Eastman Chemical Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited quarterly results; this is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars.
Business context
Eastman is a global specialty chemicals company operating manufacturing sites in 14 countries. Its products serve markets including transportation, building and construction, consumables, agriculture, and tobacco. In 2015, it reported five segments: Additives & Functional Products (AFP), Adhesives & Plasticizers (A&P), Advanced Materials (AM), Fibers, and Specialty Fluids & Intermediates (SFI). About 55% of sales were generated outside the United States and Canada.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Sales | $9.648 billion | $9.527 billion |
| Gross profit / margin | $2.580 billion / 26.7% | $2.221 billion / 23.3% |
| Operating earnings / margin | $1.384 billion / 14.3% | $1.162 billion / 12.2% |
| Net earnings attributable to Eastman | $848 million | $751 million |
| Diluted EPS | $5.66 | $4.97 |
| Adjusted earnings from continuing operations, net of tax | $1.091 billion | $1.068 billion |
| Adjusted diluted EPS | $7.28 | $7.07 |
| Cash provided by operating activities | $1.612 billion | $1.408 billion |
| Capital expenditures | $652 million | $593 million |
| Cash and cash equivalents at year-end | $293 million | $214 million |
| Total borrowings at year-end | $7.039 billion | $7.549 billion |
Margins are calculated from reported sales and earnings. Operating cash flow less capital expenditures was approximately $960 million in 2015; this is a simple calculation, not the company’s stated adjusted free-cash-flow measure. Current assets were $2.878 billion and current liabilities $2.056 billion. The company reported $842 million of available borrowing capacity under its credit and receivables facilities and said it complied with applicable covenants. Net interest expense rose to $263 million from $187 million, largely due to debt issued for the Taminco acquisition.
Eastman declared $1.66 per share in dividends for 2015 and repurchased approximately $103 million of stock. Its dividend is subject to board approval and may change.
Material changes versus 2014
- Sales rose 1%, primarily reflecting a full-year contribution from businesses acquired in 2014, partly offset by lower selling prices, especially in SFI, as raw-material and energy costs fell. Acquisitions make year-over-year comparisons less direct.
- Adjusted operating earnings increased 6% to $1.717 billion. Management attributed the improvement principally to raw-material and energy savings exceeding lower selling prices by $255 million and acquired-business earnings. Commodity hedges reduced earnings by $201 million; lower sales volume and foreign exchange also weighed on results.
- Reported operating earnings included $183 million of asset impairment and restructuring charges and a $115 million pension and postretirement mark-to-market loss. The prior year included a $304 million mark-to-market loss and $77 million of impairment and restructuring charges. These items materially affect comparisons of reported results.
- Segment sales changes were mixed: AFP increased 30%, largely from acquired Taminco businesses; A&P declined 11%; AM increased 2%; Fibers declined 16%; and SFI declined 4%.
- Fibers earnings fell as acetate tow and acetyl chemicals volumes weakened, including customer destocking in China. Eastman closed its Workington, U.K. acetate tow facility, recording $98 million of related impairment and restructuring charges.
- Eastman announced that 2016 reporting would move to four segments—AFP, AM, Fibers, and Chemical Intermediates—and that it was pursuing options to divest or otherwise monetize excess ethylene capacity and certain commodity olefin product lines.
Outlook, commentary, risks, and unusual items
- For 2016, management expected adjusted EPS to approach 2015 adjusted EPS of $7.28; operating cash flow of approximately $1.6 billion; capital spending of approximately $650 million; cost-reduction savings of approximately $100 million; and an effective tax rate of approximately 25%, excluding non-core items.
- Management expected specialty-product growth and improved product mix to support results, but said lower crude oil and related commodity prices might not fully benefit Eastman in 2016 because commodity hedges, particularly propane hedges, would offset much of the benefit. A strong U.S. dollar was also expected to remain a headwind.
- Growth investments included capacity expansions for Crystex insoluble sulfur and PVB resin in Malaysia, expected to be operational in 2017, and additional Tritan copolyester capacity in Kingsport. Management forecast 2016 capital spending similar to 2015.
- Major risks include global economic weakness, volatile or disrupted raw-material and energy supplies, customer concentration, foreign exchange, cyclical chemical markets, manufacturing interruptions and cyber risks, and the execution, cost, and integration risks of acquisitions and growth projects.
- Environmental contingency reserves totaled $336 million at year-end. Estimated remediation costs ranged from a best estimate of $308 million to a reasonably possible maximum of $516 million, inclusive of amounts accrued. Eastman noted uncertainty around remediation estimates and regulatory requirements.
- Goodwill testing found no goodwill impairment, but the specialty fluids and crop protection reporting units each had estimated fair values only 11% above carrying value; adverse operating performance or assumption changes could require future impairment. The company also recorded an $18 million intangible-asset impairment, primarily involving the V-KOOL name, amid weaker Asian vehicle-market expectations.
- 2015 quarterly results were uneven: fourth-quarter net earnings attributable to Eastman were $124 million, versus $16 million in fourth-quarter 2014. The filing cites seasonality and significant impairments, restructuring, and pension adjustments; quarterly earnings should not be treated as a clean measure of underlying performance.
Important facts for investors to verify
- Reconcile reported earnings with management’s adjusted measures, especially the pension mark-to-market loss, restructuring and impairment charges, and acquisition-related costs.
- Assess the durability of raw-material savings and the timing and magnitude of losses from commodity hedges, including propane exposure.
- Review debt maturities, interest expense, available facility capacity, and the company’s ability to fund dividends, buybacks, capital projects, and debt repayment from cash generation.
- Track Fibers volumes and pricing, the effects of the Workington closure, and the progress of the announced portfolio shift away from excess ethylene and commodity olefins.
- Monitor the 2016 outlook against actual results, including adjusted EPS, cash flow, cost savings, capital spending, currency impacts, and the new segment reporting basis.
- Evaluate environmental reserve estimates and the sensitivity of specialty fluids and crop protection goodwill valuations to weaker demand or changed assumptions.