Consumables

Eastman Announces Fourth-Quarter and Full-Year 2012 Financial Results

Tuesday 05. February 2013 - Eastman Chemical Company (NYSE:EMN) today announced earnings from continuing operations, excluding the items described in the "Non-GAAP Items and Pro Forma Combined Results" section and Tables 3 and 4, of $1.19 per diluted share for fourth quarter 2012 versus $0.78 per diluted share for fourth quarter 2011.

Reported results from continuing operations were a loss of $0.35 per diluted share in fourth quarter 2012 and earnings of $0.09 per diluted share in fourth quarter 2011.
“Eastman delivered another year of consistently strong earnings, with fourth-quarter results providing an outstanding way to end 2012,” said Jim Rogers, Chairman and CEO. “This high level of performance was driven by our market-leading businesses and the significant strategic actions we have taken to improve our portfolio. We are well positioned for continued growth in 2013 and beyond, supported by strong cash generation.”
(In millions, except per share amounts) 4Q12
4Q11
FY12 FY11
Sales revenue $2,169 $1,723 $8,102
$7,178

Pro forma combined sales revenue* $2,169 $2,250 $9,120 $9,275

Earnings (loss) per diluted share from continuing
operations ($0.35) $0.09 $2.92 $4.24

Earnings per diluted share from

continuing operations excluding MTM
pension and OPEB losses and gains,
Solutia acquisition-related costs,
and asset impairments and
restructuring charges and gains**
$1.19 $0.78 $5.38 $4.81

Net cash provided by operating activities $440 $352 $1,128 $625

*See “Non-GAAP items and Pro Forma Combined Results” below and Table 2.
**For reconciliation to reported company and segment earnings, see Tables 3 and 4.
Corporate 4Q 2012 versus 4Q 2011
Sales revenue for fourth quarter 2012 was $2.2 billion, a 26 percent increase compared with fourth quarter 2011. Fourth quarter 2012 included sales revenue from the acquired Solutia businesses. Pro forma combined sales revenue declined 4 percent due primarily to lower selling prices. The lower selling prices were primarily due to lower raw material and energy costs.
Operating results in fourth quarter 2012 were a loss of $44 million compared to operating earnings of $19 million in fourth quarter 2011. Excluding mark-to-market pension and other post-retirement benefits (MTM) losses in both periods and asset impairments and restructuring charges and Solutia acquisition-related costs in fourth quarter 2012, operating earnings were $326 million in fourth quarter 2012 and $178 million in fourth quarter 2011. Fourth quarter 2012 included operating earnings from the acquired Solutia businesses. Pro forma combined operating earnings, excluding MTM losses, asset impairments and restructuring charges, and Solutia acquisition-related costs, were $326 million in fourth quarter 2012 compared with $255 million in fourth quarter 2011. Pro forma combined operating earnings increased primarily due to lower raw material and energy costs more than offsetting lower selling prices. Operating results and pro forma combined operating earnings included the “Other” operating losses detailed in Table 3.
Segment Results 4Q 2012 versus 4Q 2011
Additives & Functional Products – Fourth quarter 2012 included sales revenue and operating earnings from the acquired Solutia rubber materials product lines. Pro forma combined sales revenue declined due to lower selling prices in solvents product lines in response to lower raw material and energy costs and lower selling prices in rubber materials anti-degradant product lines attributed to competitive conditions in a relatively weak tire market, primarily in Europe. Excluding fourth-quarter 2012 asset impairments and restructuring charges and additional costs of acquired Solutia inventories, pro forma combined operating earnings increased to $89 million in fourth quarter 2012 compared with $68 million in fourth quarter 2011. The increase was primarily due to lower raw material and energy costs partially offset by lower selling prices, primarily in solvents product lines.
Adhesives & Plasticizers – Sales revenue increased due to higher sales volume attributed to the continued substitution of phthalate plasticizers with non-phthalate plasticizers. Excluding fourth-quarter 2012 asset impairments and restructuring charges, operating earnings in fourth quarter 2012 increased to $52 million compared with $49 million in fourth quarter 2011 primarily due to lower raw material and energy costs and higher sales volume, which more than offset lower selling prices.
Advanced Materials – Fourth quarter 2012 included sales revenue and operating earnings from the acquired Solutia PVB sheet and resins and performance films product lines. The pro forma combined sales revenue decrease was attributed primarily to weakened demand in specialty copolyester end markets, particularly durable goods and consumables. Excluding fourth-quarter 2012 asset impairments and restructuring charges and additional costs of acquired Solutia inventories, pro forma combined operating earnings declined to $29 million in fourth quarter 2012 compared with $37 million in fourth quarter 2011. The decline in operating earnings was due to lower capacity utilization, which was primarily the result of efforts to reduce inventory in PVB sheet and specialty materials product lines and weakened demand for specialty copolyester product lines.
Fibers – Sales revenue was unchanged as higher selling prices in response to higher raw material and energy costs, particularly for wood pulp, were offset by lower sales volume for the acetate yarn product line attributed to weakened demand in the apparel market. Excluding asset impairments and restructuring charges in 2012, operating earnings increased to $93 million in fourth quarter 2012 compared with $84 million in fourth quarter 2011 due to higher selling prices.
Specialty Fluids & Intermediates – Fourth quarter 2012 included sales revenue and operating earnings from the acquired Solutia specialty fluids product lines. Pro forma combined sales revenue declined primarily due to lower selling prices for intermediates product lines in response to lower raw material and energy costs and lower sales volume due primarily to maintenance at a Longview, Texas, olefins cracking unit. Excluding fourth-quarter 2012 asset impairments and restructuring charges, pro forma combined operating earnings increased to $93 million in fourth quarter 2012 compared with $47 million in fourth quarter 2011. The increase was primarily due to lower raw material and energy costs, which more than offset lower selling prices.
Corporate FY 2012 versus FY 2011
Earnings from continuing operations, excluding the items described in the “Non-GAAP Items and Pro Forma Combined Results” section and Tables 3 and 4, were $5.38 per diluted share for full year 2012 versus $4.81 per diluted share for full year 2011. Reported earnings from continuing operations were $2.92 per diluted share in full year 2012 and $4.24 per diluted share in full year 2011.
Eastman’s full-year 2012 sales revenue was $8.1 billion, an increase of 13 percent year over year. Full year 2012 included sales revenue from the acquired Solutia businesses. Pro forma combined sales revenue declined 2 percent.
Operating earnings for full year 2012 were $800 million compared to $937 million for full year 2011. Excluding MTM losses and asset impairments and restructuring charges and gains for both periods, and Solutia acquisition-related costs for 2012, operating earnings were $1.3 billion for full year 2012 and $1.1 billion for full year 2011. Full year 2012 included operating earnings from the acquired Solutia businesses. Pro forma combined operating earnings, excluding MTM losses and asset impairments and restructuring charges and gains for both periods and Solutia acquisition-related costs for 2012, were $1.5 billion for full year 2012 compared with $1.4 billion for full year 2011. Operating earnings and pro forma combined operating earnings included the “Other” operating losses detailed in Table 3.
Segment Results FY 2012 versus FY 2011
Additives & Functional Products – Full year 2012 included sales revenue and operating earnings from the acquired Solutia rubber materials product lines. Pro forma combined sales revenue declined due to lower selling prices in solvents product lines in response to lower raw material and energy costs and lower selling prices in rubber materials anti-degradant product lines attributed to competitive conditions in a relatively weak tire market, primarily in Europe. Excluding full-year 2012 additional costs of acquired Solutia inventories and asset impairments and restructuring charges, pro forma combined operating earnings increased to $395 million in full year 2012 compared with $365 million in full year 2011. The increase was primarily due to lower raw material and energy costs partially offset by lower selling prices, particularly in solvents product lines, and higher operating costs including labor and maintenance.
Adhesives & Plasticizers – Sales revenue increased due to higher sales volume attributed to the continued substitution of phthalate plasticizers with non-phthalate plasticizers. Excluding full-year 2012 asset impairments and restructuring charges, operating earnings for full year 2012 increased to $263 million compared with $250 million for full year 2011. The increase was primarily due to higher sales volume, partially offset by higher operating costs including labor and maintenance and costs associated with the startup of non-phthalate plasticizers manufacturing assets at the Texas City, Texas, facility.
Advanced Materials – Full year 2012 included sales revenue and operating earnings from the acquired Solutia PVB sheet and resins and performance films product lines. The pro forma combined sales revenue decrease was attributed primarily to weakened demand in PVB sheet end markets, particularly the transportation market in Europe, and specialty copolyester end markets, particularly durable goods and consumables, partially offset by increased sales revenue in performance films. Full-year 2012 operating earnings included additional costs of acquired Solutia inventories and asset impairments and restructuring charges. Excluding these costs and charges, pro forma combined operating earnings for full year 2012 declined to $210 million compared with $251 million for full year 2011. The decline in operating earnings was due to lower capacity utilization, which was primarily the result of weakened demand in PVB sheet and specialty materials end markets, efforts to reduce inventory in specialty materials and PVB sheet and resins product lines, and additional costs related to capacity expansions.
Fibers – Sales revenue increased as higher selling prices in response to higher raw material and energy costs, particularly for wood pulp, were partially offset by lower sales volume for the acetate yarn product line attributed to weakened demand in the apparel market. Excluding asset impairments and restructuring charges in 2012, operating earnings increased to $388 million in full year 2012 compared with $365 million in full year 2011 due to higher selling prices which more than offset higher raw material and energy costs and higher operating costs including labor and maintenance.
Specialty Fluids & Intermediates – Full year 2012 included sales revenue and operating earnings from the acquired Solutia specialty fluids product lines. Pro forma combined sales revenue declined due to lower selling prices in intermediates product lines in response to lower raw material and energy costs. Excluding full-year 2012 additional costs of acquired Solutia inventories and asset impairments and restructuring charges in both periods, pro forma combined operating earnings increased to $359 million in full-year 2012 compared with $278 million in full year 2011. The increase was primarily due to lower raw material and energy costs which more than offset lower selling prices and higher operating costs including labor and maintenance.
Cash Flow
Eastman generated $1.1 billion in cash from operating activities in 2012. The company contributed approximately $125 million to its U.S. defined benefit pension plans. The company generated strong free cash flow, defined as cash from operating activities minus capital expenditures and dividends, of $471 million in 2012, which included the accelerated payment of the fourth-quarter dividend in December of $45 million. In addition, during the second half of 2012 the company repaid $250 million of the $1.2 billion Solutia acquisition term loan. See Table 5B for reconciliation of cash provided by operating activities to free cash flow.
Outlook
Commenting on the outlook for full year 2013, Rogers said: “With our world-class technology platforms and leading positions in attractive end markets, we are well positioned to generate strong earnings growth in 2013. We expect the continued integration of Solutia, capacity expansions serving customers in growing end-markets, and the increased benefit of producing versus purchasing olefins will positively impact results. However, there continues to be global economic uncertainty, particularly the timing of a recovery in Europe. Taking all these factors into consideration, we are increasing our expectation for 2013 earnings per share from continuing operations to between $6.30 and $6.40.” Solutia integration costs, any asset impairments and restructuring charges, and mark-to-market pension and OPEB gains or losses are excluded from the earnings per share projection.
Non-GAAP Items and Pro Forma Combined Results
Solutia Acquisition — On July 2, 2012, the company completed the acquisition of Solutia Inc. This news release includes a comparison of fourth-quarter and full-year 2012 and 2011 results on a pro forma combined basis assuming the acquisition of Solutia on January 1, 2011. For other selected pro forma combined information, see the company’s Current Report on Form 8-K furnished with the Securities and Exchange Commission on October 15, 2012 and Tables 2 and 3.
As required by purchase accounting, the acquired Solutia inventories were marked to fair value. These inventories were subsequently sold resulting in a $79 million increase in cost of sales ($4 million in fourth quarter and $79 million for the full year), net of the LIFO impact of these inventories. Fourth-quarter and full-year 2012 results of operations also included $7 million and $69 million, respectively, of Solutia transaction, integration, and financing costs and $4 million and $32 million, respectively, of Solutia-related restructuring charges on a pro forma combined basis. These restructuring charges were primarily for severance associated with the acquisition and integration of Solutia.
MTM Pension and OPEB Losses and Gain – As previously reported, in 2012 Eastman changed its method of accounting for actuarial gains and losses for its pension and other postretirement benefits plans so that these gains and losses are measured annually and recognized as a MTM adjustment during the fourth quarter of each year. In addition, any interim remeasurements triggered by certain plan actions or changes are recognized as a MTM adjustment in the quarter in which such remeasurement occurs. This new accounting method has been applied retrospectively to all periods. During fourth quarter 2012, Eastman recognized a pre-tax MTM loss of $276 million, compared with a $224 million loss in fourth quarter 2011 on a pro forma combined basis. At December 31, 2012, the Company’s weighted-average assumed discount rate was 3.84 percent, down significantly from the prior year, resulting in an actuarial loss of approximately $380 million. Partially offsetting the impact of the lower discount rate was an increase in pension asset value of approximately $105 million due to asset values appreciating in excess of the assumed weighted-average rate of return of 7.27 percent. In addition, in first quarter 2011 the Company recognized a $15 million MTM gain due to the interim remeasurement of the OPEB plan obligation.
Other Asset Impairments and Restructuring Charges — During fourth quarter and full year, the Company also recognized other asset impairments and restructuring charges of $79 million and $93 million, respectively, on a pro forma combined basis. These charges were primarily for costs to shut down plant sites (including the fourth quarter termination of the operating agreement at the newly acquired Sao Jose dos Campos, Brazil, Solutia site), costs resulting from a strategy change for the Perennial WoodTM developing business initiative (including losses on take-or-pay contracts with third parties and reserves for inventory costs in excess of recoverable value), costs of discontinuance of an environmental project, and, in full-year an impairment charge on land retained from the industrial gasification project.
For reconciliation of Non-GAAP to GAAP financial measures, see Tables 3 and 4.