Eastman Chemical Company — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020. Eastman reports four segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $2.409 billion | $2.241 billion | +7% |
| Gross profit | $598 million | $577 million | +4% |
| EBIT | $389 million | $368 million | +6% |
| Net earnings attributable to Eastman | $274 million | $258 million | +6% |
| Diluted EPS | $1.99 | $1.89 | +$0.10 |
| Operating cash flow | $216 million | $171 million | +$45 million |
| Free cash flow | $125 million | $72 million | +$53 million |
Gross margin was approximately 24.8% versus 25.7% a year earlier; EBIT margin was approximately 16.1% versus 16.4%. Management’s non-GAAP adjusted EBIT was $400 million versus $382 million, and adjusted diluted EPS was $2.13 versus $2.03. Adjusted results exclude restructuring and impairment charges, accelerated depreciation, and the interim tax-provision adjustment; they are not GAAP measures.
Sales growth reflected higher prices ($78 million), volume/product mix ($45 million), and favorable foreign exchange ($45 million). Q1 2021 net interest expense was $50 million, down from $52 million. The effective tax rate was 18%; management’s adjusted rate was 16%.
Liquidity, debt, and capital allocation
- Cash and equivalents were $540 million at March 31, 2021, versus $564 million at year-end 2020. Current assets were $3.797 billion and current liabilities $2.016 billion.
- Total borrowings were $5.524 billion; net debt, a non-GAAP measure, was $4.984 billion. Debt due within one year was $324 million, including $299 million of 3.5% notes due December 2021. Management planned to repay the $300 million principal using available cash.
- The company had no revolver borrowings and $1.50 billion available under its revolving credit facility, expiring October 2023. It reported compliance with covenants. A covenant amendment provides for a restriction on share repurchases until June 30, 2021 if specified financial ratios are exceeded.
- Q1 capital expenditures were $91 million; dividends paid were $94 million and share repurchases were $40 million. The quarterly dividend declared was $0.69 per share.
Material changes and management commentary
- AM had the strongest segment growth: sales rose 16% to $716 million and EBIT increased to $146 million from $100 million, driven by higher volume, favorable mix, and improved utilization.
- AFP sales rose 6% to $871 million, but EBIT declined to $135 million from $143 million, reflecting higher raw material, energy, and distribution costs and storm-related disruption.
- CI sales increased 2% to $605 million, but EBIT fell to $69 million from $80 million. Higher prices were largely offset by lower volume and storm-related costs.
- Fibers sales rose 2% to $217 million, while EBIT declined to $45 million from $53 million, mainly due to costs, lower selling prices, and product mix.
- Winter Storm Uri caused outages at the Longview and Texas City, Texas sites; associated costs were approximately $30 million, including about $20 million in CI and $10 million in AFP.
- In April 2021, after quarter-end, Eastman completed its acquisition of 3F Food & Feed for a preliminary purchase price of approximately $70 million, net of cash acquired.
Outlook, risks, and contingencies
Management forecast 2021 adjusted EPS of $8.25–$8.75 and free cash flow approaching $1.1 billion. It expected net debt reduction of approximately $300 million and share repurchases of approximately $350 million. Assumptions included continued economic recovery, stronger volumes and mix, approximately $100 million of lower costs from improved utilization, and timing-related pressure from higher raw material, energy, and distribution costs. Other stated expectations: capital expenditures of $500–$525 million, interest expense of about $200 million, depreciation and amortization of about $570 million, and an adjusted full-year tax rate of 15–16%. The company said it could not reconcile projected adjusted earnings to GAAP earnings without unreasonable effort.
Key risks include uncertain global and COVID-19-related demand, raw-material and energy cost or supply volatility, international and currency exposure, manufacturing outages and supply-chain interruptions, cyber risks, execution and returns on growth projects or acquisitions, and regulatory or climate-related compliance costs. Environmental reserves were $282 million; estimated undiscounted remediation expenditures ranged from $255 million to $497 million. Management did not expect environmental matters or pending legal proceedings, based on currently available facts, to materially harm overall financial position, results, or cash flows, but noted outcomes and estimates remain uncertain. Ordinary-course guarantees had maximum potential payments of approximately $25 million; management considered material payments remote.
Important facts for investors to verify
- Whether earnings and cash-flow guidance assumptions—including recovery, utilization savings, and price pass-through—were achieved, and how actual GAAP results compare with adjusted measures.
- The duration and financial effect of storm-related disruption, higher input and distribution costs, and any further operational interruptions.
- Debt repayment and net-debt reduction plans, liquidity and covenant headroom, and the conditions governing repurchases under the amended credit facility.
- Execution, integration, and returns from the 3F acquisition and the company’s molecular-recycling and other capital projects.
- Changes in environmental remediation estimates, tax contingencies, legal matters, and restructuring costs; the filing cites up to $50 million of charges for the Singapore closure and up to $30 million for the advanced interlayers facility closure.