Eastman Chemical Company — 2019 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter filing. Eastman is a global specialty chemicals and advanced materials company, organized into Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. Approximately 60% of 2019 sales were generated outside the United States and Canada.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | $9.273 billion | $10.151 billion |
| Gross profit | $2.234 billion | $2.479 billion |
| EBIT | $1.120 billion | $1.552 billion |
| Adjusted EBIT (non-GAAP) | $1.389 billion | $1.633 billion |
| Net earnings attributable to Eastman | $759 million | $1.080 billion |
| Diluted EPS | $5.48 | $7.56 |
| Adjusted diluted EPS (non-GAAP) | $7.13 | $8.20 |
| Cash from operating activities | $1.504 billion | $1.543 billion |
| Free cash flow (non-GAAP) | $1.079 billion | $1.080 billion |
| Capital expenditures | $425 million | $528 million |
| Total borrowings at year-end | $5.782 billion | $6.168 billion |
| Cash and cash equivalents at year-end | $204 million | $226 million |
Gross margin was approximately 24.1% (2018: 24.4%); reported EBIT margin was approximately 12.1% (2018: 15.3%). Adjusted EBIT was $1.389 billion after excluding $269 million of non-core and unusual EBIT items, including pension mark-to-market losses and impairment and restructuring charges.
Sales fell 9%, reflecting lower volume/product mix (4%), lower prices (4%), and unfavorable currency (1%). Lower demand and pricing pressures weighed on earnings; lower raw-material costs partly offset these effects. Reported EBIT declined 28%, while adjusted EBIT declined 15%. Operating cash flow was broadly stable, and free cash flow was essentially unchanged as lower capital spending offset lower operating cash flow.
Segment results
| Segment | 2019 sales | 2019 EBIT | Change versus 2018 |
|---|---|---|---|
| AFP | $3.273 billion | $496 million | Sales down 10%; EBIT down 22% |
| AM | $2.688 billion | $517 million | Sales down 2%; EBIT up 2% |
| CI | $2.443 billion | $170 million | Sales down 14%; EBIT down 45% |
| Fibers | $869 million | $194 million | Sales down 5%; EBIT down 25% |
Material changes, outlook, and risks
- Operating environment: Management cited weaker global demand, trade-related pressure, lower selling prices, and currency headwinds. CI was particularly affected by lower prices and competition; Fibers faced lower acetate-tow volume. AM premium-product growth partly offset weaker standard-product demand.
- Impairments and restructuring: Eastman recorded $126 million of impairment and restructuring charges, including a $45 million goodwill impairment in crop protection, a $27 million impairment tied to plans to discontinue certain Singapore production by the end of 2020, and $45 million in severance charges. Up to $50 million of additional restructuring charges were expected in 2020; the Singapore actions were projected to generate about $25 million in annual earnings benefit, mostly beginning in 2021.
- Portfolio actions: AFP was evaluating strategic alternatives for businesses and product lines representing about one-third of segment revenue, including certain adhesives resins, tire additives, and animal nutrition products. Alternatives included restructuring, partnerships, or divestitures.
- 2020 outlook: Management forecast adjusted EPS of $7.20–$7.60 and free cash flow of $1.0–$1.1 billion. Assumptions included higher volume, $20–$40 million of operating-cost reductions, lower pension and depreciation costs, and offsets from weaker margins in CI and specified AFP products, higher variable compensation, and a stronger U.S. dollar. Other assumptions included about $215 million interest expense, $560 million depreciation and amortization, $450–$475 million capital spending, debt reduction greater than $400 million, and continued share repurchases.
- Uncertainty in forecast: The outlook excluded possible effects of the then-recent coronavirus outbreak, including weaker demand, supply-chain disruption, and reduced site or facility availability. The forecast excluded non-core and unusual items and was not reconciled to GAAP earnings.
- Liquidity and capital allocation: The company had a $1.50 billion revolving credit facility, no borrowings under it at year-end, and approximately $1.75 billion of available borrowing capacity across credit and receivables facilities. It repurchased $325 million of stock and paid $343 million of dividends in 2019. A $0.66-per-share dividend was declared for the first quarter of 2020.
- Other risks and contingencies: Key exposures include economic and trade conditions, raw-material and energy costs and availability, foreign exchange, operational interruptions, cyber risks, customer concentration, environmental regulation, and acquisition and growth-project execution. Environmental reserves totaled $287 million; estimated undiscounted remediation costs ranged from $260 million to $487 million. Management did not expect pending litigation, based on available information, to materially affect overall financial condition, results, or cash flows.
Important facts for investors to verify
- Review the reconciliation and composition of adjusted EPS, adjusted EBIT, and free cash flow, and compare them with the GAAP results.
- Assess whether the 2020 earnings and cash-flow assumptions remain achievable, particularly volume recovery, product margins, currency, cost reductions, and the excluded coronavirus impact.
- Track CI and AFP pricing and profitability, the AFP strategic review, and execution and savings from the Singapore production changes.
- Monitor debt repayment, liquidity-facility availability, receivables factoring, and the balance among dividends, repurchases, investment, and debt reduction.
- Evaluate crop-protection goodwill and environmental reserves in light of regulatory developments and the assumptions used in impairment and remediation estimates.