EASTMAN CHEMICAL COMPANY Page
Critical Accounting Estimates 29
Non-GAAP Financial Measures 34
Overview 38
Results of Operations 39
Summary by Operating Segment 45
Sales by Customer Location 51
Liquidity and Other Financial Information 52
Inflation 55
Recently Issued Accounting Standards 55
Outlook 56
Risk Factors 56
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is based upon the consolidated financial statements of
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 consolidated
financial statements and related notes included elsewhere in this Annual Report
on Form 10-K (this "Annual Report"). All references to earnings per share
("EPS") contained in this report are to diluted EPS unless otherwise noted. EBIT
is the GAAP measure earnings before interest and taxes.
28
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSCRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with GAAP, 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 contingencies. On an ongoing basis,Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, and income taxes. 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. Management believes the critical accounting estimates described below 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.
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used byEastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of properties and equipment and definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. The Company's assumptions related to long-lived assets are subject to change and impairments may be required in the future. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset is adjusted, resulting in a charge to earnings.Goodwill Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities. A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach and applies a discounted cash flow model in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC"), and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value. For additional information, see Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. 29 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report). The Company reduced the carrying value of the crop protection reporting unit to its estimated fair value through recognition of a$45 million goodwill impairment. The impairment was primarily due to the impact of recent regulatory changes in theEuropean Union on the current period and forecasted revenue and EBIT and a decrease in the long-term growth rate assumed in the goodwill impairment model. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the WACC. The Company performed a sensitivity analysis of both of those assumptions, assuming a one percent decrease in the expected long-term growth rate or a one percent increase in the WACC, and both scenarios independently yielded an estimated fair value for the crop protection reporting unit below carrying value. The crop protection reporting unit's goodwill after the reduction for impairment was$190 million as ofDecember 31, 2019 .
Indefinite-lived Intangible Assets
Eastman conducts testing of indefinite-lived intangible assets annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value. Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium. The Company had$537 million in indefinite-lived intangible assets at the time of impairment testing. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2019.
The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of events which might require additional testing before the next annual impairment test.
For additional information, see Note 3, "Properties and Accumulated
Depreciation", Note 4, "
Environmental Costs
Eastman recognizes environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum undiscounted amount. This undiscounted amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of$260 million to the maximum of$487 million and from the best estimate or minimum of$271 million to the maximum of$508 million atDecember 31, 2019 andDecember 31, 2018 , respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at bothDecember 31, 2019 andDecember 31, 2018 . 30 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged to earnings over the estimated useful life of the assets. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted. For sites that have environmental asset retirement obligations, the best estimate for these asset retirement obligation costs recognized to date was$27 million and$25 million atDecember 31, 2019 andDecember 31, 2018 , respectively. The Company's total amount reserved for environmental loss contingencies, including the remediation and closure and post-closure costs described above, was$287 million and$296 million atDecember 31, 2019 andDecember 31, 2018 , respectively. This loss contingency reserve represents the best estimate or minimum for undiscounted remediation costs and the best estimate of the amount accrued to date for discounted asset retirement obligation costs. For additional information, see Note 12, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Under its other postretirement benefit plans in theU.S. ,Eastman provides life insurance for eligible retirees hired prior toJanuary 1, 2007 .Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior toJanuary 1, 2007 that will end onDecember 31, 2021 . Company funding is also provided for eligible Medicare retirees hired prior toJanuary 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits primarily reflect the Company's assumptions related to discount rates and expected return on plan assets. For valuing the obligations and assets of the Company'sU.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 3.25 percent and 1.56 percent, respectively, and weighted average expected returns on plan assets of 7.37 percent and 4.26 percent, respectively, atDecember 31, 2019 . The Company assumed a weighted average discount rate of 3.21 percent for its other postretirement benefit plans. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation. The Company performed a five-year experience study of the assumptions for theU.S. plans in 2017 which included a review of the mortality tables. As a result of the experience study, the Company has updated the mortality assumptions used to a modified RP-2017 table with modified MP-2017 improvement scale and no collar adjustment. The projected benefit obligation as ofDecember 31, 2019 and 2020 expense are affected by year-end 2019 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the assumed discount rate and expected return on plan assets for all pension and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. 31 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Impact on 2020 Impact on Impact on December 31, 2019 Pre-tax 2020 Pre-tax Projected Benefit Benefits Benefits Obligation for Pension Expense Impact on Expense Plans (Excludes December 31, (Excludes mark-to-market 2019 Benefit mark-to-market impact) for Obligation for impact) Other Other Change in for Pension Postretirement Postretirement Assumption Plans U.S. Non-U.S. Benefit Plans Benefit Plans 25 basis point
decrease in -
discount
rate
25 basis
point
increase in
discount
rate
25 basis
point
decrease in
expected return on plan assets 25 basis
point
increase in -
expected return on plan assets The assumed discount rate and expected return on plan assets used to calculate the Company's pension and other postretirement benefit obligations are established eachDecember 31 . The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected cash flows of the pension and other postretirement benefit obligations. Because future health care benefits under theU.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the plans invest their funds, primarily inU.S. and non-U.S. fixed income securities,U.S. and non-U.S. public equity securities, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions. The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows. This cost approach does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, as described in the next paragraph, is typically recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. For additional information, see Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. The Company uses fair value accounting for plan assets. If actual experience differs from actuarial assumptions, primarily discount rates and long-term assumptions for asset returns which were used in determining the current year expense, the difference is recognized as part of the MTM net gain or loss in fourth quarter each year, and any other quarter in which an interim remeasurement is triggered. The MTM net gain or loss applied to net earnings in 2019, 2018, and 2017 due to the actual experience versus actuarial assumptions for the defined benefit pension and other postretirement benefit plans were a net loss of$143 million , a net loss of$99 million , and a net gain of$21 million , respectively. The 2019 MTM net loss includes an actuarial loss of approximately$385 million , resulting primarily from the Company'sDecember 31, 2019 weighted-average assumed discount rate of 2.80 percent, which is lower than for the prior year, and changes in other actuarial assumptions. Overall asset values increased approximately$240 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual gain was approximately$405 million , or approximately 15 percent, which was above the expected return of approximately$165 million , or approximately 6 percent. 32 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS While changes in obligations do not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirements, attrition rates of employees, and other factors. For further information regarding pension and other postretirement benefit obligations, see Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Litigation and Contingent Liabilities
From time to time,Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon currently available facts, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against its overall financial condition, results of operations, or cash flows in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities onEastman 's Consolidated Statements of Financial Position are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the provision for (benefit from) income taxes could have a material impact on the consolidated results of operations and statements of financial position. As ofDecember 31, 2019 and 2018, valuation allowances of$453 million and$487 million , respectively, have been provided against the deferred tax assets. The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and management judgment.Eastman 's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has evaluated these potential issues under the more-likely-than-not standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. Income tax expense could be materially impacted to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent payments are required in excess of the established liability for unrecognized tax benefits. The Company accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet. For further information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. 33 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", "Liquidity and Other Financial Information", and "Outlook" in this MD&A. Management discloses non-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' performances, make resource allocation decisions, and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP financial 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 financial measure, but to consider such measures alongside the most directly comparable GAAP financial measure.
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items Excluded from Non-GAAP Earnings
In addition to evaluatingEastman 's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, 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 result fromEastman 's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature.
• Non-core transactions, costs, and losses or gains relate to, among other
things, cost reductions, growth and profitability improvement initiatives,
and other events outside of core business operations, and have included
asset impairments and restructuring charges and gains, costs of and
related to acquisitions, gains and losses from and costs related to
dispositions, closure, or shutdowns of businesses or assets, financing
transaction costs, and MTM losses or gains for pension and other
postretirement benefit plans.
• In 2018 the Company recognized unusual income from insurance in excess of
costs for, and in 2017 recognized unusual net costs of, the disruption,
repairs, and reconstruction of the
operations area resulting from the previously reported October 4, 2017
explosion (the "coal gasification incident"). Management considers thecoal gasification incident unusual because of the Company's operational
and safety history and the magnitude of the unplanned disruption.
• In 2018 the Company recognized unusual costs and in both 2019 and 2018unusual net decreases to earnings from adjustments of the net tax benefit
recognized in fourth quarter 2017, resulting from tax law changes,
primarily the 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"), and
related outside-
an international treasury services center. Management considers these
actions and associated costs and income unusual because of the infrequent
nature of such changes in tax law and resulting actions and the
significant impacts on earnings.
Because non-core, unusual, 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, management believes it is appropriate to evaluate the financial
measures prepared and calculated in accordance with both GAAP and the related
non-GAAP financial measures excluding the effect on the Company's results of
these non-core, unusual, 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.
34
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSAdjusted Tax Rate and Provision for Income Taxes
In interim periods,Eastman discloses non-GAAP earnings with an adjusted effective tax rate and a resulting adjusted provision for income taxes using the Company's forecasted tax rate for the full year as of the end of the interim period. The adjusted effective tax rate and resulting adjusted provision for income taxes are equal to the Company's projected full year effective tax rate and provision for income taxes on earnings excluding non-core, unusual, or non-recurring items for completed periods. The adjusted effective tax rate and resulting adjusted provision for income taxes may fluctuate during the year for changes in events and circumstances that change the Company's forecasted annual effective tax rate and resulting provision for income taxes excluding non-core, unusual, or non-recurring items. Management discloses this adjusted effective tax rate, and the related reconciliation to the GAAP effective tax rate, to provide investors more complete and consistent comparisons of the Company's operational performance on a period-over-period interim basis and on the same basis as management evaluates quarterly financial results to provide a better indication of expected full year results.
Non-GAAP Cash Flow Measure
Eastman regularly evaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as net cash provided by operating activities, less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment, and in 2018 net of proceeds from property insurance). Such net capital expenditures are generally funded from available cash and, as such, management believes they should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of available cash. The priorities for cash after funding operations include payment of quarterly dividends, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation 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. In addition,Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization. Management believes this metric is useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain earnings results in this Annual Report:
• MTM pension and other postretirement benefit plans gains and losses resulting
from the changes in discount rates and other actuarial assumptions and the
difference between actual and expected returns on plan assets during the
period;
• Asset impairments and restructuring charges, including severance costs and
site closure or shutdown charges, net, of which asset impairments are
non-cash transactions impacting profitability;
• Early debt extinguishment and other related costs resulting from repayment of
borrowings;
• Cost of disposition of claims against operations that were discontinued by
2012;
• Gain from sale of the formulated electronics cleaning solutions business,
which was part of the Additives & Functional Products segment; and
• Tax benefit associated with a previously impaired site.
The following unusual items are excluded by management in its evaluation of certain earnings results in this Annual Report:
• Costs of, and income from insurance for, the coal gasification incident;
• Costs of currency transaction and professional fees resulting from fourth
quarter 2017 tax law changes and related outside-
and
• Estimated net tax benefit recognized in fourth quarter 2017 resulting from
tax law changes, primarily the Tax Reform Act, and tax impact of related
outside-U.S. entity reorganizations and related subsequent adjustments
recognized in 2018 and 2019.
As described above, the alternative non-GAAP measure "free cash flow" is presented in this Annual Report.
35
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSNon-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings (Dollars in millions)
2019 2018 2017
Non-core items impacting EBIT: Mark-to-market pension and other postretirement benefits (gain) loss, net$ 143 $ 99 $ (21 ) Asset impairments and restructuring charges, net 126 45 8
Cost of disposition of claims against discontinued
- - 9
Gains from sale of businesses - - (3 )
Unusual items impacting EBIT:
Net coal gasification incident (insurance) costs - (83 ) 112
Costs resulting from tax law changes and
outside-U.S. entity reorganizations - 20 -
Total non-core and unusual items impacting EBIT 269 81 105
Non-core item impacting earnings before income taxes: Early debt extinguishment and other related costs - 7 - Total non-core item impacting earnings before income taxes - 7 -
Less: Items impacting provision for (benefit from) income taxes: Tax effect for non-core and unusual items
47 16 30
Tax benefit associated with previously impaired
site - - 8
Estimated net tax (expense) benefit from tax law
changes and tax loss from outside-U.S. entity
reorganizations (7 ) (20 ) 339 Total items impacting provision for (benefit from) income taxes
40 (4 ) 377
Total items impacting net earnings attributable to
Eastman $ 229 $ 92 $ (272 )
Below is the calculation of the "Other components of post-employment (benefit)
cost, net" that are not included in the above non-core item "mark-to-market
pension and other postretirement benefits gain (loss), net" and that are
included in the non-GAAP results.
(Dollars in millions) 2019 2018 2017
Other components of post-employment (benefit) cost, net
$ 60 $ (21 ) $ (135 ) Service cost 41 49 53 Net periodic benefit (credit) cost 101 28 (82 ) Less: Mark-to-market (gain) loss 143 99 (21 ) Components of post-employment (benefit) cost, net included in non-GAAP earnings measures$ (42 ) $ (71
)
Below is the calculation of the MTM pension and other post-retirement benefits (gain) loss disclosed above. (Dollars in millions) 2019 2018 2017
Actual return and percentage of return on assets
(3 )%$ 314 11 % Less: expected return on assets 165 6 % 189 7 % 180 7 % Mark-to-market (loss) gain on assets 241 (271 ) 134 Actuarial (loss) gain (384 ) 172 (113 ) Total mark-to-market (loss) gain$ (143 ) $ (99 )
For more detail about MTM pension and other postretirement benefit plans net
gains and losses, including actual and expected return on plan assets and the
components of the net gain or loss, see "Critical Accounting Estimates - Pension
and Other Postretirement Benefits" above, and Note 10, "Retirement Plans",
"Summary of Changes - Actuarial (gain) loss, Actual return on plan assets, and
Reserve for third party contributions", and "Summary of Benefit Costs and Other
Amounts Recognized in Other Comprehensive Income - Mark-to-market pension and
other postretirement benefits (gain) loss, net" to the Company's consolidated
financial statements in Part II, Item 8 of this Annual Report.
36
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following GAAP financial measures:
• Gross profit,
• Selling, general and administrative ("SG&A") expenses,
• Other components of post-employment (benefit) cost, net,
• Other (income) charges, net,
• EBIT,
• Provision for (benefit from) income taxes,
• Net earnings attributable to
• Diluted EPS, and
• Net cash provided by operating activities.
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measure
In addition to the non-GAAP measures presented in this Annual Report and other
periodic reports, management occasionally has evaluated and disclosed to
investors and securities analysts the non-GAAP measure cash provided by or used
in operating activities excluding certain non-core, unusual, or non-recurring
sources or uses of cash or including cash from or used by activities that are
managed as part of core business operations ("adjusted cash provided by or used
in operating activities") when analyzing, among other things, business
performance, liquidity and financial position, and performance-based
compensation. Management has used this non-GAAP measure in conjunction with the
GAAP measure cash provided by or used in operating activities because it
believes it is an appropriate metric to evaluate the cash flows from Eastman 's
core operations that are available for organic and inorganic growth initiatives
and because it allows for a more consistent period-over-period presentation of
such amounts. In its evaluation, management generally excludes the impact of
certain non-core activities and decisions of management that it considers not
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, and generally includes cash from or used in activities that are
managed as operating activities and in business operating decisions. Management
has disclosed 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.
Alternative Non-GAAP Earnings Measures
From time to time,Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "EBIT Margin", "Adjusted EBITDA", "EBITDA Margin", and "Return onInvested Capital " (or "ROIC"). Management defines EBIT Margin as the GAAP measure EBIT adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods divided by the GAAP measure sales revenue in the Company's income statement for the same period. Adjusted EBITDA is EBITDA (net earnings before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. EBITDA Margin is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statement for the same periods. Management defines ROIC as net earnings plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Management believes that EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC are useful as supplemental measures in evaluating the performance of and returns fromEastman 's operating businesses, and from time to time uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC to compare the results, returns, and value of the Company with those of peer and other companies. 37
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Eastman 's products and operations are managed and reported in four operating
segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"),
Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven
growth model which consists of leveraging world class scalable technology
platforms, delivering differentiated application development capabilities, and
relentlessly engaging the market. The Company's world class technology platforms
form the foundation of sustainable growth by differentiated products through
significant scale advantages in research and development ("R&D") and advantaged
global market access. Differentiated application development converts market
complexity into opportunities for growth and accelerates innovation by enabling
a deeper understanding of the value of Eastman 's products and how they perform
within customers' and end-user products. Key areas of application development
include thermoplastic conversion, functional films, coatings formulations,
rubber additive formulations, adhesives formulations, nonwovens and textiles,
animal nutrition, and chemical and plastics recycling technologies. The Company
engages the market by working directly with customers and downstream users,
targeting attractive niche markets, and leveraging disruptive macro trends.
Management believes that these elements of the Company's innovation-driven
growth model, combined with disciplined portfolio management and balanced
capital deployment, will result in consistent, sustainable earnings growth and
strong cash flow.
The Company generated sales revenue of $9.3 billion and $10.2 billion for 2019
and 2018, respectively. EBIT was $1.1 billion and $1.6 billion in 2019 and 2018,
respectively. Excluding the non-core and unusual items referenced in "Non-GAAP
Financial Measures", adjusted EBIT was $1.4 billion and $1.6 billion in 2019 and
2018, respectively. Discussion of sales revenue and EBIT changes is presented in
"Results of Operations" and "Summary by Operating Segment" in this MD&A.
Net earnings and EPS and adjusted net earnings and EPS were as follows:
2019 2018
(Dollars in millions, except diluted EPS) $ EPS $ EPS Net earnings attributable to Eastman$ 759 $ 5.48
Total non-core and unusual items, net of tax 229 1.65 92 0.64 Net earnings attributable toEastman excluding non-core and unusual items$ 988 $ 7.13 $ 1,172 $ 8.20
The Company generated
As previously reported, in fourth quarter 2017 an explosion in theKingsport site's coal gasification area disrupted manufacturing operations, primarily for the Fibers and CI segments which are significant internal users of cellulose and acetyl stream intermediates. The incident, net of insurance, reduced 2017 earnings by$112 million and increased 2018 earnings by$83 million . The cumulative net costs of the incident were$29 million . Costs net of insurance of the disruption, repairs, and reconstruction of coal gasification operations in 2017 were recognized in "Cost of sales" and insurance net of costs in 2018 was recognized in "Cost of sales" and "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. 38 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Eastman 's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below. Sales 2019 Compared to 2018 2018 Compared to 2017 (Dollars in millions) 2019 2018 Change 2018 2017 Change Sales$ 9,273 $ 10,151 (9 )%$ 10,151 $ 9,549 6 % Volume / product mix effect (4 )% 2 % Price effect (4 )% 3 % Exchange rate effect (1 )% 1 % 2019 Compared to 2018
Sales revenue decreased as a result of decreases in all operating segments. Further discussion by operating segments is presented in "Summary of Operating Segment" in this MD&A.
2018 Compared to 2017
Sales revenue increased as a result of increases in all operating segments.
Gross Profit
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
Gross profit $ 2,234 $ 2,479 (10 )% $ 2,479 $ 2,363 5 %
Net coal gasification
incident (insurance)
costs - (18 ) (18 ) 112
Gross profit excluding
unusual item $ 2,234 $ 2,461 (9 )% $ 2,461 $ 2,475 (1 )%
2019 Compared to 2018
Gross profit included coal gasification incident insurance in excess of costs in
2018. Excluding this unusual item, gross profit decreased due to lower sales
volume and an unfavorable shift in foreign currency exchange rates across all
operating segments. Further discussion by operating segment is presented in
"Summary by Operating Segment" in this MD&A.
2018 Compared to 2017
Gross profit included coal gasification incident insurance in excess of costs in
2018 and coal gasification incident net costs in 2017. Excluding these unusual
items, gross profit decreased primarily due to raw material, energy, and
distribution costs exceeding selling prices across most segments and higher
growth initiative costs being partially offset by higher sales volume in the AM
and AFP segments.
39
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSSelling, General and Administrative Expenses
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
Selling, general and
administrative expenses $ 691 $ 721 (4 )% $ 721 $ 729 (1 )%
Costs resulting from tax law
changes and outside-U.S.
entity reorganizations - (7 ) (7 ) -
Selling, general and
administrative expenses
excluding unusual item $ 691 $ 714 (3 )% $ 714 $ 729 (2 )%
2019 Compared to 2018
SG&A expenses in 2018 included $7 million of costs of professional fees
resulting from fourth quarter 2017 tax law changes and related outside-U.S.
entity reorganizations as part of the transition to an international treasury
services center. Excluding this item, SG&A expenses decreased primarily due to
lower variable compensation costs resulting from Company performance and cost
management actions.
2018 Compared to 2017
SG&A expenses in 2018 included $7 million of costs of professional fees
resulting from fourth quarter 2017 tax law changes and related outside-U.S.
entity reorganizations as part of the transition to an international treasury
services center. Excluding this item, SG&A expenses decreased primarily due to
lower variable compensation costs mostly offset by higher costs of growth
initiatives.
Research and Development Expenses
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
Research and
development expenses $ 234 $ 235 - % $ 235 $ 227 4 %
2019 Compared to 2018
R&D expenses were relatively unchanged.
2018 Compared to 2017
R&D expenses increased primarily due to higher costs of growth initiatives.
Asset Impairments and Restructuring Charges, Net
For years ended December 31,
(Dollars in millions) 2019 2018 2017
Asset impairments $ 27 $ - $ 1
Intangible asset and goodwill impairments 45 39 -
Severance charges 45 6 6
Site closure and restructuring charges 9 - 1
Total $ 126 $ 45 $ 8
40
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2019 , management approved a plan to discontinue production of
certain products at the Singapore manufacturing site by the end of 2020
resulting in an asset impairment charge of $27 million . Eastman is evaluating
alternative uses for the site after the end of 2020. Additional restructuring
charges of up to $50 million are expected in 2020. This action is projected to
result in an estimated annual earnings benefit of approximately $25 million
within the AFP and CI segments beginning mostly in 2021.
As a result of the annual impairment test of goodwill the Company reduced the
carrying value of the crop protection reporting unit (part of the AFP segment)
to its estimated fair value through recognition of a $45 million goodwill
impairment. The impairment was primarily due to the recent and expected
continuing impact of recent regulatory changes in the European Union and a
decrease in the long-term growth rate assumed for the reporting unit in the
goodwill impairment model.
In 2019, as part of business improvement and cost reduction initiatives, the
Company recognized restructuring charges of $45 million for severance and $5
million for related costs. Management anticipated total cost savings from these
actions of approximately $50 million , most of which was recognized in 2019
primarily in cost of sales and SG&A expenses. Additionally, in 2019 the Company
recognized a $4 million restructuring charge related to a capital project in the
AFP segment that was discontinued in 2016.
In 2018, asset impairments and restructuring charges, net consisted of
restructuring charges of approximately $6 million for severance. As a result of
the annual impairment test of goodwill the Company reduced the carrying value of
the crop protection reporting unit (part of the AFP segment) to its estimated
fair value through recognition of a $38 million goodwill impairment. The
impairment was primarily due to an increase in the WACC applied to the
impairment analysis and the estimated impact of future regulatory changes.
Additionally, the Company recognized an intangible asset impairment of $1
million in the AM segment.
In 2017, asset impairments and restructuring charges, net were $3 million of
asset impairments and restructuring charges, including severance, in the AFP
segment related to the closure of a facility in China and restructuring charges
of approximately $5 million for severance.
Other Components of Post-employment (Benefit) Cost, Net
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
Other components of
post-employment
(benefit) cost, net $ 60 $ (21 ) >(100%) $ (21 ) $ (135 ) (84 )%
Mark-to-market pension
and other
postretirement benefit
gain (loss), net (143 ) (99 ) (99 ) 21
Other components of
post-employment
(benefit) cost, net
excluding non-coreitem$ (83 ) $ (120 ) (31 )%$ (120 ) $ (114 ) 5 % For more information regarding "Other components of post-employment (benefit) cost, net" see Note 1, "Significant Accounting Policies", and Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. 41 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other (Income) Charges, Net (Dollars in millions) 2019 2018
2017
Foreign exchange transaction losses (gains), net (1) $ 9$ 12 $ 5 Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations - 13 - (Income) loss from equity investments and other investment (gains) losses, net (10 ) (17 ) (12 ) Coal gasification incident property insurance - (65 ) - Cost of disposition of claims against discontinued Solutia operations - - 9 Gain from sale of business (2) - - (3 ) Other, net 4 4 5 Other (income) charges, net $ 3$ (53 ) $ 4 Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations - (13 ) - Coal gasification incident property insurance - 65 - Cost of disposition of claims against discontinued Solutia operations - - (9 ) Gain from sale of business (2) - - 3 Other (income) charges, net excluding non-core and unusual items $ 3$ (1 ) $ (2 ) (1) Net impact of revaluation of foreign entity assets and liabilities and effect of foreign exchange non-qualifying derivatives.
(2) Gain from sale of the AFP segment formulated electronic cleaning solution
business.
Earnings Before Interest and Taxes
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
EBIT $ 1,120 $ 1,552 (28 )% $ 1,552 $ 1,530 1 %
Mark-to-market pension
and other
postretirement benefit
(gain) loss, net 143 99 99 (21 )
Net coal gasification
incident (insurance)
costs - (83 ) (83 ) 112
Asset impairments and
restructuring charges,
net 126 45 45 8
Costs resulting from
tax law changes and
outside-U.S. entity
reorganizations - 20 20 -
Cost of disposition of
claims against
discontinued Solutia
operations - - - 9
Gains from sale of
businesses - - - (3 )
EBIT excluding
non-core and unusualitems$ 1,389 $ 1,633 (15 )%$ 1,633 $ 1,635 - % 42
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense
2019 Compared to 2018 2018 Compared to 2017
(Dollars in millions) 2019 2018 Change 2018 2017 Change
Gross interest expense $ 225 $ 242 $ 242 $ 251
Less: Capitalized interest 4 4 4 7
Interest Expense 221 238 238 244
Less: Interest income 3 3 3 3
Net interest expense $ 218 $ 235 (7 )% $ 235 $ 241 (2 )%
2019 Compared to 2018
Net interest expense decreased
2018 Compared to 2017
Net interest expense decreased
Early Debt Extinguishment and Other Related Costs
In fourth quarter 2018, the Company sold 3.5% notes dueDecember 2021 in the principal amount of$300 million and 4.5% notes dueDecember 2028 in the principal amount of$500 million . Net proceeds from the notes were$789 million and were used, together with available cash, for the early and full repayment of the 5.5% notes dueNovember 2019 ($250 million principal) and the partial redemption of the 2.7% notes dueJanuary 2020 ($550 million principal). Total consideration for these prepayments were$806 million ($800 million total principal and$6 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of$7 million for early debt extinguishment costs which was primarily attributable to the early redemption premiums and related unamortized costs. The book value of the redeemed debt was$799 million . For additional information regarding the early debt extinguishment costs, see Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Provision for (Benefit from) Income Taxes (Dollars in millions) 2019 2018 2017 $ % $ % $ % Provision for (benefit from) income taxes and effective tax rate$ 140 16 %$ 226 17 %$ (99 ) (8 )% Tax provision for non-core and unusual items(1) 47 16
30
Tax benefit associated with previously impaired site - -
8
Estimated net tax (expense) benefit from tax law changes and tax loss from outside-U.S. entity reorganizations (7 ) (20 ) 339 Adjusted provision for income taxes and effective tax rate$ 180 15 %$ 222 16%$ 278 20 %
(1) Provision for income taxes for non-core and unusual items is calculated
using the tax rate for the jurisdiction where the gains are taxable and
the expenses are deductible.
43
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 2019 effective tax rate includes a $7 million increase to the provision for
income taxes resulting from adjustments to the net tax benefit recognized in
fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act
and from outside-U.S. entity reorganizations. The 2019 effective tax rate also
includes adjustments to the tax provision to reflect finalization of prior
year's income tax returns and an increase to state income taxes related to
additional valuation allowance provided against state income tax credits.
The 2018 effective tax rate included a $20 million increase to the provision for
income taxes resulting from adjustments to the net tax benefit recognized in
fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform
Act, and from outside-U.S. entity reorganizations. These adjustments related to
the one-time transition tax on deferred foreign income and changes in valuation
of deferred tax assets associated with tax law changes and outside-U.S. entity
reorganizations as part of the formation of an international treasury services
center.
The 2017 effective tax rate included a $339 million net benefit resulting from
tax law changes, primarily the Tax Reform Act, and a tax loss from outside-U.S.
entity reorganizations as part of the formation of an international treasury
services center, a $20 million benefit due to amendments to prior years'
domestic income tax returns, and a $30 million benefit reflecting the
finalization of prior years' foreign income tax returns. The 2017 effective tax
rate also includes an $8 million tax benefit due to a tax ruling permitting
deductibility of a liquidation loss on a previously impaired site.
For more information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Net Earnings Attributable to
2019 2018 2017
(Dollars in millions, except
per share amounts) $ EPS $ EPS $ EPS
Net earnings and diluted
earnings per share
attributable to Eastman $ 759 $ 5.48 $ 1,080 $ 7.56 $ 1,384 $ 9.47
Non-core items, net of
tax: (1)
Mark-to-market pension and
other postretirement benefit
(gain) loss, net 109 0.79 75 0.52 (14 ) (0.09 )
Asset impairments and
restructuring charges
(gain), net 113 0.81 43 0.30 (3 ) (0.02 )
Early debt extinguishment
and other related costs - - 6 0.04 - -
Cost of disposition of
claims against discontinued
Solutia operations - - - - 5 0.03
Gains from sale of
businesses - - - - (1 ) (0.01 )
Unusual items, net of tax:
(1)
Net coal gasification
incident (insurance) costs - - (67 ) (0.47 ) 80 0.55
Estimated net tax expense
(benefit) from tax law
changes and tax loss from
outside-U.S. entity
reorganizations 7 0.05 20 0.14 (339 ) (2.32 )
Costs resulting from tax law
changes and outside-U.S.
entity reorganizations - - 15 0.11 - -
Adjusted net earnings and
diluted earnings per share
attributable to Eastman $ 988 $ 7.13 $ 1,172 $ 8.20$ 1,112 $ 7.61 (1) The provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. 44
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSSUMMARY BY OPERATING SEGMENT
Eastman 's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. For additional financial and product information for each operating segment, see "Business - Business Segments" in Part I, Item 1 of this Annual Report and Note 19, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Additives & Functional Products Segment
2019 Compared to 2018 2018 Compared to 2017
Change Change
(Dollars in
millions) 2019 2018 $ % 2018 2017 $ %
Sales $ 3,273 $ 3,647 $ (374 ) (10 )% $ 3,647 $ 3,343 $ 304 9 %
Volume / product
mix effect (177 ) (5 )% 151 4 %
Price effect (133 ) (3 )% 98 3 %
Exchange rate
effect (64 ) (2 )% 55 2 %
EBIT $ 496 $ 639 $ (143 ) (22 )% $ 639 $ 653 $ (14 ) (2 )%
Asset impairments
and restructuring
charges, net 54 38 16 38 3 35
Gain from sale of
business - - - - (3 ) 3
Net coal
gasification
incident
(insurance) costs - (6 ) 6 (6 ) 8 (14 )
EBIT excluding
non-core and 550 671 (121 ) (18 )% 671 661 10 2 %
unusual items
2019 Compared to 2018
Sales revenue decreased primarily due to lower sales volume, lower selling prices, and an unfavorable shift in foreign currency exchange rates. The lower sales volume was primarily attributed to weaker end-market demand resulting from global trade-related pressures, particularly in transportation markets and other consumer discretionary end markets. Lower selling prices were primarily due to lower raw material prices, including for care chemicals, and increased competitive pressure in markets for tire additives, animal nutrition, and adhesives resins. EBIT in 2019 included a$45 million goodwill impairment of the crop protection business, an asset impairment charge of$5 million resulting from management's approval of a plan to discontinue production of certain products at theSingapore manufacturing site by the end of 2020, and a$4 million restructuring charge related to a capital project. EBIT in 2018 included a goodwill impairment charge related to the crop protection business and coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices of$133 million , lower sales volume of$101 million , and an unfavorable shift in foreign currency exchange rates of$22 million , partially offset by lower raw material costs of$136 million .
2018 Compared to 2017
Sales revenue increased due to higher sales volume, higher selling prices across
most product lines, and a favorable shift in foreign currency exchange rates.
The higher sales volume was primarily attributed to volume growth in care
chemicals, coatings and inks additives, tire additives, and animal nutrition,
and products previously reported in the CI segment.
45
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBIT in 2018 included a goodwill impairment charge related to the crop
protection business and coal gasification incident insurance in excess of costs.
EBIT in 2017 included net costs resulting from the coal gasification incident,
asset impairment and restructuring charges, including severance, related to the
closure of a facility in China , and a gain from sale of the formulated
electronics cleaning solutions business. Excluding these non-core and unusual
items, EBIT increased primarily due to higher sales volume of $54 million
largely offset by higher raw material, energy, and distribution costs more than
exceeding higher selling prices by $20 million , primarily due to fourth quarter
competitive pressure in adhesives resins, and higher growth initiative costs of
approximately $20 million .
Growth Initiatives
In 2019, the AFP segment: • advanced growth and innovation of Regalite™ UltraPure hydrocarbon resin, a
new class of clean tackifying hydrocarbon resins, through a capacity
expansion at the Middelburg, Netherlands manufacturing site;
• acquired the Marlotherm™ heat transfer assets in Marl,
related formulations, intellectual property, and customer contracts, as a
targeted addition to the specialty fluids business;
• advanced growth of Impera™ resins through capacity expansions for the
production of performance resins for tires at both the Middelburg,
demand from tire manufacturers around the world for product solutions that
enable improved safety, efficiency, and performance;
• continued to enhance our ability to serve the global customer base in low
volatile organic compound ("VOC") coatings and other markets by completing
the final phase of a ketones capacity expansion at the Kingsport,
Tennessee manufacturing site in fourth quarter 2019; and
• responded to growing demand for purified water and sustainable waste water
treatment across the globe with world scale production units for
Dimethylaminoethanol ("DMAE"/"DMEA") in
(
regulation and rapidly growing demand in
component into flocculants that are critical for municipal and industrial
water treatments).
Advanced Materials Segment
2019 Compared to 2018 2018 Compared to 2017
Change Change
(Dollars in
millions) 2019 2018 $ % 2018 2017 $ %
Sales $ 2,688 $ 2,755 $ (67 ) (2 )% $ 2,755 $ 2,572 $ 183 7 %
Volume / product
mix effect (25 ) (1 )% 130 5 %
Price effect - - % 22 1 %
Exchange rate
effect (42 ) (1 )% 31 1 %
EBIT $ 517 $ 509 $ 8 2 % $ 509 $ 483 $ 26 5 %
Asset impairments
and restructuring
charges, net 1 1 - 1 - 1
Net coal
gasification
incident
(insurance) costs - (9 ) 9 (9 ) 11 (20 )
EBIT excluding
non-core and 518 501 17 3 % 501 494 7 1 %
unusual items
46
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS2019 Compared to 2018
Sales revenue decreased due to lower sales volume and an unfavorable shift in foreign currency exchange rates. Increased sales volume of premium products, including paint protection film, Tritan™ copolyester, and Saflex™ acoustic and architectural interlayers, was more than offset by decreased sales volume of standard copolyester and interlayers products related to underlying market declines in transportation and consumer durable end markets. EBIT in 2019 included a restructuring charge for severance costs. EBIT in 2018 included coal gasification incident insurance in excess of costs and a charge for an impairment of an indefinite-lived intangible asset. Excluding these non-core and unusual items, EBIT increased primarily due to lower raw material costs of$49 million , mostly offset by an unfavorable shift in foreign currency exchange rates of$23 million and lower sales volume of$16 million . The impact of lower sales volume was mostly offset by increased sales of certain premium products. 2018 Compared to 2017 Sales revenue increased primarily due to higher sales volume and improved product mix across the segment, including for premium products such as performance films, Saflex™ head-up displays, and Tritan™ copolyester. While 2018 had higher sales volume compared with 2017, fourth quarter 2018 had lower specialty plastics sales volume compared to fourth quarter 2017 attributed to customer inventory destocking related to uncertainty caused by theU.S. -China trade dispute. EBIT in 2018 included coal gasification incident insurance in excess of costs and a charge for an impairment of an indefinite-lived intangible asset. EBIT in 2017 included net costs resulting from the coal gasification incident. Excluding these non-core and unusual items, EBIT increased primarily due to higher sales volume and improved product mix of premium products of$94 million , partially offset by higher raw material (particularly for paraxylene in the second half of the year), energy, and distribution costs of$67 million and higher growth initiative costs of approximately$25 million .
Growth Initiatives
In 2019, the AM segment: • continued the growth of Tritan™ copolyester in the durable goods and
health and wellness markets, supported by continued market and application
development;
• strengthened growth in automotive paint protection films in
and
execution strategies and capabilities;
• finalized development and announced the launch of
and patent pending) next generation analytics-based software platform for
automotive window and paint protection film products, enabling more
efficient application and overall business management for dealers; and
• developed and enhanced Eastman 's sustainability capabilities and
commercial opportunities, including strategic collaborations with thirdparties to secure a consistent source of recyclable copolyester feedstock
and to innovate new sustainable specialty plastic solutions.
47
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSChemical Intermediates Segment
2019 Compared to 2018 2018 Compared to 2017
Change Change
(Dollars in
millions) 2019 2018 $ % 2018 2017 $ %
Sales $ 2,443 $ 2,831 $ (388 ) (14 )% $ 2,831 $ 2,728 $ 103 4 %
Volume / product
mix effect (122 ) (4 )% (142 ) (5 )%
Price effect (247 ) (9 )% 229 8 %
Exchange rate
effect (19 ) (1 )% 16 1 %
EBIT $ 170 $ 308 $ (138 ) (45 )% $ 308 $ 255 $ 53 21 %
Asset impairments
and restructuring
charges, net 22 - 22 - - -
Net coal
gasification - (30 ) 30 (30 ) 44 (74 )
incident
(insurance) costs
EBIT excluding
unusual item 192 278 (86 ) (31 )% 278 299 (21 ) (7 )%
2019 Compared to 2018
Sales revenue decreased primarily due to lower selling prices across the segment attributed to lower raw material prices and increased competitive activity. Sales revenue was also negatively impacted by lower functional amines products sales volume attributed to weaker demand in agricultural end-markets resulting from wet weather inNorth America and lower intermediates products sales volume attributed to increased competitive activity. EBIT in 2019 included an asset impairment charge resulting from management's approval of a plan to discontinue production of certain products at theSingapore manufacturing site by the end of 2020. EBIT in 2018 included coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices more than offsetting lower raw material costs of$63 million and lower sales volumes of$9 million . 2018 Compared to 2017 Sales revenue increased due to higher selling prices across most product lines, particularly for acetyl derivatives attributed to favorable market conditions and for olefin derivatives due to higher raw material and energy costs. Higher selling prices were partially offset by lower sales volume primarily attributable to lower merchant ethylene sales, products previously reported in the CI segment being reported in the AFP segment in 2018, and supplier operational disruptions at theTexas City andLongview, Texas manufacturing facilities. Lower merchant ethylene sales are primarily due to the decision to reduce operating rates of the olefins cracking units at theLongview, Texas manufacturing facility due to spot ethylene prices. Lower sales volume was partially offset by higher functional amines products sales attributed to strengthened agriculture and energy markets. EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased due to lower sales volume of$62 million , and higher planned manufacturing shutdown costs of$21 million . The decrease was partially offset by higher selling prices exceeding higher raw material, energy, and distribution costs of$61 million . 48
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSCost and Growth Initiatives
To maintain and enhance its status as a low-cost producer and optimize earnings, the CI segment continuously focuses on cost control, operational efficiency, and capacity utilization. This includes focusing on products used internally by other operating segments, thereby supporting growth in specialty product lines throughout the Company, and also external licensing opportunities. In 2018, the Company completed modifications to the olefin cracking units at theLongview, Texas manufacturing site. These modifications allowed for the introduction of refinery-grade propylene ("RGP") into the feedstock mix while also reducing the amount of other purchased feedstocks. This feedstock shift resulted in a significant decrease in ethylene production and excess ethylene sales in 2019, while maintaining historical levels of propylene production. The RGP project provided the flexibility to significantly reduce the Company's participation in the merchant ethylene market, while retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company. Fibers Segment 2019 Compared to 2018 2018 Compared to 2017 (Dollars in millions) Change Change 2019 2018 $ % 2018 2017 $ % Sales$ 869 $ 918 $ (49 ) (5 )%$ 918 $ 852 $ 66 8 % Volume / product mix effect (38 ) (4 )% 95 11 % Price effect (7 ) (1 )% (30 ) (3 )% Exchange rate effect (4 ) - % 1 - % EBIT$ 194 $ 257 $ (63 ) (25 )%$ 257 $ 181 $ 76 42 % Net coal gasification incident (insurance) costs - (38 ) 38 (38 ) 49 (87 ) EBIT excluding non-core and 194 219 (25 ) (11 )% 219 230 (11 ) (5 )% unusual items 2019 Compared to 2018
Sales revenue decreased primarily due to lower acetate tow sales volume attributed to weakened market demand resulting from general market decline and customer buying patterns.
EBIT included coal gasification incident insurance in excess of costs in 2018. Excluding this unusual item, EBIT decreased primarily due to lower acetate tow sales volume of$24 million . 2018 Compared to 2017 Sales revenue increased primarily due to sales of nonwovens products previously reported in "Other" of$57 million and higher sales volume, particularly for textiles products. The higher sales revenue was partially offset by lower selling prices, particularly for acetate tow. Lower acetate tow selling prices were primarily attributed to lower industry capacity utilization. EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased primarily due to the net impact of$7 million of lower selling prices, particularly for acetate tow attributed to lower capacity utilization, and higher raw material and energy costs, partially offset by volume growth of textiles products. 49
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSCost and Growth Initiatives
In 2019 the Company acquired Industrias del Acetato de Celulosa. S.A.
("INACSA"), a cellulosic yarn business in LA Batllòria,
The Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in new markets, optimizing asset productivity, and working with suppliers to reduce costs. For acetate tow, these efforts are assisting customers in the effective use of the segment's products and customers' product development efforts. Beyond acetate tow, management is applying the innovation-driven growth model to leverage its fibers technology and expertise to focus on innovative growth in the textiles and nonwovens markets. Examples of recent product innovation within the Fibers segment include Naia™ yarn for the apparel market developed fromEastman 's proprietary cellulose ester technology; Avra™ performance fibers for the apparel, home furnishings and industrial fabrics markets developed from a combination ofEastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™ wood pulp-based alternative for the nonwoven industry used in personal hygiene applications. Other (Dollars in millions) 2019 2018 2017 Sales $ - $ -$ 54
Loss before interest and taxes Growth initiatives and businesses not allocated to operating segments
$ (102 ) $
(114 )
(97 ) (17 ) 93
Asset impairments and restructuring charges, net (49 ) (6 ) (5 ) Other income (charges), net not allocated to operating segments
(9 ) (24 ) (16 ) Loss before interest and taxes before non-core and unusual items
$ (257 ) $
(161 )
143 99 (21 )
Asset impairments and restructuring charges, net 49 6 5
Cost of disposition of claims against discontinued
- - 9
Costs resulting from tax law changes and outside-
- 20 -
Loss before interest and taxes excluding non-core and
unusual items (65 ) (36 ) (49 )
Sales revenue and costs related to growth initiatives, R&D costs, certain
components of pension and other postretirement benefits, and other expenses and
income not identifiable to an operating segment are not included in segment
operating results for any periods presented and are included in "Other". See
"Eastman Chemical Company General Information - Research and Development", in
Part I, Item 1 of this Annual Report.
Sales revenue in 2017 was primarily sales from the nonwovens products. Beginning
first quarter 2018, sales revenue and innovation costs from the nonwovens and
textiles innovation products previously reported in "Other" are reported in the
Fibers segment due to accelerating commercial progress of growth initiatives.
See Note 19, "Segment and Regional Sales Information", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual Report.
50
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSSALES BY CUSTOMER LOCATION
Sales Revenue
Change Change
(Dollars in millions) 2019 2018 $ % 2018 2017 $ %
United States and Canada $ 3,885 $ 4,303 $ (418 ) (10 )% $ 4,303 $ 4,189 $ 114 3 %
Europe , Middle East , and
Africa 2,544 2,756 (212 ) (8 )% 2,756 2,539 217 9 %
Asia Pacific 2,278 2,504 (226 ) (9 )% 2,504 2,306 198 9 %
Latin America 566 588 (22 ) (4 )% 588 515 73 14 %
Total $ 9,273 $ 10,151 $ (878 ) (9 )% $ 10,151 $ 9,549 $ 602 6 %
2019 Compared to 2018
Sales revenue in
Sales revenue inEurope ,Middle East , andAfrica decreased primarily due to unfavorable foreign currency exchange rates in all operating segments, lower AFP segment selling prices, and lower AFP and CI segments sales volume. These items were partially offset by higher sales volume in the AM segment. Sales revenue inAsia Pacific decreased primarily due to lower sales volume in all operating segments, particularly in the AFP and AM segments, and lower CI and AFP segments selling prices.
Sales revenue in
2018 Compared to 2017
Sales revenue inUnited States andCanada increased primarily due to higher CI, AFP, and AM segments selling prices and higher AFP and AM segments sales volume. The increase was partially offset by lower CI segment sales volume, primarily resulting from lower merchant ethylene sales. Sales revenue inEurope ,Middle East , andAfrica increased primarily due to a favorable shift in foreign currency exchange rates across the segments, higher CI, AM, and Fibers segments sales volume, and higher AFP and CI segments selling prices. These items were partially offset by lower AFP segment sales volume.
Sales revenue in
Sales revenue in
See Note 19, "Segment and Regional Sales Information", in Part II, Item 8 of this Annual Report for segment sales revenues by customer location.
51
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSLIQUIDITY AND OTHER FINANCIAL INFORMATION
Cash Flows
The Company had cash and cash equivalents as follows: (Dollars in millions)
December 31,
2019 2018 2017
Cash and cash equivalents
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing ofEastman 's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility. For years ended December 31, (Dollars in millions) 2019 2018 2017 Net cash provided by (used in): Operating activities$ 1,504 $ 1,543 $ 1,657 Investing activities (480 ) (463 ) (643 ) Financing activities (1,043 ) (1,040 ) (1,006 ) Effect of exchange rate changes on cash and cash equivalents (3 ) (5 ) 2 Net change in cash and cash equivalents (22 ) 35 10 Cash and cash equivalents at beginning of period 226 191 181
Cash and cash equivalents at end of period
2019 Compared to 2018
Cash provided by operating activities decreased primarily due to lower net earnings, partially offset by lower net working capital (trade receivables, inventories, and trade payables).
Cash used in investing activities increased
Cash used in financing activities was relatively unchanged with increased net debt repayments and dividend payments offset by lower share repurchases.
2018 Compared to 2017
Cash provided by operating activities decreased primarily due to increased inventory resulting from reduced demand and higher cost raw materials inventory in fourth quarter 2018.
Cash used in investing activities decreased primarily due to decreased capital expenditures as significant capital projects related to key growth initiatives were completed and put into service during 2018. See "Capital Expenditures" below.
Cash used in financing activities increased primarily due to increased share repurchases and dividend payments partially offset by reduced net debt repayments.
52
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For years ended December 31,
(Dollars in millions) 2019 2018 2017
Net cash provided by operating activities$ 1,504 $ 1,543 $ 1,657 Capital expenditures Additions to properties and equipment (425 ) (528 ) (649 ) Proceeds from property insurance (1) - 65 - Net capital expenditures (425 ) (463 ) (649 ) Free cash flow$ 1,079 $ 1,080 $ 1,008 (1) Cash proceeds from insurance for coal gasification incident property damage.
Working Capital Management and Off Balance Sheet Arrangements
Eastman works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, in 2019, the Company introduced a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due fromEastman to a participating financial institution. A downgrade inEastman 's credit rating or changes in the financial markets could limit the financial institution's willingness to commit funds to, and participate in, the program. Management does not believe such risk would have a material impact on the Company's working capital or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for additional information regarding the program. In 2019, the Company expanded off balance sheet, uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. The total amount of receivables sold in 2019 and 2018 were$857 million and$219 million , respectively. Based on the original terms of receivables sold for certain agreements and actual outstanding balance of receivables under service agreements, the Company estimates that$169 million and$76 million of these receivables would have been outstanding as ofDecember 31, 2019 andDecember 31, 2018 , respectively, had they not been sold under these factoring agreements.
Revolving Credit Facilities and Commercial Paper Borrowings
The Company has access to a$1.50 billion revolving credit agreement (the "Credit Facility") expiringOctober 2023 . Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. AtDecember 31, 2019 , the Company had no outstanding borrowings under the Credit Facility. AtDecember 31, 2019 , commercial paper borrowings were$170 million with a weighted average interest rate of 2.03 percent. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. The Company has access to up to$250 million under an accounts receivable securitization agreement (the "A/R Facility") that expiresApril 2020 .Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. AtDecember 31, 2019 , the Company had no borrowings under the A/R Facility. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. 53
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Credit Facility and A/R Facility contain customary covenants, including
requirements to maintain certain financial ratios, that determine the events of
default, amounts available, and terms of borrowings. The Company was in
compliance with all covenants at both December 31, 2019 and December 31, 2018 .
The amount of available borrowings under the A/R and Credit Facilities was
approximately $1.75 billion as of December 31, 2019 . For additional information,
see Section 5.03 of the Credit Facility at Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 .
Debt and Other Commitments
(Dollars in
millions) Payments Due for
Credit Facilities Interest Purchase
Period Debt Securities and Other Payable Obligations Operating Leases Other Liabilities Total
2020 $ - $ 171 $ 173 $ 181 $ 62 $ 241 $ 828
2021 483 - 186 156 49 81 955
2022 741 - 175 102 38 87 1,143
2023 840 - 156 91 25 87 1,199
2024 240 - 137 100 14 89 580
2025 and 3,307 - 1,414 1,967 30 1,106 7,824
beyond
Total $ 5,611 $ 171 $ 2,241 $ 2,597 $ 218 $ 1,691 $ 12,529
At December 31, 2019 , Eastman 's borrowings totaled approximately $5.8 billion
with various maturities. In fourth quarter 2019, the Company repaid the 2.7%
notes due January 2020 ($250 million principal) using available cash. In fourth
quarter 2018 the Company refinanced certain outstanding public debt with
proceeds of the sale of new debt securities, which extended the weighted average
maturity of outstanding debt while retaining adequate levels of pre-payable debt
and near-term maturities.
Estimated future payments of debt securities assumes the repayment of principal
upon stated maturity, and actual amounts and the timing of such payments may
differ materially due to repayment or other changes in the terms of such debt
prior to maturity. For information on debt securities, credit facilities and
other, and interest payable, see Note 8, "Borrowings", to the Company's
consolidated financial statements in Part II, Item 8 of this Annual Report.
For information about purchase obligations and operating leases, see Note 11, "Leases and Other Commitments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, environmental loss contingency reserves, accrued compensation benefits, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2025 and beyond" line item. The amount and timing of pension and other postretirement benefit payments included in other liabilities is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company'sU.S. defined benefit pension plans are not currently under any benefit restrictions. See Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for more information regarding pension and other postretirement benefit obligations. 54 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The resolution of uncertainties related to environmental matters included in other liabilities may have a material adverse effect on the Company's consolidated results of operations in the period recognized, however, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for the Company's accounting policy for environmental costs, and see Note 12, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for more information regarding outstanding environmental matters and asset retirement obligations.
Capital Expenditures
Capital expenditures were$425 million ,$528 million ($463 million net of proceeds from property damage insurance for 2017 coal gasification incident), and$649 million in 2019, 2018, and 2017, respectively. Capital expenditures in 2019 were primarily for targeted growth initiatives and site modernization projects at theLongview, Texas ;Kingsport, Tennessee ; andJefferson, Pennsylvania manufacturing sites. The Company expects that 2020 capital spending will be between$450 million and$475 million , primarily for targeted growth initiatives and site modernization projects. The Company had capital expenditures related to environmental protection and improvement of approximately$27 million ,$44 million , and$38 million in 2019, 2018, and 2017, respectively. The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities.
Stock Repurchases and Dividends
InFebruary 2014 , the Company's Board of Directors authorized the repurchase of up to$1 billion of the Company's outstanding common stock. The Company completed the$1 billion repurchase authorization inMay 2018 , acquiring a total of 12,215,950 shares. InFebruary 2018 , the Company's Board of Directors authorized the repurchase of up to an additional$2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company. As ofDecember 31, 2019 , a total of 6,753,164 shares have been repurchased under theFebruary 2018 authorization for a total amount of$573 million . During 2019, the Company repurchased a total of 4,282,409 shares for a total cost of approximately$325 million . The Board of Directors has declared a cash dividend of$0.66 per share during the first quarter of 2020, payable onApril 3, 2020 to stockholders of record onMarch 16, 2020 . INFLATION In recent years, general economic inflation has not had a material adverse impact onEastman 's costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy prices and costs to continue and the Company will continue to pursue pricing and hedging strategies and ongoing cost control initiatives to offset the effects. For additional information, see Note 9, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards,
see Note 1, "Significant Accounting Policies", to
55
--------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
In 2020, management expects adjusted EPS to be between $7.20 to $7.60 and free
cash flow to be between $1.0 billion to $1.1 billion . These expectations assume:
• earnings to benefit from higher sales volume due to increased new business
revenue, less market and customer inventory destocking, and stable growth
in some end-markets, actions to reduce operating costs by
$40 million , and lower pension and depreciation costs; • earnings to be negatively impacted by lower product margins in the CI
segment and adhesive resins, tire additives, and animal nutrition products
in the AFP segment, higher variable compensation costs, and a stronger
• interest expense of approximately
• the full-year effective tax rate on reported earnings before income tax to
be similar to 2019;
• depreciation and amortization of approximately
• capital expenditures between
• debt reduction greater than
• continued share repurchases.
The Company's 2020 financial results forecasts do not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected full-year 2020 earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts. These forecasts also do not include the possible impact on business and financial results of the recent coronavirus outbreak, including negative impact on overall business and market conditions;Eastman manufacturing sites and distribution, sales, and service facilities closure or reduced availability, including for employee health and safety; andEastman products market demand weakness and supply chain disruption. See "Risk Factors" below. RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward-Looking Statements".
Continued uncertain conditions in the global economy and the financial markets could negatively impact the Company.
The Company's business and operating results were affected by the impact of the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. Continued uncertainty in the global economy and global capital markets may adversely affectEastman 's results of operations, financial condition, and cash flows. In addition, the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect the Company's financial results.
Eastman is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in raw material and energy costs. These risk mitigation measures do not eliminate all exposure to market fluctuations and may limit the Company from fully benefiting from lower raw material costs and, conversely, offset the impact of higher raw material costs. In addition, natural disasters, pandemic illness (including the recent coronavirus outbreak), plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.
Loss or financial weakness of any of the Company's largest customers could adversely affect the Company's financial results.
AlthoughEastman has an extensive customer base, loss of, or material financial weakness of, certain of the Company's largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced. No assurances can be made that the Company would be able to regain or replace any lost customers. 56 --------------------------------------------------------------------------------
[[Image Removed: eastmanlogoa04.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's business is subject to operating risks common to chemical
manufacturing businesses, including cyber security risks, any of which could
disrupt manufacturing operations or related infrastructure and adversely affect
results of operations.
As a global specialty chemicals manufacturing company, Eastman 's business is
subject to operating risks common to chemical manufacturing, storage, handling,
and transportation, including explosions, fires, inclement weather, natural
disasters, mechanical failure, unscheduled downtime, transportation
interruptions, remediation, chemical spills, discharges or releases of toxic or
hazardous substances or gases. Significant limitation on the Company's ability
to manufacture products due to disruption of manufacturing operations or related
infrastructure could have a material adverse effect on the Company's sales
revenue, costs, results of operations, credit ratings, and financial condition.
Disruptions could occur due to internal factors such as computer or equipment
malfunction (accidental or intentional), operator error, or process failures; or
external factors such as computer or equipment malfunction at third-party
service providers, natural disasters, pandemic illness (including the recent
coronavirus outbreak), changes in laws or regulations, war or other outbreak of
hostilities or terrorism, cyber attacks, or breakdown or degradation of
transportation infrastructure used for delivery of supplies to the Company or
for delivery of products to customers. The Company has in the past experienced
cyber attacks and breaches of its computer information systems, although none of
these have had a material adverse effect on the Company's operations. While the
Company remains committed to managing cyber related risk, no assurances can be
provided that any future disruptions due to these, or other, circumstances will
not have a material effect on operations. Unplanned disruptions of manufacturing
operations or related infrastructure could be significant in scale and could
negatively impact operations, neighbors, and the environment, and could have a
negative impact on the Company's results of operations. As previously reported,
manufacturing operations and earnings have been negatively impacted by the
fourth quarter 2017 operational incident in the Kingsport manufacturing facility
coal gasification operations area and the second quarter 2018 third-party
supplier operational disruptions at the Texas City and Longview, Texas
manufacturing facilities.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by available and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed or current investments and projects. 57 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's substantial global operations subject it to risks of doing
business in other countries, including
More than half ofEastman 's sales for 2019 were to customers outside ofNorth America . The Company expects sales from international markets to continue to represent a significant portion of its sales. Also, a significant portion of the Company's manufacturing capacity is located outside ofthe United States . Accordingly, the Company's business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements, and economic conditions of many jurisdictions. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability inU.S. dollars of products and services provided in foreign countries. In addition, theU.S. or foreign countries have imposed and may impose additional taxes or otherwise taxEastman 's foreign income, or adopt or increase restrictions on foreign trade or investment, including currency exchange controls, tariffs or other taxes, or limitations on imports or exports (including recent and proposed changes inU.S. trade policy and resulting retaliatory actions by other countries, includingChina , which have recently reduced and which may increasingly reduce demand for and increase costs of impacted products or result inU.S. -based trade counterparties limiting trade withU.S. -based companies or non-U.S. customers limiting their purchases fromU.S. -based companies). Certain legal and political risks are also inherent in the operation of a company withEastman 's global scope. For example, it may be more difficult forEastman to enforce its agreements or collect receivables through foreign legal systems, and the laws of some countries may not protect the Company's intellectual property rights to the same extent as the laws of theU.S. Failure of foreign countries to have laws to protectEastman 's intellectual property rights or an inability to effectively enforce such rights in foreign countries could result in loss of valuable proprietary information. There is also risk that foreign governments may nationalize private enterprises in certain countries whereEastman operates. Social and cultural norms in certain countries may not support compliance withEastman 's corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions (including theU.K. departure from theEuropean Union , also known as "Brexit") in countries whereEastman operates are a risk to the Company's financial performance. AsEastman continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect onEastman 's business, financial condition, or results of operations.
Legislative, regulatory, or voluntary actions could increase the Company's future health, safety, and environmental compliance costs.
Eastman and its facilities and businesses are subject to complex health, safety, and environmental laws, regulations and related voluntary actions, both in theU.S. and internationally, which require and will continue to require significant expenditures to remain in compliance with such laws, regulations, and voluntary actions. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. For example, any amount accrued for environmental matters reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number of and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and actions, and testing requirements could result in higher costs. Specifically, future changes in legislation and regulation and related voluntary actions associated with physical impacts of climate change may increase the likelihood that the Company's manufacturing facilities will in the future be impacted by carbon requirements, regulation of greenhouse gas emissions, and energy policy, and may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct compliance costs. 58 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.
While acquisitions have been and continue to be a part ofEastman 's growth strategy, acquisitions of large companies and businesses (such as the previous acquisitions ofTaminco Corporation andSolutia, Inc. ) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect onEastman . These include, but are not limited to, the possibilities that the actual and projected future financial performance of the acquired business may be significantly worse than expected and that, as reported in "Critical Accounting Estimates - Impairment of Long-Lived Assets -Goodwill " in Part II, Item 7 of this Annual Report, the carrying values of certain assets from acquisitions may be impaired resulting in charges to future earnings; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the new business resulting in a loss of focus on the successful operation of the Company's existing businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business intoEastman or that the integration efforts will not achieve the expected benefits. In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance. This disclosure, including that under "Outlook" and other forward-looking statements and related disclosures made by the Company in this Annual Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with theSecurities and Exchange Commission or in Company press releases) on related subjects. 59 -------------------------------------------------------------------------------- [[Image Removed: eastmanlogoa04.jpg]]
© Edgar Online, source
