Eastman Chemical Company — 2022 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Eastman operates four segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. It completed the sale of its adhesives resins business on April 1, 2022, following the 2021 sale of rubber additives. The company reports these divested businesses in “Other” for comparison purposes.
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Sales | $2,784 | $2,653 | $5,498 | $5,062 |
| Gross profit | $670 | $681 | $1,220 | $1,279 |
| EBIT, GAAP | $426 | $(56) | $759 | $333 |
| Adjusted EBIT | $469 | $454 | $835 | $854 |
| Net earnings attributable to Eastman | $256 | $(146) | $491 | $128 |
| Diluted EPS, GAAP | $2.03 | $(1.07) | $3.82 | $0.93 |
| Adjusted diluted EPS | $2.83 | $2.46 | $4.88 | $4.59 |
Sales rose 5% in Q2 and 9% for the first half, mainly from higher selling prices, partly offset by lower volume and foreign-exchange effects. Adjusted EBIT increased 3% in Q2 but declined 2% for the first half. Q2 2021 GAAP results included a $495 million loss on divested businesses, making the GAAP year-over-year comparison unusually large.
Segments and material changes
- AFP: Sales were $835 million in Q2, up 27%; EBIT was $148 million, up 36%. Higher prices and volume supported results.
- AM: Sales were $846 million, up 10%; EBIT was $141 million, down 6%. First-half adjusted EBIT fell 28%, with lower volume and higher manufacturing costs, including effects of the steam line incident.
- CI: Sales were $861 million, up 17%; EBIT was $154 million, up 12%, primarily reflecting higher prices.
- Fibers: Sales were $242 million, up 9%; EBIT was $37 million, unchanged. First-half EBIT declined 26%, affected by lower volume and higher manufacturing costs.
On January 31, a steam line failure disrupted Kingsport operations. Impacted areas were operational by March 31. Incident costs, net of insurance proceeds, were $17 million in Q2 and $42 million in the first half; management excluded these costs from adjusted results. Divestiture proceeds included $998 million received in the first half from the adhesives resins sale; estimated total consideration was $957 million. The sale generated a $5 million gain.
Cash flow, debt, and liquidity
- First-half operating cash flow was $262 million, versus $642 million in 2021. Management cited higher variable-compensation payments, increased working capital and lower earnings excluding divestiture effects.
- Investing activities provided $756 million, including divestiture proceeds; capital expenditures were $247 million. Financing activities used $1.010 billion, including $752 million of share repurchases and $196 million of dividends paid.
- At June 30, cash was $456 million and total borrowings were $4.991 billion; reported net debt was $4.535 billion. The company had $1.50 billion available under its revolving credit facility and no outstanding commercial paper.
- A $500 million five-year term loan was taken in Q2 at a 2.73% variable rate at June 30. The remaining $200 million of notes due August 2022 was repaid in July. The company reported covenant compliance.
- Current assets were $4.003 billion and current liabilities $3.148 billion. Inventory increased to $1.826 billion from $1.504 billion at year-end 2021.
Outlook, risks, and contingencies
Management forecast 2022 adjusted EPS of $9.50–$10.00 and operating cash flow of approximately $1.5 billion. It expected capital expenditures of approximately $700 million, share repurchases in excess of $1 billion, interest expense of approximately $180 million, and depreciation and amortization of approximately $490 million. The forecast assumes a 15%–16% adjusted effective tax rate and does not include non-core or unusual items.
Management cited moderated demand in select end markets, a slower automotive recovery, elevated energy and certain raw-material costs, a strong U.S. dollar, inflation, Russia/Ukraine-related effects, COVID-related lockdowns in China, and supply-chain constraints. Other disclosed risks include operational interruptions, cyber incidents, global-market and currency exposure, growth-project execution, and environmental and regulatory costs.
Environmental reserves totaled $277 million, including $249 million for remediation; estimated undiscounted future remediation costs ranged from $249 million to $464 million. The company retained responsibility for any civil penalty in the Jefferson Hills, Pennsylvania environmental proceeding and said it was vigorously defending the allegations; it considered a penalty below $1 million not reasonably likely. Management did not expect pending legal matters, based on available facts, to materially affect overall results or cash flows.
Most important facts for investors to verify
- Whether pricing continues to offset raw-material, energy, distribution, and manufacturing costs—and whether demand and volumes meet the assumptions behind adjusted EPS guidance.
- Progress in restoring cash generation and controlling working capital, particularly inventory, while funding the planned capital program and buybacks.
- How the steam line incident, divestitures, and business mix affect ongoing segment profitability and comparability.
- Debt and liquidity developments, including the variable-rate term loan, scheduled maturities, and the company’s planned capital allocation.
- Potential changes in environmental remediation estimates and the outcome of the Jefferson Hills proceeding.