Eastman Chemical Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial amounts are in U.S. dollars; unless otherwise stated, dollar amounts are millions. Eastman operates in Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Sales | $2,653 | $1,924 | $5,062 | $4,165 |
| Gross profit | $681 | $371 | $1,279 | $948 |
| GAAP EBIT | $(56) | $54 | $333 | $422 |
| Adjusted EBIT | $454 | $195 | $854 | $577 |
| Net earnings (loss) attributable to Eastman | $(146) | $27 | $128 | $285 |
| Adjusted net earnings | $339 | $116 | $632 | $393 |
| GAAP diluted EPS | $(1.07) | $0.20 | $0.93 | $2.09 |
| Adjusted diluted EPS | $2.46 | $0.85 | $4.59 | $2.88 |
- Sales rose 38% in Q2 and 22% in the first half. Management attributed growth primarily to stronger volumes and product mix, higher selling prices, and foreign exchange. Q2 adjusted EBIT increased 133%; first-half adjusted EBIT increased 48%.
- Gross margin was approximately 25.7% in Q2 versus 19.3% a year earlier; first-half gross margin was approximately 25.3% versus 22.8%. These are calculated from reported sales and gross profit.
- The Q2 GAAP loss primarily reflects a $495 million pretax loss on the rubber additives business classified as held for sale. The company’s adjusted measures exclude this and other specified non-core items; they are non-GAAP measures and should be considered alongside GAAP results.
- Segment sales increased year over year across all four segments. Adjusted EBIT rose in AFP, AM, and CI; Fibers EBIT declined to $37 million in Q2 from $46 million, pressured by lower selling prices and higher raw-material and energy costs. AFP’s reported Q2 EBIT loss of $368 million includes the held-for-sale loss; adjusted AFP EBIT was $132 million.
Cash flow, debt, and liquidity
- First-half operating cash flow was $642 million, compared with $607 million. Capital expenditures were $198 million, resulting in reported free cash flow of $444 million, versus $411 million.
- At June 30, cash and cash equivalents were $609 million; total borrowings were $5.548 billion and net debt was $4.939 billion. Total borrowings were $5.618 billion and net debt $5.054 billion at December 31, 2020.
- Eastman had access to a $1.50 billion revolving credit facility, with no facility borrowings outstanding, and $25 million of commercial paper outstanding. It reported compliance with applicable credit-facility covenants.
- First-half dividends paid were $188 million and share repurchases were $140 million. The company said it planned to repay $300 million of notes maturing in December 2021 using available cash.
- Working capital increased, including higher receivables and inventories; management cited stronger business conditions. The company also sold $587 million of receivables through its uncommitted, without-recourse factoring program during the first half.
Material changes and business developments
- On June 9, Eastman agreed to sell specified AFP global tire-additives products, assets, and technology, excluding Impera and other performance resins. Consideration is $725 million cash at closing plus up to $75 million tied to post-closing performance through 2023, subject to adjustments and conditions. Closing was expected in the second half of 2021; the filing does not establish that the transaction had closed.
- The sale generated the $495 million preliminary loss and resulted in held-for-sale classification. The balance sheet reports $793 million of assets held for sale and $97 million of related liabilities; the note provides disposal-group assets of $1.283 billion before the fair-value reduction.
- Eastman completed its acquisition of 3F Food & Feed in April for a preliminary purchase price of approximately $65 million, net of cash acquired.
- Sales recovery reflected improving demand following COVID-19 disruptions in 2020. Management cited stronger end-market demand, higher utilization, and more favorable specialty-product mix, while noting higher raw-material, energy, and distribution costs and planned maintenance spending.
Outlook, risks, and contingencies
- For 2021, management expected adjusted EPS of $8.80–$9.20 and free cash flow greater than $1.1 billion. It also expected net debt reduction of approximately $300 million, share repurchases of approximately $400 million, and capital expenditures of $500–$525 million.
- Outlook assumptions included continued economic recovery, higher sales volume and specialty-product growth, improved capacity utilization, a 15%–16% adjusted effective tax rate, approximately $200 million of interest expense, and completion of the rubber-additives divestiture in the second half. Management cautioned that timing of price increases might not fully offset higher raw-material, energy, and distribution costs. Forecasts exclude non-core items and were not reconciled to GAAP because doing so would require unreasonable effort.
- Environmental contingencies totaled $286 million at June 30, including $258 million for remediation. Estimated undiscounted remediation costs ranged from $258 million to $482 million. Management did not expect these matters to materially affect future liquidity or financial position, but noted uncertainty in remediation requirements and estimates.
- Legal proceedings include product liability, asbestos, intellectual-property, environmental, and other matters. Management did not believe currently pending matters would materially adversely affect overall financial condition, results, or cash flows. The filing also describes potential Solutia legacy tort exposure if claims are not covered by Monsanto/Bayer indemnification.
- Principal disclosed risks include economic and COVID-19 uncertainty; raw-material and energy price or supply volatility; global trade, currency, and political risks; manufacturing disruptions, including cyber incidents; execution and returns on growth projects and acquisitions; and increasing environmental, climate, and regulatory costs. Management reported no material change in market risks from its 2020 Form 10-K.
Important facts for investors to verify
- Whether the tire-additives divestiture closed as expected, final proceeds and adjustments, and whether performance-based consideration is earned.
- Progress against 2021 adjusted EPS, free-cash-flow, net-debt, repurchase, and capital-spending expectations, and the assumptions underpinning those targets.
- How much of sales and earnings improvement reflects sustainable volume and mix versus price increases, input-cost movements, and recovery comparisons against 2020.
- Working-capital cash requirements and continued use and availability of receivables factoring and supplier-finance arrangements.
- Changes in environmental remediation estimates, litigation exposure, and restructuring costs, including the Singapore and facility-closure programs.