Eastman Chemical Company (NYSE:EMN) announced its second-quarter 2020 financial results.
|(In millions, except per share amounts)||2Q2020||2Q2019|
|Earnings before interest and taxes ("EBIT")||54||371|
|Earnings per diluted share||0.20||1.85|
|Adjusted earnings per diluted share*||0.85||1.99|
|Net cash provided by operating activities||436||422|
|Free cash flow*||339||330|
*For non-core and unusual items excluded from adjusted earnings and for adjusted provision for income taxes, calculation of free cash flow, net debt, and of adjusted EBIT margins, and reconciliations to reported company and segment earnings and to cash provided by operating activities and total borrowings, see Tables 3A, 3B, 4A, 4B, 5A, 5B, and 6.
"As we continue to navigate the impact of the COVID-19 global pandemic, our focus remains on the health and safety of our employees and the operational integrity of our global facilities in order to serve our customers," said Mark Costa, Board Chair and CEO. "In this challenging environment, I deeply appreciate the resiliency and determination of our employees, which enabled us to deliver nearly the best free cash flow result for the first half of a year in our history. In addition, our sales revenue in the first half of the year was relatively solid, demonstrating the value of a diverse set of end markets and the benefit of our innovation-driven growth model. And, we moved swiftly to aggressively manage costs to offset meaningfully lower capacity utilization. We are on track to deliver free cash flow of greater than $1 billion for 2020, and cash flow generation remains our priority given the persistent uncertainty resulting from COVID-19."
Corporate Results 2Q 2020 versus 2Q 2019
Sales revenue decreased primarily due to lower sales volume and, to a lesser extent, lower selling prices. The sales volume decline was most pronounced for products used in end markets negatively impacted by COVID-19, including transportation, building and construction, consumer durables, and textiles. This decrease was partially offset by higher sales volume for products used in resilient end markets including consumables, personal care and wellness, medical, and agriculture. Some of these end markets had higher demand due to COVID-19. Lower selling prices were mostly attributed to lower raw material prices.
Reported and adjusted EBIT decreased due to the lower sales volume, reduced capacity utilization and less favorable product mix, partially offset by the impact of cost reduction actions. COVID-19 was the primary driver of the lower sales volume and less favorable product mix. Capacity utilization was substantially lower due to lower sales volume and the focus on maximizing cash generation by reducing inventories, reducing EBIT by approximately $140 million, with roughly half of the impact in Advanced Materials. Cost reduction actions in response to COVID-19 included reduced discretionary spending, deferred asset maintenance turnarounds, and adjusted operations to protect the health and safety of employees and contractors. Overall, spreads were relatively unchanged with lower selling prices offset by lower raw material and energy costs.
Segment Results 2Q 2020 versus 2Q 2019
Additives & Functional Products – Sales revenue decreased primarily due to lower sales volume, less favorable product mix, and lower selling prices. Lower sales volume was most pronounced for products in markets negatively impacted by COVID-19, especially tire additives, coatings additives, and aviation fluids products sold in transportation end markets. This decrease was partially offset by increased volume in stable end markets such as care chemicals and adhesives resins products used in applications for personal care and wellness and consumables end markets due to strengthened demand attributed to COVID-19. Lower selling prices were attributed primarily to increased competition and cost pass through contracts. The increased competition was in tire additives and, to a lesser extent, adhesives resins product lines.
The reported second-quarter loss includes tire additives asset impairment and restructuring charges. Excluding these items, adjusted EBIT decreased primarily due to lower sales volume, reduced capacity utilization, and less favorable product mix primarily due to decreased sales of aviation fluids, coatings additives, and tire additives sold in the transportation market. This decline was somewhat offset by growth in care chemicals products sold in markets for personal care and wellness and consumables. Lower capacity utilization was mostly offset by the impact of cost reduction actions. Spreads were relatively unchanged with lower selling prices offset by lower raw material and energy costs.
Advanced Materials – Sales revenue decreased primarily due to lower sales volume and less favorable product mix. Lower sales volume was most pronounced for products in markets negatively impacted by COVID-19, especially interlayers, films, and copolyester products sold in transportation and consumer durables end markets. This impact was partially offset by increased sales volume of certain standard copolyester products used in stable applications for personal care and wellness and consumables end markets, which also strengthened due to demand attributed to COVID-19.
EBIT decreased primarily due to lower sales volume, reduced capacity utilization, and less favorable product mix. Lower sales volume due to COVID-19 resulted in several manufacturing facilities that primarily serve transportation end markets being temporarily idled or having substantially reduced operating rates. The less favorable product mix was driven by relative declines in high-value transportation end-market products partially offset by growth in lower-value copolyester products used in packaging and personal protection equipment end uses. Lower capacity utilization was partially offset by the impact of cost reduction actions.
Chemical Intermediates – Sales revenue decreased due to lower sales volume and lower selling prices across the segment. Lower sales volume was attributed to the negative impact of COVID-19 on demand and lower Brent crude oil prices resulting in U.S. olefin production being less competitive globally. Lower selling prices were due to lower raw material prices.
Reported and adjusted EBIT decreased due to lower sales volume, reduced capacity utilization, and lower selling prices mostly offset by lower raw material and energy costs. Lower capacity utilization was mostly offset by the impact of cost reduction actions.
Fibers – Sales revenue was relatively unchanged. Acetate tow sales volume increased slightly attributed to customer buying patterns while demand for textiles products was negatively impacted by COVID-19.
EBIT decreased primarily due to lower capacity utilization that was partially offset by the impact of cost reduction actions.
In second quarter 2020, cash from operating activities was $436 million and free cash flow (cash from operating activities less net capital expenditures) was $339 million, reflecting aggressive working capital management. In second quarter 2020, the company returned $119 million to stockholders, with $89 million of dividends and $30 million of share repurchases. See Tables 5A and 5B.
Priorities for uses of available cash for full year 2020 include payment of the quarterly dividend and the reduction of net debt (total borrowings less cash and cash equivalents) by more than $600 million. In March and April, as a precautionary measure due to increased financial market volatility resulting from COVID-19, the company took certain liquidity actions, including borrowing $400 million under its existing revolving credit agreement and $250 million under a new 364-day term loan agreement. The company subsequently repaid the entire $400 million revolving credit agreement borrowings and has the full $1.5 billion amount available. As previously reported, in April, the company amended the covenants of both loan agreements to reflect higher cash balances and the expected negative impact on operating results of COVID-19. In the first half of 2020, the company reduced net debt by $149 million and ended the second quarter with $704 million of cash and cash equivalents. See Table 6.
Commenting on the outlook for full year 2020, Costa said: "We have done an outstanding job of navigating a challenging global business environment during the first half of the year, delivering nearly the best free cash flow result for the first half of a year in our history. Looking to the second half of the year, visibility remains limited. However, we are seeing demand for products serving the auto, tires, building and construction, and consumer durables end markets begin to recover sequentially from the low levels of the second quarter leading to increased capacity utilization, particularly in Advanced Materials. We are also on track to deliver approximately $150 million of cost savings for full year 2020 in response to the impact of COVID-19. And, with our emphasis on cash generation in the current environment, we expect to generate greater than $1 billion of free cash flow for the year. We are confident that the actions we are taking in 2020 will position us to significantly benefit from a return to global economic growth as we recover from the impact of COVID-19."
Due to the heightened level of uncertainty related to the impact of COVID-19, including on overall business and market conditions and demand for Eastman products, the company is not providing a 2020 full-year earnings forecast.
This news release includes forward-looking statements concerning current expectations and assumptions for future global economic conditions and the impact of the COVID-19 coronavirus pandemic on demand in key end markets; competitive position and acceptance of specialty products in key markets; mix of products sold; capacity utilization, manufacturing costs, and cost reductions; and cash flow, cash and cash equivalents, and debt repayment for full year 2020. Such expectations and assumptions are based upon certain preliminary information, internal estimates, and management assumptions, expectations, and plans, and are subject to a number of risks and uncertainties inherent in projecting future conditions, events, and results. Actual results could differ materially from expectations and assumptions expressed in the forward-looking statements if one or more of the underlying assumptions or expectations prove to be inaccurate or are unrealized. Important factors that could cause actual results to differ materially from such expectations are and will be detailed in the company's filings with the Securities and Exchange Commission, including the Form 10-Q filed for first quarter 2020 available, and the Form 10-Q to be filed for second quarter 2020 and to be available on the Eastman web site at www.eastman.com in the Investors, SEC filings section.
Conference Call and Webcast Information
Eastman will host a conference call with industry analysts on August 4, 2020 at 8:00 a.m. ET. To listen to the live webcast of the conference call and view the accompanying slides and prepared remarks, go to investors.eastman.com, Events & Presentations. The slides and prepared remarks to be discussed during the call and webcast will be available at investors.eastman.com at approximately 5:00 p.m. ET on August 3, 2020. To listen via telephone, the dial-in number is 323-994-2093, passcode number 9531025. A web replay, a replay in downloadable MP3 format, and the accompanying slides and prepared remarks will be available at investors.eastman.com, Events & Presentations. A telephone replay will be available continuously from 11:00 a.m. ET, August 4, 2020 to 11:00 a.m. ET, August 14, 2020 at 888-203-1112 or 719-457-0820, passcode 9531025.