Eastman Chemical Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; dollar amounts are in millions unless stated otherwise.
Business context and financial performance
Eastman operates in Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. COVID-19-related demand weakness, lower capacity utilization, and inventory reductions materially affected results.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Sales | $1,924 | $2,363 | $4,165 | $4,743 |
| Gross profit | $371 | $589 | $948 | $1,163 |
| Gross margin | 19.3% | 24.9% | 22.8% | 24.5% |
| EBIT | $54 | $371 | $422 | $691 |
| Adjusted EBIT (non-GAAP) | $195 | $389 | $577 | $741 |
| Net earnings attributable to Eastman | $27 | $258 | $285 | $467 |
| Diluted EPS | $0.20 | $1.85 | $2.09 | $3.34 |
| Operating cash flow | Not stated separately | Not stated separately | $607 | $417 |
| Free cash flow (non-GAAP) | Not stated separately | Not stated separately | $411 | $219 |
Q2 sales fell 19%; first-half sales fell 12%. For the first half, management attributed the $578 sales decline mainly to lower volume/product mix ($299), lower prices ($251), and currency ($28). Q2 earnings included a $31 income tax benefit; the company reported a $1 pretax loss. Adjusted net earnings were $116 million, or $0.85 per diluted share, in Q2 and $393 million, or $2.88 per diluted share, for the first half; these are non-GAAP measures.
Liquidity, debt, and cash flow
At June 30, cash was $704, total borrowings were $6,133, and net debt was $5,429, down $149 from year-end 2019. Borrowings due within one year were $702, versus $171 at December 31, 2019. First-half operating cash flow of $607 exceeded capital expenditures of $196, producing reported free cash flow of $411. Management said the increase in operating cash flow primarily reflected more favorable working-capital changes, partly offset by lower earnings.
Eastman borrowed $250 under a new 364-day term loan in April; $249 remained outstanding at quarter-end. It had $268 of commercial paper outstanding and approximately $1.50 billion available under its revolving credit facility, with no facility borrowings outstanding. The company complied with applicable covenants. Covenant amendments added a conditional restriction on share repurchases through June 30, 2021 if specified financial ratios are exceeded.
Material changes and unusual items
- Q2 asset impairment and restructuring charges were $141, compared with $18 a year earlier; first-half charges were $155 versus $50. The main item was a $123 impairment of AFP tire-additive tradenames, reflecting weaker transportation demand and competitive pricing.
- Q2 AFP reported a $56 EBIT loss, including the impairment; adjusted for non-core charges, AFP EBIT was $72, down from $147. AM and CI EBIT also declined, while Fibers sales were nearly flat.
- Demand increased for some care chemicals and adhesives resins used in consumables and personal-care applications, partly offsetting weakness in transportation- and aviation-related products. Temporary idling and lower utilization raised manufacturing costs across several segments.
- First-half receivables factoring rose to $868 from $270 in the prior-year period. The program is off-balance-sheet and uncommitted; the company estimated $214 of sold receivables would otherwise have been outstanding at June 30.
Outlook, risks, and contingencies
Management withdrew its prior 2020 earnings and cash-flow forecasts because the continuing effects of COVID-19 were uncertain. Its stated 2020 expectations were free cash flow above $1 billion, net-debt reduction above $600 million, approximately $150 million of cost reductions, and share repurchases limited to offsetting dilution, with none planned in the second half. Capital expenditures were expected to be $325–$375 million.
Management cited risks from prolonged economic and market uncertainty, raw-material and energy cost or supply volatility, customer weakness, manufacturing and supply-chain disruptions, cyber incidents, international and trade exposure, and regulatory and environmental costs. Goodwill for the tire-additives reporting unit had a carrying value of $718 and fair value approximating carrying value; further deterioration could lead to impairment. Environmental reserves were $287, with estimated undiscounted remediation costs ranging from $259 to $493. The company said pending legal matters were not expected, based on available facts, to materially affect its financial condition, results, or cash flows.
Most important facts for investors to verify
- Whether demand, utilization, pricing, and margins recover from COVID-19-driven weakness, particularly in AFP tire additives and AM transportation markets.
- Progress against management’s cash-flow, net-debt reduction, and cost-reduction targets, and the effects of working-capital programs and receivables factoring.
- Debt maturities and liquidity, covenant compliance, and the conditional share-repurchase restriction.
- Whether further impairment charges arise in tire additives goodwill or intangible assets, and whether planned closures and restructuring deliver projected benefits and costs.
- Potential changes to environmental reserves, tax exposures, and other contingencies.