EASTMAN CHEMICAL COMPANY Page
Non-GAAP Financial Measures 30
Overview 33
Results of Operations 34
Summary by Operating Segment 38
Sales by Customer Location 41
Liquidity and Other Financial Information 41
Critical Accounting Estimates 44
Recently Issued Accounting Standards 45
Outlook 45
Risk Factors 45
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 in the United States
("GAAP"), and should be read in conjunction with the Company's audited
consolidated financial statements, including related notes, and MD&A contained
in the Company's 2019 Annual Report on Form 10-K , and the Company's
unaudited consolidated financial statements, including related notes, included
elsewhere in this Quarterly Report on Form 10-Q. All references to earnings per
share ("EPS") contained in this report are diluted EPS unless otherwise noted.
29--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.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", and "Liquidity and Other Financial Information - Cash Flows" in this MD&A. Management discloses non-GAAP financial measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's and its operating segments' 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 mark-to-market losses or gains for pension and other postretirement benefit plans. •In first quarter 2019, the Company recognized an unusual net decrease to earnings from adjustments of the provision for income taxes resulting from tax law changes, primarily the 2017 Tax Cuts and Jobs Act ("Tax Reform Act") and related outside-U.S. entity reorganizations as part of the transition to 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 one-time 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 both the financial measures prepared and calculated in accordance with 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. 30
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Adjusted 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 cash provided by or used in operating activities less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment). 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 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 Quarterly Report
The following non-core item is excluded by management in its evaluation of certain earnings results in this Quarterly Report: •Asset impairments and restructuring charges, net.
The following unusual items are excluded by management in its evaluation of certain earnings results in this Quarterly Report: •Adjustments to the provision for income taxes resulting from fourth quarter 2017 tax law changes, primarily the Tax Reform Act, and related outside-U.S. entity reorganizations.
As described above, the alternative non-GAAP measure of cash flow, free cash flow, is presented in this Quarterly Report.
31--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Excluded Non-Core and Unusual Items and Adjustments to Provision for Income Taxes
First Quarter
(Dollars in millions) 2020 2019
Non-core item impacting earnings before interest and taxes: Asset impairments and restructuring charges, net
$ 14 $ 32
Total non-core items impacting earnings before interest and taxes
14 32
Less: Items impacting provision for income taxes:
Tax effect of non-core items 3 6
Adjustments from tax law changes and outside-
- (10)
Interim adjustment to tax provision (8) (3)
Total items impacting provision for income taxes (5) (7)
Total items impacting net earnings attributable to Eastman $ 19 $ 39 This MD&A includes an analysis of the effect of the foregoing on the following GAAP financial measures:
•Earnings before interest and taxes ("EBIT"),
•Provision for income taxes,
•Net earnings attributable to Eastman ,
•Diluted EPS, and
•Net cash provided by (used in) operating activities.
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measures
In addition to the non-GAAP measures presented in this Quarterly 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.
32--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
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 ofEastman '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$2.2 billion and$2.4 billion in first quarter 2020 and 2019, respectively. EBIT was$368 million and$320 million in first quarter 2020 and 2019, respectively. Excluding the non-core and unusual items identified in "Non-GAAP Financial Measures", adjusted EBIT was$382 million and$352 million in first quarter 2020 and 2019, 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:
First Quarter
2020 2019
(Dollars in millions, except EPS) $ EPS $ EPS
Net earnings attributable to Eastman $ 258 $ 1.89 $ 209 $ 1.49
Total non-core and unusual items, net of tax 11 0.08 36 0.25
Interim adjustment to tax provision 8 0.06 3 0.03
Adjusted net earnings $ 277 $ 2.03 $ 248 $ 1.77
Cash provided by operating activities was $171 million in first three months
2020 and cash used in operating activities was $5 million in first three months
2019. Free cash flow was $72 million and $(111) million in first three months
2020 and 2019, respectively.
33--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COVID-19 Coronavirus Pandemic Response and Impact
Following the outbreak of the COVID-19 coronavirus global pandemic ("COVID-19")
in early 2020, in March 2020 the U.S. Centers for Disease Control issued
guidelines to mitigate the spread and health consequences of COVID-19. The
Company implemented changes to its operations and business practices to follow
the guidelines and minimize physical interaction, including using technology to
allow employees to work from home when possible and altering production
procedures and schedules. As previously reported, as a precautionary measure due
to increased financial market volatility resulting from COVID-19, Eastman took
certain liquidity actions, including borrowing $400 million under the revolving
credit agreement (the "Credit Facility") in March 2020 and $250 million under a
new 364-Day Term Loan Credit Agreement (the "Term Loan") in April 2020 . The
Company's cash balance as of March 31, 2020 was $680 million . See "Liquidity and
Other Financial Information" for additional information. In addition to these
liquidity actions, the Company plans approximately $150 million of cost
reductions in 2020 primarily by changes to operations in response to weakened
demand, deferring planned manufacturing asset maintenance, and limiting
discretionary spending. See "Outlook" for additional information.
While COVID-19 is having a negative impact on overall business and market
conditions and market demand for certain Eastman products, the impact on first
quarter 2020 business and financial results was limited, with certain operating
segments benefiting and others negatively impacted. See "Summary by Operating
Segment" in this MD&A for additional information. The negative impact of
COVID-19 remains uncertain, including on overall business and market conditions;
Eastman manufacturing sites and distribution, sales, and service facilities
closure or reduced availability; and Eastman products market demand weakness and
supply chain disruption. See "Outlook" in this MD&A for additional information.
RESULTS OF OPERATIONS
Sales
First Quarter
Change
(Dollars in millions) 2020 2019 $ %
Sales $ 2,241 $ 2,380 $ (139) (6) %
Volume / product mix effect 13 1 %
Price effect (135) (6) %
Exchange rate effect (17) (1) %
Sales revenue decreased in first quarter 2020 compared to first quarter 2019 as
a result of decreases in all operating segments. Further discussion by operating
segment is presented in "Summary by Operating Segment" in this MD&A.
Gross Profit
First Quarter(Dollars in millions) 2020 2019 Change Gross profit
$ 577 $ 574 1 % Gross profit increased in first quarter 2020 compared to first quarter 2019 as a result of increases in the Fibers and CI operating segments offsetting declines in the AFP and AM operating segments. Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A. 34
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
First Quarter
(Dollars in millions) 2020 2019 Change
Selling, general and administrative expenses
Selling, General and Administrative ("SG&A") expenses decreased in first quarter
2020 compared to first quarter 2019 primarily as a result of lower variable
compensation costs for deferred compensation with returns based on financial
market performance.
Research and Development Expenses
First Quarter
(Dollars in millions) 2020 2019 Change
Research and development expenses $ 61 $ 58 5 %
R&D expenses increased slightly in first quarter 2020 compared to first quarter 2019 primarily due to higher costs of growth initiatives.
Asset Impairments and Restructuring Charges, Net
First Quarter
(Dollars in millions) 2020 2019
Fixed asset impairments $ 7 $ -
Intangible asset impairments 2 -
Severance charges 5 28
Other restructuring costs - 4
Total $ 14 $ 32
First quarter 2020 asset impairments and restructuring charges included fixed
asset impairment charges of $4 million and severance charges of $3 million in
the AM segment resulting from the closure of a manufacturing facility in North
America and fixed asset impairment charges of $3 million and severance charges
of $1 million in the AFP segment for a manufacturing facility in Asia Pacific ,
each as part of ongoing site optimization actions. The Company also recognized
an intangible asset impairment charge of $2 million in the AFP segment for
customer relationships. In the CI segment, the Company recognized severance
charges of $1 million related to the previously disclosed plan to discontinue
production of certain products at the Singapore manufacturing site by the end of
2020.
First quarter 2019 restructuring charges included $28 million for severance and
related costs as part of business improvement and cost reduction initiatives.
Management anticipated and recognized total cost savings from these actions of
approximately $50 million mostly in 2019 primarily in cost of sales and SG&A
expenses. First quarter 2019 also included an additional $4 million
restructuring charge related to a capital project in the AFP segment that was
discontinued in 2016.
For more information regarding asset impairments and restructuring charges, net
see Note 13, "Asset Impairments and Restructuring Charges, Net", to the
Company's unaudited consolidated financial statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Other Components of Post-employment (Benefit) Cost, Net
First Quarter
(Dollars in millions) 2020 2019
Other components of post-employment (benefit) cost, net
For more information regarding other components of post-employment (benefit)
cost, net see Note 7, "Retirement Plans", to the Company's unaudited
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
35--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other (Income) Charges, Net
First Quarter
(Dollars in millions) 2020 2019
Foreign exchange transaction (gains) losses, net $ 5 $ -
(Income) loss from equity investments and other investment (gains) losses,
net (3) (3)
Other, net 2 1
Other (income) charges, net $ 4 $ (2) Earnings Before Interest and Taxes
First Quarter
(Dollars in millions) 2020 2019 Change Earnings before interest and taxes$ 368 $
320 15 %
Asset impairments and restructuring charges, net 14
32
Earnings before interest and taxes excluding non-core item$ 382 $ 352 9 % Net Interest Expense First Quarter (Dollars in millions) 2020 2019 Change Gross interest costs$ 54 $ 58 (7) % Less: Capitalized interest 1 1 Interest expense 53 57 Less: Interest income 1 1 Net interest expense$ 52 $ 56 (7) % Net interest expense decreased primarily as a result of reduced public debt and commercial paper borrowings. Provision for Income Taxes First Quarter 2020 2019 (Dollars in millions) $ % $ % Provision for income taxes and effective tax rate$ 56 18 %$ 55 21 % Tax provision for non-core and unusual items (1) 3 6
Adjustments from tax law changes and outside-
- (10)
Interim adjustment to tax provision (2) (8) (3)
Adjusted provision for income taxes and effective tax rate
16 %$ 48 17 % (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. (2)First quarter 2020 and 2019 provision for income taxes were adjusted to reflect the then current forecasted full year effective tax rate. The adjusted provision for income taxes for first three months 2020 and 2019 are calculated applying the forecasted full year effective tax rates as shown below. 36
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Three Months (1)
2020 2019
Effective tax rate 18 % 21 %
Discrete tax items (2) (1) % - %
Tax impact of non-core and unusual items (3) 1 % (2) %
Forecasted full year impact of expected tax events (2)
% (2) %
Forecasted full year effective tax rate 16
% 17 %
(1)Effective tax rate percentages are rounded to the nearest whole percent. The forecasted full year effective tax rates are 15.5 percent and 16.5 percent for first three months 2020 and 2019, respectively. (2)"Discrete tax items" are items that are excluded from a company's estimated annual effective tax rate and recognized entirely in the quarter in which the item occurs. Discrete items for first three months 2020 are for share based compensation expense and interest expense on uncertain tax positions. (3)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.
Net Earnings Attributable to
First Quarter
2020 2019
(Dollars in millions, except EPS) $ EPS $ EPS
Net earnings and diluted earnings per share
attributable to Eastman $ 258 $ 1.89 $ 209 $ 1.49
Non-core item, net of tax: (1)
Asset impairments and restructuring charges, net 11 0.08 26 0.18
Unusual items, net of tax: (1)
Adjustments from tax law changes and outside-U.S. entity reorganizations - - 10 0.07 Interim adjustment to tax provision 8 0.06 3 0.03
Adjusted net earnings and diluted earnings per share
attributable to
$ 277 $
2.03
(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.
37--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SUMMARY 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 Part I, Item 1, "Business - Business Segments" and Part II, Item 8, Note 19, "Segment and Regional Sales Information", in the Company's 2019 Annual Report on Form 10-K .
Additives & Functional Products Segment
First Quarter
Change
2020 2019 $ %
(Dollars in millions)
Sales $ 822 $ 855 $ (33) (4) %
Volume / product mix effect 27 3 %
Price effect (52) (6) %
Exchange rate effect (8) (1) %
Earnings before interest and taxes $ 143 $ 146 $ (3) (2) %
Asset impairments and restructuring charges, net 6 4 2
Earnings before interest and taxes excluding non-core
items 149 150 (1) (1) %
Sales revenue in first quarter 2020 decreased compared to first quarter 2019 due
to lower selling prices across the segment and an unfavorable shift in foreign
currency exchange rates, partially offset by higher sales volume. Lower selling
prices were due to increased competitive activity for certain adhesives resins,
tire additives, and animal nutrition products constituting the approximately
one-third of segment revenue for which management is evaluating strategic
alternatives. Lower raw material prices also contributed to price declines,
particularly for care chemicals cost-pass-through contracts. Changes in demand
as a result of COVID-19 resulted in higher sales volume of care chemicals and
adhesives resins products used in certain consumable and personal care end
markets and lower sales volume of coatings and inks additives and tire additives
in the China automotive end market and specialty fluids in the aviation end
market, resulting in less favorable product mix.
First quarter 2020 EBIT included asset impairments and restructuring charges of
$4 million for a manufacturing facility in Asia Pacific as part of ongoing site
optimization actions and an intangible asset impairment charge of $2 million for
customer relationships. First quarter 2019 EBIT included a restructuring charge
related to a capital project. Excluding these non-core items, EBIT decreased in
first quarter 2020 compared to first quarter 2019 primarily due to higher sales
volume more than offset by less favorable product mix, totaling $10 million ,
partially offset by lower variable compensation costs of $9 million . Lower
selling prices were offset by lower raw material and energy costs.
38--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Advanced Materials Segment
First Quarter
Change
2020 2019 $ %
(Dollars in millions)
Sales $ 615 $ 657 $ (42) (7) %
Volume / product mix effect (17) (3) %
Price effect (19) (3) %
Exchange rate effect (6) (1) %
Earnings before interest and taxes $ 100 $ 102 $ (2) (2) %
Asset impairments and restructuring charges, net 7 - 7
Earnings before interest and taxes excluding non-core
item 107 102 5 5 %
Sales revenue in first quarter 2020 decreased compared to first quarter 2019 due
to lower selling prices, less favorable product mix, and an unfavorable shift in
foreign currency exchange rates. Lower selling prices were primarily due to
lower raw material prices. Changes in demand as a results of COVID-19 resulted
in lower advanced interlayers and performance films sales volume primarily in
automotive end markets and increased sales volume of certain standard
copolyester products used in consumable and health and wellness products,
resulting in a less favorable product mix.
First quarter 2020 EBIT included asset impairments and restructuring charges
resulting from the closure of a manufacturing facility in North America as part
of ongoing site optimization actions. Excluding this non-core item, EBIT in
first quarter 2020 increased compared to first quarter 2019 due to lower raw
material costs more than offsetting lower selling prices by $10 million and
lower variable compensation costs of $10 million . These were partially offset by
higher sales volume more than offset by less favorable product mix, totaling $7
million , higher R&D costs of $3 million , and an unfavorable shift in foreign
currency exchange rates of $3 million .
Chemical Intermediates Segment
First Quarter
Change
2020 2019 $ %
(Dollars in millions)
Sales $ 592 $ 655 $ (63) (9) %
Volume / product mix effect - - %
Price effect (60) (9) %
Exchange rate effect (3) - %
Earnings before interest and taxes $ 80 $ 73 $ 7 10 %
Asset impairments and restructuring charges, net 1 - 1
Earnings before interest and taxes excluding non-core
item 81 73 8 11 %
Sales revenue in first quarter 2020 decreased compared to first quarter 2019
primarily due to lower selling prices across the segment resulting from lower
raw material prices.
39--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First quarter 2020 EBIT included restructuring charges related to the previously
disclosed plan to discontinue production of certain products at the Singapore
manufacturing facility by the end of 2020. Excluding this non-core item, EBIT
increased compared to first quarter 2019 primarily due to lower SG&A costs,
mostly variable compensation costs of $6 million . Lower selling prices were
offset by lower raw material and energy costs. EBIT included recognition of
technology licensing earnings.
Fibers Segment
First Quarter
Change
2020 2019 $ %
(Dollars in millions)
Sales $ 212 $ 213 $ (1) - %
Volume / product mix effect 3 1 %
Price effect (4) (1) %
Exchange rate effect - - %
Earnings before interest and taxes
Sales revenue in first quarter 2020 was relatively unchanged compared to first quarter 2019. Acetate tow sales volume was stable while lower textile products sales volume was primarily attributed to the impact of COVID-19. First quarter 2020 EBIT increased compared to first quarter 2019 primarily due to lower raw material and energy costs of$5 million and lower variable compensation cost of$5 million . Other First Quarter 2020 2019 (Dollars in millions) Loss before interest and taxes Growth initiatives and businesses not allocated to operating segments $
(23)
21 12
Asset impairments and restructuring charges, net - (28)
Other income (charges), net not allocated to operating segments (6) -
Loss before interest and taxes $
(8)
Asset impairments and restructuring charges, net - 28 Loss before interest and taxes excluding non-core items (8) (15)
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 operating segment results for any of the periods presented and are included in "Other".
40--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SALES BY CUSTOMER LOCATION
Sales Revenue
First Quarter
Change
(Dollars in millions) 2020 2019 $ %
United States and Canada $ 980 $ 1,000 $ (20) (2) %
Asia Pacific 495 553 (58) (10) %
Europe, Middle East, and Africa 631 689 (58) (8) %
Latin America 135 138 (3) (2) %
Total Eastman Chemical Company $ 2,241 $ 2,380 $ (139) (6) %
Sales revenue in
Sales revenue inAsia Pacific decreased in first quarter 2020 compared to first quarter 2019 primarily due to lower selling prices in all operating segments, particularly in the AFP and CI segments, and lower sales volume in all operating segments except the Fibers segment.
Sales revenue in
Sales revenue inLatin America decreased in first quarter 2020 compared to first quarter 2019 primarily due to lower selling prices in most operating segments, mostly offset by higher AFP segment sales volume.
LIQUIDITY AND OTHER FINANCIAL INFORMATION
COVID-19 Liquidity Actions
As described below, during first quarter andApril 2020 ,Eastman took certain liquidity actions as a precautionary measure due to increased financial market volatility resulting from COVID-19 including borrowing$400 million under the Credit Facility and$250 million under a new Term Loan and amending covenants in both loan agreements. Cash Flows Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing ofEastman 's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Management believes maintaining a financial profile consistent with an investment grade credit rating is important to its long-term strategic and financial flexibility. First Three Months (Dollars in millions) 2020 2019 Net cash provided by (used in) Operating activities$ 171 $ (5) Investing activities (101) (125) Financing activities 408 102 Effect of exchange rate changes on cash and cash equivalents (2) (3) Net change in cash and cash equivalents 476 (31) Cash and cash equivalents at beginning of period 204 226 Cash and cash equivalents at end of period$ 680 $ 195 41
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cash provided by operating activities was $171 million in first three months
2020 compared with $5 million cash used in operating activities in first three
months 2019. The increase was due to higher net earnings and lower increases in
net working capital (trade receivables, inventories, and trade payables).
Cash used in investing activities decreased $24 million in first three months
2020 compared with first three months 2019 due to lower additions to properties
and equipment and an acquisition in the AFP business segment in the first three
months 2019.
Cash provided by financing activities increased $306 million in first three
months 2020 compared with first three months 2019 due to higher net proceeds
from borrowings primarily from borrowings of $400 million under the revolving
credit agreement as a precautionary measure due to increased financial market
volatility, particularly in the availability and terms of commercial paper,
resulting from COVID-19, and lower share repurchases. In addition, on April 9,
2020 the Company borrowed an additional $250 million under the new Term Loan
agreement.
First Three Months
(Dollars in millions) 2020 2019
Net cash provided by (used in) operating activities $ 171 $ (5)
Capital expenditures (99) (106)
Free cash flow $ 72 $ (111) Working Capital Management and Off Balance Sheet Arrangements
In 2019, the Company expanded its off balance sheet, uncommitted accounts receivable factoring program 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 first quarter 2020 and 2019 were$457 million and$101 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$250 million and$169 million of these receivables would have been outstanding as ofMarch 31, 2020 andDecember 31, 2019 , respectively, had they not been sold under these factoring agreements.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. See Note 1, "Significant Accounting Policies", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the program.
Revolving Credit Facilities and Commercial Paper Borrowings
The Company has access to a$1.50 billion 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. AtMarch 31, 2020 , the Company's borrowings under the Credit Facility were$400 million with an interest rate of 2.17 percent. AtMarch 31, 2020 , the Company's commercial paper borrowings were$310 million with a weighted average interest rate of 3.13 percent. See Note 5, "Borrowings", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 42
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company had access to $250 million under an accounts receivable
securitization agreement (the "A/R Facility") that expired April 2020 . Eastman
Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, had an
agreement to sell interests in trade receivables under the A/R Facility to a
third party purchaser. Third party creditors of ECFC had 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 were subject to
interest rates based on a spread over the lender's borrowing costs, and ECFC
paid a fee to maintain availability of the A/R Facility. See Note 5,
"Borrowings", to the Company's unaudited consolidated financial statements in
Part I, Item 1 of this Quarterly Report on Form 10-Q. In April 2020 , the Company
made the decision not to renew the A/R Facility.
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 March 31, 2020 and December 31, 2019 . The
total amount of available borrowings under the Credit Facility and A/R Facility
was approximately $1.35 billion as of March 31, 2020 .
As previously reported, in April 2020 , the Company amended the Credit Facility
and the Term Loan maximum debt covenants to reflect the higher cash balance to
enhance liquidity due to, and the expected negative impact on operating results
of, COVID-19 and added a new restrictive covenant prohibiting stock repurchases
until June 30, 2021 in the event certain financial ratios are exceeded. See the
Current R eport on Form 8-K filed
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 $ - $ 710 $ 154 $ 131 $ 47 $ 144 $ 1,186
2021 483 - 185 151 51 74 944
2022 741 - 173 100 40 83 1,137
2023 821 - 153 89 27 88 1,178
2024 241 - 136 98 16 89 580
2025 and beyond 3,298 - 1,413 1,958 33 1,111 7,813
Total $ 5,584 $ 710 $ 2,214 $ 2,527 $ 214 $ 1,589 $ 12,838
As previously reported, in April 2020 , the Company borrowed $250 million under a
new Term Loan as a precautionary measure due to increased financial market
volatility, particularly in the availability and terms of commercial paper,
resulting from COVID-19. Borrowings under the Term Loan are subject to interest
at varying spreads above quoted market rates depending on the Company's public
debt rating and with principal and accrued interest payable April 2021 . The Term
Loan contains the same customary covenants and events of default, including
maintenance of certain financial ratios, as the Credit Facility, with payment of
customary fees. 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 5, "Borrowings", to the
Company's unaudited consolidated financial statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
For information about purchase obligations and operating leases, see Note 8, "Leases and Other Commitments", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
43--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, uncertain tax
liabilities, accrued compensation benefits, 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. See Note 7, "Retirement Plans" and Note 9, "Environmental Matters and
Asset Retirement Obligations", to the Company's unaudited consolidated financial
statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for more
information regarding pension and other postretirement benefit obligations and
outstanding environmental matters and asset retirement obligations,
respectively.
Capital Expenditures
Capital expenditures were$99 million and$106 million in first three months 2020 and 2019, respectively. Capital expenditures in first three months 2020 were primarily for targeted growth initiatives and site modernization projects at theKingsport, Tennessee manufacturing site. The Company expects that 2020 capital expenditures will be between$325 million and$375 million , primarily for targeted growth initiatives and maintenance.
Stock Repurchases and Dividends
InFebruary 2018 , the Company's Board of Directors authorized the repurchase of up to$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 ofMarch 31, 2020 , a total of 7,263,465 shares have been repurchased under this authorization for a total amount of$603 million . The Board of Directors declared a cash dividend of$0.66 per share during the second quarter of 2020, payable onJuly 10, 2020 to stockholders of record onJune 15, 2020 .
CRITICAL 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 contingent assets and liabilities. 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 in Part II, Item 7 of the Company's 2019 Annual Report on Form 10-K are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
Impairment of Long-Lived Assets
Goodwill is an asset determined as the residual of the purchase price over the fair value of identified assets and liabilities acquired in a business combination. As ofMarch 31, 2020 , the goodwill balance as reported on the Unaudited Consolidated Statements of Financial Position is$4.4 billion . In accordance with GAAP,Eastman conducts testing of goodwill annually in the fourth quarter of each year or more frequently when events and circumstances indicate an impairment may have occurred. As a result of impact on the Company of market deterioration resulting from COVID-19, the Company considered whether these conditions indicated that it was more likely than not that goodwill was impaired for each of its reporting units. As ofMarch 31, 2020 , the Company's market capitalization based on its stock price was above the book value of equity. Management does not believe it is more likely than not that goodwill was impaired for each of its reporting units as ofMarch 31, 2020 . 44
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
However, the decrease in forecasted revenue and EBIT for the tire additives
reporting unit (part of the Additives & Functional Products operating segment as
described in Part I, Item 1, "Business", of the Company's 2019 Annual Report
on Form 10-K ) reduced the fair value such that the estimated fair value only
slightly exceeded the carrying value. The decrease in forecasted revenue and
EBIT for the tire additives reporting unit is primarily a result of decreased
demand in automotive markets due to COVID-19. Additional declines in the market
conditions or forecasted revenue and EBIT could result in an impairment of
indefinite-lived intangible assets or goodwill, especially for the tire
additives reporting unit. The Company will continue to monitor goodwill for any
indication of events, including the continued impact of COVID-19, which might
require additional testing before the next annual impairment test and could
result in material impairment charges.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards, see Note 1, "Significant Accounting Policies", to the Company's unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. OUTLOOK The negative impact of COVID-19 remains uncertain, including on overall business and market conditions;Eastman manufacturing sites and distribution, sales, and service facilities closure or reduced availability; andEastman products market demand weakness and supply chain disruption. The extent of the impact of these and other consequences is uncertain. Accordingly, management has withdrawn the previous 2020 earnings and cash flow forecasts and underlying expectations disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook" in the Company's 2019 Annual Report on Form 10-K . In addition to the business and financial actions taken in first quarter andApril 2020 , the Company plans to take the following actions to mitigate the impact of COVID-19 on its markets, business, and financial position and results: •increasing cost reduction targets to approximately$150 million of net savings; •significantly reducing discretionary spending and deferring some planned manufacturing asset maintenance; •reducing capital expenditures by approximately$100 million to between$325 million and$375 million ; •leveraging working capital to be a source of more than$250 million of cash flow beyond previous expectations; •reducing debt substantially more than the original target of$400 million ; and •limiting share repurchases to offset dilution.
See "Risk Factors" below.
RISK FACTORS
In addition to factors described elsewhere in this Quarterly 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 Quarterly 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 impacted by 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 impacted the global economy. Similarly, continued uncertainty in the global economy and global capital markets resulting from the current COVID-19 coronavirus global pandemic have adversely impacted and are expected to continue to adversely impact demand for certainEastman products and, accordingly results of operations, and may adversely impact the Company's financial condition and cash flows and ability to access the credit and capital markets under attractive rates and terms and negatively impact the Company's liquidity or ability to pursue certain growth initiatives. 45
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely impact 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, the ongoing COVID-19 coronavirus global pandemic has adversely impacted and is expected to continue to impact, and natural disasters, plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation and supply chain 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 impact 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 impact 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. 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 impact 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 and supply chain 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 impact 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 supply chain disruption due to the ongoing COVID-19 coronavirus global pandemic, computer or equipment malfunction at third-party service providers, natural disasters, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation and supply chain 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 impact 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 impact 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 second quarter 2018 third-party supplier operational disruptions at theTexas City andLongview, Texas manufacturing facilities. 46
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 impact the returns from any proposed or current investments and projects.
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 impact product demand and may adversely impact 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 impact onEastman 's business, financial condition, or results of operations. 47
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g30.jpg]]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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.
Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely impact 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 impact 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 I, Item 2 of this Quarterly 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 impact 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 information under "Outlook" and other forward-looking statements and related disclosures made by the Company in this Quarterly 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. 48
--------------------------------------------------------------------------------
Table of Contents [[Image Removed: emn-20200331_g49.jpg]]
© Edgar Online, source
