Eastman Chemical Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Comparisons are with the corresponding 2022 periods unless noted. Amounts are in U.S. dollars.
Business context and results
Eastman operates in Advanced Materials (AM), Additives & Functional Products (AFP), Chemical Intermediates (CI), and Fibers. Management attributed weaker results mainly to lower volumes, customer destocking and weaker end-market demand; Fibers was a notable offset. Segment figures for 2022 were recast for product-line moves made in 2023.
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Sales | $2.267 billion | $2.709 billion | $7.003 billion | $8.207 billion |
| Gross profit | $484 million | $541 million | $1.597 billion | $1.761 billion |
| Gross margin | 21.3% | 20.0% | 22.8% | 21.5% |
| EBIT | $256 million | $324 million | $825 million | $1.083 billion |
| Net earnings attributable to Eastman | $178 million | $301 million | $584 million | $792 million |
| Diluted EPS | $1.49 | $2.46 | $4.89 | $6.26 |
| Net cash from operating activities | Not separately stated for quarter | $922 million | $518 million |
Financial position and liquidity
- Cash was $439 million at September 30, 2023, down from $493 million at December 31, 2022. Total borrowings were $5.220 billion versus $5.151 billion; reported net debt was $4.781 billion versus $4.658 billion.
- Current assets were $3.567 billion and current liabilities $2.615 billion. Eastman had $1.50 billion available under its revolving credit facility and no borrowings outstanding under it. Commercial paper borrowings were $399 million, at a weighted-average rate of 5.55%.
- Eastman reported compliance with applicable debt covenants. It expects operating cash flows and other liquidity sources to meet known requirements, while noting cash generation is exposed to demand, pricing, raw-material availability and other business risks.
- Capital expenditures were $649 million in the first nine months, compared with $408 million a year earlier. The company expected approximately $800 million for full-year 2023.
Changes versus prior periods
- Q3 sales fell 16%; first-nine-month sales fell 15%. Management attributed the declines primarily to lower volume: down 11% in Q3 and 12% year to date. Year-to-date sales also reflected lower prices, unfavorable exchange effects and the absence of sales from a divested business.
- Adjusted EBIT, a non-GAAP measure, was $256 million in Q3 versus $333 million, and $875 million for the first nine months versus $1.168 billion. Management cited lower volume, reduced capacity utilization and higher pension expense, partly offset by lower raw-material, energy and distribution costs.
- Q3 gross margin increased year over year despite lower gross profit. Year-to-date gross profit and adjusted gross profit declined; the latter excludes specified non-core and unusual items.
- Operating cash flow rose $404 million year over year for the first nine months, mainly due to lower working capital, variable-compensation payments and pension contributions, partly offset by lower earnings. Investing cash flow included $649 million of capital spending; 2022 investing cash flow benefited from proceeds from the sale of the adhesives resins business.
Segments, outlook and notable items
- AM: Q3 sales declined 16% and EBIT declined 29%; weak specialty-plastics demand and destocking weighed on results. Management cited stronger automotive demand for premium advanced interlayers as a partial offset.
- AFP: Q3 sales declined 26% and EBIT declined 27%, reflecting lower volume and prices, including destocking in agriculture, consumables, and building and construction.
- CI: Q3 sales declined 21% and EBIT declined 91%. Management cited lower olefins prices amid weak demand and competitive pressure.
- Fibers: Q3 sales increased 29% and EBIT rose to $109 million from $21 million, primarily due to higher acetate-tow selling prices and lower input and distribution costs.
- No specific earnings or sales guidance is provided in the supplied filing text. The disclosed full-year capital-spending expectation was approximately $800 million. Management described molecular recycling as an investment focus and said it expects attractive returns from eligible sustainability projects financed with its 2023 green bond.
- On September 27, Eastman agreed to sell its Texas City operations, excluding plasticizers. Stated consideration was $413 million cash at closing plus $38.5 million on each of the first two closing anniversaries, subject to adjustments. Closing was expected in Q4 2023, subject to approvals and customary conditions. The assets were classified as held for sale; Eastman expected a gain on disposition, but the filing does not provide a clear gain amount.
- First-nine-month results included $23 million of accelerated depreciation related to a European acetate-yarn facility closure and $22 million of impairment and restructuring charges. The period also included $8 million of net insurance proceeds related to the 2022 Kingsport steam-line incident. These items affect comparisons and some management-reported non-GAAP measures.
- Environmental reserves totaled $286 million at September 30, including $255 million for remediation. Estimated undiscounted future remediation costs ranged from $255 million to $499 million. Management did not expect environmental matters, individually or collectively, to materially affect overall future financial position, results or cash flows, but noted outcomes could affect results when recognized.
- Ordinary-course legal matters include product liability, asbestos, environmental and other claims. Management stated it did not believe pending matters would materially adversely affect overall financial position, results or cash flows based on currently available facts. The Jefferson Hills environmental proceeding was resolved without material financial impact.
Important facts for investors to verify
- Whether volume, destocking and capacity-utilization trends improved after September 30, particularly in AM, AFP and CI.
- Progress and final proceeds from the Texas City sale, including closing timing, adjustments and any recognized gain.
- Cash conversion and working-capital sustainability; operating cash flow benefited from working-capital changes, and Eastman sold $2.1 billion of receivables through factoring programs in the first nine months.
- Debt, interest costs and refinancing needs: borrowings were $5.220 billion, including $640 million due within one year; variable-rate term loans carried rates of 6.56% and 6.55%.
- Delivery against the approximately $800 million 2023 capital-spending expectation and progress, costs and returns from the Kingsport molecular-recycling investment.
- Potential changes in environmental remediation estimates, tax contingencies, and the effects of pension costs and foreign exchange.