Eastman Chemical Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Eastman reports four segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Sales | $2,363 | $2,621 | $4,743 | $5,228 |
| Gross profit | $589 | $704 | $1,163 | $1,285 |
| EBIT | $371 | $491 | $691 | $900 |
| Net earnings attributable to Eastman | $258 | $344 | $467 | $634 |
| Diluted EPS | $1.85 | $2.39 | $3.34 | $4.39 |
- Sales fell 10% in Q2 and 9% for the first six months. For the first six months, lower volume/product mix reduced sales by $281, lower prices by $117, and foreign exchange by $87.
- Q2 gross margin was approximately 24.9%, versus 26.9% a year earlier; first-half gross margin was approximately 24.5%, broadly level with 24.6% in 2018. GAAP EBIT declined 24% in Q2 and 23% in the first half.
- Management’s adjusted EBIT, excluding specified non-core and unusual items, was $389 in Q2 versus $447, and $741 in the first half versus $906. Adjusted diluted EPS was $1.99 versus $2.22 in Q2 and $3.76 versus $4.45 for the first half. These are non-GAAP measures.
- Operating cash flow was $417 for the first half, compared with $408; capital expenditures were $198, yielding reported free cash flow of $219 versus $229. The company attributed the underlying operating-cash-flow decline, excluding 2018 incident-related cash effects, mainly to lower earnings, partly offset by working-capital changes.
- At June 30, cash was $186; total borrowings were $6,355, including $731 due within one year. Borrowings were $6,168 at year-end 2018. The current ratio was approximately 1.58, compared with 1.82 at year-end. Available borrowings under the revolving credit and A/R facilities were approximately $1.75 billion; the company reported covenant compliance.
- Environmental loss-contingency reserves totaled $292, including $267 for remediation. Total assets were $16,256 and total equity $5,946.
Material changes and operating drivers
- Sales and EBIT declined across all segments on a reported basis. AFP sales fell 13% in Q2; AM 5%; CI 11%; and Fibers 12%. AFP and Fibers were especially pressured by weaker demand and trade-related effects; CI faced lower selling prices and competition. AM’s adjusted Q2 EBIT was slightly higher than the prior-year comparable period.
- Management cited global trade pressures, weaker end-market demand, reduced automotive sales, lower acetate tow demand, and currency headwinds. Lower raw-material costs and cost management partly offset these effects.
- 2018 comparisons included coal-gasification incident insurance proceeds and other incident-related benefits. In Q2 2018, incident insurance in excess of costs boosted results by $56; the first-half comparison also includes the incident’s effects. In 2019, restructuring charges were $18 in Q2 and $50 for the first half, primarily severance and related costs.
- Q2 2019 dividends declared were $0.62 per share, compared with $0.56. First-half share repurchases totaled $250, and the company reported $498 spent under its $2 billion repurchase authorization since its approval.
Outlook, risks, and notable items
- Management forecast 2019 adjusted EPS of $7.50–$8.00 and free cash flow of up to $1.1 billion. Assumptions included approximately $40 of cost savings from improvement initiatives, interest expense of about $225, a full-year reported effective tax rate of about 17%, depreciation and amortization of about $620, and capital expenditures of $450–$475. Management expected debt reduction to be lower than in 2018 and share repurchases similar to 2018. The forecast excludes non-core, unusual, or non-recurring items and was not reconciled to GAAP earnings.
- Key stated risks include weak global growth and trade tensions, foreign-exchange movements, raw-material and energy cost or supply volatility, manufacturing disruptions and cybersecurity events, customer concentration, growth-project execution, and regulatory or environmental costs. Management warned that environmental matters could affect results when resolved, though it did not expect them to materially impair future liquidity or financial condition.
- Other commitments include approximately $2.7 billion of supplier purchase obligations over roughly 30 years and operating lease liabilities with a present value of $202. The company also sold $270 of receivables through factoring agreements in the first half; management described these sales as without recourse.
- The filing reported ordinary-course litigation, including legacy Solutia tort matters for which Monsanto/Bayer indemnification may apply. Management did not expect pending matters, based on currently available facts, to materially affect overall financial condition, results, or cash flows.
Important facts for investors to verify
- Whether the sales and adjusted-earnings declines persist, particularly in AFP, CI, and Fibers, and how much results depend on price, volume, trade conditions, and currency.
- Progress toward the $7.50–$8.00 adjusted EPS and up-to-$1.1-billion free-cash-flow outlook, including delivery of stated savings and capital-spending plans.
- Near-term refinancing and liquidity needs given $731 of borrowings due within one year, alongside facility availability and cash generation.
- The scale and timing of environmental remediation payments, and any material developments in litigation or manufacturing and supply risks.
- The effect of restructuring and other excluded items on reported results; adjusted measures are non-GAAP and should be assessed alongside GAAP figures.