Eastman Chemical Company — 2016 Form 10-K
Business context and reporting period. Global specialty chemicals and advanced materials company operating in Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. The filing covers the fiscal year ended December 31, 2016; comparative figures are for 2015 unless stated otherwise. Eastman reorganized its reporting segments in 2016, with prior-period segment information recast.
Key financial metrics
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Sales | $9.008 billion | $9.648 billion | Down 7%; lower prices across all segments and lower Fibers volume were principal factors. |
| Gross profit | $2.350 billion | $2.580 billion | Down 9%; reported gross margin was approximately 26.1%, versus 26.7%. |
| Operating earnings | $1.383 billion | $1.384 billion | Essentially flat; reported operating margin increased to approximately 15.4% from 14.3%. |
| Adjusted operating earnings | $1.534 billion | $1.717 billion | Down 11%, excluding specified non-core items. |
| Net earnings attributable to Eastman | $854 million | $848 million | Up slightly; diluted EPS was $5.75 versus $5.66. |
| Adjusted net earnings attributable to Eastman | $1.003 billion | $1.091 billion | Adjusted diluted EPS was $6.76 versus $7.28. |
| Cash from operating activities | $1.385 billion | $1.624 billion | Down $239 million, including an additional $150 million contribution to U.S. pension plans. |
| Capital expenditures | $626 million | $652 million | 2017 planned spending: approximately $575 million. |
| Cash and cash equivalents | $181 million | $293 million | Year-end balance. |
| Total borrowings | $6.594 billion | $7.008 billion | Borrowings declined; year-end current assets were $2.866 billion and current liabilities $1.795 billion. |
Segment performance
- AFP: Sales fell 6% to $2.979 billion; operating earnings fell 9% to $601 million. Lower selling prices outweighed lower input costs, partly offset by higher volume.
- AM: Sales rose 2% to $2.457 billion; operating earnings rose 23% to $471 million. Higher premium-product volume and mix, and improved capacity utilization, supported results.
- CI: Sales fell 10% to $2.534 billion; operating earnings fell 42% to $171 million. Lower prices more than offset lower raw-material and energy costs.
- Fibers: Sales fell 19% to $992 million. Operating earnings were $310 million, up from $292 million reported in 2015; excluding 2015 restructuring and impairment charges, earnings declined. Weaker acetate tow demand, especially in China, and lower prices weighed on sales.
Material changes and unusual items
- Sales declined by $640 million, primarily from lower selling prices; volume gains in most segments did not offset lower Fibers volume.
- Reported operating earnings were flat, but adjusted operating earnings declined. Companywide cost-reduction actions contributed approximately $100 million of benefit during 2016.
- 2016 results included $97 million of net mark-to-market pension and postretirement losses, $45 million of asset impairment and restructuring charges, and $85 million of debt-extinguishment and related costs. The early debt repayments also included a $44 million cash settlement of an interest-rate swap.
- The effective tax rate was 18%, compared with 24% in 2015, including identified tax benefits; management’s 2017 tax outlook excludes non-core items.
- Eastman sold its 50% Primester joint-venture interest for $35 million, recognizing a $17 million gain. It also began pursuing options to divest or monetize excess ethylene capacity and certain commodity olefin product lines.
- Environmental loss-contingency reserves were $321 million at year-end. Management did not expect pending legal matters or environmental liabilities to materially affect overall financial condition or cash flows, while noting that some matters could affect earnings in the period recognized.
Liquidity, debt and capital allocation
Year-end borrowings were approximately $6.6 billion, including $283 million due within one year. Eastman reported $1.50 billion of availability under its revolving credit and accounts-receivable facilities and stated that it complied with borrowing covenants. In 2016, it issued euro-denominated notes and borrowed under a term loan to refinance debt, extending weighted-average maturity; management estimated approximately $20 million of net interest savings in 2017. Cash uses include dividends, debt repayment, growth investment and share repurchases. 2016 dividends declared were $1.89 per share, and share repurchases totaled $145 million.
Outlook, commentary and risks
- Management expected adjusted 2017 EPS to be 8%–12% above adjusted 2016 EPS of $6.76; the forecast excludes non-core and unusual items and was not reconciled to GAAP EPS.
- 2017 expectations included approximately $1.6 billion of operating cash flow, $575 million of capital spending, $100 million of cost savings, and an approximately 23% effective tax rate on reported earnings before tax excluding non-core items.
- Management anticipated slow global economic growth, continued challenges in Fibers, volatile commodity prices and raw-material and energy costs, and a negative overall effect from U.S. dollar strength. It expected organic growth and specialty-product mix improvements to support results.
- Key risks include global economic weakness; raw-material, energy and supply disruption; customer concentration (the top 100 customers represented approximately 55% of sales); manufacturing, cyber and transportation disruptions; foreign-exchange and regulatory exposure; environmental obligations; and execution, cost and demand risks for growth projects and portfolio changes.
- Planned capacity projects included Crystex insoluble-sulfur and PVB capacity in Malaysia, both expected to start in the second half of 2017, and a 60,000-metric-ton Tritan capacity expansion in Tennessee expected in the first half of 2018. Completion, timing, costs and demand remain subject to execution and market risks.
Most important facts for investors to verify
- Whether lower selling prices and weaker Fibers demand persist, and whether CI and AFP earnings recover.
- Whether the 2017 adjusted EPS, cash-flow, cost-savings and tax-rate outlook is achieved; compare adjusted measures with GAAP results and their exclusions.
- Debt refinancing outcomes, interest savings, debt reduction and continued availability under credit facilities.
- Progress and economics of the Malaysia and Tritan expansions, and the outcome of strategic options for excess ethylene and commodity olefins.
- Developments in environmental remediation reserves, pension funding and any material litigation or contingent liabilities.
- The filing reports a $47 million correction of prior-period cumulative foreign-currency translation adjustment related to the Solutia and Taminco acquisitions; review the related financial-statement disclosures.