Business Context and Reporting Period
Company: Eastman Chemical Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: Eastman is a global chemical company manufacturing chemicals, plastics, and fibers across five operating segments: Coatings, Adhesives, Specialty Polymers, and Inks (CASPI); Fibers; Performance Chemicals and Intermediates (PCI); Performance Polymers; and Specialty Plastics. The 2009 fiscal year was significantly impacted by the global recession, resulting in lower demand and selling prices, partially offset by lower raw material costs.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Sales Revenue | $5,047 million | $6,726 million |
| Operating Earnings | $317 million | $519 million |
| Net Earnings | $136 million | $346 million |
| Diluted EPS | $1.85 | $4.55 |
| Gross Profit Margin | 21% | 17% |
| Cash from Operating Activities | $758 million | $653 million |
| Capital Expenditures | $310 million | $634 million |
| Total Assets | $5,515 million | $5,281 million |
| Long-term Borrowings | $1,604 million | $1,442 million |
| Cash and Cash Equivalents | $793 million | $387 million |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 25% year-over-year, driven by a 13% volume decrease and a 12% price decrease due to the global recession and lower raw material costs.
- Asset Impairments: The company recorded $200 million in asset impairments and restructuring charges in 2009, compared to $46 million in 2008. This included a $179 million impairment related to the discontinuance of the Beaumont, Texas industrial gasification project.
- Segment Performance:
- CASPI & Fibers: Operating earnings increased despite revenue declines, aided by lower raw material costs and cost reduction actions.
- PCI & Performance Polymers: Operating earnings declined significantly due to lower selling prices, lower capacity utilization, and operational challenges at the South Carolina PET facility.
- Specialty Plastics: Operating earnings decreased due to lower volume and capacity utilization.
- Cash Flow: Operating cash flow increased to $758 million, supported by a change in tax accounting method and reduced working capital, despite a $181 million pension contribution.
Guidance, Outlook, and Risks
- 2010 Outlook: Management expects volume increases due to economic recovery. Raw material and energy costs are expected to be higher than 2009. Capital spending is projected between $250 million and $275 million.
- Earnings Guidance: Earnings per share are expected to be 20% above 2009 levels, excluding charges related to asset impairments, restructuring, and cost reduction actions.
- Strategic Initiatives:
- Operational start-up of the Korean cellulose acetate tow facility (Q1 2010).
- Commercialization of Eastman Tritan™ copolyester (Q1 2010).
- Improved operational performance at the South Carolina PET facility.
- Risks: Continued adverse global economic conditions, volatility in raw material and energy costs, and potential disruptions to manufacturing operations or infrastructure.
Key Facts for Investor Verification
- Beaumont Project Discontinuation: Verify the impact of the $179 million impairment charge on the Beaumont, Texas industrial gasification project and the remaining book value of $56 million.
- Performance Polymers Turnaround: Monitor the operational recovery of the South Carolina PET facility and its ability to produce ParaStar™ PET at nameplate capacity to reduce segment losses.
- Raw Material Hedging: Review the effectiveness of hedging strategies given the expectation of higher raw material and energy costs in 2010.
- Pension Funding: Note the $181 million contribution to the U.S. defined benefit pension plan in 2009 and the expectation of lower funding requirements in 2010.
- Accounting Change: Verify the impact of the new accounting guidance on the accounts receivable securitization program, which will reclassify $200 million from operating to financing cash flows starting Q1 2010.