Eastman Chemical Company — Form 10-Q Summary
Reporting period: Third quarter and first nine months ended September 30, 2013. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Eastman completed its Solutia acquisition on July 2, 2012, so year-to-date reported comparisons include Solutia for only part of 2012; pro forma combined results provide additional context.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Sales | $2,338 | $2,259 | $7,085 | $5,933 |
| Gross profit | $689 | $525 | $1,982 | $1,437 |
| Operating earnings | $479 | $263 | $1,300 | $844 |
| Earnings attributable to Eastman | $308 | $154 | $819 | $491 |
| Diluted EPS | $1.97 | $0.99 | $5.23 | $3.35 |
| Cash from operating activities | — | — | $794 | $688 |
Reported gross margin was approximately 29.5% in Q3 2013 versus 23.2% in Q3 2012; reported operating margin was approximately 20.5% versus 11.6%. These reported comparisons are affected by unusual items. Excluding the items identified by the company, Q3 operating earnings were $405 million versus $397 million, and first-nine-month operating earnings were $1,262 million versus $993 million. Adjusted continuing-operations diluted EPS was $1.68 versus $1.57 for Q3 and $5.09 versus $4.20 for the first nine months.
At September 30, 2013, cash was $222 million, total borrowings were $4,429 million, current assets were $2,767 million and current liabilities were $1,323 million. Borrowings decreased from $4,783 million at year-end 2012. The company had $450 million available under its revolving credit facility and $100 million under its receivables facility; it reported compliance with debt covenants. First-nine-month capital expenditures were $312 million. Dividends declared were $0.30 per share in Q3 and $0.90 per share for the first nine months. The company repurchased 1.58 million shares for approximately $113 million during the first nine months.
Material changes and operating trends
- Q3 sales grew 3%; higher volumes in Additives & Functional Products and Advanced Materials were largely offset by lower Adhesives & Plasticizers sales. First-nine-month reported sales rose 19%, substantially reflecting the Solutia acquisition. On a pro forma combined basis, first-nine-month sales increased 2%, to $7.085 billion from $6.951 billion.
- Adjusted Q3 operating earnings rose 2%; reported earnings included an $86 million OPEB mark-to-market gain, while Q3 2012 included $75 million of acquired-inventory fair-value costs. First-nine-month adjusted operating earnings increased 27%; pro forma combined adjusted operating earnings increased 9%.
- Segment results were mixed. Q3 operating earnings increased in Additives & Functional Products, Advanced Materials and Fibers, but declined in Adhesives & Plasticizers and Specialty Fluids & Intermediates. Adhesives & Plasticizers faced weaker resin demand, competitive pricing and lower capacity utilization.
- First-nine-month operating cash flow increased $106 million year over year, reflecting stronger cash earnings and the absence of prior-year acquisition-related payments, partly offset by working-capital needs and higher taxes and interest. Investing cash outflow was far lower than in 2012, which included Solutia acquisition spending.
Outlook, commentary and risks
Management forecast 2013 operating cash flow of approximately $1.3 billion, capital spending of approximately $500 million and a full-year tax rate near 30%. It expected full-year diluted EPS from continuing operations of $6.30–$6.40, excluding non-core or non-recurring items. The outlook acknowledged normal Q4 seasonality, uncertainty in global growth and continued challenges in Adhesives & Plasticizers. Management expected global growth slightly above 2%, with the U.S. near 2%, Europe near zero and China near 8%.
- Management cited volatile commodity, raw-material and energy prices; competitive pressures and demand softness; and possible manufacturing, supply-chain or infrastructure disruptions as risks. Hedging and pricing strategies cannot eliminate commodity and currency exposures.
- Environmental contingencies totaled $373 million. Estimated remediation expenditures ranged from a best estimate of $344 million to a reasonably possible maximum of $600 million. Management did not expect these matters to be material to consolidated financial position or cash flows, though outcomes could materially affect results in the period recognized.
- Annual goodwill testing found no impairment. However, acquired performance films and rubber chemicals reporting units had relatively limited fair-value headroom: 11% and 16%, respectively. A 1% increase in the discount rate would put performance films’ estimated fair value 2% below carrying value.
- Q3 included an $86 million actuarial OPEB gain following a benefits change and interim remeasurement, primarily reflecting a higher discount rate. The plan change also reduced the benefit obligation by approximately $47 million, to be amortized as a prior-service credit over eight years.
- Other notable items included $24 million of first-nine-month impairment and restructuring charges, including costs associated with closing a German Photovoltaics facility. The company reported no material change in market risks, effective disclosure controls, and no material adverse effect expected from pending legal matters based on currently available facts.
Important facts for investors to verify
- How much of earnings growth is supported by underlying operations versus the $86 million OPEB gain and other adjustments; review both GAAP and company-defined non-GAAP reconciliations.
- Whether pro forma combined growth and expected Solutia integration benefits translate into sustained earnings and cash generation.
- Progress against the $1.3 billion operating-cash-flow, $500 million capital-spending and $6.30–$6.40 adjusted EPS outlook, including the assumptions behind the EPS range.
- Adhesives & Plasticizers demand, pricing, competitive supply and utilization trends, and the timing and returns of announced capacity expansions.
- Performance films goodwill sensitivity, environmental remediation estimates and potential changes in pension/OPEB assumptions or obligations.
- Debt repayment, available borrowing capacity, planned pension contributions, share repurchases and the effect of these uses of cash on liquidity.