Eastman Chemical Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Eastman is a global specialty chemicals manufacturer. Results include Solutia, acquired July 2, 2012; therefore reported year-over-year growth reflects the acquisition as well as underlying performance.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $2.307 billion | $1.821 billion |
| Gross profit | $616 million; 26.7% margin | $431 million; 23.7% margin |
| Operating earnings | $393 million; 17.0% margin | $264 million; 14.5% margin |
| Net earnings attributable to Eastman | $247 million | $158 million |
| Diluted EPS from continuing operations | $1.57 | $1.13 |
| Net cash from operating activities | $5 million | $19 million |
| Capital expenditures | $87 million | $90 million |
Net interest expense rose to $47 million from $19 million, primarily due to acquisition-related borrowing. The effective tax rate was 28%, versus 35%; Q1 2013 included a $10 million benefit, primarily from an R&D tax credit. Company-reported adjusted earnings from continuing operations were $253 million, or $1.62 per diluted share, excluding specified acquisition/integration and restructuring items; these are non-GAAP measures.
Balance sheet, liquidity, and cash flow
- At March 31, cash was $178 million, current assets $2.737 billion, and current liabilities $1.293 billion. Current borrowings were $4 million.
- Total borrowings were $4.783 billion, including $4.779 billion long-term; cash less borrowings implies net debt of approximately $4.605 billion. Debt was largely unchanged from year-end.
- Cash declined $71 million during the quarter, from $249 million to $178 million. Operating cash flow was pressured by working-capital needs and higher interest payments.
- Eastman had a $750 million revolving facility, reduced by $200 million of commercial paper outstanding, and a $250 million accounts-receivable facility; neither facility had direct borrowings. The company reported compliance with debt covenants and substantial facility availability.
- Stockholders’ equity was $3.188 billion. The company repurchased 445,500 shares for $32 million and declared a $0.30-per-share dividend.
Changes and segment performance
Reported sales rose 27%, largely because acquired Solutia businesses contributed $501 million of sales and $64 million of operating earnings. On a pro forma combined basis, sales were nearly flat at $2.307 billion versus $2.319 billion; adjusted operating earnings increased 11% to $403 million from $363 million. Management cited lower raw-material and energy costs, cost synergies, and lower corporate growth-initiative spending, partly offset by lower capacity utilization.
- Additives & Functional Products: Sales $419 million; operating earnings $98 million. Pro forma sales rose 5%; higher volume and lower input costs supported earnings.
- Adhesives & Plasticizers: Sales $345 million; operating earnings $49 million. Lower adhesives-resin demand, particularly packaging, reduced sales and utilization.
- Advanced Materials: Sales $584 million; operating earnings $65 million. Pro forma sales rose 3%, with stronger interlayers demand, particularly in Asia.
- Fibers: Sales $346 million; operating earnings $114 million. Higher prices more than offset higher raw-material and energy costs.
- Specialty Fluids & Intermediates: Sales $607 million; operating earnings $95 million. Pro forma sales declined 5%, while lower input costs supported earnings.
Outlook, risks, and contingencies
- For 2013, management expected diluted EPS from continuing operations of $6.30–$6.40, excluding non-recurring and non-core items; operating cash flow of $1.2–$1.4 billion; capital spending of approximately $525 million; and a full-year reported tax rate of approximately 31%.
- Management expected global growth slightly above 2%, with the U.S. at 2%, Europe approximately flat, and China near 8%. It anticipated continued volatility in commodity prices and raw-material and energy costs.
- Planned cash uses included dividends, debt repayment, growth initiatives, pension funding, and share repurchases. Expected 2013 U.S. defined-benefit pension contributions were approximately $120 million.
- Environmental reserves totaled $385 million. Estimated future remediation costs ranged from a best estimate of $356 million to a reasonably possible maximum of $612 million. Management did not expect these matters to be material to consolidated financial position or cash flows, but noted that resolution could materially affect results in the period recognized.
- Other disclosed risks include uncertain global conditions, commodity cost or supply disruptions, manufacturing and infrastructure interruptions, customer weakness, acquisition integration and synergy execution, and environmental or regulatory costs. Management said pending legal matters were not expected to have a material adverse effect; a DOJ Medicare reimbursement case involving legacy Solutia matters was awaiting an appellate decision expected in 2013.
- Solutia purchase accounting remained subject to finalization of certain tax items, expected in the first half of 2013; management did not expect a material impact.
Most important facts for investors to verify
- Whether pro forma underlying performance and the expected Solutia synergies persist, given reported growth is substantially acquisition-driven.
- Whether operating cash flow converts into the full-year $1.2–$1.4 billion outlook after working-capital demands, interest, capital spending, and pension contributions.
- Debt repayment progress, borrowing costs, and continued covenant and liquidity-facility availability.
- Execution and cost of planned projects, including the China acetate tow joint venture and other capacity expansions.
- Changes in environmental remediation estimates, legacy Solutia exposures, and the outcome of the DOJ litigation.