Eastman Chemical Company — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filing dated February 23, 2011. This is an annual report, not a standalone fourth-quarter filing. Financial results below are principally for continuing operations.
Business context and financial performance
Eastman is a global chemicals, plastics and fibers company with four reported segments: CASPI, Fibers, PCI and Specialty Plastics. Management attributed the year’s improvement to recovering end-market demand, growth initiatives, higher capacity utilization and selling-price increases that more than offset higher input costs.
| Metric | 2010 | 2009 |
|---|---|---|
| Sales | $5.842 billion | $4.396 billion |
| Gross profit / margin | $1.474 billion / 25% | $1.032 billion / 23% |
| Operating earnings | $862 million | $345 million |
| Operating earnings excluding impairment and restructuring charges | $891 million | $541 million |
| Continuing-operations earnings | $425 million | $154 million |
| Diluted continuing-operations EPS | $5.75 | $2.09 |
| Adjusted continuing-operations earnings / diluted EPS, excluding specified charges | $514 million / $6.96 | $281 million / $3.83 |
| Net earnings | $438 million | $136 million |
| Cash from operating activities | $575 million reported; $775 million excluding accounting-adoption impact | $758 million |
| Capital expenditures / dividends paid | $243 million / $127 million | $310 million / $128 million |
| Cash and cash equivalents at year-end | $516 million | $793 million |
| Total borrowings / long-term borrowings | $1.604 billion / $1.598 billion | $1.604 billion / $1.604 billion |
2010 adjusted free cash flow, as defined by Eastman as operating cash flow less capital expenditures and dividends, was $405 million after excluding the $200 million accounting-presentation impact. Reported gross margin was approximately 25% versus 23% in 2009; operating margin was approximately 15% versus 8%.
Material changes and segment results
- Sales rose 33% year over year, reflecting volume growth of 19%, price increases of 10% and favorable product mix of 4%; foreign exchange had no material net effect.
- CASPI sales increased 29% to $1.574 billion and operating earnings rose to $293 million from $221 million. Fibers sales increased 11% to $1.142 billion and operating earnings reached $323 million from $292 million.
- PCI sales rose 49% to $2.083 billion and operating earnings increased to $224 million from $41 million, supported by higher volumes and prices, Genovique, and improved utilization. Specialty Plastics sales rose 39% to $1.043 billion and operating earnings increased to $88 million from $9 million, led by demand and growth in copolyesters and Tritan.
- Genovique was acquired in April 2010 for approximately $160 million, including assumed debt, expanding Eastman’s specialty plasticizer offering. Eastman also acquired the Korean acetate-tow facility and restarted a Longview olefins cracking unit.
- In the fourth quarter, continuing-operations earnings were $17 million, including a $115 million net early-debt-extinguishment charge. The quarter also included $26 million of impairment and restructuring charges.
Liquidity, debt and capital allocation
At year-end, current assets were $2.047 billion and current liabilities were $1.070 billion. The company reported $1.598 billion of long-term borrowings, plus $6 million due within one year, and $516 million of cash. It had no borrowings outstanding under its $700 million revolving credit facility or $200 million accounts-receivable facility and reported compliance with facility covenants.
Eastman issued $500 million of new five- and ten-year notes and repaid $500 million face value of older debt in the fourth quarter. The transaction incurred a $115 million net charge but was intended to improve maturities and reduce future interest costs. The company repurchased $280 million of shares in 2010 and declared dividends totaling $1.79 per share.
Outlook, risks and unusual items
- For 2011, management expected continuing-operations EPS, excluding asset-sale gains, to be slightly more than 10% above the 2010 adjusted benchmark of $6.96. It forecast approximately $450 million of capital expenditures and more than $100 million of positive free cash flow, excluding projected cash taxes on the PET sale gain.
- Management expected raw-material and energy costs to be higher than in 2010, while anticipating benefits from economic growth, lower interest expense, full-year integration of Genovique and the Korean facility, and Tritan adoption. The company planned a $100 million U.S. pension contribution in 2011; it made that contribution in January.
- Eastman completed the sale of substantially all of its PET business, related Columbia, South Carolina assets and technology to DAK Americas on January 31, 2011, for $600 million cash, subject to working-capital adjustment. The company expected a modest gain. PET results were classified as discontinued operations in the filing.
- 2010 included $29 million of impairment and restructuring charges and the $115 million debt-extinguishment charge. The 2009 comparison included $196 million of impairment and restructuring charges, chiefly related to the discontinued Beaumont gasification project.
- Key risks include economic and market-cycle weakness; volatile or disrupted raw-material and energy supply; manufacturing or transportation interruptions; customer concentration; execution, cost and demand risks for growth projects; foreign-exchange exposure; and potentially higher environmental compliance costs. Environmental reserves were $40 million; estimated remediation expenditures ranged from $10 million to $27 million. A Pennsylvania air-permit proceeding could involve a civil penalty of at least $100,000, though management did not expect a material overall impact.
- The filing says ordinary-course litigation is not expected, based on currently available information, to materially affect overall financial condition, results or cash flows, but adverse developments could affect an individual period. PwC gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Reconcile reported EPS of $5.75 with management’s $6.96 adjusted comparison base and assess the effects of the $115 million debt charge and other excluded items.
- Review the quality and sustainability of operating cash flow, including the $200 million receivables-accounting presentation change and working-capital growth; distinguish reported from adjusted free cash flow.
- Track whether 2011 EPS, free-cash-flow and capital-spending expectations were achieved, including pension funding and any cash taxes related to the PET sale.
- Assess post-sale earnings and balance-sheet changes after the $600 million PET divestiture, and confirm the final proceeds after working-capital adjustment and reported gain.
- Monitor feedstock and energy costs, segment pricing and utilization, growth-project spending and ramp-up, environmental requirements, and pension obligations.