Eastman Chemical Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparisons are with Q1 2018 unless stated otherwise. Amounts are in millions of dollars, except per-share data.
Business context and operating results
Eastman reports four segments: Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. Sales declined across all four segments. Management cited weaker volumes and customer inventory destocking, lower prices in some businesses, unfavorable currency effects, and global economic and trade uncertainty.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $2,380 | $2,607 | Down 9% |
| Gross profit | $574 | $581 | Down 1% |
| EBIT | $320 | $409 | Down 22% |
| Net earnings attributable to Eastman | $209 | $290 | Down 28% |
| Diluted EPS | $1.49 | $2.00 | Down 26% |
| Adjusted EBIT (non-GAAP) | $352 | $459 | Down 23% |
| Adjusted diluted EPS (non-GAAP) | $1.77 | $2.23 | Down 21% |
Reported gross margin was approximately 24.1%, versus 22.3% in Q1 2018; however, the prior-year figure included coal gasification incident costs. Excluding that unusual item, Q1 2018 gross profit was $668 million, making the comparable gross profit decline 14%. Reported EBIT margin was approximately 13.4% versus 15.7%; adjusted EBIT margin was approximately 14.8% versus 17.6%.
| Segment | Sales, 2019 (change) | EBIT, 2019 (change) |
|---|---|---|
| AFP | $855 (down 9%) | $146 (down 17%) |
| AM | $657 (down 5%) | $102 (down 24%) |
| CI | $655 (down 10%) | $73 (up 4%) |
| Fibers | $213 (down 13%) | $42 (down 2%) |
CI’s reported EBIT rose against Q1 2018, which included coal gasification incident costs; excluding those prior-year costs, CI EBIT declined 18%. Adjusted net earnings were $248 million, or $1.77 per diluted share, compared with $324 million, or $2.23, in Q1 2018.
Cash flow, debt and liquidity
- Operating cash flow was a use of $5 million, compared with a use of $35 million. Management said the prior-year period included $110 million of incident-related operating cash use; excluding that, 2019 operating cash flow worsened by $80 million, mainly from lower earnings and higher working capital, partly offset by lower tax payments.
- Capital expenditures were $106 million; free cash flow, as defined by Eastman (operating cash flow less net capital expenditures), was negative $111 million, versus negative $113 million.
- Cash was $195 million at March 31, down from $226 million at December 31, 2018. Total borrowings were $6.464 billion, up from $6.168 billion; $862 million was due within one year. Cash and total debt are reported gross, without a company-provided net-debt figure here.
- Current assets were $3.551 billion and current liabilities $2.352 billion at quarter-end (current ratio approximately 1.51). A $1.50 billion revolving credit facility had no borrowings outstanding; commercial paper borrowings were $502 million. Eastman reported approximately $1.75 billion available under the credit and A/R facilities and compliance with debt covenants.
- Financing activities included $125 million of share repurchases and $87 million of dividends paid. Debt reduction was partly offset by increased commercial paper and other borrowings.
Guidance, management commentary and risks
- For 2019, management expected adjusted EPS to be 6%–10% above 2018 and free cash flow to exceed $1.1 billion. The company stated the forecast excludes non-core, unusual, or non-recurring items and did not reconcile it to projected GAAP earnings.
- Assumptions included $40 million of savings from improvement and cost-reduction initiatives, interest expense of about $225 million, an approximately 17% full-year effective tax rate, depreciation and amortization of about $620 million, and capital expenditures of $475–$500 million. Management anticipated lower debt reduction than in 2018 and increased share repurchases versus 2018.
- Expected benefits included specialty businesses and innovative high-margin products, cost management, and cost savings. Headwinds included slow global growth, the U.S.–China trade dispute, a stronger U.S. dollar, and higher pension costs. Management also anticipated relatively unchanged manufacturing costs.
- Q1 2019 included $32 million of restructuring charges, principally $28 million for severance tied to business improvement and cost-reduction initiatives. Management expected further 2019 charges and approximately $50 million of total savings, mostly recognized in 2019.
- Environmental reserves totaled $294 million at quarter-end; estimated future environmental expenditures ranged from $269 million to $507 million. Management did not expect these matters to materially affect future liquidity or financial condition, but noted recognized uncertainties could materially affect results in the period incurred.
- Other risks include raw-material and energy price or supply volatility, manufacturing and cyber disruptions, foreign exchange and trade exposure, customer concentration, regulation and environmental compliance costs, and execution risks for growth initiatives and acquisitions. Management did not believe pending legal matters would materially affect overall financial condition, results, or cash flows based on currently available facts.
Most important facts for investors to verify
- Whether sales volumes, destocking and segment profitability improve, particularly in AFP and AM, and whether CI’s underlying decline persists.
- Whether the 2019 adjusted EPS and free-cash-flow targets remain achievable given negative Q1 free cash flow and working-capital use.
- Progress and realized savings from restructuring, including the expected $50 million savings and associated charges.
- Debt maturities, short-term borrowing levels, liquidity availability, and the implications of ongoing repurchases and dividends.
- Developments in environmental estimates, trade conditions, foreign exchange, raw-material costs, and operational disruption risks.