Eastman Chemical Company — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2011, compared with Q1 2010. Eastman reported four continuing segments: CASPI, Fibers, Performance Chemicals and Intermediates (PCI), and Specialty Plastics. The PET business, substantially all of the former Performance Polymers segment, was sold on January 31, 2011; its results are presented as discontinued operations in both periods.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Sales | $1.758 billion | $1.370 billion |
| Gross profit; gross margin | $433 million; 25% | $317 million; 23% |
| Operating earnings; operating margin | $284 million; 16% | $189 million; 14% |
| Continuing-operations earnings | $182 million; diluted EPS $2.52 | $105 million; diluted EPS $1.43 |
| Net earnings; diluted EPS | $220 million; $3.04 | $101 million; $1.37 |
| Net cash used in operating activities | $146 million | $225 million |
Sales increased 28%, with volume up 17% and pricing up 13%; product mix and foreign exchange each reduced growth by 1%. Operating earnings rose 50%. Management attributed improvement to stronger volumes and higher prices more than offsetting higher raw-material and energy costs. Continuing-operations net interest expense was $19 million, down from $25 million; the effective tax rate was 33% in both periods.
Q1 net earnings include $8 million after tax from discontinued PET operations and a $30 million after-tax disposal gain. The PET sale generated $615 million, subject to working-capital adjustments. Segment sales and operating earnings were: CASPI $467 million and $98 million; Fibers $290 million and $81 million; PCI $694 million and $88 million; Specialty Plastics $307 million and $30 million.
Cash, debt, and liquidity. At March 31, cash and cash equivalents were $640 million and short-term time deposits were $200 million, versus $516 million cash and no time deposits at year-end 2010. Total borrowings were $1.603 billion, including $7 million due within one year; long-term borrowings were $1.596 billion. The company had no borrowings under its $700 million revolving credit facility or $200 million accounts-receivable facility and reported compliance with their covenants. Current assets were $2.434 billion and current liabilities $1.055 billion.
Operating cash use included a $100 million U.S. pension contribution and a $270 million working-capital increase, primarily related to higher sales. Investing activities provided $307 million, including PET sale proceeds, while capital expenditures were $97 million. Dividends paid were $34 million and share repurchases were $74 million. Management’s non-GAAP free-cash-flow measure was negative $277 million for the quarter; the comparable 2010 figure was negative $88 million, but 2010 operating cash flow included a $200 million accounting-presentation impact from receivables securitization.
Material changes, outlook, and risks
- Divestiture: PET sale proceeds and the disposal gain were significant; the business’s operating results are excluded from continuing operations. Accrued taxes included approximately $110 million related to the sale.
- Growth and investment: Capital expenditures rose to $97 million from $31 million. Initiatives included capacity expansions, a proposed 30,000-ton acetate-tow joint venture in China (Eastman ownership 45%; expected operational in 2013), and development of acetylated wood and other technologies.
- Guidance: Eastman expected 2011 diluted EPS from continuing operations to be slightly above $9, free cash flow of approximately $200 million excluding PET-sale tax payments, and capital spending of approximately $450 million. It expected higher raw-material and energy costs than in 2010 and lower net interest expense.
- Near-term pressure: Management anticipated paraxylene costs would peak in Q2 2011 and negatively affect Specialty Plastics earnings in that quarter.
- Risks and contingencies: Key risks include economic weakness, volatile or disrupted supplies of raw materials and energy, manufacturing or infrastructure disruptions, customer losses, growth-project execution and returns, and increased environmental or regulatory costs. Environmental reserves were $35 million. Management did not expect pending legal matters to materially affect overall results, though adverse developments could affect a particular period. A disclosed Pennsylvania environmental proceeding could involve a civil penalty of at least $100,000; the company said it expected no material financial impact.
Important facts for investors to verify
- Whether volume growth and pricing continue to offset raw-material and energy inflation, particularly in Specialty Plastics.
- Delivery against the full-year diluted EPS, free-cash-flow, and capital-spending outlook, including the effect and timing of PET-sale tax payments.
- Cash conversion and working-capital trends after the quarter’s $270 million increase and $100 million pension contribution.
- Progress, cost, and expected returns on announced capacity expansions and other growth initiatives.
- Renewal or replacement of the accounts-receivable facility, which expires in July 2011, and the credit-facility tranche expiring in April 2012.
- Final working-capital adjustments and tax consequences of the PET divestiture, and developments in environmental and legal contingencies.