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EMN > SEC Filings for EMN > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for EASTMAN CHEMICAL CO

Form 10-Q for EASTMAN CHEMICAL CO


30-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM                                                                Page

  Critical Accounting Estimates                                     29

Non-GAAP Financial Measures                                         30

  Overview                                                          31

  Results of Operations                                             33

  Summary by Operating Segment                                      37

  Summary by Customer Location                                      43

Liquidity, Capital Resources, and Other Financial Information 44

  Recently Issued Accounting Standards                              47

2014 Outlook                                                        48

  Forward-Looking Statements and Risk Factors                       48

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements for Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's audited consolidated financial statements, including related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2013 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this Quarterly Report on Form 10-Q. All references to earnings per share ("EPS") contained in this report are diluted earnings from continuing operations per share unless otherwise noted.

CRITICAL ACCOUNTING ESTIMATES

In preparing the consolidated financial statements in conformity with GAAP, the Company's management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, income taxes, and purchase accounting. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2013 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

NON-GAAP FINANCIAL MEASURES

In addition to evaluating the Company's financial condition, results of operations, liquidity and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly arise from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature. These transactions, costs, and losses or gains relate to, among other things, cost reduction, growth and profitability improvement initiatives, and other events outside of core business operations (such as mark-to-market losses or gains for pension and other postretirement benefit plans, typically in the fourth quarter of each year and any other quarters in which an interim remeasurement is triggered). Because non-core or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on our results of these non-core or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends. Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performance, make resource allocation decisions and evaluate organizational and individual performance in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.

The non-core or non-recurring items excluded by management in its evaluation of certain results in this Quarterly Report are:

• Costs resulting from the sale of acquired BP plc global aviation turbine engine oil business (the "aviation turbine oil business") inventories at fair value (as required by purchase accounting, these inventories were marked to fair value and a portion sold in second quarter 2014);

• Transaction and integration costs from the Solutia and aviation turbine oil business acquisitions which are non-core costs; and

• Asset impairments and restructuring charges and gains, net, which, other than severance costs, are not cash transactions impacting profitability,

in each case for the periods and in the amounts in the table below.

Non - GAAP Financial Measures -- Excluded Non-Core or Non-Recurring Items

                                              Second Quarter                     First Six Months
(Dollars in millions)                     2014                2013             2014             2013
Additional costs of acquired
inventories                         $           2         $         -     $           2     $         -
Acquisition transaction costs                   3                   -                 3               -
Acquisition integration costs                   7                   8                16              15
Asset impairments and restructuring
charges (gains), net                           (7 )                18                 6              21

This MD&A includes the effect of the foregoing on the following financial measures:

• Gross profit,

• Selling, general, and administrative ("SG&A") expenses,

• Operating earnings,

• Earnings from continuing operations, and

• Diluted earnings per share.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

These non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented in "Overview", "Results of Operations", and "Summary by Operating Segment" in this MD&A.

In addition to the non-GAAP measures presented in this Quarterly Report and other periodic reports, from time to time management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain non-core or non-recurring items ("cash provided by operating activities, as adjusted") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Eastman management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available to grow the business and create stockholder value, and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, Eastman management generally excludes the impact of certain non-core activities and decisions of management because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.

Similarly, from time to time, Eastman may disclose to investors and securities analysts one or both of alternative non-GAAP measures of "free cash flow", which management defines as (i) cash provided by operating activities, as adjusted, described above, less the amounts of capital expenditures and dividends, and
(ii) cash provided by operating activities, as adjusted, described above, less the amount of capital expenditures. Management believes such items are generally funded from available cash and, as such, should be considered in determining free cash flow. Eastman management believes these are appropriate metrics to use to evaluate the Company's overall ability to generate cash to fund future operations, inorganic growth opportunities, and to meet the Company's debt repayment obligations. Management believes these metrics are useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating potential future cash available for various initiatives and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies.

OVERVIEW

Eastman's portfolio of specialty businesses holds leading market positions and manufactures products that enhance performance in a variety of end markets such as transportation, building and construction, and consumables. Management believes that despite ongoing economic uncertainty, the Company's key end markets generally benefited from modest global economic growth. Eastman management believes that the Company's global market and manufacturing presence, and vertically integrated manufacturing streams, combined with global trends such as energy efficiency, a rising middle class in emerging economies, and increased health and wellness will continue to support the Company's achievement of its growth objectives in the long term.

The Company generated sales revenue of $2.5 billion and $2.4 billion in second quarter 2014 and 2013, respectively, and sales revenue of $4.8 billion and $4.7 billion in first six months 2014 and 2013, respectively.

Operating earnings were $436 million in second quarter 2014 compared with $428 million in second quarter 2013. Excluding the non-core or non-recurring items referenced in "Non-GAAP Financial Measures", operating earnings in second quarter 2014 and 2013 were $441 million and $454 million, respectively. The decline was primarily due to lower Specialty Fluids & Intermediates ("SFI") segment operating earnings of $22 million, including the negative impact of higher raw material and energy costs, particularly for propane. The previously announced unplanned shutdown at the Kingsport, Tennessee facility negatively impacted second quarter 2014 operating earnings by approximately $10 million, primarily due to resulting costs, in the Advanced Materials ("AM"), Fibers, and SFI segments.

Operating earnings were $797 million in first six months 2014 compared with $821 million in first six months 2013. Excluding the non-core or non-recurring items referenced in "Non-GAAP Financial Measures", operating earnings in first six months 2014 and 2013 were $824 million and $857 million, respectively. The decline was primarily due to lower SFI segment operating earnings of $53 million, including the negative impact of higher raw material and energy costs, particularly for propane.



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               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


As described in more detail in "Results of Operations", earnings from continuing
operations and diluted earnings per share attributable to Eastman are as
follows:
                                                             Second Quarter
                                                    2014                        2013
(Dollars in millions, except diluted EPS)      $            EPS            $            EPS
Earnings from continuing operations, net
of tax                                    $     290     $    1.92     $     264     $    1.69
Earnings from continuing operations
excluding non-core or non-recurring
items, net of tax (1)                     $     291     $    1.92     $     282     $    1.80

                                                            First Six Months
                                                    2014                        2013
(Dollars in millions, except diluted EPS)      $            EPS            $            EPS
Earnings from continuing operations, net
of tax                                    $     523     $    3.43     $     511     $    3.26
Earnings from continuing operations
excluding non-core or non-recurring
items, net of tax (1)                     $     538     $    3.54     $     535     $    3.41

(1) Excludes the non-core or non-recurring items referenced in "Non-GAAP Financial Measures".

The Company generated $389 million in cash from operating activities in first six months 2014 compared with cash provided by operating activities of $367 million in first six months 2013. The increase in cash from operating activities was primarily due to lower tax payments partially offset by higher variable compensation. Variable compensation increased primarily due to changes in design of certain variable compensation programs.

In 2014, the Company made progress on both organic (internal growth) and inorganic (external growth through joint venture and acquisition) growth initiatives including:

• In the Adhesives & Plasticizers ("A&P") segment:

•            completing the capacity expansion of its Eastman 168™ non-phthalate
             plasticizers at its manufacturing facility in Texas City, Texas in
             second quarter 2014.

• in the AM segment:

•            continuing the expansion of Eastman TritanTM copolyester capacity at
             the Kingsport, Tennessee manufacturing facility which is expected to
             be operational in the second half of 2014 to meet demand for Eastman
             TritanTM copolyester; and


•            entering into a definitive agreement to acquire Commonwealth
             Laminating & Coating, Inc., a specialty films business. The
             acquisition is expected to be completed in the second half of 2014.

• in the SFI segment:

•            continuing a Therminol® heat transfer fluid capacity expansion in
             Newport, Wales, which is expected to be operational in the first
             half of 2015 to support expected demand in the industrial chemicals
             and processing market; and


•            completing the acquisition of the aviation turbine oil business from
             BP plc. Added to the segment's Skydrol® aviation hydraulic fluids,
             the acquired aviation turbine oil business enables Eastman to better
             supply the global aviation industry.



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               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS
                             Second Quarter                 First Six Months
(Dollars in millions)   2014       2013     Change      2014       2013     Change
Sales                 $ 2,460    $ 2,440      1 %     $ 4,765    $ 4,747      -  %
Volume effect                                 - %                            (1 )%
Price effect                                  - %                             1  %
Exchange rate effect                          1 %                             -  %

Sales revenue was slightly higher in second quarter 2014 compared to second quarter 2013. Sales revenue was relatively unchanged in first six months 2014 compared to first six months 2013.

                                    Second Quarter                            First Six Months
(Dollars in millions)     2014          2013          Change         2014          2013          Change
Gross Profit           $     657     $     677           (3 )%    $   1,252     $   1,293           (3 )%
Additional costs of
acquired inventories           2             -                            2             -
Gross Profit excluding
non-core or
non-recurring items    $     659     $     677           (3 )%    $   1,254     $   1,293           (3 )%

Gross profit decreased in second quarter and first six months 2014 compared with second quarter and first six months 2013 by $20 million and $41 million, respectively. Gross profit decreased primarily in the SFI segment due to lower sales volume of $13 million and $22 million, respectively, and higher raw material and energy costs, particularly for propane, exceeding higher selling prices by $5 million and $24 million, respectively. The previously announced unplanned shutdown at the Kingsport facility negatively impacted second quarter and first six months 2014 gross profit by approximately $10 million, primarily costs, in the AM, Fibers, and SFI segments.

Gross profit in second quarter and first six months 2014 was negatively impacted by $2 million for the sale of the acquired aviation turbine oil business inventories, which were marked to fair value as required by purchase accounting. For more information see Note 2, "Acquisitions", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

                                    Second Quarter                            First Six Months
(Dollars in millions)     2014          2013          Change         2014          2013          Change
Selling, General and
Administrative
Expenses               $     172     $     180           (4 )%    $     340     $     351           (3 )%
Acquisition
transaction costs             (3 )           -                           (3 )           -
Acquisition
integration costs             (7 )          (8 )                        (16 )         (15 )
Selling, General, and
Administrative
Expenses excluding
non-core or
non-recurring items    $     162     $     172           (6 )%    $     321     $     336           (4 )%

SG&A expenses in second quarter and first six months 2014 were lower compared to second quarter and first six months 2013 primarily due to Solutia acquisition cost reduction synergies.



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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Second Quarter First Six Months (Dollars in millions) 2014 2013 Change 2014 2013 Change Research and Development Expenses $ 56 $ 51 10 % $ 109 $ 100 9 %

Research and development ("R&D") expenses were higher in second quarter and first six months 2014 compared to second quarter and first six months 2013 primarily due to increased R&D for growth initiatives in the AM and Additives & Functional Products ("AFP") segments.

Asset Impairments and Restructuring (Gains) Charges, Net

In second quarter and first six months 2014, there were net asset impairments and restructuring gains of $7 million and charges of $6 million, respectively.

During second quarter 2014, the Company recognized gains from the sale of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.

In first six months 2014, charges consisted of $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the AM segment primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. First six months 2014 also included $3 million of restructuring charges for severance associated with the continued integration of Solutia.

In second quarter and first six months 2013, there were net asset impairments and restructuring charges of $18 million and $21 million, respectively.

During second quarter 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $7 million and restructuring charges of $5 million including charges for severance. During second quarter 2013, management also approved and recorded severance charges of $6 million primarily for a voluntary separation plan for certain employees.

During second quarter 2013, a change in estimate for certain costs associated with the fourth quarter 2012 termination of the operating agreement for the Sao Jose dos Campos, Brazil site resulted in a reduction of $4 million to previously recorded asset impairments and restructuring charges.

In second quarter and first six months 2013, there were $3 million and $6 million, respectively, of restructuring charges primarily for severance associated with the continued integration of Solutia.

For more information regarding asset impairments and restructuring charges and gains see Note 14, "Asset Impairments and Restructuring Charges (Gains), Net", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.



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               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


Operating Earnings
                                    Second Quarter                            First Six Months
(Dollars in millions)     2014          2013          Change          2014          2013          Change
Operating earnings     $     436     $     428            2  %    $      797     $     821           (3 )%
Additional costs of
acquired inventories           2             -                             2             -
Acquisition
transaction costs              3             -                             3             -
Acquisition
integration costs              7             8                            16            15
Asset impairments and
restructuring charges
(gains), net                  (7 )          18                             6            21
Operating earnings
excluding non-core or
non-recurring items    $     441     $     454           (3 )%    $      824     $     857           (4 )%



Net Interest Expense
                                 Second Quarter                First Six Months
(Dollars in millions)       2014      2013    Change       2014        2013    Change
Gross interest costs       $   50    $  47              $   97        $  96
Less: Capitalized interest      2        -                   4            1
Interest expense               48       47      2  %        93           95     (2 )%
Interest income                 3        1                   6            2
Net interest expense       $   45    $  46     (2 )%    $   87        $  93     (6 )%

Net interest expense decreased $1 million in second quarter 2014 compared to second quarter 2013. The decrease was primarily due to repayment in 2013 of the five-year term loan (the "Term Loan") used to finance part of the Solutia acquisition and increased capitalized interest partially offset by interest expense for the new $500 million principal amount notes issued in May 2014. Net interest expense decreased $6 million in first six months 2014 compared to first six months 2013. The decrease was primarily due to repayment in 2013 of the Term Loan.

Other Charges (Income), Net
                                                 Second Quarter                First Six Months
(Dollars in millions)                         2014            2013           2014             2013
Foreign exchange transaction (gains)
losses                                    $        -       $      (1 )   $        -       $        4
(Income) loss from equity investments and
other investment (gains) losses, net              (2 )            (1 )           (5 )             (3 )
Other, net                                        (6 )             2             (6 )              -
Other charges (income), net               $       (8 )     $       -     $      (11 )     $        1

Included in other charges (income), net are gains or losses on foreign exchange transactions, equity investments, business venture investments, non-operating assets, and certain litigation costs and earnings.



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