Eastman Chemical Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing also reports fourth-quarter results; the company is a global specialty chemicals and advanced materials producer with four segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Sales | $10.151 billion | $9.549 billion |
| Gross profit / margin | $2.479 billion / 24.4% | $2.363 billion / 24.7% |
| EBIT / margin | $1.552 billion / 15.3% | $1.530 billion / 16.0% |
| Net earnings attributable to Eastman | $1.080 billion | $1.384 billion |
| Diluted EPS | $7.56 | $9.47 |
| Adjusted EBIT | $1.633 billion | $1.635 billion |
| Adjusted diluted EPS | $8.20 | $7.61 |
| Operating cash flow / free cash flow | $1.543 billion / $1.080 billion | $1.657 billion / $1.008 billion |
| Total borrowings | $6.168 billion | $6.540 billion |
Gross and EBIT margins are calculated from reported sales and profit figures. Cash and cash equivalents were $226 million at year-end, versus $191 million a year earlier. The company reported approximately $1.70 billion of available borrowing capacity under its credit and receivables facilities and was in compliance with debt covenants.
Material changes versus prior period
- Sales increased 6% year over year, with reported growth from all four operating segments. Adjusted EBIT was essentially flat; higher volume and pricing were offset by raw-material, energy, distribution, and growth-initiative costs.
- Net earnings and reported EPS fell from 2017, when results included a $339 million estimated tax benefit associated primarily with U.S. tax reform and related foreign-entity reorganizations. Adjusted EPS rose to $8.20 from $7.61.
- Operating cash flow declined, primarily because of higher inventory, including inventory accumulated amid reduced demand and higher-cost raw materials late in 2018. Free cash flow increased, with lower capital spending contributing.
- Segment adjusted EBIT varied: AFP increased 2%, AM increased 1%, CI declined 7%, and Fibers declined 5%. CI faced lower volume and higher planned shutdown costs; Fibers faced lower acetate-tow pricing. Figures reflect segment reporting changes, including product reclassifications.
- Year-end borrowings decreased by $372 million. The company issued $800 million of notes and used proceeds and cash to redeem or partially redeem $800 million of nearer-term principal, extending weighted-average debt maturity.
Outlook, commentary, and risks
- For 2019, management expected adjusted EPS growth of 6%–10% over 2018 and free cash flow greater than $1.1 billion. Assumptions included interest expense of about $225 million, a 16%–17% reported effective tax rate, depreciation and amortization of about $620 million, and capital spending of $475–$500 million. Management expected lower debt reduction and increased share repurchases versus 2018.
- Management cited specialty-market and innovative-product growth and cost management as supports, while identifying slow global growth, U.S.–China trade tensions, a stronger U.S. dollar, and higher pension costs as headwinds. The outlook excludes non-core and unusual items and was not reconciled to projected GAAP earnings.
- Unusual items included an $83 million net insurance benefit in 2018 from the 2017 Kingsport coal-gasification incident, compared with $112 million of net incident costs in 2017; a $38 million goodwill impairment in crop protection; and $20 million of tax-related adjustments and reorganization costs. The impairment was sensitive to discount-rate and long-term-growth assumptions and reflected expected regulatory impacts.
- Key risks include cyclical demand and pricing, raw-material and energy cost or supply volatility, manufacturing disruptions, global trade and currency exposure, customer concentration, execution of growth projects, and environmental and regulatory obligations. Environmental loss-contingency reserves were $296 million; estimated undiscounted remediation costs ranged from $271 million to $508 million.
- The company reported that pending legal matters were not expected, based on currently available facts, to materially affect overall financial condition, results, or cash flows. Solutia legacy tort claims may involve Monsanto/Bayer indemnification, subject to the settlement agreement and claim eligibility.
Important facts for investors to verify
- Reconcile reported earnings and EPS with adjusted measures, particularly the 2017 tax benefit and 2018 incident insurance, pension mark-to-market loss, and crop-protection impairment.
- Track whether 2019 adjusted EPS and free-cash-flow guidance was achieved, and assess the effects of trade uncertainty, currency, pension costs, and inventory normalization.
- Review debt maturities, facility availability, covenant terms, and the balance among debt reduction, capital investment, dividends, and share repurchases.
- Monitor environmental reserve estimates, crop-protection regulatory and valuation assumptions, and the status of material legal or indemnification matters.
- Consider the filing’s reporting changes: 2018 adoption of the revenue-recognition standard and segment reclassifications affect comparability. The auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective internal control over financial reporting.