Eastman Chemical Company — FY 2013 Form 10-K
Business context and period. This annual report covers the year ended December 31, 2013; it is not a standalone fourth-quarter filing. Eastman is a global specialty chemicals company with five reporting segments. Its July 2012 acquisition of Solutia materially expanded the business, so reported comparisons with 2012 include Solutia for only part of that year. The company also presents pro forma combined comparisons.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Sales | $9.350 billion | $8.102 billion |
| Operating earnings | $1.862 billion | $800 million |
| Operating earnings, excluding identified non-core/non-recurring items | $1.591 billion | $1.319 billion |
| Earnings from continuing operations attributable to Eastman stockholders | $1.165 billion | $436 million |
| Diluted EPS from continuing operations | $7.44 | $2.92 |
| Cash provided by operating activities | $1.297 billion | $1.128 billion |
| Capital expenditures | $483 million | $465 million |
| Long-term borrowings | $4.254 billion | $4.779 billion |
| Cash and cash equivalents | $237 million | $249 million |
Reported operating earnings included a $383 million net mark-to-market pension and other postretirement-benefit gain; excluding that gain, impairment/restructuring charges and Solutia integration costs, operating earnings were $1.591 billion. The comparable 2012 adjusted figure was $1.319 billion. Sales grew 15% as reported, mainly reflecting Solutia sales included for a full year in 2013; pro forma combined sales increased 3% to $9.350 billion. Cash generation rose by $169 million, while the company repaid $525 million of long-term borrowings during 2013.
Current assets were $2.840 billion and current liabilities were $1.470 billion at year-end. Eastman reported $3.875 billion in total equity. Its $1 billion revolving credit facility had no direct borrowings outstanding, though $425 million of commercial paper reduced available capacity; the separate $250 million receivables facility was also undrawn at year-end. The company reported compliance with its credit covenants.
Gross profit was $2.776 billion, or approximately 29.7% of sales, versus $1.762 billion, or 21.7%, in 2012. Adjusted gross profit was $2.479 billion, approximately 26.5% of sales, compared with $2.049 billion, approximately 25.3%. These comparisons are affected by the pension mark-to-market items and 2012 acquired-inventory accounting charges.
Segments and material changes
- Additives & Functional Products: Sales of $1.719 billion and operating earnings of $405 million. Pro forma sales increased 7%; higher solvent, tire-additive and cellulosic-polymer volumes supported results.
- Adhesives & Plasticizers: Sales of $1.326 billion and operating earnings of $172 million. Sales declined 7% and earnings fell 34%, primarily due to lower adhesives-resin volume and weaker selling prices amid competitive pressure and customer destocking.
- Advanced Materials: Sales of $2.349 billion and operating earnings of $257 million. Higher Tritan copolyester and acquired Solutia product volumes, improved utilization and product mix contributed to higher earnings.
- Fibers: Sales of $1.441 billion and operating earnings of $462 million. Higher selling prices more than offset increased raw-material and energy costs; sales volume also benefited from flake supplied to the new China joint venture.
- Specialty Fluids & Intermediates: Sales of $2.497 billion and operating earnings of $363 million. Higher volume, including acquired Solutia products, supported reported growth; pro forma combined sales were nearly unchanged.
Fourth-quarter 2013 sales were $2.265 billion and net earnings attributable to Eastman were $346 million, or $2.22 diluted EPS. Fourth-quarter impairment and restructuring charges were $52 million. The company completed Solutia integration substantially, opened its 30,000-metric-ton acetate-tow China joint-venture facility, and expanded or began capacity projects. It discontinued the Perennial Wood growth initiative and shut down its Photovoltaics product line.
Outlook, risks and contingencies
- For 2014, management forecast diluted EPS of $6.70–$7.00, excluding non-core and non-recurring items; operating cash flow of approximately $1.4 billion; capital spending of approximately $600 million; and an effective tax rate of approximately 29%.
- Management expected global growth slightly above 2% in 2014, including approximately 3% in the U.S., 1% in Europe and 7.5% in China. It anticipated lower net interest expense following repayment of the Solutia term loan.
- Planned investment included Kingsport modernization and expansion and a Therminol capacity expansion in Wales. The company expected the Tritan capacity expansion to be operational in the second half of 2014. In January 2014, it agreed to acquire BP’s global aviation turbine engine oil business, with approximately $100 million in 2013 revenue; completion was expected in the second quarter of 2014.
- Key risks include economic and chemical-cycle volatility; changes in raw-material and energy costs or availability; manufacturing, infrastructure and cybersecurity disruptions; competitive and customer-demand pressures; execution, cost and integration risks for acquisitions and growth projects; foreign-exchange and interest-rate exposure; and environmental, health and safety regulation.
- Environmental reserves totaled $368 million at year-end. Estimated future remediation expenditures ranged from $341 million (best estimate) to $581 million (reasonably possible maximum). The company accrued $215 million for future remediation at shared sites subject to a Monsanto cost-sharing arrangement. Management did not expect environmental matters to materially affect consolidated financial position or cash flows.
- In January 2014, the Texas Commission on Environmental Quality alleged violations of air-quality rules and permits at the Longview site, naming Eastman and Flint Hills Resources as jointly and severally liable. Eastman said it would contest the allegations and did not expect a material financial impact. The company reported that pending legal matters generally were not expected to materially affect its overall financial condition, results or cash flows.
Investor verification points
- Separate the $383 million pension mark-to-market gain and other unusual items from recurring operating performance; review the company’s non-GAAP reconciliations.
- Assess pro forma combined results to distinguish underlying growth from the full-year inclusion of Solutia, and examine continued weakness in Adhesives & Plasticizers.
- Track debt reduction, commercial-paper use, facility availability, pension funding needs and the planned $600 million 2014 capital program alongside the $1.4 billion operating-cash-flow forecast.
- Monitor delivery and returns from capacity expansions, the China joint ventures and the proposed BP aviation-oil acquisition, including integration and execution costs.
- Review environmental remediation estimates, the Monsanto cost-sharing terms and the outcome of the Longview air-quality enforcement matter.
- Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.