EASTMAN CHEMICAL COMPANY Page
Non-GAAP Financial Measures 32
Overview 35
Results of Operations 37
Summary by Operating Segment 41
Sales by Customer Location 44
Liquidity and Other Financial Information 45
Critical Accounting Estimates 48
Recently Issued Accounting Standards 50
Outlook 50
Risk Factors 50
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.
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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" 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 second quarter 2019, the Company recognized an unusual increase to earnings and in first six months 2019, the Company recognized an unusual decrease to earnings from adjustments of the provision for income taxes resulting from tax law changes, primarily the 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"), and the tax impact of the related outside-U.S. entity reorganizations. 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. 32 --------------------------------------------------------------------------------
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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 Debt MeasureEastman from time to time evaluates and discloses to investors and securities and credit analysts the non-GAAP debt measure "net debt", which management defines as total borrowings less cash and cash equivalents. Management believes this metric is useful to investors and securities and credit analysts to provide them with information similar to that used by management in evaluating the Company's overall financial position, liquidity, and leverage and because management believes investors, securities analysts, credit analysts and rating agencies, and lenders often use a similar measure to assess and compare companies' relative financial position and liquidity.
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 measures of cash flow, free cash flow, and of debt, net debt, are presented in this Quarterly Report.
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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
Second Quarter First Six Months
(Dollars in millions) 2020 2019 2020 2019Non-core items impacting earnings before interest and taxes: Asset impairments and restructuring charges, net
$ 141 $ 18 $ 155 $ 50
Total non-core items impacting earnings before interest and taxes
141 18 155 50
Less: Items impacting provision for income taxes:
Tax effect of non-core items 33 6 36 12
Adjustments from tax law changes and outside-
- 3 - (7)
Interim adjustment to tax provision 19 (10) 11 (13)
Total items impacting provision for income taxes 52 (1) 47 (8)
Total items impacting net earnings attributable to
$ 19 $ 108 $ 58
This MD&A includes an analysis of the effect of the foregoing on the following GAAP financial measures:
•Earnings before interest and taxes ("EBIT"),
•(Benefit from) provision for income taxes,
•Net earnings attributable to Eastman ,
•Diluted EPS, and
•Net cash provided by 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.
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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$1.9 billion and$2.4 billion in second quarter 2020 and 2019, respectively, and$4.2 billion and$4.7 billion in first six months 2020 and 2019, respectively. EBIT was$54 million and$371 million in second quarter 2020 and 2019, respectively, and$422 million and$691 million in first six months 2020 and 2019, respectively. Excluding the non-core and unusual items identified in "Non-GAAP Financial Measures", adjusted EBIT was$195 million and$389 million in second quarter 2020 and 2019, respectively, and$577 million and$741 million in first six months 2020 and 2019, respectively.
Further discussion of sales revenue and EBIT changes is presented in "Results of Operations" and "Summary by Operating Segment" in this MD&A.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net earnings and EPS and adjusted net earnings and EPS were as follows:
Second Quarter
2020 2019
(Dollars in millions, except EPS) $ EPS $ EPS
Net earnings attributable to Eastman $ 27 $ 0.20 $ 258 $ 1.85
Total non-core and unusual items, net of tax 108 0.79 9 0.07
Interim adjustment to tax provision (19) (0.14) 10 0.07
Adjusted net earnings $ 116 $ 0.85 $ 277 $ 1.99
First Six Months
2020 2019
(Dollars in millions, except EPS) $ EPS $ EPS
Net earnings attributable to Eastman $ 285 $ 2.09 $ 467 $ 3.34
Total non-core and unusual items, net of tax 119 0.87 45 0.32
Interim adjustment to tax provision (11) (0.08) 13 0.10
Adjusted net earnings $ 393 $ 2.88 $ 525 $ 3.76
Cash provided by operating activities was $607 million and $417 million in first
six months 2020 and 2019, respectively. Free cash flow was $411 million and $219
million in first six months 2020 and 2019, respectively.
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.
In response to the uncertainties of the impact of COVID-19 (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), management's focus
shifted to cash flow, liquidity, and cost management.
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 . Borrowings under the
Credit Facility were repaid in second quarter 2020. The Company reduced net debt
by $149 million in the first half of 2020, and its cash balance as of June 30,
2020 was $704 million . See "Liquidity and Other Financial Information" for
additional information.
In second quarter and first six months 2020 capacity utilization was
substantially lower due to lower sales volume and the Company's focus on
maximizing cash generation by reducing inventories, reducing EBIT approximately
$140 million with approximately half of the impact in the AM segment. Cost
reduction actions in response to COVID-19, including reduced discretionary
spending, deferred asset maintenance turnarounds, and adjusted operations to
ensure the health and safety of employees and contractors, totaled approximately
$60 million in second quarter 2020 and are expected to total approximately $150
million for full year 2020, primarily in "Cost of Sales" in the Unaudited
Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings
in both periods. See "Summary by Operating Segment" and "Outlook" for additional
information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
Second Quarter First Six Months
Change Change
(Dollars in millions) 2020 2019 $ % 2020 2019 $ %
Sales $ 1,924 $ 2,363 $ (439) (19) % $ 4,165 $ 4,743 $ (578) (12) %
Volume / product mix
effect (302) (13) % (299) (6) %
Price effect (125) (5) % (251) (5) %
Exchange rate effect (12) (1) % (28) (1) %
Sales revenue decreased in second quarter and first six months 2020 compared to second quarter and first six months 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
Second Quarter First Six Months
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Gross profit $ 371 $ 589 (37) % $ 948 $ 1,163 (18) %
Gross profit decreased in second quarter 2020 compared to second quarter 2019 as
a result of decreases in all operating segments. Gross profit decreased in first
six months 2020 compared to first six months 2019 as a result of decreases in
all operating segments except the Fibers segment which was relatively unchanged.
Lower gross profit was primarily due to lower capacity utilization as a result
of lower sales volume and reduction in inventory, partially offset by cost
reduction actions. Further discussion by operating segment is presented in
"Summary by Operating Segment" in this MD&A.
Selling, General and Administrative Expenses
Second Quarter First Six Months
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Selling, general and administrative
expenses $ 155 $ 165 (6) % $ 315 $ 352 (11) %
Selling, General and Administrative ("SG&A") expenses decreased in second
quarter 2020 compared to second quarter 2019 primarily as a result of cost
reduction actions partially offset by higher variable compensation costs. SG&A
expenses decreased in first six months 2020 compared to first six months 2019
primarily as a result of cost reduction actions and lower variable compensation
costs.
Research and Development Expenses
Second Quarter First Six Months
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Research and development expenses $ 52 $ 57 (9) % $ 113 $ 115 (2) %
R&D expenses decreased in second quarter and first six months 2020 compared to
second quarter and first six months 2019 primarily due to cost reduction actions
including increased focus on project prioritization.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
Second Quarter First Six Months
(Dollars in millions) 2020 2019 2020 2019
Fixed asset impairments $ 13 $ - $ 20 $ -
Intangible asset impairments 123 - 125 -
Severance charges 2 16 7 44
Other restructuring costs 3 2 3 6
Total $ 141 $ 18 $ 155 $ 50
In second quarter and first six months 2020 the Company recognized intangible
asset impairments of $123 million in the AFP segment tire additives business to
reduce the carrying value of the Crystex™ and Santoflex™ tradenames to the
estimated fair value. The impairments are primarily the result of weakened
demand in transportation markets impacted by COVID-19 and increased competitive
pricing pressure as a result of global capacity increases. The Company also
recognized a fixed asset impairment of $5 million in the AFP segment resulting
from the closure of a tire additives manufacturing facility in Asia Pacific as
part of ongoing site optimization. Additionally, management decided to
discontinue growth initiatives for polyester based microfibers, including Avra™
performance fibers, that were not allocated to an operating segment and reported
in "Other" resulting in $8 million of asset impairments and $3 million in
contract termination fees.
In second quarter and first six months 2020, in the CI segment, the Company
recognized severance charges of $2 million and $3 million , respectively, related
to the previously disclosed plan to discontinue production of certain products
at the Singapore manufacturing site by the end of 2020. Restructuring charges
totaling up to $50 million are expected in 2020 for this action. This action is
projected to result in an estimated annual earnings benefit of approximately $25
million in the AFP and CI segments beginning mostly in 2021.
Additionally, first six months 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 performance films
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 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.
Second quarter and first six months 2019 restructuring charges included $18
million and $46 million , respectively, for severance and related costs as part
of business improvement and cost reduction initiatives. First six months 2019
also included an additional $4 million restructuring charge related to a capital
project in the AFP segment that was discontinued in 2016.
As part of ongoing site optimization efforts, in July 2020 management decided to
close an advanced interlayers manufacturing facility in North America in the AM
segment. Management expects charges of up to $30 million in second half 2020
related to this decision.
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
Second Quarter First Six Months
(Dollars in millions) 2020 2019 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Other (Income) Charges, Net
Second Quarter First Six Months
(Dollars in millions) 2020 2019 2020 2019
Foreign exchange transaction (gains) losses, net $ - $ 2 $ 5 $ 2
(Income) loss from equity investments and other
investment (gains) losses, net - (3) (3) (6)
Other, net (1) - 1 1
Other (income) charges, net $ (1) $ (1) $ 3 $ (3)
Earnings Before Interest and Taxes
Second Quarter First Six Months
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Earnings before interest and taxes $ 54 $ 371 (85) % $ 422 $ 691 (39) %
Asset impairments and restructuring
charges, net 141 18 155 50
Earnings before interest and taxes
excluding non-core items $ 195 $ 389 (50) % $ 577 $ 741 (22) %
Net Interest Expense
Second Quarter First Six Months
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Gross interest costs $ 56 $ 56 - % $ 110 $ 114 (4) %
Less: Capitalized interest 1 1 2 2
Interest expense 55 55 108 112
Less: Interest income - - 1 1
Net interest expense $ 55 $ 55 - % $ 107 $ 111 (4) %
Net interest expense decreased primarily as a result of lower interest rates and prior year repayment of public debt.
(Benefit from) Provision for Income Taxes
Second Quarter First Six Months
2020 2019 2020 2019
(Dollars in millions) $ % $ % $ % $ %
(Benefit from) provision for income
taxes and effective tax rate $ (31) - $ 57 18 % $ 25 8 % $ 112 19 %
Tax provision for non-core items (1) 33 6 36 12
Adjustments from tax law changes and
outside-U.S. entity reorganizations - 3 - (7)
Interim adjustment to tax provision
(2) 19 (10) 11 (13)
Adjusted provision for income taxes
and effective tax rate $ 21 16 % $ 56 17 % $ 72 16 % $ 104 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)Second quarter 2020 provision for income taxes was adjusted to reflect the
current forecasted full year effective tax rate. Second quarter 2019 provision
for income taxes was adjusted to reflect the then current forecasted full year
effective tax rate. The adjusted provision for income taxes for first six months
2020 and 2019 are calculated applying the forecasted full year effective tax
rates as shown below.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Six Months (1)
2020 2019
Effective tax rate 8 % 19 %
Discrete tax items (2) 1 % - %
Tax impact of non-core and unusual items (3) 7 % 1 %
Changes in tax contingencies and valuation allowances 2 % - %
Forecasted full year impact of expected tax events (2) % (3) %
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 six 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 six months 2020 are for share based compensation expense and estimated adjustments to certain prior year tax returns. (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
Second Quarter
2020 2019
(Dollars in millions, except EPS) $ EPS $ EPS
Net earnings and diluted earnings per share
attributable to Eastman $ 27 $ 0.20 $ 258 $ 1.85
Non-core items, net of tax: (1)
Asset impairments and restructuring charges, net 108 0.79 12 0.09
Unusual items, net of tax: (1)
Adjustments from tax law changes and outside-U.S. entity reorganizations - - (3) (0.02) Interim adjustment to tax provision (19) (0.14) 10 0.07 Adjusted net earnings and diluted earnings per share attributable to Eastman$ 116 $ 0.85 $ 277 $ 1.99 First Six Months 2020 2019 (Dollars in millions, except EPS) $ EPS $ EPS Net earnings and diluted earnings per share attributable to Eastman$ 285 $ 2.09 $ 467 $ 3.34 Non-core items, net of tax: (1) Asset impairments and restructuring charges, net 119 0.87 38 0.27
Unusual items, net of tax: (1)
Adjustments from tax law changes and outside-U.S. entity reorganizations - - 7 0.05 Interim adjustment to tax provision (11) (0.08) 13 0.10
Adjusted net earnings and diluted earnings per share
attributable to
$ 393 $
2.88
(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.
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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
Second Quarter First Six Months
Change Change
2020 2019 $ % 2020 2019 $ %
(Dollars in millions)
Sales $ 685 $ 823 $ (138) (17) % $ 1,507 $ 1,678 $ (171) (10) %
Volume / product mix effect (83) (10) % (60) (3) %
Price effect (50) (6) % (98) (6) %
Exchange rate effect (5) (1) % (13) (1) %
Earnings (loss) before
interest and taxes $ (56) $ 147 $ (203) (138) % $ 87 $ 293 $ (206) (70) %
Asset impairments and
restructuring charges, net 128 - 128 134 4 130
Earnings before interest and
taxes excluding non-core items 72 147 (75) (51) % 221 297 (76) (26) %
Sales revenue in second quarter 2020 decreased compared to second quarter 2019
primarily due to lower sales volume and lower selling prices. The negative
impact of COVID-19 on demand resulted in lower sales volume of tire additives
and coatings and inks additives used in the transportation end-market and of
specialty fluids used in the aviation end-market, partially offset by higher
sales volume of care chemicals and adhesives resins products used in certain
consumable and personal care end-markets attributed to strengthened demand due
to COVID-19, resulting overall in less favorable product mix. Lower selling
prices were primarily attributed to increased competition and cost-pass-through
contracts. Increased competition was primarily in tire additives and, to a
lesser extent, adhesives resins products.
Sales revenue in first six months 2020 decreased compared to first six months
2019 primarily due to lower selling prices and lower sales volume. Lower selling
prices were due to increased competitive activity in adhesives resins and tire
additives products. Lower raw material prices also contributed to price
declines, particularly for cost-pass-through contracts. Lower sales volume was
due to lower sales volume of tire additives and coatings and inks additives used
in the transportation end-market and specialty fluids used in the aviation
end-market partially offset by higher sales volume of care chemicals and
adhesives resins products used in certain consumable and personal care
end-markets, resulting in less favorable product mix.
Second quarter 2020 loss before interest and taxes included intangible asset
impairment charges of $123 million for tire additive tradenames. The impairments
are primarily the result of weakened demand in transportation markets impacted
by COVID-19 and increased competitive pricing pressure as a result of global
capacity increases. Second quarter 2020 loss before interest and taxes also
included asset impairments and restructuring charges of $5 million for closure
of a tire additives manufacturing facility in Asia Pacific as part of ongoing
site optimization actions. Excluding these non-core items, EBIT decreased in
second quarter 2020 compared to second quarter 2019 primarily due to $76 million
of lower sales volume and higher manufacturing costs primarily due to lower
capacity utilization and reduction of inventory. These higher costs were offset
$12 million by cost reduction actions.
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First six months 2020 EBIT included intangible asset impairment charges of $125
million for tradenames and customer relationships and asset impairments and
restructuring charges of $9 million for closure of manufacturing facilities in
Asia Pacific as part of ongoing site optimization actions. First six months 2019
EBIT included a restructuring charge related to a capital project. Excluding
these non-core items, EBIT decreased in first six months 2020 compared to first
six months 2019 primarily due to $84 million of lower sales volume and higher
manufacturing costs primarily due to lower capacity utilization and reduction of
inventory. These higher costs were offset $12 million by cost reduction actions.
Advanced Materials Segment
Second Quarter First Six Months
Change Change
2020 2019 $ % 2020 2019 $ %
(Dollars in millions)
Sales $ 567 $ 696 $ (129) (19) % $ 1,182 $ 1,353 $ (171) (13) %
Volume / product mix effect (109) (16) % (130) (10) %
Price effect (15) (2) % (31) (2) %
Exchange rate effect (5) (1) % (10) (1) %
Earnings before interest and
taxes $ 64 $ 145 $ (81) (56) % $ 164 $ 247 $ (83) (34) %
Asset impairments and
restructuring charges, net - - - 7 - 7
Earnings before interest and
taxes excluding non-core item 64 145 (81) (56) % 171 247 (76) (31) %
Sales revenue in second quarter and first six months 2020 decreased compared to
second quarter and first six months 2019 due to lower sales volume and less
favorable product mix. Lower sales volume was most pronounced for products in
markets negatively impacted by COVID-19, particularly interlayers, films, and
copolyester products sold in transportation and consumer durables end-markets,
partially offset by increased sales volume of certain standard copolyester
products used in applications for personal care and wellness and consumables
end-markets attributed to strengthened demand due to COVID-19.
Second quarter 2020 EBIT decreased compared to second quarter 2019 primarily due
to $108 million of lower sales volume and higher manufacturing costs due to
lower capacity utilization and reduction of inventory. Several manufacturing
facilities that primarily serve transportation end-markets were temporarily
idled during second quarter. As a result, certain manufacturing costs were
recognized in the second quarter rather than being assigned to products in
inventory and then recognized over several periods. These higher costs were
offset $28 million by cost reduction actions.
First six months 2020 EBIT included asset impairments and restructuring charges
resulting from the closure of a performance films manufacturing facility in
North America as part of ongoing site optimization actions. Excluding this
non-core item, EBIT in first six months 2020 decreased compared to first six
months 2019 primarily due to $115 million of lower sales volume and higher
manufacturing costs due to lower capacity utilization and reduction of
inventory. These higher costs were offset $28 million by cost reduction actions.
In addition, lower raw material and energy costs offset lower selling prices by
$22 million .
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CONDITION AND RESULTS OF OPERATIONS
Chemical Intermediates Segment
Second Quarter First Six Months
Change Change
2020 2019 $ % 2020 2019 $ %
(Dollars in millions)
Sales $ 461 $ 631 $ (170) (27) % $ 1,053 $ 1,286 $ (233) (18) %
Volume / product mix effect (111) (18) % (113) (9) %
Price effect (58) (9) % (116) (9) %
Exchange rate effect (1) - % (4) - %
Earnings before interest and
taxes $ 20 $ 63 $ (43) (68) % $ 100 $ 136 $ (36) (26) %
Asset impairments and
restructuring charges, net 2 - 2 3 - 3
Earnings before interest and
taxes excluding non-core item 22 63 (41) (65) % 103 136 (33) (24) %
Sales revenue in second quarter 2020 decreased compared to second quarter 2019
primarily due to lower sales volume and lower selling prices across the segment.
Lower sales volume was attributed to the negative impact of COVID-19 on demand,
and lower Brent crude oil prices resulting in U.S. olefin production being less
competitive globally. Lower selling prices resulted from lower raw material
prices.
Sales revenue in first six months 2020 decreased compared to first six months
2019 primarily due to lower selling prices across the segment resulting from
lower raw material prices, and lower sales volume in most product lines
primarily impacted by COVID-19 and increased competitive pressure.
Second quarter and first six months 2020 EBIT included restructuring severance
charges related to the previously reported plan to discontinue production of
certain products at the Singapore manufacturing facility by the end of 2020.
Excluding this non-core item, EBIT decreased compared to second quarter and
first six months 2019 primarily due to $50 million and $45 million ,
respectively, of lower sales volume and higher manufacturing costs due to lower
capacity utilization and reduction of inventory. These higher costs were offset
$15 million by cost reduction actions in both second quarter and first six
months 2020. Selling prices were mostly offset by lower raw material and energy
costs.
Fibers Segment
Second Quarter First Six Months
Change Change
2020 2019 $ % 2020 2019 $ %
(Dollars in millions)
Sales $ 211 $ 213 $ (2) (1) % $ 423 $ 426 $ (3) (1) %
Volume / product mix effect 1 - % 4 - %
Price effect (2) (1) % (6) (1) %
Exchange rate effect (1) - % (1) - %
Earnings before interest and
taxes $ 46 $ 51 $ (5) (10) % $ 99 $ 93 $ 6 6 %
Sales revenue in second quarter and first six months 2020 was relatively unchanged compared to second quarter and first six months 2019. Acetate tow sales volume increased slightly due to customer buying patterns while lower textile products sales volume was primarily attributed to the impact of COVID-19.
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Second quarter 2020 EBIT decreased compared to second quarter 2019 primarily due
to $7 million of higher manufacturing costs resulting from lower capacity
utilization and reduction of inventory. These higher costs were offset $4
million by cost reduction actions.
First six months 2020 EBIT increased compared to first six months 2019 primarily
due to the $4 million impact of cost reduction actions. Higher manufacturing
costs due to lower capacity utilization and reduction of inventory were offset
by higher sales volume.
Other
Second Quarter First Six Months
2020 2019 2020 2019
(Dollars in millions)
Loss before interest and taxes Growth initiatives and businesses not allocated to operating segments
$ (28) $ (25) $ (51) $ (52) Pension and other postretirement benefits income (expense), net not allocated to operating segments 20 11 41 23 Asset impairments and restructuring charges, net (11) (18) (11) (46)
Other income (charges), net not allocated to operating segments
(1) (3) (7) (3)
Loss before interest and taxes $ (20) $
(35)
Asset impairments and restructuring charges, net 11 18 11 46 Loss before interest and taxes excluding non-core items (9) (17) (17) (32) 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". In second quarter and first six months 2020, the Company recognized$8 million of asset impairments and$3 million in contract termination fees resulting from management's decision to discontinue growth initiatives for polyester based microfibers, including Avra™ performance fibers. SALES BY CUSTOMER LOCATION Sales Revenue Second Quarter First Six Months Change Change (Dollars in millions) 2020 2019 $ % 2020 2019 $ % United States and Canada$ 786 $ 995 $ (209) (21) %$ 1,766 $ 1,995 $ (229) (11) % Asia Pacific 523 574 (51) (9) % 1,018 1,127 (109) (10) %Europe ,Middle East , and Africa 526 649 (123) (19) % 1,157 1,338 (181) (14) % Latin America 89 145 (56) (39) % 224 283 (59) (21) %
(19) %
Sales revenue inUnited States andCanada decreased in second quarter 2020 compared to second quarter 2019 primarily due to lower sales volume and selling prices in all operating segments, particularly in the AFP and CI segments. Sales revenue inUnited States andCanada decreased in first six months 2020 compared to first six months 2019 primarily due to lower selling prices in all operating segments and lower sales volume in most operating segments, offset by higher sales volume in the Fibers segment. Sales revenue inAsia Pacific decreased in second quarter 2020 compared to second quarter 2019 primarily due to lower selling prices in all operating segments, particularly in the AFP and CI segments, and lower sales volume mostly in the AM segment, partially offset by higher sales volume in the AFP and Fibers segments. Sales revenue inAsia Pacific decreased in first six months 2020 compared to first six months 2019 primarily due to lower selling prices in all operating segments, particularly in the AFP and CI segments, and lower sales volume, mostly in the AM segment, partially offset by higher sales volume in the Fibers segment. 44 --------------------------------------------------------------------------------
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CONDITION AND RESULTS OF OPERATIONS
Sales revenue in Europe , Middle East , and Africa decreased in second quarter
2020 compared to second quarter 2019 primarily due to lower sales volume in most
operating segments, except the Fibers segment, and lower selling prices in all
operating segments. Sales revenue in Europe , Middle East , and Africa decreased
in first six months 2020 compared to first six months 2019 primarily due to
lower sales volume and lower selling prices in all operating segments.
Sales revenue in Latin America decreased in second quarter and first six months
2020 compared to second quarter and first six months 2019 primarily due to lower
sales volume in all operating segments.
LIQUIDITY AND OTHER FINANCIAL INFORMATION
COVID-19 Liquidity Actions
Priorities for uses of available cash for full year 2020 include payment of the quarterly dividend and the reduction of net debt by more than$600 million . In March and April, as a precautionary measure due to increased financial market volatility resulting from COVID-19, the Company took certain liquidity actions, including borrowing$400 million under its existing Credit Facility and$250 million under a new Term Loan agreement. The Company has subsequently repaid the entire$400 million Credit Facility borrowings. As previously reported, in April the Company amended the covenants of both loan agreements to reflect higher cash balances and the expected negative impact on operating results impacted by COVID-19.
Cash Flows
Cash flows from operations, cash and cash equivalents, and the other sources of liquidity described below are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing ofEastman 's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Management believes maintaining a financial profile consistent with an investment grade credit rating is important to its long-term strategic and financial flexibility. First Six Months (Dollars in millions) 2020
2019
Net cash provided by (used in) Operating activities$ 607 $ 417 Investing activities (201) (219) Financing activities 94 (237)
Effect of exchange rate changes on cash and cash equivalents -
(1)
Net change in cash and cash equivalents 500
(40)
Cash and cash equivalents at beginning of period 204
226
Cash and cash equivalents at end of period$ 704
Cash provided by operating activities increased$190 million in first six months 2020 compared with first six months 2019 due to lower increases in net working capital (trade receivables, inventories, and trade payables), partially offset by lower net earnings. Cash used in investing activities decreased$18 million in first six months 2020 compared with first six months 2019 due to an acquisition in the AFP business segment in first six months 2019.
Cash provided by financing activities increased
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CONDITION AND RESULTS OF OPERATIONS
First Six Months
(Dollars in millions) 2020 2019
Net cash provided by operating activities$ 607 $ 417 Capital expenditures (196) (198) Free cash flow$ 411 $ 219
Working Capital Management and Off Balance Sheet Arrangements
Since 2019, the Company has been expanding 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 amounts sold in second quarter 2020 and 2019 were$411 million and$169 million , respectively, and$868 million and$270 million in first six months 2020 and 2019, 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$214 million and$169 million of these receivables would have been outstanding as ofJune 30, 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 both programs. 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 Remainder of 2020 $ -$ 517 $ 97 $ 95 $ 33 $ 127$ 869 2021 483 - 187 153 55 70 948 2022 742 - 175 101 41 80 1,139 2023 839 - 155 90 27 85 1,196 2024 241 - 136 94 15 98 584 2025 and beyond 3,311 - 1,414 1,958 32 1,112 7,827 Total$ 5,616 $ 517 $ 2,164 $ 2,491 $ 203 $ 1,572$ 12,563
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.
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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. 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.
Loan Agreement, Credit Facility, and Commercial Paper Borrowings
InApril 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. AtJune 30, 2020 , the Company's borrowings under the Term Loan were$249 million with a weighted average interest rate of 2.75 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. 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. AtJune 30, 2020 , the Company had no outstanding borrowings under the Credit Facility. AtJune 30, 2020 , the Company's commercial paper borrowings were$268 million with a weighted average interest rate of 0.53 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. The Credit Facility and Term Loan 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 applicable covenants at bothJune 30, 2020 andDecember 31, 2019 . The total amount of available borrowings under the Credit Facility was approximately$1.50 billion as ofJune 30, 2020 . As previously reported, inApril 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 untilJune 30, 2021 in the event certain financial ratios are exceeded. See the
Current Report on Form 8-K filed
In
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CONDITION AND RESULTS OF OPERATIONS
Net Debt
June 30, December 31,
(Dollars in millions) 2020 2019
Total borrowings $ 6,133 $ 5,782
Less: Cash and cash equivalents 704 204
Net debt $ 5,429 $ 5,578 In the first half of 2020 the Company reduced net debt by
Capital Expenditures
Capital expenditures were$196 million and$198 million in first six months 2020 and 2019, respectively. Capital expenditures in first six months 2020 were primarily for targeted growth initiatives and site modernization projects. 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 ofJune 30, 2020 , a total of 7,887,216 shares have been repurchased under this authorization for a total amount of$633 million . The Board of Directors declared a cash dividend of$0.66 per share during the third quarter of 2020, payable onOctober 2, 2020 to stockholders of record onSeptember 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. 48
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CONDITION AND RESULTS OF OPERATIONS
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 ofJune 30, 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 impacted by 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. Management does not believe it is more likely than not that goodwill was impaired for each of its reporting units as ofJune 30, 2020 . However, the decrease in forecasted revenue and EBIT for the tire additives reporting unit (part of the AFP 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 approximates the carrying value. The decrease in forecasted revenue and EBIT for the tire additives reporting unit is primarily the result of weakened demand in transportation markets impacted by COVID-19 and increased competitive pricing pressure as a result of global capacity increases. The Company uses an income approach, including some unobservable inputs, and applies a discounted cash flow model in testing the carrying value of goodwill. Key assumptions and estimates used in this impairment testing included projections of revenues and EBIT, 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 value. 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. The Company performed a sensitivity analysis assuming a 25 basis point decrease in the projected long-term growth rate or a 25 basis point increase in the WACC, and both scenarios independently yielded approximately a$50 million decrease to the estimated fair value for the tire additives reporting unit. As ofJune 30, 2020 , goodwill allocated to the tire additives reporting unit is$718 million . Additional declines in the market conditions or forecasted revenue and EBIT could result in an impairment of goodwill, especially for the tire additives reporting unit.
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, including some unobservable inputs, 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 reviewed the indefinite-lived intangible assets associated with the tire additives reporting unit for impairment. As a result of the review, the Company recognized intangible asset impairments of$123 million in second quarter 2020 in the tire additives reporting unit to reduce the carrying value of the Crystex™ and Santoflex™ tradenames to the estimated fair value. After recognizing the impairment, the Company had$371 million in indefinite-lived intangible assets. The remaining tradename carrying value of$42 million for the tire additives reporting unit will be amortized prospectively. Additional declines in the market conditions or forecasted revenue could result in additional impairment of indefinite-lived intangible assets.
The Company will continue to monitor both goodwill and indefinite-lived intangible assets 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.
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CONDITION AND RESULTS OF OPERATIONS
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 continuing negative impact of COVID-19 (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) remains 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 2020, management expects: •reduced discretionary spending, deferred asset maintenance turnarounds, and adjusted operations to ensure the health and safety of employees and contractors to reduce costs approximately$150 million ; •free cash flow greater than$1 billion ; •more than$600 million reduction of net debt; and •limiting share repurchases to offset dilution, with no share repurchases in second half of 2020. 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.
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. 50 --------------------------------------------------------------------------------
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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 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 impact the returns from any proposed or current investments and projects. 51 --------------------------------------------------------------------------------
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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.
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. 52 --------------------------------------------------------------------------------
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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 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, as has been the case for certain acquired assets primarily in the AFP segment, 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. 53
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