Eastman Chemical Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results are compared with the same 2018 periods. Dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Sales | $2,325 | $2,547 | $7,068 | $7,775 |
| Gross profit | $574 | $728 | $1,737 | $2,013 |
| EBIT | $367 | $517 | $1,058 | $1,417 |
| Net earnings attributable to Eastman | $266 | $412 | $733 | $1,046 |
| Diluted EPS | $1.93 | $2.89 | $5.27 | $7.28 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $833 | $803 |
| Free cash flow (non-GAAP) | Not separately provided for quarter | Not separately provided for quarter | $525 | $487 |
- Sales fell 9% in both comparison periods. For Q3, lower volume/product mix reduced sales by $69, lower prices by $129, and foreign exchange by $24. Nine-month declines were $352, $245, and $110, respectively.
- Gross margin was approximately 24.7% in Q3 2019 versus 28.6% in Q3 2018; nine-month gross margin was 24.6% versus 25.9%. EBIT margin was approximately 15.8% and 20.3% for the respective third quarters, and 15.0% and 18.2% for the nine-month periods.
- Management’s adjusted EBIT, excluding identified non-core and unusual items, was $369 in Q3 2019 versus $451 in Q3 2018, and $1,110 for the first nine months versus $1,357. Adjusted diluted EPS was $1.94 versus $2.34 for Q3 and $5.70 versus $6.79 for the first nine months. These are non-GAAP measures.
- At September 30, cash was $207; current assets were $3,440 and current liabilities $2,080. Total borrowings were $6,209, including $642 due within one year; total equity was $6,097. The current ratio was approximately 1.65.
- Operating cash flow increased $30 year over year, but excluding $85 of 2018 operating cash used for the coal-gasification incident, it decreased $55, primarily reflecting lower earnings. Capital expenditures were $308; dividends paid were $258 and share repurchases were $325.
Material changes and segment performance
- All four segments reported lower sales for the first nine months. Chemical Intermediates had the largest Q3 sales decline, down 18%, and EBIT fell 69%; management cited lower prices, competitive pressure, weaker volumes, and maintenance and power-disruption costs.
- Additives & Functional Products sales fell 9% in Q3 and EBIT fell 23%, with weaker demand, lower prices, mix, and currency effects partly offset by lower raw-material costs.
- Advanced Materials Q3 sales declined 2%, while EBIT increased 4% to $159; premium-product sales and lower costs helped, while the nine-month EBIT declined 7%.
- Fibers Q3 sales decreased 1% and EBIT fell 39%; nine-month sales and EBIT declined 9% and 31%, respectively, reflecting weaker acetate demand and lower utilization.
- Reported 2018 comparisons benefited from coal-gasification incident insurance income exceeding related costs: $67 in Q3 and $86 for the first nine months. That unusual benefit did not recur in 2019. 2019 also included $52 of nine-month restructuring charges, mainly severance.
Outlook, risks, and contingencies
- Management forecast 2019 adjusted EPS of $7.00–$7.20 and free cash flow approaching $1.1 billion. Assumptions included about $40 of cost savings, approximately $225 of interest expense, a roughly 16% full-year effective tax rate, $620 of depreciation and amortization, and $425–$450 of capital expenditures. Management expected debt reduction similar to 2018 and share repurchases slightly below 2018.
- The outlook recognized risks from weak product demand and lower capacity utilization, slow global growth, trade disruptions, a stronger U.S. dollar, and higher pension costs. Results are also exposed to raw-material and energy prices and supply, customer demand, foreign exchange, manufacturing interruptions, cyber risks, and regulatory and environmental costs.
- Environmental reserves totaled $290 at September 30, 2019; estimated future undiscounted remediation costs ranged from $263 to $492. Management did not expect environmental liabilities to materially harm future liquidity or financial condition, but stated that resolution could materially affect results in the period recognized.
- The company reported $6.2 billion of borrowings, had no borrowings under its $1.50 billion revolving credit facility or $250 million A/R facility, and reported approximately $1.75 billion of available capacity under those facilities. It was in compliance with covenants. A separate receivables facility had $95 outstanding at quarter-end; that balance was repaid in October using A/R facility borrowings.
- Other commitments included approximately $2.8 billion of supplier purchase obligations over about 30 years. Management considered material payments under residual-value guarantees remote. Pending legal matters were not expected, based on currently available facts, to materially affect overall financial condition, results, or cash flows.
Important facts for investors to verify
- Whether demand, pricing, and capacity utilization stabilize, particularly in Chemical Intermediates, AFP, and Fibers.
- Progress against the $40 million cost-savings assumption and the $7.00–$7.20 adjusted EPS and approximately $1.1 billion free-cash-flow outlook.
- Cash conversion and working-capital trends, including the increased use of receivables factoring and facility borrowing.
- Near-term debt maturities, refinancing plans, and liquidity after the October 2019 receivables-facility repayment.
- Potential changes in environmental remediation estimates, restructuring costs, impairment testing, and other legal or operational contingencies.