
For 2022, management expected adjusted EPS of $9.50–$10.00 and operating cash flow approaching $1.6 billion. Assumptions included strong end-market demand and recovery from the steam-line disruption, timely price increases to recover higher input and distribution costs, and continued cost discipline. Expected headwinds included the divested businesses, normalization of CI price/cost spreads, growth investment, China COVID-related lockdowns, and the Russia/Ukraine conflict. Management estimated interest expense of approximately $190 million, depreciation and amortization of approximately $490 million, and an adjusted full-year tax rate of 15%–16%.
Planned 2022 capital expenditures were approximately $700 million; management also expected share repurchases in excess of $1 billion, alongside potential bolt-on acquisitions and organic investment. A $500 million unsecured five-year term loan was entered into in April, with a planned second-quarter draw. The company expected to use available cash and debt proceeds to repay the $750 million notes due in August.
Key risks include raw-material, energy, and transportation cost or supply volatility; global economic, geopolitical, and pandemic-related disruption; manufacturing and cybersecurity incidents; execution and returns on growth projects; divestiture-related revenue, costs, and retained liabilities; and environmental and regulatory obligations. Environmental reserves totaled $278 million; estimated undiscounted remediation costs ranged from a best estimate of $250 million to a maximum of $468 million. Eastman retained responsibility for any civil penalty in a Pennsylvania environmental proceeding after selling the facility; it was vigorously defending the allegations. Management did not expect pending legal matters, based on then-available facts, to materially affect overall financial position, results, or cash flows.
The filing also disclosed that Eastman had not timely filed a Form S-8 covering shares issued under its 2017 stock compensation plan. It filed the registration statement on April 5, 2022 and stated that potential liability was not material to financial condition or results. Management reported disclosure controls were effective as of March 31, 2022.
Important facts for investors to verify
- Whether Kingsport production and lost sales recovered as assumed, and how much incident-related cost or insurance recovery remained.
- Actual proceeds and working-capital adjustments from the April 1 adhesives resins sale, and the resulting impact on ongoing revenue, margins, and cash.
- Progress toward the $9.50–$10.00 adjusted EPS and approximately $1.6 billion operating-cash-flow outlook, including assumptions on pricing, input costs, and CI spreads.
- Funding and repayment plans for the August 2022 notes, the draw and terms of the April term loan, and planned capital spending and repurchases.
- Developments in environmental remediation estimates and the Pennsylvania proceeding, including any civil penalty or other retained divestiture liabilities.
- Comparability of reported segment trends: divested and held-for-sale businesses were reclassified to “Other,” and prior-period segment data was recast.