Eastman Chemical Company — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results; amounts in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Sales | $2,324 | $2,784 | $4,736 | $5,498 |
| Gross profit | $584 | $670 | $1,113 | $1,220 |
| EBIT | $323 | $426 | $569 | $759 |
| Net earnings attributable to Eastman | $272 | $256 | $406 | $491 |
| Diluted EPS | $2.27 | $2.03 | $3.39 | $3.82 |
| Adjusted EBIT (non-GAAP) | $336 | $469 | $619 | $835 |
| Adjusted net earnings (non-GAAP) | $238 | $358 | $433 | $627 |
| Adjusted diluted EPS (non-GAAP) | $1.99 | $2.83 | $3.62 | $4.88 |
Gross margin was approximately 25.1% in Q2, versus 24.1% a year earlier; first-half gross margin was 23.5%, versus 22.2%. EBIT margin was approximately 13.9% in Q2 (15.3% prior year) and 12.0% for the first half (13.8% prior year). GAAP Q2 earnings benefited from a $3 million income-tax benefit, including a favorable effect from enacted state tax changes; adjusted results exclude specified unusual and non-core items.
First-half cash from operations was $408, up from $262. Investing used $498, including $413 of capital expenditures and $76 for an acquisition; financing provided $4. Cash declined $83 to $410. Operating cash flow less capital expenditures was approximately negative $5, compared with positive $15 in the prior-year first half.
At June 30, borrowings totaled $5,437, cash was $410, and management-defined net debt was $5,027, up from $4,658 at year-end 2022. Current assets were $3,671 and current liabilities $2,787. The $1.50 billion revolving credit facility was undrawn, and the company reported compliance with applicable debt covenants. Dividends declared were $0.79 per share for Q2; $50 was spent on share repurchases in the first half.
Material changes and business drivers
- Sales fell 17% in Q2 and 14% in the first half, chiefly from lower volumes; first-half sales also reflected the prior-year adhesives resins divestiture. Lower volume, reduced capacity utilization, and higher pension costs weighed on adjusted EBIT. Lower raw-material, energy, and distribution costs partly offset the pressure.
- Advanced Materials Q2 sales declined 13% and EBIT declined 30%; management cited weak specialty-plastics demand and customer destocking, partly offset by stronger automotive-related interlayers demand and higher prices.
- Additives & Functional Products sales declined 19% and EBIT 13% in Q2, mainly due to demand deceleration and destocking.
- Chemical Intermediates sales declined 33% and EBIT 73%, reflecting lower volumes and prices, competitive pressure, and weaker demand.
- Fibers sales increased 33% and EBIT increased 186%, primarily due to higher acetate tow selling prices. First-half Fibers results included $23 of accelerated depreciation and $6 of restructuring charges related to a facility closure.
- The company reorganized certain product lines between segments in Q1 2023; comparative segment figures were recast. It also acquired Dalian, a supplier of automotive and architectural films, for approximately $75 net of cash acquired.
Outlook, risks, and unusual items
- Management expects 2023 capital expenditures of approximately $800, including spending on the Kingsport plastic-to-plastic molecular recycling facility and other growth and modernization projects. The filing does not provide quantitative earnings guidance.
- Management stated that operating cash flow and other liquidity sources are expected to meet known requirements, and emphasized maintaining an investment-grade financial profile. It cautioned that cash flows are exposed to demand, product pricing, raw-material availability and costs, capacity utilization, and global operating risks.
- Higher interest rates and borrowings increased net interest expense 20% in Q2 and 16% in the first half. Commercial paper outstanding was $603 at a 5.45% weighted average rate; the $300 variable-rate 2024 term loan carried a 6.37% rate.
- First-half results included $22 of impairment and restructuring charges, $23 of accelerated depreciation, and $8 of net steam-line incident insurance proceeds. Q2 included a $51 tax benefit from state tax-law changes; first-half tax expense also reflected a $23 increase related to state guidance. These items affect comparability with prior periods.
- Environmental reserves totaled $290, including $280 long-term. Estimated future environmental remediation expenditures ranged from a best estimate/minimum of $258 to a maximum of $500. Management does not expect environmental matters or pending legal proceedings, including the tentatively settled Jefferson Hills proceeding, to materially affect overall financial condition, results, or cash flows, while noting that environmental uncertainties could affect results when resolved.
- Other stated risks include foreign-exchange, commodity-price and interest-rate exposure, operational disruption, cybersecurity, economic slowdown, and legal and regulatory matters. The company uses hedging instruments and does not enter into derivatives for speculation.
Important facts for investors to verify
- Whether volume and destocking conditions improve, particularly in Advanced Materials, AFP, and Chemical Intermediates, and whether capacity utilization recovers.
- Whether the expected $800 of 2023 capital spending, including the molecular-recycling project, remains on plan and is funded alongside dividends and debt obligations.
- How the higher debt balance, floating-rate borrowings, and commercial-paper costs affect future interest expense and liquidity.
- How much reported cash generation depends on receivables factoring: $1.4 billion of invoices were sold in the first half; the company estimated $409 of such receivables would have remained outstanding at June 30 had they not been sold.
- Developments in environmental remediation estimates, legal matters, and the tax-related adjustments affecting reported earnings.