UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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(Mark One) | |
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 20162017 |
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| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from ______________ to ______________ |
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
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| Delaware | 62-1539359 |
| (State or other jurisdiction of | (I.R.S. employer |
| incorporation or organization) | identification no.) |
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| 200 South Wilcox Drive | |
| Kingsport, Tennessee | 37662 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | New York Stock Exchange |
| 1.50% Notes Due 2023 | | New York Stock Exchange |
| 1.875% Notes Due 2026 | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | [X] | |
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| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. | | [X] |
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| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | [X] | |
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| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | [X] | |
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| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | [X] | |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer", "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company) Emerging growth company [ ] | | |
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ [ ] | | |
| | Yes | No |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | | [X] |
The aggregate market value (based upon the $67.90$83.99 closing price on the New York Stock Exchange on June 30, 2016)2017) of the 145,850,452142,397,967 shares of common equity held by non-affiliates as of December 31, 20162017 was $9,903,245,691$11,960,005,248 using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude common stock that may be deemed beneficially owned as of December 31, 20162017 by Eastman Chemical Company's ("Eastman" or the "Company") directors and executive officers and charitable foundation, some of whom might not be held to be affiliates upon judicial determination. A total of 146,488,924142,966,679 shares of common stock of the registrant were outstanding at December 31, 2016.2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 20172018 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10 to 14 of this Annual Report on Form 10-K (this "Annual Report") as indicated herein.
FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Annual Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, Section(Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended.amended). Forward-looking statements are all statements, other than statements of historical fact, that may be made by Eastman Chemical Company ("Eastman" or the "Company") from time to time. In some cases, you can identify forward-looking statements by terminology such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would," and similar expressions or expressions of the negative of these terms. Forward-looking statements may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; exposure to, and effects of hedging of, raw material and energy prices and costs; foreign currencies and interest rates; disruption of raw material or energy supply; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin and sales; pending and future legal proceedings; earnings, cash flow, dividends, stock repurchases and other expected financial results, events, and conditions; expectations, strategies, and plans for individual assets and products, businesses, and operating segments, as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans and activities; pension expenses and funding; credit ratings; anticipated and other future restructuring, acquisition, divestiture, and consolidation activities; cost reduction and control efforts and targets; the timing and costs of, and benefits from, the integration of, and expected business and financial performance of, acquired businesses; strategic and technology and product innovation initiatives and development, production, commercialization and acceptance of new products, services and technologies and related costs; asset, business, and product portfolio changes; and expected tax rates and net interest costs.
Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report. Other factors, risks or uncertainties of which we are not aware, or presently deem immaterial, could also cause actual results to differ materially from those in the forward-looking statements.
The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date such statements are made. Except as may be required by law, the Company undertakes no obligation to update or alter these forward-looking statements, whether as a result of new information, future events, or otherwise. Investors are advised, however, to consult any further public Company disclosures (such as filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
TABLE OF CONTENTS
PART II
PART III
PART IV
SIGNATURES
PART I
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| Chemical Intermediates Segment | |
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Eastman Chemical Company ("Eastman" or the "Company") is a global advanced materials and specialty additives company that produces a broad range of advanced materials, specialty additives, chemicals, and fibersproducts found in items people use every day. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company's photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 4948 manufacturing sites and equity interests in sixthree manufacturing joint ventures in 14 countries that supply products to customers throughout the world. The Company's headquarters and largest manufacturing site are located in Kingsport, Tennessee. With a robust portfolio of specialty businesses, Eastman works with customers to deliver innovative products and solutions while maintaining a commitment to safety and sustainability. Eastman's businesses are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. See "Business Segments".
Eastman is focusedAcquisitions have supported Eastman's strategy to increase emphasis on consistent earnings growth through a market-driven approach that takes advantagespecialty businesses and have provided opportunities for the integration of the Company's existing technology platforms global market and manufacturing presence, and leading positions in key end markets such as transportation, building and construction, and consumables. Eastman management believes that the Company's end-market diversity is a source of strength, and that many of the markets into which the Company's products are sold are benefiting from longer-term global trends such as energy efficiency, a rising middle class in emerging economies, and an increased focus on health and wellness. Management believes that these trends, combined with the diversity of the Company's end markets, facilitate more consistent demand for the Company's products over time.
Onenabling differentiated product development targeting new niche markets. In July 2, 2012, the Company acquired Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. The Company completed four acquisitions in 2014. OnIn June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business. OnIn August 6, 2014, the Company acquired Knowlton Technologies, LLC, a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs. OnIn December 5, 2014, Eastman acquired Taminco Corporation, a global specialty chemical company. On December 11, 2014, Eastman acquiredcompany and Commonwealth Laminating & Coating, Inc. ("Commonwealth"), a specialty films business. Results of the acquired businesses are included in Eastman's financial results for the periods presented in this Annual Report on Form 10-K (this "Annual Report").
Eastman results asuses 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 datevalue of acquisitions.Eastman's products and how they perform within customers' and end user products. Key areas of application development include thermoplastic processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, non-wovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. 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.
In 2016,2017, the Company reported sales revenue of $9.0$9.5 billion, operating earnings of $1.4$1.5 billion, and net earnings attributable to Eastman of $854 million. Earnings$1.4 billion. Diluted earnings per diluted share attributable to Eastman were $5.75.$9.47. Cash provided by operating activities was $1.7 billion. Excluding non-core and unusual items, adjusted net earnings were $1.4 billion.$1.1 billion and adjusted earnings per diluted share were $7.61. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report for reconciliation of non-GAAP to GAAP measures, description of excluded items, and related information. For Company sales revenue by end-market, see Exhibit 99.01 "2016"2017 Company and Segment Sales Revenue by End-Use Market" of this Annual Report.
Business Strategy
BUSINESS STRATEGY
Eastman's objective is to be an outperforming specialty chemical company with consistent earnings growth and strong cash flow. Integral to the Company's strategy for growth is leveraging its heritage of expertise and innovation within its cellulose and acetyl, olefins, polyester, and alkylamine chemistries. For each of these "streams", the Company has developed and acquired a combination of assets and technologies that combine scale and integration across multiple manufacturing units and sites as a competitive advantage. Management uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development, and relentlessly engaging the market. The Company sells differentiated products into diverse markets and geographic regions. Eastman worksregions and engages the market by working directly with customers and downstream users to meet their needs in existing and new markets through the development of innovative products and technologies.niche markets. Management believes that the Company can deliverthis innovation-driven growth model will result in consistent financial results by leveraging the Company's world classproven technology platforms, improvingcapabilities to improve product mix, through innovation and increasing emphasis on specialty businesses, and products, sustaining and expanding advantaged market positions, and leveraging advantaged cost positions.leadership in attractive niche markets. A consistent increase in earnings is expected to result from both organic (internal) growth initiatives and strategic inorganic (externalinitiatives such as external growth through acquisitions that are complementary or additive to existing products and joint ventures) initiatives.ventures.
InnovationIn 2017, as part of the Company's strategy to increase emphasis on specialty businesses and market development initiativesproducts, the Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company.
Growth and Innovation
Management is pursuing specific opportunities to leverage Eastman's innovation-driven growth model for continued near-term and long-term greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. These opportunities which are expected to add one togreater than two percent on a compounded basis to revenue from 20162018 through 2018. In 2016, the Company:2020, currently include:
In the AFP segment:
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| • | Completed retrofitGrowth and innovation of part of an existing manufacturing facility in Nienburg, Germany and continued construction of an expansion of the Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia expected to be operational in second half 2017. These actions are2017 that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and allowing forfacilitating the introduction of new products for the tire markets.
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| • | Commercialized EastmanGrowth and innovation of Tetrashield™® performance polyester resins based on proprietary monomer technology. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets.
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| • | Growth and innovation of Impera® high performance resins for tires. When used as additives in tire compound formulations, Impera® resins enable tire manufacturers to improve the safety and handling of tires, balance tire performance and fuel economy needs, and achieve superior levels of tack for tire construction. |
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| • | Growth and innovation of Aerafin® polymer, developed from proprietary olefin technology. These olefin polymers enable improved processing time and other benefits including low odor, improved adhesion, exceptional peel performance, and thermal stability for adhesive applications within the hygiene market. |
In the AM segment:
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| • | Continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Eastman Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018 to meet expected future demand2018. |
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| • | Growth and innovation of Saflex® and head up displays ("HUD") acoustic interlayers used in the durable goodstransportation and healthbuilding and wellness markets.construction markets, supported by construction of a manufacturing facility for polyvinyl butyral ("PVB") resin at the Kuantan, Malaysia site which became fully operational in first quarter 2018. |
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| • | Growth and innovation of Treva™, a cellulose-based engineering bioplastic that offers high performance, sustainability, and design flexibility in applications that require complex and intricate designs and high safety requirements such as eyeglass frames, wearable electronics, and lenses. |
Continued construction of a manufacturing facility for polyvinyl butyral ("PVB") resin atGrowth in performance films in North America and China through strengthened sales channel, marketing, and commercial execution strategies and capabilities.
Fibers segment:
Leveraging the Kuantan, Malaysia site expectedinnovation-driven growth model to be operational in second half 2017. This manufacturing capacity will support globalfocus on growth and innovation in the transportation and building and construction markets and allow the Company to better serve customers in the Asia Pacific region.textiles market through new product offerings including:
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| ▪ | Naia®, a yarn for the apparel market developed from Eastman's proprietary cellulose ester technology. |
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| ▪ | Avra™, a family of fibers for the performance apparel market developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance. |
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| ▪ | Vestera™, a new wood pulp-based alternative for the nonwoven industry used in personal hygiene applications. |
Completed integration of the acquired Commonwealth business to strengthen the window film product portfolio, add industry leading protective film technology, and increase scale cost efficiencies.Sustainability
In 2016, the Company announced that as partBecause of its strategy to increase emphasis on specialty businessesEastman's proprietary and products:
it is pursuing strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company, and
it changed its organizational and management structure following completion of the integration of recently acquired businesses to better align similar strategies and business models.
Management continues to pursue additional opportunities to leverage the Company's innovation and world class technology platforms for continued near-term and long-term growth both sustaining our leadership in existing markets and expanding into new markets. Examples of thesedifferentiated technologies, include Eastman Tetrashield™ performance polyester resins, cellulose esters for tires, next generation Crystex® insoluble sulfur technology, and Eastman microfibers technology.
The Company benefits from proprietary technologiesapplications development capabilities and advantaged feedstocks, and focuses onthe Company views sustainability as a source of competitive strength for growth. Eastman is committed to innovation and growth efforts focused on opportunities where disruptive macro trends align with the Company's differentiated and innovative technology platforms and applications development. Eastman has developedidentified disruptive macro trends to align with the corporate strategy and drive innovation of new products and technologies that enable customers' development and sales of sustainable products. Examples of Eastman's leading position in providing sustainable solutions are Eastman Tritan® copolyester, Saflex® acoustic interlayers and acoustic interlayers head up displays ("HUD"), Eastman Impera® high performance resins for tires, and Eastman's Visualize® Material for optical compensation films in liquid crystal displays.within identified disruptive macro trends include:
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| • | Health and wellness: Tritan® copolyester, Tetrashield® performance polyester resins, and Vestera™ cellulosic fiber. |
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| • | Natural resource efficiency: Saflex® Q series advanced acoustic interlayers, Impera® high performance resins for tires, and Treva™ proprietary engineering bioplastic. |
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| • | Emerging middle class: Saflex® and HUD acoustic interlayers, Regalite® hydrocarbon resins, Naia® cellulosic yarn, and Avra™ performance fibers. |
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| • | Feeding a growing population: Eastman organic acids, Enhanz™ feed additive, and Banguard™ crop protection. |
Financial StrategyFINANCIAL STRATEGY
In addition to managing its management of the Company's businesses and growth initiatives, the Company remainsmanagement is committed to maintaining a strong financial position with appropriate financial flexibility and liquidity. Eastman management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategic and financial flexibility. The Company employs a disciplined and balanced approach to capital allocation and deployment of cash. The priorities for uses of available cash include payment of the quarterly dividend, repayment of debt, funding targeted organic and inorganic growth initiatives, and repurchasing shares. Management expects that the combination of continued strong cash flow generation, and liquidity and a solidstrong balance sheet, and sufficient liquidity will continue to provide flexibility to pursue organic and inorganic growth initiatives.
As a result of changes in the Company's organizational structure and management, beginning first quarter 2016 theThe Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. This organizational structure is based on the management of the strategies, operating models, and sales channels that the various businesses employ and supports the Company's strategy to transformof continued transformation towards a specialty portfolio by better aligning similar businesses in a more streamlined structure. All financial information in this Annual Report on Form 10-K (this "Annual Report") is presented on the new operating segment basis. For additional financial and product information for each operating segment, see the Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on April 18, 2016.of products.
Sales revenue and costs related to growth initiatives, research and development ("R&D") costs,&D, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are included in "Other". For identification of manufacturing sites, see Item 2, "Properties". For additional information concerning the Company's operating segments, see Note 20,19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT
Overview
In the AFP segment, the Company manufactures chemicals for products in the coatings, tires,transportation, consumables, building and construction, industrial applications including solar energy markets, animal nutrition, care chemicals, crop protection, energy, personal and energyhome care, and other markets. In 2016,2017, the AFP segment had sales revenue of $3.0$3.3 billion, 3335 percent of Eastman's total sales. Key technology platforms in this segment are cellulose esters, polyester polymers, insoluble sulfur, hydrocarbon resins, alkylamine derivatives, and propylene derivatives.
The AFP segment's sales growth is typically similar to or slightly above global gross domestic productannual industrial production growth due to the segment'sinnovation and enhanced commercial execution with sales to diversifieda robust set of end markets. The segment is focused on producing high-value additives that provide critical functionality but which comprise a small percentage of total customer product cost. The segment principally competes on the unique performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. A critical element of the AFP segment's success is its close formulation collaboration with customers through advantaged application development capability.
Principal Products
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| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
| Coatings and Inks Additives |
Polymers cellulosics Eastman
Tetrashield™® polyesters polyolefins
Additives and Solvents Texanol® Optifilm™® ketones esters glycol ethers oxo alcohols | specialty coalescents, specialty solvents, and commodity solvents paint additives and specialty polymers | BASF SE The Dow Chemical CompanyDowDuPont Inc.
Oxea Celanese Corporation Alternative technologiesTechnologies
| wood pulp propane propylene
| building and construction (architectural coatings) transportation (OEM) and refinish coatings durable goods (wood, industrial coatings and applications) consumables (graphic arts, inks, and packaging)
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| Adhesives Resins |
Piccotac® Regalite® Eastotac® Eastoflex® Aerafin® | hydrocarbon resins and rosin resins mainly for hot-melt and pressure sensitive adhesives | Exxon Mobil Corporation Kolon Industries, Inc. Evonik Industries | C9 resin oil piperylene gum rosin propylene
| consumables (resins used in hygiene and packaging adhesives) building and construction (resins for construction adhesives and interior flooring)
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| Tire Additives |
Crystex® | insoluble sulfur rubber additive
| Oriental Carbon & Chemicals Limited Shikoku Chemicals Corporation | sulfur naphthenic process oil | transportation (tire manufacturing) other rubber products (such as hoses, belts, seals, and footwear) |
Santoflex® | antidegradant rubber additive | Jiangsu Sinorgchem Technology Co,Co., Ltd. Korea Kumho Petrochemical Co., Ltd. Lanxess AG
| nitrobenzene aniline methyl isobutyl ketone
| transportation (tire manufacturing) other rubber products (such as hoses, belts, seals, and footwear)
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Impera™®
| performance resins | Cray Valley Hydrocarbon Specialty Chemicals Exxon Mobil Corporation Kolon Industries Incorporated
| alpha methylstyrene piperylene styrene
| transportation (tire manufacturing)
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| Product | Description |
Principal Competitors |
Key Raw Materials |
End-Use Applications |
Care Chemicals Additives |
Alkylamine Derivativesderivatives
| amine-derivative-basedamine derivative-based building blocks for production of flocculants
intermediates for surfactants | BASF SE The Dow Chemical CompanyDowDuPont Inc.
Huntsman Corporation
| alkylamines ammonia alcohols ethylene oxide
| water treatment personal and home care
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| Specialty Fluids |
Therminol® Eastman Turbo Oils
Skydrol® Eastman SkyKleen®
| heat transfer and aviation fluids
| The Dow Chemical CompanyDowDuPont Inc.
Exxon Mobil Corporation
| benzene phosphorous neo-polyol esters
| industrial chemicals and processing (heat transfer fluids for chemical processes) renewable energy commercial aviation
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| Animal Nutrition |
Formic acid solutions Enhanz™ | formic-acid basedformic acid-based solutions | BASF SE Perstorp Luxi Chemical Group Feicheng Acid Chemicals | sulfuric acid formic acid | animal nutrition de-icing
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| Crop Protection |
Alkylamine derivatives
Banguard™
| metam basedmetam-based soil fumigants
thiram and ziram basedziram-based fungicides plant growth regulator
| The Dow Chemical CompanyDowDuPont Inc.
Argo-Kanesho Co LtdCo., Ltd. Bayer BASF SE | alkylamines CS2 caustic soda
| agriculture crop protection
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| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| Coatings and Inks Additives | 24% | 31% | 23% | 24% |
| Adhesives Resins | 21% | 27% | 18% | 21% |
| Tire Additives | 17% | 22% | 17% |
| Other | 38% | 20% | |
| Care Chemicals | | 17% | 15% |
| Specialty Fluids | | 13% | 11% |
| Animal Nutrition and Crop Protection | | 12% |
| Total | 100% | 100% |
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Sales by Customer Location | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| United States and Canada | 37% | 38% | 41% | 35% | 37% | 38% |
| Asia Pacific | 21% | 24% | 23% | 21% |
| Europe, Middle East, and Africa | 35% | 29% | 36% | 35% |
| Latin America | 7% | 6% | 6% | 7% | 6% |
| Total | 100% | 100% |
See Exhibit 99.01 for AFP segment revenue by end-use market.
Strategy
A key element ofManagement applies the innovation-driven growth model in the AFP segment's strategy is to leveragesegment by leveraging proprietary technologies for the continued development of innovative product offerings and to focusfocusing growth efforts on further expanding end markets such as coatings, tires,transportation, consumables, building and construction, industrial applications, animal nutrition, care chemicals, crop protection, and energy. Eastman management believes that the ability to leverage the AFP segment's research, differentiated application development, and production capabilities across multiple markets makes the segment uniquely positionedpositions it to meet evolving needs to improve the quality and performance of its customers' products. For example, tire performance labeling regulations in various parts of the world and competitive pressure favoring performance over cost are causing tire manufacturers to simultaneously improve conflicting tire attributes. Eastman's tire additives technology helps tire manufacturers overcome common compromises often observed between wet grip and rolling resistance. In order to address identified market needs, the Company is also developing new technologies such as polyester resins for coatings, sustainable solvents, and cellulose esters and hydrocarbon resins for tires.
In 2016, the Company continued expansion of the Crystex® insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in second half 2017, and retrofitted part of an existing manufacturing facility in Nienburg, Germany. These actions are expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and introducing new products for the tire markets.
An example of the Company's continuing innovation and market development efforts is the recently commercialized Eastman Tetrashield™ performance polyester resins. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets. Additional examples where the Company is pursuing innovation through other technologies include next generation Crystex® and resins and cellulose esters for tires.
The Company'sEastman's global manufacturing presence is a key element of the AFP segment's growth strategy. For example, the segment expects to capitalize on industrial growth in Asia from its manufacturing capacity expansion in Kuantan, Malaysia and cellulose ester products sourced from our low costthe Company's low-cost cellulose and acetyl manufacturing stream in North America.
In 2017, the Company:
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| • | advanced growth and innovation of Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and facilitating the introduction of new products into the tire markets; |
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| • | advanced growth and innovation of Tetrashield® performance polyester resins based on proprietary monomer technology. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets; |
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| • | advanced growth and innovation of Impera® high performance resins for tires. When used as additives in tire compound formulations, Impera® resins enable tire manufacturers to improve the safety and handling of tires, balance tire performance and fuel economy needs, and achieve superior levels of tack for tire construction; |
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| • | advanced growth and innovation of Aerafin® polymer, developed from proprietary olefin technology. These olefin polymers enable improved processing time and other benefits including low odor, improved adhesion, exceptional peel performance, and thermal stability for adhesive applications within the hygiene market; and |
accelerated growth in animal nutrition and solar specialty fluids through enhanced commercial execution.
ADVANCED MATERIALS SEGMENT
Overview
In the AM segment, the Company produces and markets its polymers, films, and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness markets. In 2016,2017, the AM segment had sales revenue of $2.5$2.6 billion, 2827 percent of Eastman's total sales. Key technology platforms for this segment include cellulose esters, copolyesters, and PVB and polyester films.
Eastman has strongEastman's technical, application development, and market development capabilities that enable the AM segment to modify its polymers, films, and plastics to control and customize their final properties for development of new applications with enhanced functionality. For example, Eastman Tritan® copolyesters are a leading solution for food contact applications due to their performance and processing attributes and Bisphenol A ("BPA") free properties. The Saflex® Q Series product line is a leading solution for sound reduction in the cabin of an automobile.architectural and automotive applications. The Company maintains what management believes is a leading solar control technology position in the window film market through the use of high performance sputter coatings which enhance solar heat rejection while maintaining superior optical properties. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.
Principal Products
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| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
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| Specialty Plastics |
Eastman Tritan®
copolyester Eastar® copolyesters Eastman Spectar®
copolyester Eastman Embrace®
copolyester Eastman Visualize®
Material
Eastman Aspira™ family of resins Flexvue® Treva™
| copolyesters cellulose esters | Covestro Trinseo Evonik Industries AG Saudi Basic Industries Corporation Mitsubishi Chemical Corporation S.K. Chemical Industries Sichuan Push Acetati Company Limited Daicel Chemical Industries Ltd SABIC
| paraxylene ethylene glycol cellulose purified terephthalic acid ("PTA")
| consumables (consumer packaging, consumables and cosmetics packaging, in-store packaging, in-store fixtures and displays) durable goods (consumer housewares and appliances) health and wellness (medical) electronics (displays)
|
| Advanced Interlayers |
Saflex® Saflex® Q Series
| PVB sheet specialty PVB intermediates
| Sekisui Chemical Co., Ltd. Kuraray Co., Ltd
Kingboard (Fo Gang)
Specialty Resins Limited, Chang Chun Petrochemical Co., Ltd
| polyvinyl alcohol vinyl acetate monomer butyraldehyde 2-ethyl hexanol ethanol triethylene gylcol | transportation (automotive safety glass, automotive acoustic glass, and HUD) building and construction (PVB for architectural interlayers)
|
| Performance Films |
LLumar® SunTek® V-KOOL® Gila®
| window film and protective film products for aftermarket applied films
| 3M Company Saint-Gobain S.A. Garware ChemicalsBeijing Kangde Xin
LimitedComposite Material Company, LLC "KDX"
| polyethylene terephthalate film
| transportation (automotive after-marketafter- market window film and paint protection film) building and construction (residential and commercial window films)
|
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| Specialty Plastics | 50% | 51% | 54% | 51% | 50% | 51% |
| Advanced Interlayers | 34% | 33% | 34% | 33% | 34% | 33% |
| Performance Films | 16% | 12% | 16% |
| Total | 100% | 100% |
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Sales by Customer Location | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| United States and Canada | 37% | 38% | 36% | 36% | 37% | 38% |
| Asia Pacific | 32% | 31% | 30% | 33% | 32% | 31% |
| Europe, Middle East, and Africa | 26% | 28% | 26% |
| Latin America | 5% | 6% | 5% |
| Total | 100% | 100% |
See Exhibit 99.01 for AM segment revenue by end-use market.
Strategy
Management believes thatapplies the innovation-driven growth model in the AM segment has significant opportunities to leverageby leveraging innovation and technology platforms into new products and applications, accelerate itsaccelerating AM segment growth, and further leverageleveraging its manufacturing capacity. The segment continues to expand its portfolio of higher margin products in attractive end markets. Through Eastman's advantaged asset position and expertise in applications development, management believes that the AM segment is well positioned for future growth. The advanced interlayers product lines, including acoustic PVB sheet and HUD interlayers, leverage Eastman's global presence to supply industry leading innovations to automotive and architectural end markets by collaborating with global and large regional customers. In the automotive end market, the performance films product line has industry leading technologies, recognized brands, and what management believes is one of the largest distribution and dealer networks which, when combined, position Eastman for further growth, particularly in leading automotive markets such as North America and Asia. The segment's product portfolio is aligned with underlying energy efficiency trends in both automotive and architectural markets. Additionally, increased demand for BPA-free products has created new opportunities for various copolyester applications.
The AM segment expects to continue to improve product mix from increased sales of premium products, including Eastman Tritan® copolyester, Eastman Visualize® Material, advanced interlayers withmaterial, Saflex® Q acoustic properties,series and Saflex® HUD interlayer products, LLumar®, V-KOOL®, and SunTek® window and protective films.
The acquisition of Commonwealth Laminating & Coating, Inc. in December 2014 further expanded the AM segment's product portfolio and sales channel network in the diverse window film markets, enabled further manufacturing and distribution efficiencies, and added industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.
The Company is continuing an additional 60,000 metric ton expansion of Eastman Tritan® copolyester capacity atIn 2017, the Kingsport, Tennessee manufacturing facility expected to be operational in first half 2018 to meet expected future demand in the durable goods and health and wellness markets. Through recent debottlenecks and working capital management, management expects to have adequate Eastman Tritan® copolyester manufacturing capacity to meet demandCompany:
| |
| • | advanced the continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018; |
| |
| • | advanced growth and innovation of Saflex® and HUD acoustic interlayers used in the transportation and building and construction markets, supported by construction of a manufacturing facility for PVB resin at the Kuantan, Malaysia site which became fully operational in first quarter 2018; |
| |
| • | advanced growth and innovation of Treva™, a cellulose-based engineering bioplastic that offers high performance, sustainability, and design flexibility in applications that require complex and intricate designs and high safety requirements such as eyeglass frames, wearable electronics, and lenses; and |
strengthened growth in advance of the capacity expansionperformance films in 2018.
Construction of a manufacturing facility for PVB resin at the Kuantan, Malaysia site is expected to be operational in second half 2017. This manufacturing capacity will support expected global growth in the transportationNorth America and buildingChina through improved sales channel, marketing, and construction marketscommercial execution strategies and allow the Company to better serve customers in the Asia Pacific region.capabilities.
CHEMICAL INTERMEDIATES SEGMENT
Overview
The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support ourthe Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond ourthe Company's internal specialty needs for use ininto markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Certain products are also used internally by other operating segments of the Company. In 2016,2017, the CI segment had sales revenue of $2.5$2.7 billion, 2829 percent of Eastman's total sales. Key technology platforms include acetyls, oxos, plasticizers, polyesters, and alkylamines.
The CI segment product lines benefit from competitive cost positions primarily resulting from the use of and access to lower cost raw materials, and the Company's scale, technology, and operational excellence. Examples include coal used in the production of cellulose and acetyl stream product lines, feedstocks used in the production of olefin derivative product lines such as oxo alcohols and plasticizers, and ammonia and methanol used to manufacture methylamines. The CI segment also provides superior reliability to customers through its backward integration into readily available raw materials, such as ethane, propane, and coal. In addition to a competitive cost position, the plasticizers business shouldexpects to continue to benefit from the growth in relative use of non-phthalate rather than phthalate plasticizers in the United States, Canada, and Europe.
Several CI segment product lines are affected by cyclicality, most notably in the olefin and acetyl-based businesses.products. See "Eastman Chemical Company General Information - Manufacturing Streams". This cyclicality is caused by periods of supply and demand imbalance, when either incremental capacity additions are not offset by corresponding increases in demand, or when demand exceeds existing supply. While management continues to take steps to reduce the impact of the trough of these cycles, future results are expected to occasionally fluctuate due to both to general economic conditions and industry supply and demand.
Principal Products
|
| | | | |
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
| | | | | |
| Intermediates |
oxoOxo alcohols
and derivatives aceticAcetic acid and
derivatives aceticAcetic anhydride
ethyleneEthylene
glycolGlycol ethers
estersEsters
| Olefin derivatives, acetyls,acetyl derivatives, ethylene, commodity solvents
| Lyondell Bassell, BASF SE The Dow Chemical CompanyDowDuPont Inc.
Oxea BP plc Celanese Corporation Lonza Flint Hills Resources
| propane ethane propylene coal natural gas paraxylene metaxylene
| industrial chemicals and processing building and construction (paint/(paint and coating applications, construction chemicals, building materials) pharmaceuticals and agriculture health and wellness packaging
|
| Plasticizers |
Eastman 168® Eastman® DOP
Benzoflex® Eastman TXIB®
Eastman
Effusion™
| primary non- phthalate and phthalate plasticizers and a range of niche non- phthalate plasticizers
| BASF SE Exxon Mobil Corporation LG Chem, Ltd. Emerald Performance Materials
| propane propylene paraxylene
| building and construction (non-phthalate plasticizers used in interior surfaces) consumables (food packaging, packaging adhesives, and glove applications) health and wellness (medical devices)
|
| Functional Amines |
alkylaminesAlkylamines
| methylamines and salts higher amines and solvents
| BASF SE Chemours U.S. Amines Oxea
| methanol ammonia acetone ethanol butanol
| agrochemicals energy consumables water treatment animal nutrition industrial intermediates |
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| Intermediates | 65% | 78% | 64% | 65% | 65% |
| Plasticizers | 20% | 21% | 19% | 20% |
| Functional Amines | 15% | 1% | 17% | 15% |
| Total | 100% | 100% |
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Sales by Customer Location | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| United States and Canada | 69% | 72% | 68% | 69% |
| Asia Pacific | 12% | 13% | 14% | 12% |
| Europe, Middle East, and Africa | 13% | 10% | 12% | 13% |
| Latin America | 6% | 5% | 6% |
| Total | 100% | 100% |
See Exhibit 99.01 for CI segment revenue by end-use market.
Strategy
To maintain and enhance its status as a low costlow-cost producer and optimize earnings, the CI segment continuously focuses on cost control, operational efficiency, and capacity utilization. This includes focusing on products used internally by other downstream operating segments, thereby supporting growth in specialty product lines throughout the Company. Through the CI segment, the Company has leveraged the advantage of its highly integrated manufacturing facilities. For example, the Kingsport, Tennessee manufacturing facility allows for the production of acetic anhydride and other acetyl derivatives from coal rather than natural gas or other petroleum feedstocks. At the Longview, Texas manufacturing facility, Eastman uses its proprietary oxo-technologyoxo technology in one of the world's largest single-site, oxo butyraldehyde manufacturing facilities to produce a wide range of alcohols and other derivative products utilizing local propane and ethane supplies as well asand purchased propylene. The Pace, Florida manufacturing facility, usingwhich uses ammonia and methanol feedstocks, is the largest methylamine production site in the world. These integrated facilities, combined with large scale production processes and a continuous focus on additional process improvements, allow the CI segment product lines to remain cost competitive and, for some products, cost-advantaged over competitors.
In 2016,2017, to support the Company announced that as part of its strategy to increaseincreased emphasis on specialty businesses and products, it is pursuingthe Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines. Eastman will retainlines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company. This process is expected to continue through first half 2017.
In 2012, theThe Company entered intois party to an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant to further improve the Company's long-term competitive cost position. ThisThe Company expects to begin purchasing propylene from this plant is expected to be operational in 2017.first half 2018. Prior to completion of the plant,beginning these purchases, the Company continueswill continue to benefit from a propylene market contract with an advantaged cost position for purchased propylene.
FIBERS SEGMENT
Overview
In the Fibers segment, Eastman manufactures and sells Estron® acetate tow and Estrobond® triacetin plasticizers for use primarily in the manufacture offiltration media, primarily cigarette filters; Estron® natural (undyed) and Chromspun® solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman is one of the world's two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began production in the early 1950s. The Company is the world's largest producer of acetate yarn and has been in this business for over 7585 years. In 2016,2017, the Fibers segment had sales revenue of $1.0 billion, 11$852 million, 9 percent of Eastman's total sales.
The largest 1210 Fibers segment customers accountaccounted for approximately 8070 percent of the segment's 20162017 sales revenue, and include multinational as well as regional cigarette producers, fabric manufacturers, and other acetate fiber producers.
The Company's long history and experience in the fibers markets are reflected in the Fibers segment's operating expertise, both within the Company and in support of its customers' processes. The Fibers segment's knowledge of the industry and of customers' processes allows it to assist its customers in maximizing their processing efficiencies, promoting repeat sales, and developing mutually beneficial, long-term customer relationships.
The Company's fully integrated fiberfibers manufacturing process employs unique technology that allows it to use a broad range of high-purity wood pulps for which the Company has dependable sources of supply.
Contributing to profitability in the Fibers segment is the limited number of competitors and significant barriers to entry. These barriers include, but are not limited to, high capital costs for integrated manufacturing facilities.
The Fibers segment's competitive strengths include a reputation for high-quality products, technical expertise, large scale vertically-integrated processes, reliability of supply, balanced internally produced acetate flake supply for Fibers products, a reputation for customer service excellence, and a customer base characterized by strategic long-term customer and end user relationships. The Company continues to capitalize and build on these strengths to further improve the strategic position of its Fibers segment. The principal methods of competition include maintaining the Company's large-scale vertically integrated manufacturing process from acetyl raw materials, reliability of supply, product quality, and sustaining long-term customer relationships. Despite continued challenging acetate tow market conditions, including additional industry capacity and lower capacity utilization rates, management expects continued strong Fibers segment cash flow.
Principal Products
|
| | | | |
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
| | | | | |
| Acetate Tow |
Estron® | cellulose acetate tow | Celanese Corporation Solvay S.A.Rhodia Acetow
Daicel Corporation Mitsubishi Rayon Co. Ltd. | wood pulp methanol high sulfur coal | tobacco (manufacture offiltration media (primarily cigarette filters) |
Acetate Yarn |
Estron®
Chromspun®
Cosilva™
| natural (undyed) acetate yarn
solution dyed acetate yarn
| UAB Dirbtinis Pluostas
Industrias del Acetato de Celulosa S.A.
Mitsubishi Rayon Co. Ltd.
| wood pulp
methanol
high sulfur coal
| consumables (apparel, home furnishings, and industrial fabrics)
health and wellness (medical tape)
|
| Acetyl Chemical Products |
Estrobond® | triacetin cellulose diacetateacetate flake acetic acid acetic anhydride
| Jiangsu Ruijia Chemistry Co., Ltd. Polynt SPA Daicel Corporation Celanese Corporation Solvay S.A.Rhodia Acetow
| wood pulp methanol high sulfur coal | tobacco (manufacture offiltration media (primarily cigarette filters)
|
| Acetate Yarn |
Estron® Chromspun® Naia® Avra™ Vestera™
| natural (undyed) acetate yarn solution dyed acetate yarn natural (undyed) polyester yarn | UAB Dirbtinis Pluostas Industrias del Acetato de Celulosa S.A. Mitsubishi Rayon Co. Ltd. Invista Nan Ya Plastics Corporation | wood pulp methanol high sulfur coal polyethylene terephthalate | consumables (apparel, home furnishings, and industrial fabrics) health and wellness (medical tape) |
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| Acetate Tow | 80% | 78% | 79% | 77% | 80% | 78% |
| Acetate Yarn and Acetyl Chemical Products | 20% | 22% | 21% | |
| Acetyl Chemical Products | | 15% | 13% | 14% |
| Acetate Yarn | | 8% | 7% | 8% |
| Total | 100% | 100% |
|
| | | |
| | Percentage of Total Segment Sales |
| Sales by Customer Location | 2016 | 2015 | 2014 |
| United States and Canada | 21% | 21% | 19% |
| Asia Pacific | 44% | 49% | 53% |
| Europe, Middle East, and Africa | 29% | 26% | 24% |
| Latin America | 6% | 4% | 4% |
| Total | 100% | 100% | 100% |
|
| | | |
| | Percentage of Total Segment Sales |
| Sales by Customer Location | 2017 | 2016 | 2015 |
| United States and Canada | 22% | 21% | 21% |
| Asia Pacific | 37% | 44% | 49% |
| Europe, Middle East, and Africa | 37% | 29% | 26% |
| Latin America | 4% | 6% | 4% |
| Total | 100% | 100% | 100% |
Strategy
InManagement applies the innovation-driven growth model in the Fibers segment Eastman continues to leverageby leveraging its strong customer relationships and industry knowledge to maintain a leading industry position in the global market. Eastman's FibersThe segment benefits from a state-of-the-art, world class, acetate flake production facility at the Kingsport, Tennessee site, which is supplied from Eastman's vertically integrated coal gasification facility.facility and is the largest and most integrated acetate tow site in the world. Eastman's total global acetate tow capacity is approximately 180,000 metric tons, not including the Company's participation in an acetate tow joint venture manufacturing facility in China. The Company also benefits from the Kingsport, Tennessee tow production facility being the largest and most integrated acetate tow site in the world. The Company supplies 100 percent of the acetate flake raw material to the China manufacturing joint venture from the Company's manufacturing facility in Kingsport, Tennessee, which the Company recognizes in sales revenue. The Company recognizes earnings in the joint venture through its equity investment, reported in "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in Part II, Item 8 of this Annual Report.
The Company intends to continue to makemakes use of its capabilities in fibers technology to maintain a strong focus on incremental product and process improvements, with the goals of meeting customers' evolving needs and further improving the segment's manufacturing process efficiencies.
The Fibers segment R&D efforts focus on serving existing customers, developingleveraging proprietary cellulose ester and spinning technology for differentiated application development in new applicationsmarkets, optimizing asset productivity, and markets, and reducing cost. These R&Dworking with suppliers to reduce costs. For acetate tow, these efforts assist acetate toware assisting customers in the effective use of the segment's products and customers' product development efforts. Additionally, these efforts are focusedBeyond acetate tow, management is applying the innovation-driven growth model to leverage its fibers technology and expertise to focus on developing new products and exploring new market applications, leveraging experience innovating cellulosics products to offset declining demandinnovative growth in the tobaccotextiles market. During 2017, the Company advanced innovation of new product offerings including Naia®, a yarn for the apparel market developed from Eastman's proprietary cellulose ester technology; Avra™, a family of fibers for the performance apparel market developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™, a new wood pulp-based alternative for the nonwoven industry optimizing asset productivity, and working with suppliers to reduce costs.used in personal hygiene applications.
As a result of challenging market conditions for acetate tow, the Company closed its Workington, UK acetate tow manufacturing facility in 2015. Following an increase in acetate flake capacity at the Kingsport, Tennessee site in 2015, the Fibers segment could supply all its acetate tow and yarn spinning capacity from this low costlow-cost flake asset. In order to fully utilize the increased capacity and reduce fixed costs, in June 2016, the Company sold its 50 percent interest in Primester, which manufactures cellulose acetate at the Company's Kingsport, Tennessee site in June 2016.site.
|
|
| EASTMAN CHEMICAL COMPANY GENERAL INFORMATION |
Financial Information About Geographic Areas
Eastman operates as a global business with approximately 55 percent of its 2017 sales revenue generated from outside the United States and Canada region in 2016.region. The United States and Canada region contains the highest concentration of the Company's long-lived assets with approximately 75 percent located in the United States. The Company has expanded its international manufacturing presence and is also able to transport products globally to meet demand. While all regions continue to beare affected by ongoing uncertainty and volatility in the global economy, the degree of the impact on the various regions is dependent on the mix of the Company's operating segments and products in each region. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report. For sales by customer location by business segments, see "Business Segments". For sales revenue by geographic areas, see Note 20,19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Sales by Customer Location" in Part II, Item 7 of this Annual Report. For long-lived assets by geographic areas, see Note 20,19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Seasonality and Cyclicality
The Company'sEastman's earnings are typically higher in second and third quarters, and cash flows from operations are typically highest in the second half of the year due to seasonal demand based on general economic activity in the Company's key markets as described in "Business Segments". Results in the AM segment are typically weaker in fourth quarter due to seasonal downturns in key markets.
The coatings and inks additives product line of the AFP segment and the intermediates product linesline of the CI segment and the coatings and inks product lines of the AFP segment are impacted by the cyclicality of key end products and markets, while other operating segments and product lines are more sensitive to global economic conditions. Supply and demand dynamics determine profitability at different stages of business cycles and global economic conditions affect the length of each cycle.
Despite sensitivity to global economic conditions, many of the productsproduct portfolios of each operating segment are expected to continue to provide an overall stable foundation for earnings growth.
Sales, Marketing, and Distribution
The CompanyEastman markets and sells products primarily through a global marketing and sales organization which has a presence in the United States and approximately 30 other countries selling into more than 100 countries around the world. The Company focuses its market engagement on attractive niche markets, leveraging disruptive macro trends, and market activation throughout the value chain with both customers and downstream users. Eastman's strategy is to target industries and applicationsmarkets where the Company can leverage its application development expertise to develop products and serviceproduct offerings to provide differentiated value that address current and future customer and market needs. Management considers both customer-facing capabilities and technical expertise to be critical for success. OurThe Company's strategic marketing approach and capabilities leverage the Company's insights about trends, markets, and customers to drive development of specialty product and service offerings.products. Through a highly skilled and specialized sales force that is capable of providing differentiated product solutions, Eastman strives to be the preferred supplier in the Company's targeted markets.
The Company's products are also marketed through indirect channels, which include distributors, dealers, and contract representatives. Sales outside the United States tend to be made more frequently through distributors, dealers, and contract representatives than sales in the United States. The combination of direct and indirect sales channels, including sales online through its Customer Center website, allows Eastman to reliably serve customers throughout the world.
The Company's products are shipped to customers and to downstream users directly from Eastman'sEastman manufacturing plants and from distribution centers worldwide.
Sources and Availability of Raw Material and Energy
Eastman purchases approximately 75 percent of its key raw materials and energy through different contract mechanisms, generally of two to five years in initial duration with renewal or cancellation options for each party. Most of these agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase, and Eastman uses derivative financial instruments for certain of its key raw materials to mitigate the impact of market price fluctuations. Key raw materials include propane, cellulose, propane, paraxylene, propylene, methanol, fatty alcohol, polyvinyl alcohol, and a wide variety of precursors for specialty organic chemicals. Key purchased energy sources include natural gas, coal, and electricity. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and on-going performance assessmentassessments and benchmarking, as part of its supplier selection process. When appropriate, the Company purchases raw materials from a single source supplier to maximize quality and cost improvements, and has developed contingency plans designed to minimize the potential impact of any supply disruptions from single source suppliers.
While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and cost are subject to unscheduled plant interruptions occurring during periods of high demand, domestic and world market conditions, changes in government regulation, natural disasters, war or other outbreak of hostilities or terrorism or other political factors, or breakdown or degradation of transportation infrastructure. Eastman's operations or products have in the past, and may in the future, be adversely affected by these factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II Item 7 of this Annual Report. The Company's raw material and energy costs as a percent of total cost of operations were approximately 4045 percent in 2016.2017. For additional information about raw materials, see Exhibit 99.02 "Product and Raw Material Information" of this Annual Report.
Manufacturing Streams
Integral to Eastman's strategy for growth is leveraging its heritage of expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries in key markets, including transportation, building and construction, consumables, tobacco,filtration media, and agriculture. For each of these chemistries, Eastman has developed and acquired a combination of assets and technologies that are operated within four manufacturing "streams".
, combining scale and integration across multiple manufacturing units and sites as a competitive advantage.
In the cellulose and acetyl stream, the Company begins with coal which is gasified in the presence ofwith oxygen in its coal gasification facility. The resulting synthesis gas is converted into a number of chemicals including methanol, methyl acetate, acetic acid, and acetic anhydride. In the long-term, theThe Company's ability to use coal is considered to be a long-term raw material cost advantage. Cellulose derivative manufacturing at the Company begins with natural polymers, sourced from managed forests, which, when combined with acetyl and olefin chemicals, provide differentiated product lines. Cellulose and acetyl stream products include, but are not limited to, cellulose fibers, plastics, and esters. The major end markets for products from the cellulose and acetyl stream include coatings, displays, thermoplastics, and tobacco.filtration media.
In the olefins stream, the Company begins primarily with propane and ethane, which are cracked"cracked" (the process whereby hydrocarbon molecules are broken down and rearranged) into the "olefin" chemicals ethylene and propylene in three cracking units at its facility in Longview, Texas. The Company purchases additional propylene for use at its Longview facility and other facilities outside the United States. Propylene derivative products are used in a variety of items such as paints and coatings, automotive safety glass, and non-phthalate plasticizers. Ethylene derivative products are converted for end uses in the food industry, health and beauty products, detergents, and automotive products. Historically, periodic additions of large blocks of capacity have caused profit margins of light olefins to expand and contract, resulting in "ethylene" or "olefins" cycles. The Company believes it is positioned to be less impacted by these cycles than more commodity basedcommodity-based producers due to its diverse derivatives products and focus on more specialty markets.
In the polyester stream, the Company begins with purchased paraxylene and produces purified terephthalic acid ("PTA") and dimethyl terephthalate ("DMT") for polyesters and copolyesters. PTA or DMT is then reacted with various glycols, which the Company either makes or purchases, along with other raw materials (some of which the Company makes and are proprietary) to produce copolyesters. The Company believes that this backward integration of polyester manufacturing is a competitive advantage, giving Eastman a low costlow-cost position, as well asand a more reliable intermediate supply. In addition, Eastman can add specialty monomers to copolyesters to provide clear, tough, chemically resistant product characteristics. As a result, the Company's copolyesters effectively compete with materials such as polycarbonate and acrylic.
In the alkylamines stream, the Company begins with ammonia and alcohols (C1 - C6) to produce methylamines and higher alkylamines, which can then be further reacted with other chemicals to produce alkylamine derivatives. The Company's alkylamines products are primarily used in agriculture, water treatment, consumables, animal nutrition, and oil and gas end markets. The Company is recognized as one of the leading global producers of alkylamines. Methylamines are manufactured by reacting methanol with ammonia in a catalytic reactor. Three different methylamines are produced: mono methylamine ("MMA"), di methylamine ("DMA") and tri methylamine ("TMA"). The reaction circumstances (pressure, temperature, catalysts, etc.) and reactant ratios determine the ratio of the three products which arereactor, purified by distillation and used as building blocks to produce downstream derivatives or sold externally to merchant customers. The term higher alkylamines"higher alkylamines" refers to amines produced with C2-C6 alcohols (ethyl, n butyl, n propyl, isopropyl and cyclohexyl amines). The manufacturing process for higher alkylamines is similar to that for methylamines, as ammonia is combined with various alcohols in catalytic reactors and subsequently distilled. The use of different alcohols results in the creation of different higher alkylamines which are used both internally to produce derivatives or sold externally to the merchant market.
The Company leverages its expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries and technologies, to meet demand and create new uses and opportunities for the Company's products in key markets. Through integration and optimization across these streams, the Company is able to create unique and differentiated products that have a performance advantage over competitive materials.
Capital Expenditures
Capital expenditures were $649 million, $626 million, and $652 million in 2017, 2016, and $593 million in 2016, 2015, and 2014, respectively. Capital expenditures in 20162017 were primarily for AFP and AM segmentsegments manufacturing expansions in Kuantan, Malaysia, an AM segment expansion of Eastman Tritan® copolyester capacity in Kingsport, Tennessee, an AFP segment expansion of specialty ketones manufacturing capacity in Kingsport, Tennessee, and Longview, Texas site modernization projects.projects in Longview, Texas. Capital expenditures in 2017 included $49 million for repair and reconstruction of the manufacturing facilities damaged in the previously reported fourth quarter 2017 coal gasification incident. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Overview" for a description of the coal gasification incident and its impact on financial results. The Company expects that 20172018 capital spending will be approximately $575 million.$550 million primarily for targeted growth initiatives and maintenance.
Employees
Eastman employs approximately 14,000 men and women worldwide. Approximately 10 percent of the total worldwide labor force is represented by collective labor agreements, mostly outside the United States.
Customers
Eastman has an extensive customer base and, while it is not dependent on any one customer, loss of certain top customers could adversely affect the Company until such business is replaced. The top 100 customers accounted for approximately 55 percent of the Company's 20162017 sales revenue. No single customer accounted for 10 percent or more of the Company's consolidated sales revenue during 2016.2017.
Intellectual Property and Trademarks
While the Company'sEastman's intellectual property portfolio is an important Company asset which it expands and vigorously protects globally through a combination of patents that expire at various times, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular operating segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad range of advanced materials, specialty additives, chemicals, and fibers, Eastman owns over 700 active United States patents and more than 1,8001,600 active foreign patents, expiring at various times over several years, and also owns over 5,000 active worldwide trademark applications and registrations. Eastman continues to actively protect its intellectual property. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot ensure that it will be able to adequately protect its intellectual property assets outside the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II Item 7 of this Annual Report.
The Company pursues opportunities to license proprietary technology to third parties in areas where it has determined competitive impact to its businesses will be minimal. These arrangements typically are structured to require payments at significant project milestones such as signing, completion of design, and start-up.
Research and Development
For 2017, 2016, 2015, and 2014,2015, Eastman's R&D expenses totaled $215 million, $219 million, and $242 million, respectively. Management applies the innovation-driven growth model to leverage the Company's world class scalable technology platforms that provide a competitive advantage and $227 million, respectively. the foundation for sustainable earnings growth. The Company's R&D strategy for sustainable growth through innovation includes multi-generational product development for specialty products, faster and more differentiated product development, and the creation of value through integration of multiple technology platforms. This strategy has been accelerated by recent enhancements of global differentiated application development capabilities that position Eastman as a strategic element of the Company's customers’ success within attractive niche markets. These enhanced AM segment growth in the automotive market through new solutions such as Saflex® and HUD acoustic interlayers and in the AFP segment's launch of Tetrashield® performance polyester resins for solutions in the transportation and food packaging markets.
The Company manages certain growth initiatives and costs at the corporate level, including certain R&D costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional amounts are spent on those projects. The Company continues to explore and invest in R&D initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials and advanced cellulosics.cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles. In 2016,2017, the Company shifted some R&D resources from process technology efforts intoto application development efforts which focusedwith focus on new product introductions and increased growth related spend. Plans have been developed to increase future spending on select R&D programs.introductions.
Environmental
The Company'sEastman's cash expenditures related to environmental protection and improvement were $257 million, $267 million, and $290 million, in 2017, 2016, and $319 million, in 2016, 2015, and 2014, respectively, and include operating costs associated with environmental protection equipment and facilities, engineering costs, and construction costs. These cash expenditures include environmental capital expenditures of approximately $38 million, $45 million, and $52 million in 2017, 2016, and $69 million in 2016, 2015, and 2014, respectively.
EastmanThe Company is subject to significant and complex laws, regulations, and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal, and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Health, Safety, Environmental and Security Committee of Eastman's Board of Directors oversees the Company's policies and practices concerning health, safety, and the environment and its processes for complying with related laws and regulations, and monitors related matters.
The Company's policy is to operate its plants and facilities in compliance with all applicable laws and regulations such that it protects the environment and the health and safety of its employees and the public. The Company intends to continue to make expenditures for environmental protection and improvements in a timely manner consistent with its policies and with the technology available.available technology. In some cases, applicable environmental regulations such as those adopted under the Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, and related actions of regulatory agencies determine the timing and amount of environmental costs incurred by the Company. Likewise, any new legislation or regulations related to greenhouse gas emissions and energy, or the repeal of such legislation or regulations, could impact the timing and amount of environmental costs incurred by the Company.
The Company accrues environmental costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. In some instances, the amount cannot be reasonably estimated due to insufficient information, particularly as to the nature and timing of future expenditures. In these cases, the liability is monitored until such time that sufficient information exists. With respect to a contaminated site, the amount accrued reflects liabilities expected to be paid out within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations, and testing requirements could result in higher or lower costs.
The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities. Other matters concerning health, safety, and the environment are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II Item 7 and in Note 1, "Significant Accounting Policies"; Note 13,12, "Environmental Matters and Asset Retirement Obligations"; and Note 22,21, "Reserve Rollforwards" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Backlog
OnAs of December 31, 2016 and 2015,2017, Eastman's backlog of firm sales orders represented less than 10 percent of the Company's total consolidated revenue for the year. These orders are primarily short-term and all orders are expected to be filled in the following year. The Company manages its inventory levels to control the backlog of products depending on customers' needs. In areas where the Company is the single source of supply, or competitive forces or customers' needs dictate, the Company may carry additional inventory to meet customer requirements.
Available Information - SEC Filings
The CompanyEastman makes available free of charge, throughin the "Investors - SEC Information" section of its Internet website (www.eastman.com), its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.
The Company is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
For identification and discussion of the most significant risks applicable to the Company and its business, see Part II - Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II - Item 7 of this Annual Report.
|
|
| ITEM 1B. UNRESOLVED STAFF COMMENTS |
None.
|
|
| EXECUTIVE OFFICERS OF THE COMPANY |
Certain information about the Company'sEastman's executive officers is provided below:
Mark J. Costa, age 50,51, is Chief Executive Officer and Chair of the Eastman Chemical Company Board of Directors. Mr. Costa joined the Company in June 2006 as Senior Vice President, Corporate Strategy and Marketing; was appointed Executive Vice President, Polymers Business Group Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer in May 2009; and became President and a member of the Board of Directors of the Company in May 2013. Prior to joining Eastman, Mr. Costa was a senior partner with Monitor Group ("Monitor"). He joined Monitor, a global management consulting firm, in 1988, and his experience included corporate and business unit strategies, asset portfolio strategies, innovation and marketing, and channel strategies across a wide range of industries. Mr. Costa was appointed Chief Executive Officer in January 2014 and was named Board Chair effective July 2014.
Curtis E. Espeland, age 52,53, is Executive Vice President and Chief Financial Officer. Mr. Espeland joined Eastman in 1996, and has served in various financial management positions of increasing responsibility, including Director of Internal Auditing; Director of Finance, Asia Pacific; Director of Corporate Planning and Forecasting; Vice President and Controller; Vice President, Finance, Eastman Division; Vice President, Finance, Polymers; and Senior Vice President and Chief Financial Officer from 2008 until December 2013. He served as the Company's Chief Accounting Officer from December 2002 to 2008. Prior to joining Eastman, Mr. Espeland was an audit and business advisory manager with Arthur Andersen LLP in the United States, Eastern Europe, and Australia. Mr. Espeland was appointed to his current position effective January 2014.
Brad A. Lich, age 49,50, is Executive Vice President and Chief Commercial Officer, with responsibility for the Advanced Materials ("AM") and Fibers segments, outside U.S. regional business leadership, and the marketing, sales, pricing, and procurement organizations. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for the Coatings business. Other positions of increasing responsibility followed, including General Manager of Emerging Markets of the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the CASPI segment, and in 2012 was appointed Vice President and General Manager of the Additives & Functional Products ("AFP") segment. In January 2014, Mr. Lich was appointed Executive Vice President, with responsibility for the AFP and AM segments and the marketing, sales, and pricing organizations. In March 2016, Mr. Lich assumed executive responsibility for outside U.S. regional business leadership. Mr. Lich was appointed to his current position effective July 2016.
Lucian Boldea, age 45,46, is Senior Vice President with responsibility for the AFP segment. Mr. Boldea joined Eastman in 1997 as a chemist. During his career at Eastman, he has held various positions in R&D, licensing, business management, and corporate growth platforms leadership. These positions included Technology Director for the former Performance Chemicals and Intermediates ("PCI") segment and Director of Corporate Growth Platforms. In 2015, he was Group Vice President and General Manager of the AFP segment. Mr. Boldea was appointed to his current position effective July 2016.
Michael H.K. Chung, age 63, is Senior Vice President and Chief International Ventures Officer. Mr. Chung joined Eastman in 1976, and since that time has held various management positions, primarily in the Company's chemicals and fibers businesses. He was appointed Vice President, Fibers International Business in 2006, and in 2009 he was appointed Vice President and Managing Director, Asia Pacific Region. Mr. Chung was appointed to his current position effective January 2011.
Mark K. Cox, age 51,52, is Senior Vice President and Chief Manufacturing, Supply Chain, and Engineering Officer. Mr. Cox joined Eastman in 1986 and has served in a variety of management positions, including leadership roles within the Business Management, Manufacturing,business management, manufacturing, and Technologytechnology areas. Additionally, he has held responsibility for Eastman's Corporate Six Sigma program. In August 2008, Mr. Cox was appointed Vice President, Chemicals and Fibers Technology. Beginning in May 2009, Mr. Cox served as Vice President, Chemicals, Fibers, and Performance Polymers Technology. He was appointed Vice President, Worldwide Engineering and Construction in August 2010, appointed Senior Vice President and Chief Manufacturing and Engineering Officer effective January 2014, and to his current position effective March 2016.
Stephen G. Crawford, age 52,53, is Senior Vice President and Chief Technology Officer, with executive responsibility for corporate innovation. Mr. Crawford joined Eastman in 1987. Since then, he has held several leadership positions of increasing responsibility in both the manufacturing and technology organizations. Since 2007, he has served as Vice President of Global R&D in the AM and AFP segments. Mr. Crawford was appointed to his current position effective January 2014.
David A. Golden, age 51,52, is Senior Vice President, Chief Legal and& Sustainability Officer and Corporate Secretary. Mr. Golden has overall responsibility for Eastman's Legal, Corporate Health, Safety, Environment, Security, Global PublicProduct Safety and Regulatory Affairs, Sustainability, Government Relations, Community Affairs, and Public Policy and Sustainability organizations, andfunctions. He also has overall responsibility for Eastman's EthicsGlobal Business Conduct and CorporateInternational Trade Compliance program.programs. Prior to this position, he was Vice President, Associate General Counsel, and Corporate Secretary with overall responsibility for Eastman's Legal Department. Mr. Golden joined Eastman in 1995 as an attorney and has held positions of increasing responsibility, including serving as the Company's Director of Internal Audit from October 2005 to October 2007 and Vice President and Assistant General Counsel responsible for the Company's Commercialcommercial and International Lawinternational law groups from 2007 to 2010. Mr. Golden was appointed Senior Vice President, Chief Legal Officer, and Corporate Secretary in January 2013 and to his current position including executive leadership of the Company's sustainability efforts in March 2016. Prior to joining Eastman, he worked as an attorney in the Atlanta office of the law firm of Hunton & Williams.
Perry Stuckey III, age 57,58, is Senior Vice President, Chief Human Resources Officer. Mr. Stuckey joined Eastman in 2011 as Vice President, Global Human Resources, and was responsible for Eastman's human resources strategy and services worldwide. Mr. Stuckey's work experience includes a variety of global human resource management positions in manufacturing, industrial automation, and bio-technology organizations,companies, including Hill-Rom Company, Rockwell Automation, and Monsanto Company. Mr. Stuckey was appointed to his current position in January 2013.
Damon C. Warmack, age 59,60, is Senior Vice President, Corporate Development with executive responsibility for theand Chemical Intermediates segment.Intermediates. Mr. Warmack joined Eastman in 1980, working in a series of sales and product management positions. He was located in Taiwan, Hong Kong, Shanghai, and Singapore with a range of assignments including the establishment of Eastman's commercial presence in China, joint venture development and management, and serving as Vice President and Managing Director, Asia Pacific. In addition, he served as Vice President and General Manager of Resins, Inks, and Monomers, leading the restructure and divestiture of this business. Mr. Warmack then served as Vice President and General Manager of the former CASPI segment and then of the former PCI segment. More recently, he had responsibility for corporate development and strategic planning, playing a lead role in the Company's business portfolio transformation through acquisitions and divestitures. Mr. Warmack was appointed to his current position effective July 2016.
Scott V. King, age 48,49, is Vice President, Corporate Controller and Chief Accounting Officer. Since joining Eastman in 1999 as Manager, Corporate Consolidations and External Reporting, Mr. King has held various positions of increasing responsibility in the financial organization. He was first appointed Corporate Controller in August 2007 and has served as Chief Accounting Officer since September 2008. Prior to joining Eastman, Mr. King was an audit and business advisory manager with PricewaterhouseCoopers LLP.
At December 31, 2016,2017, Eastman owned or operated 4948 manufacturing sites and had equity interests in sixthree manufacturing joint ventures in a total of 14 countries. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions; however, none of the principal plants isare substantially idle. The Company's plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable and adequate for their use. Unless otherwise indicated, all of the properties are owned.
The locations and general character of the Company's manufacturing sites are:
|
| | | | |
| | Segment using manufacturing location |
| Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | | |
| USA | | | | |
Alvin, Texas (1) | x | | | |
| Anniston, Alabama | x | | | |
| Axton, Virginia | | x | | |
Canoga Park, California (2) | | x | | |
Cartersville, Georgia (1) | x | | | |
| Chestertown, Maryland | | | x | |
Columbia, South Carolina (1)(3) | | x | | |
Franklin, Virginia (1) | x | | | |
Indianapolis, Indiana (2)
| x | | | |
| Jefferson, Pennsylvania | x | | | |
| Kingsport, Tennessee | x | x | x | x |
Lemoyne, Alabama (1) | x | | | |
| Linden, New Jersey | x | | | |
| Longview, Texas | x | x | x | |
Martinsville, Virginia (4)(3) | | x | | |
| Monongahela, Pennsylvania | x | | | |
| Pace, Florida | x | | x | |
| Sauget, Illinois | x | | | |
| Springfield, Massachusetts | | x | | |
| St. Gabriel, Louisiana | x | | x | |
| Sun Prairie, Wisconsin | | x | | |
| Texas City, Texas | | | x | |
| Trenton, Michigan | | x | | |
Watertown, New York (5)(4) | | | | |
| Europe | | | | |
Antwerp, Belgium (1) | x | x | | |
Ghent, Belgium (4)(3) | x | x | x | |
| Kohtla-Järve, Estonia | x | | x | |
Oulu, Finland (2) | x | | | |
| Dresden, Germany | | x | | |
| Leuna, Germany | x | | x | |
| Nienburg, Germany | x | | | |
| Middelburg, the Netherlands | x | | | |
| Newport, Wales | x | x | | |
| |
(1) | Eastman is a guest under an operating agreement with a third party whichthat operates its manufacturing facilities at the site. |
| |
(2) | Eastman leases from a third party and operates the site. |
| |
(3) | Although nearly the entire manufacturing site was included in the first quarter 2011 divestiture of the Company's polyethylene terephthalate ("PET") business and related assets, a portion was retained subsequent to the sale. |
| |
(4)
| Eastman has more than one manufacturing site at this location. |
| |
(5)(4)
| This location supports developing businesses of the Eastman microfiber technology platform, the financial results of which are not identifiable to an operating segment and are included in "Other". |
|
| | | | |
| | Segment using manufacturing location |
| Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | | |
| Asia Pacific | | | | |
Fengxian,Nanjing, China | x | | x | |
Suzhou, China (1)(2)(3) | x | x | | |
Wuhan, China (4) | | | x | |
| Yixing, China | x | | | |
Zibo, China (5) | x | | x | |
| Kashima, Japan | x | | | |
Ulsan, Korea(6) | | | | x |
Kuantan, Malaysia (1) | x | x | | |
Jurong Island, Singapore (1) | x | | x | |
| Latin America | | | | |
Itupeva, Brazil (6)(7) | x | | | |
| Mauá, Brazil | | | x | |
| Santo Toribio, Mexico | | x | | |
| Uruapan, Mexico | x | | | |
| |
(1) | Eastman leases from a third party and operates the site. |
| |
(2) | Eastman has more than one manufacturing site at this location. |
| |
(3) | Eastman holds a 60 percent share in the joint ventureof Solutia Therminol Co., Ltd., Suzhou in the AFP segment. |
| |
(4) | Eastman holds a 51 percent share in the joint ventureof Eastman Specialties Wuhan Youji Chemical Co., Ltd. |
| |
(5) | Eastman holds a 51 percent share in the joint ventureof Qilu Eastman Specialty Chemical Ltd. |
| |
(6) | Eastman holds an 80 percent share of Eastman Fibers Korea Limited. |
| |
(7) | Eastman is a guest under an operating agreement with a third party whichthat operates its manufacturing facilities at the site. |
Eastman has 50 percent or less ownership in joint ventures that have manufacturing sites at the following manufacturing sites:locations: |
| | | | |
| | Segment using manufacturing location |
| Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | | |
USA | | | | |
St. Gabriel, Louisiana | x | | | |
| Asia Pacific | | | | |
| Hefei, China | | | | x |
Nanjing, China(1) | x | | x | |
| Shenzhen, China | | x | | |
Jurong Island, Singapore | | | x | |
| |
(1)
| Eastman has more than one manufacturing site at this location. |
Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases approximately 200 stand-alone distribution facilities in approximately 30 countries. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Shanghai, China; Miami, Florida; Capelle aan den IJssel, the Netherlands; Zug, Switzerland; Singapore; and Kingsport, Tennessee. Technical service is provided to the Company's customers fromThe Company also maintains technical service centers in Kingsport, Tennessee; Palo Alto, California; Canoga Park, California; Springfield, Massachusetts; Akron, Ohio; Martinsville, Virginia; Ghent, Belgium; Guangzhou, China; Middelburg,around the Netherlands; Mumbai, India; and Shanghai, China.world.
A summary of properties, classified by type, is included in Note 4,3, "Properties and Accumulated Depreciation", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
General
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
Solutia Legacy Torts Claims Litigation
Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible for the defense and indemnification of Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia has agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly-owned subsidiary of Eastman onupon Eastman's acquisition of Solutia in July 2, 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
| |
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a)Eastman Chemical Company's ("Eastman" or the "Company") common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN". The following table presents the high and low sales prices of the common stock on the NYSE and the cash dividends per share declared by the Company's Board of Directors for each quarterly period of 20162017 and 2015:2016:
| | | | | | High | | Low | | Cash Dividends Declared |
| 2017 | | First Quarter | $ | 82.10 |
| | $ | 74.78 |
| | $ | 0.51 |
|
| | Second Quarter | 86.28 |
| | 76.11 |
| | 0.51 |
|
| | | | | | | | | Third Quarter | 90.97 |
| | 81.91 |
| | 0.51 |
|
| | | High | | Low | | Cash Dividends Declared | Fourth Quarter | 94.96 |
| | 86.58 |
| | 0.56 |
|
| 2016 | First Quarter | $ | 74.98 |
| | $ | 56.03 |
| | $ | 0.46 |
| First Quarter | $ | 74.98 |
| | $ | 56.03 |
| | $ | 0.46 |
|
| | Second Quarter | 78.79 |
| | 65.19 |
| | 0.46 |
| Second Quarter | 78.79 |
| | 65.19 |
| | 0.46 |
|
| | Third Quarter | 72.50 |
| | 63.10 |
| | 0.46 |
| Third Quarter | 72.50 |
| | 63.10 |
| | 0.46 |
|
| | Fourth Quarter | 77.98 |
| | 62.70 |
| | 0.51 |
| Fourth Quarter | 77.98 |
| | 62.70 |
| | 0.51 |
|
| 2015 | First Quarter | $ | 76.67 |
| | $ | 67.13 |
| | $ | 0.40 |
| |
| | Second Quarter | 83.90 |
| | 67.74 |
| | 0.40 |
| |
| | Third Quarter | 82.79 |
| | 62.84 |
| | 0.40 |
| |
| | Fourth Quarter | 73.82 |
| | 63.84 |
| | 0.46 |
| |
As of December 31, 20162017, there were 146,488,924142,966,679 shares of the Company'sEastman's common stock issued and outstanding, which shares were held by 17,19815,804 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation. The Company's Board of Directors has declared a cash dividend of $0.51$0.56 per share during the first quarter of 2017,2018, payable on April 3, 20176, 2018 to stockholders of record on March 15, 2017.2018. Quarterly dividends on common stock, if declared by the Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. The payment of dividends is a business decision made by the Board of Directors, from time to time, based on the Company's earnings, financial position and prospects, and such other considerations as the Board considers relevant. Accordingly, while management currently expects that the Company will continue to pay a quarterly cash dividend, its dividend practice may change at any time.
See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance Under Equity Compensation Plans" of this Annual Report on Form 10-K (this "Annual Report") for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
In February 2014, the Board of Directors authorized the repurchase of up to an additional $1 billion of the Company's outstanding common stock. As of December 31, 2016,2017, a total of 6,542,19010,726,827 shares have been repurchased under this authorization for a total amount of $498$848 million. During 2016,2017, the Company repurchased 2,131,5014,184,637 shares of common stock for a total cost of approximately $145$350 million. In February 2018, the Company's Board of Directors authorized the repurchase of up to an additional $2 billion of Eastman's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interests of the Company. For additional information, see Note 15,14, "Stockholders' Equity", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs |
| October 1 - 31, 2016 | 304,943 |
| $ | 65.59 |
| 304,943 |
| $ | 507 |
|
| November 1 - 30, 2016 | — |
| $ | — |
| — |
| $ | 507 |
|
| December 1 - 31, 2016 | 65,618 |
| $ | 76.20 |
| 65,618 |
| $ | 502 |
|
| Total | 370,561 |
| $ | 67.46 |
| 370,561 |
| |
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid Per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs |
| October 1 - 31, 2017 | 280,114 |
| $ | 89.25 |
| 280,114 |
| $ | 202 |
|
| November 1 - 30, 2017 | — |
| $ | — |
| — |
| $ | 202 |
|
| December 1 - 31, 2017 | 543,740 |
| $ | 91.96 |
| 543,740 |
| $ | 152 |
|
| Total | 823,854 |
| $ | 91.04 |
| 823,854 |
| |
(1)All shares were repurchased under a Company announced repurchase plan.
(2)Average price paid per share reflects the weighted average purchase price paid for shares.
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
| | | Statements of Earnings Data | Year Ended December 31, | Year Ended December 31, |
| (Dollars in millions, except per share amounts) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Sales | $ | 9,008 |
| | $ | 9,648 |
| | $ | 9,527 |
| | $ | 9,350 |
| | $ | 8,102 |
| $ | 9,549 |
| | $ | 9,008 |
| | $ | 9,648 |
| | $ | 9,527 |
| | $ | 9,350 |
|
| Operating earnings | 1,383 |
| | 1,384 |
| | 1,162 |
| | 1,862 |
| | 800 |
| 1,532 |
| | 1,383 |
| | 1,384 |
| | 1,162 |
| | 1,862 |
|
| Earnings from continuing operations | 859 |
| | 854 |
| | 755 |
| | 1,172 |
| | 443 |
| 1,388 |
| | 859 |
| | 854 |
| | 755 |
| | 1,172 |
|
| Earnings from discontinued operations | — |
| | — |
| | 2 |
| | — |
| | — |
| — |
| | — |
| | — |
| | 2 |
| | — |
|
| Gain from disposal of discontinued operations | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| Net earnings | 859 |
| | 854 |
| | 757 |
| | 1,172 |
| | 444 |
| 1,388 |
| | 859 |
| | 854 |
| | 757 |
| | 1,172 |
|
| Less: Net earnings attributable to noncontrolling interest | 5 |
| | 6 |
| | 6 |
| | 7 |
| | 7 |
| 4 |
| | 5 |
| | 6 |
| | 6 |
| | 7 |
|
| Net earnings attributable to Eastman | $ | 854 |
| | $ | 848 |
| | $ | 751 |
| | $ | 1,165 |
| | $ | 437 |
| $ | 1,384 |
| | $ | 854 |
| | $ | 848 |
| | $ | 751 |
| | $ | 1,165 |
|
| Amounts attributable to Eastman stockholders: | | | | | | | | | | |
| Amounts attributable to Eastman: | | | | | | | | | | |
| Earnings from continuing operations, net of tax | $ | 854 |
| | $ | 848 |
| | $ | 749 |
| | $ | 1,165 |
| | $ | 436 |
| $ | 1,384 |
| | $ | 854 |
| | $ | 848 |
| | $ | 749 |
| | $ | 1,165 |
|
| Earnings from discontinued operations, net of tax | — |
| | — |
| | 2 |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | 2 |
| | — |
|
| Net earnings attributable to Eastman stockholders | $ | 854 |
| | $ | 848 |
| | $ | 751 |
| | $ | 1,165 |
| | $ | 437 |
| |
| Net earnings attributable to Eastman | | $ | 1,384 |
| | $ | 854 |
| | $ | 848 |
| | $ | 751 |
| | $ | 1,165 |
|
| Basic earnings per share attributable to Eastman: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Earnings from continuing operations | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.01 |
| | $ | 7.57 |
| | $ | 2.99 |
| $ | 9.56 |
| | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.01 |
| | $ | 7.57 |
|
| Earnings from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.01 |
| — |
| | — |
| | — |
| | 0.02 |
| | — |
|
| Net earnings | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.03 |
| | $ | 7.57 |
| | $ | 3.00 |
| $ | 9.56 |
| | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.03 |
| | $ | 7.57 |
|
| Diluted earnings per share attributable to Eastman: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Earnings from continuing operations | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.95 |
| | $ | 7.44 |
| | $ | 2.92 |
| $ | 9.47 |
| | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.95 |
| | $ | 7.44 |
|
| Earnings from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.01 |
| — |
| | — |
| | — |
| | 0.02 |
| | — |
|
| Net earnings | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.97 |
| | $ | 7.44 |
| | $ | 2.93 |
| $ | 9.47 |
| | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.97 |
| | $ | 7.44 |
|
| Statements of Financial Position Data | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
| Current assets | $ | 2,866 |
| | $ | 2,878 |
| | $ | 3,173 |
| | $ | 2,840 |
| | $ | 2,699 |
| $ | 3,143 |
| | $ | 2,866 |
| | $ | 2,878 |
| | $ | 3,173 |
| | $ | 2,840 |
|
| Net properties | 5,276 |
| | 5,130 |
| | 5,087 |
| | 4,290 |
| | 4,181 |
| 5,607 |
| | 5,276 |
| | 5,130 |
| | 5,087 |
| | 4,290 |
|
| Goodwill | 4,461 |
| | 4,518 |
| | 4,486 |
| | 2,637 |
| | 2,644 |
| 4,527 |
| | 4,461 |
| | 4,518 |
| | 4,486 |
| | 2,637 |
|
| Other intangibles | 2,469 |
| | 2,650 |
| | 2,905 |
| | 1,781 |
| | 1,870 |
| |
| Intangible assets, net of accumulated amortization | | 2,373 |
| | 2,479 |
| | 2,650 |
| | 2,905 |
| | 1,781 |
|
| Total assets | 15,457 |
| | 15,580 |
| | 16,072 |
| | 11,845 |
| | 11,710 |
| 15,999 |
| | 15,457 |
| | 15,580 |
| | 16,072 |
| | 11,845 |
|
| Current liabilities | 1,795 |
| | 2,056 |
| | 2,022 |
| | 1,470 |
| | 1,364 |
| 1,982 |
| | 1,795 |
| | 2,056 |
| | 2,022 |
| | 1,470 |
|
| Long-term borrowings | 6,311 |
| | 6,577 |
| | 7,248 |
| | 4,254 |
| | 4,779 |
| 6,147 |
| | 6,311 |
| | 6,577 |
| | 7,248 |
| | 4,254 |
|
| Total liabilities | 10,849 |
| | 11,559 |
| | 12,482 |
| | 7,970 |
| | 8,682 |
| 10,519 |
| | 10,849 |
| | 11,559 |
| | 12,482 |
| | 7,970 |
|
| Total Eastman stockholders' equity | 4,532 |
| | 3,941 |
| | 3,510 |
| | 3,796 |
| | 2,943 |
| 5,403 |
| | 4,532 |
| | 3,941 |
| | 3,510 |
| | 3,796 |
|
| Dividends declared per share | 1.89 |
| | 1.66 |
| | 1.45 |
| | 1.25 |
| | 1.08 |
| 2.09 |
| | 1.89 |
| | 1.66 |
| | 1.45 |
| | 1.25 |
|
On December 5, 2014, Eastman completed its acquisition of Taminco Corporation ("Taminco"), a global specialty chemical company. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Taminco's debt of $1.1 billion. The acquisition was accounted for as a business combination. Taminco's former specialty amines and crop protection businesses are managed and reported as part of the Additives & Functional Products ("AFP") segment and its former functional amines business are managed and reported as part of the Chemical Intermediates ("CI") segment.
On December 11, 2014, the Company acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") for a total purchase price of $438 million including the repayment of debt. The acquisition was accounted for as a business combination and the acquired Commonwealth business is managed and reported in the Advanced Materials ("AM") segment.
On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and the acquired aviation turbine oil business is managed and reported in the AFP segment.
On August 6, 2014, the Company acquired Knowlton Technologies, LLC, ("Knowlton"), for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the Eastman microfiber technology platform, the financial results of which are not identifiable to an operating segment and are included in "Other".
For additional information about the above acquired businesses, see Note 2, "Acquisitions", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. As of the date of acquisition, results of the acquired businesses are included in Eastman results.
On July 2, 2012, the Company completed its acquisition of Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. The fair value of total consideration transferred was $4.8 billion, consisting of cash of $2.6 billion, net of cash acquired; equity in the form of Eastman stock of approximately $700 million; and Solutia's debt at fair value of $1.5 billion.
| |
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this 20162017 Annual Report on Form 10-K (this "Annual Report").10-K. All references to earnings per share ("EPS") contained in this report are to diluted earnings per share unless otherwise noted.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with GAAP, the Company's management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the CompanyEastman 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. The Company's management believes the critical accounting estimates described below are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by the CompanyEastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is either salvage value determined throughthe price that would be received to sell an asset in an orderly transaction between market analysis or alternative future use.participants. The Company's assumptions related to long-lived assets are subject to change and impairments may be required in the future. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset is adjusted, resulting in a charge to earnings.
Goodwill
The CompanyEastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the reporting unit"reporting unit" level which the Company has determined to be its components."components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a business"business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 20162017 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate and a projected long-term growth rate. The Company believes these assumptions are consistent with those of 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 determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. 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.
If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including a valuation of the estimated fair value toof the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the tests performed during fourth quarter 2016,2017, there were no impairments of the Company's goodwill. Fair values substantially exceeded the carrying values for each reporting unit tested, except for the specialty fluids reporting unit and the crop protection reporting unit (both a part(part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report).
As of December 31, 2016,2017, goodwill of $541 million is allocated to the specialty fluids reporting unit. As of fourth quarter testing, specialty fluids had an estimated fair value that exceeded the carrying value including goodwill by 32 percent. Cash flows from the specialty fluids reporting unit are susceptible to changes in demand due to cyclicality and timing of customer project completions primarily in the industrial and solar markets. Two of the most critical assumptions used in the calculation of the fair value of the specialty fluids reporting unit are the target market long-term growth rate and the discount rate. The Company performed a sensitivity analysis of both of those assumptions. A one percent decrease in the target market long-term growth rate and a one percent increase in the discount rate would result in the fair value exceeding the carrying value by thirteen percent and nine percent, respectively. The business performance for 2016 was slightly below expectations for 2016 used in the previous impairment analysis. Although management believes its estimate of fair value is reasonable, if the specialty fluids reporting unit's financial performance falls below expectations or there are negative revisions to key assumptions, the Company may be required to recognize an impairment charge.
As of December 31, 2016, goodwill of $272$274 million is allocated to the crop protection reporting unit. As of fourth quarter testing, crop protection had an estimated fair value that exceeded the carrying value including goodwill by 25nine percent. The crop protection reporting unit is directly impacted by the agricultural market. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the discount rate. The Company performed a sensitivity analysis of both of those assumptions. AThe fair value was eight percent less than the carrying value with a one percent decrease in the target market long-term growth rate and ten percent less than the carrying value with a one percent increase in the discount rate would result in the fair value exceeding the carrying value by five percent and two percent, respectively.rate. The business performance for 2016 did not meet2017 exceeded expectations for 2016 used in the previous impairment analysis. Although management believes its estimate of fair value is reasonable, if the crop protection reporting unit's financial performance falls below expectations or there are negative revisions to key assumptions, the Company may be required to recognize an impairment charge.
Indefinite-lived Intangible Assets
The CompanyEastman conducts testing of indefinite-lived intangible assets annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
The Company had $529$539 million in indefinite-lived intangible assets at the time of impairment testing. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2016.
2017. The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of triggering events which might require additional testing before the next annual impairment test.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Costs
The CompanyEastman accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum undiscounted amount. This undiscounted accrued amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $295$280 million to the maximum of $503$483 million and from the best estimate or minimum of $308$295 million to the maximum of $516$503 million at December 31, 20162017 and December 31, 2015,2016, respectively. The best estimate or minimum estimated future costsenvironmental expenditures are considered to be probable and reasonably possibleestimable and include the amounts accrued at both December 31, 20162017 and December 31, 2015.2016.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets as defined by GAAP, include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged to earnings over the estimated useful life of the assets. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted. For sites that have environmental asset retirement obligations, the best estimate for these asset retirement obligation costs accrued to date over the sites' estimated useful lives was $26$24 million and $28$26 million at December 31, 20162017 and December 31, 2015,2016, respectively.
The Company monitors conditional obligations and recognizes loss contingencies associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs.
The Company's total amount reserved for environmental loss contingencies, including the remediation and closure and post-closure costs described above, was $321$304 million and $336$321 million at December 31, 20162017 and December 31, 2015,2016, respectively. This loss contingency reserve represents the best estimate or minimum for undiscounted remediation costs (undiscounted) and the best estimate of the amount accrued to date over the regulated assets' estimated useful lives for discounted asset retirement obligation costs (discounted).costs.
Pension and Other Postretirement Benefits
The CompanyEastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Additionally,Under its other postretirement benefit plans in the U.S., Eastman provides a subsidy for life insurance health care, and dental benefits for eligible retirees hired prior to January 1, 2007, and2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for retirees' eligible survivors.Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits primarily reflect the Company's assumptions related to general economic conditions (particularly interest rates)discount rates and expected return on plan assets. For valuing the obligations and assets of the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 3.893.57 percent and 2.332.25 percent, respectively, and a weighted average expected returnreturns on plan assets of 7.497.48 percent and 5.024.83 percent, respectively at December 31, 2016.2017. The Company assumed a weighted average discount rate of 3.913.54 percent for its other postretirement benefit plans and an expected return on plan assets of 3.75 percent for its voluntary employees' beneficiary association retiree trust at December 31, 2016.2017. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
The Company performed a five-year experience study of the assumptions for the U.S. plans in 20142017 which included a review of the mortality tables. As a result of the experience study, the Company continueshas updated the mortality assumptions used to use the RP-2000a modified RP-2017 table with scale AA staticmodified MP-2017 improvement scale and no collar adjustment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The projected benefit obligation as of December 31, 20162017 and 20172018 expense are affected by year-end 20162017 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the assumed discount rate and expected return on plan assets and assumed discount rate for all pension and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | |
Change in Assumption | Impact on 20172018 Pre-tax
Benefits Expense (Excludes mark-to-market impact) for Pension Plans | Impact on December 31, 20162017 Projected Benefit Obligation for Pension Plans | Impact on 20172018 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 20162017 Benefit Obligation for Other Postretirement Benefit Plans |
| U.S. | Non-U.S. |
25 basis point decrease in discount rate | -$3 Million | +$5057 Million | +$4143 Million | -$1 Million | +$1718 Million |
25 basis point increase in discount rate | +$23 Million | -$4855 Million | -$3739 Million | +$1 Million | -$17 Million |
25 basis point decrease in expected return on plan assets | +$7 Million | No Impact | No Impact | <+$0.5 Million | No Impact |
25 basis point increase in expected return on plan assets | -$7 Million | No Impact | No Impact | <-$0.5 Million | No Impact |
The assumed discount rate and expected return on plan assets and assumed discount rate used to calculate the Company's pension and other postretirement benefit obligations are established each December 31. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected cash flows of the pension and other postretirement benefit obligations. Because future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on the results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the trusts invest their funds, primarily in U.S. and non-U.S. fixed income, U.S. and non-U.S. public equity, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected durations of the pension and other postretirement benefit obligations. Because future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on the results of operations.
In 2016, the Company changed the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, which, as described in the next paragraph, is typically is recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. For additional information, see Note 11,10, "Retirement Plans" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company uses fair value accounting for plan assets. If actual experience differs from actuarial assumptions, primarily discount rates and long-term assumptions for asset returns and actuarial assumptions (primarily discount rates) which were used in determining the current year expense, the difference is recognized immediately as part of the MTM net gain or loss in fourth quarter each year, and any other quarter in which an interim remeasurement is triggered. The MTM net gain or loss applied to net earnings from continuing operations in 2017, 2016, 2015, and 20142015 due to the actual experience versus assumptions of returns on plan assets and actuarial assumptions (primarily discount rates) for the defined benefit pension and other postretirement benefit plans were a net gain of $21 million, net loss of $97 million, and net loss of $115 million, and net loss of $304 million, respectively. The 20162017 MTM net lossgain included an actuarial loss of approximately $170$115 million, resulting primarily from the Company's December 31, 20162017 weighted-average assumed discount rate of 3.553.25 percent, down from the prior year, and changes in other actuarial assumptions. Overall asset values increased approximately $75$135 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual return was approximately $250$315 million, or an approximately 911 percent gain, which was above the expected return of approximately $175$180 million, or approximately 7 percent.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While changes in obligations do not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirement, attrition rates of employees, and other factors. For further information regarding pension and other postretirement benefit obligations, see Note 11,10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Litigation and Contingent Liabilities
From time to time, the CompanyEastman and its operations are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon facts and information currently available, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against earnings in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities on the Company'sEastman's balance sheet are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies.opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the (benefit from) provision for income taxes could have a material adverse impact on the consolidated results of operations and statement of financial position. As of December 31, 20162017 and 2015,2016, valuation allowances of $278$410 million and $254$278 million, respectively, have been provided against the deferred tax assets. The Company recognizes income tax positions that are more likely than not to be realized and accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet.
A provisionOn December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for U.S. income taxes has not been recognized for undistributed profitsthe impacts of our non-U.S. subsidiaries that we have determinednewly enacted tax legislation are generally required to be indefinitely reinvested outsidecompleted in the U.S. Ifperiod of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law, but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017. For further information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
As of December 31, 2017, management intentions orestimated a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The final impact of the recent tax law changes on the Company may differ due to changes in the Company's current interpretation and assumptions, clarification and implementation guidance, and actions the Company may take. In addition, any future additional changes in U.S. tax law changes in the future, there may behave a significant negative impact on the provision for income taxes to recognize an incremental tax liability in the period the change occurs.
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 "2016 Overview"this section and in "Overview", "Results of Operations", "Summary by Operating Segment", and "Outlook" in this MD&A.
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items
In addition to evaluating the Company'sEastman's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly ariseresult from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature. These
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, (such asand have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions of businesses, financing transaction costs, and MTM losses or gains for pension and other postretirement benefit plans). plans.
In 2017, two events resulted in unusual net costs and gains - net costs resulting from the fourth quarter coal gasification incident described below and a net income tax benefit resulting primarily from fourth quarter tax law changes and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. Management considers the coal gasification incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption, and considers the one-time net tax benefit unusual because of the infrequent nature of such changes in tax law and the significant one-time impact on fourth quarter and full year 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, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on ourthe 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.
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 current forecasted tax rate for the full year. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performance,performances, make resource allocation decisions and evaluate organizational and individual performanceperformances in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain results in this Annual Report:
MTM pension and other postretirement benefit plans loss, net, which are actuarial gains and losses resulting from the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period;
Asset impairments and restructuring charges, net, of which asset impairments are non-cash transactions impacting profitability;
Acquisition integration transaction, and financingtransaction costs;
Costs resulting from the sale of acquired inventories at fair value, net of the last-in, first-out ("LIFO") impact for certain of these inventories (as required by acquisition accounting, these inventories were marked to fair value);
Early debt extinguishment and other related costs resulting from the repayment of borrowings;
Cost of disposition of claims against operations that were discontinued by Solutia, Inc. prior to the Company's 2012 acquisition of Solutia; andSolutia in 2012;
Gain from sale of the formulated electronics cleaning solutions business, which was part of the Additives & Functional Products segment;
Gain from sale of the Company's 50 percent interest in the Primester cellulose acetate flake joint venture.venture; and
Tax benefit associated with a previously impaired site.
The following unusual items are excluded by management in its evaluation of certain results in this Annual Report:
Net costs of the disruption, repairs, and reconstruction of the Kingsport site's coal gasification operations area resulting from the previously reported October 4, 2017 explosion ("the coal gasification incident"); and
Estimated net income tax benefit resulting from tax law changes (primarily the Tax Reform Act) and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures -- Excluded Non-Core and Unusual Items
| | | (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Non-core items impacting operating earnings: | | | | | | | | | | |
| Mark-to-market pension and other postretirement benefits loss, net | $ | 97 |
| | $ | 115 |
| | $ | 304 |
| |
| Mark-to-market pension and other postretirement benefits (gain) loss, net | | $ | (21 | ) | | $ | 97 |
| | $ | 115 |
|
| Asset impairments and restructuring charges, net | 45 |
| | 183 |
| | 77 |
| 8 |
| | 45 |
| | 183 |
|
| Acquisition integration and transaction costs | 9 |
| | 28 |
| | 46 |
| — |
| | 9 |
| | 28 |
|
| Additional costs of acquired inventories | — |
| | 7 |
| | 24 |
| — |
| | — |
| | 7 |
|
| Unusual item impacting operating earnings: | | | | | | |
| Net costs resulting from coal gasification incident | | 112 |
| | — |
| | — |
|
| Total non-core and unusual items impacting operating earnings | | 99 |
| | 151 |
| | 333 |
|
| Non-core items impacting earnings before income taxes: | | | | | | | | | | |
| Early debt extinguishment and other related costs | 85 |
| | — |
| | — |
| — |
| | 85 |
| | — |
|
| Cost of disposition of claims against discontinued Solutia operations | 5 |
| | — |
| | — |
| 9 |
| | 5 |
| | — |
|
| Gain from sale of equity investment in Primester joint venture | (17 | ) | | — |
| | — |
| |
| Taminco acquisition financing costs | — |
| | — |
| | 13 |
| |
| Gains from sale of businesses | | (3 | ) | | (17 | ) | | — |
|
| Total non-core items impacting earnings before income taxes | | 6 |
| | 73 |
| | — |
|
| Less: Items impacting (benefit from) provision for income taxes: | | | | | | |
| Tax effect for non-core and unusual items | | 30 |
| | 75 |
| | 90 |
|
| Tax benefit associated with previously impaired site | | 8 |
| | — |
| | — |
|
| Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | | 339 |
| | — |
| | — |
|
| Total items impacting (benefit from) provision for income taxes | | 377 |
| | 75 |
| | 90 |
|
| Total items impacting net earnings attributable to Eastman | | $ | (272 | ) | | $ | 149 |
| | $ | 243 |
|
The non-core item "mark-to-market pension and other postretirement benefits (gain) loss, net" does not include a $61 million credit, $44 million credit, and $4 million credit and $22 million cost for defined benefit pension and other postretirement benefit plans credits or costs for the years ended December 31, 2017, 2016, 2015, and 2014,2015, respectively. The calculated MTM gains and losses included expected amounts of and percentage returns on assets of approximately $180 million (7 percent), $175 million (7 percent), $190 million (7 percent), and $185$190 million (7 percent) for the years ended December 31, 2017, 2016, 2015, and 2014,2015, respectively, compared with actual amounts of and percentage returns on plan assets of approximately $315 million (11 percent), $250 million (9 percent), and $15 million loss (-1 percent), and $255 million (9 percent) for the years ended December 31, 2017, 2016, and 2015, and 2014, respectively.
For more detail about MTM pension and other postretirement benefit plans net gains and losses, including actual and expected return on plan assets and the components of the net gain or loss, see "Critical Accounting Estimates - Pension and Other Postretirement Benefits" above and Note 11,10, "Retirement Plans", "Summary of Changes" - Actuarial (gain) loss, Curtailment gain, Actual return on plan assets, and Reserve for third party contributions and "Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income" - Curtailment gain and Mark-to-market pension and other postretirement benefits (gain) loss, net to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
As described under "Critical Accounting Estimates - Pension and Other Postretirement Benefits" above, in 2016, the Company elected to change its method of calculating service and interest costs components of net periodic benefit costs for pension and other postretirement benefit plans. The change in the approach for full-year 2016 pre-tax expense was an increase to service cost of approximately $2 million and a reduction in interest cost of approximately $22 million compared to the previous method. The net benefit from the change in approach of approximately $20 million is included in the $44 million credit for 2016 described in the paragraph above and was offset by a portion of the $97 million MTM net loss as part of the annual remeasurement of the plans in 2016. For additional information, see Note 11, "Retirement Plans" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following financial measures:
Net earnings attributable to Eastman,
Gross profit,
Selling, general, and administrative ("SG&A") expenses,
Research and development ("R&D") expenses,
Operating earnings,
Net interest expense,
Other (income) charges, net,
Earnings from continuing operations,(Benefit from) provision for income taxes,
Net earnings attributable to Eastman, and
Diluted earnings per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measures
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, from time to time, management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain non-core, unusual, or non-recurring itemssources 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 operating activities, as adjusted"activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available 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 because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations.operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision makingdecision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
Similarly, fromFrom time to time, Eastman may discloseevaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as adjusted cash provided by operating activities, as adjusted, described above, less the amount of capital expenditures. Management believes such itemscapital expenditures are generally funded from available cash and, as such, 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 cash. The priorities for cash after funding operations include payment of quarterly dividends, additional repayment of debt, organic and inorganic growth opportunities, and from time to time repurchasing shares. Management believes this metric is useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization. Management believes this metric is useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
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 "Adjusted EBITDA", "EBITDA Margin", and "Return on Invested Capital" (or "ROIC"). Management defines Adjusted EBITDA as EBITDA (net earnings or net earnings per share before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, andor 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 incomeearnings 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 Adjusted EBITDA, EBITDA Margin, and ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman'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 Adjusted EBITDA, EBITDA Margin, and ROIC to compare the results, returns, and value of the Company with those of peer and other companies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2016OVERVIEW
The Company'sEastman'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 is focused on consistent earningsuses 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 R&D and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a market-driven approach that takes advantagedeeper understanding of the Company's existing technology platforms, globalvalue of Eastman's products and how they perform within customers' and end user products. Key areas of application development include thermoplastic processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, non-wovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and manufacturing presence,downstream users, targeting attractive niche markets, and leading positions in key end markets such as transportation, building and construction, and consumables. Management believes that the Company's end-market diversity is a source of strength, and that many of the markets into which the Company's products are sold are benefiting from longer-term globalleveraging disruptive macro trends such as energyhealth and wellness, natural resource efficiency, a risingan increasing middle class in emerging economies, and an increased focus on health and wellness.feeding a growing population. Management believes that these trends, combined with the diversityelements of the Company's end markets, facilitate moreinnovation-driven growth model combined with disciplined portfolio management and balanced capital deployment will result in consistent, demand for the Company's products over time.sustainable earnings growth and strong cash flow.
The Company generated sales revenue of $9.5 billion and $9.0 billion for 2017 and $9.6 billion for 2016, and 2015, respectively. The salesSales revenue decrease of $640increased $541 million in 2016 is primarily due to lower selling prices2017 as increases in all operatingthe AFP, CI, and AM segments and lower Fibers segment sales volume more than offsetting higher sales volumeoffset a decline in the other operating segments.Fibers segment.
Operating earnings were $1.5 billion and $1.4 billion both in 2017 and 2016, and 2015.respectively. Excluding the non-core and unusual items referenced in "Non-GAAP Financial Measures", adjusted operating earnings were $1.6 billion in 2017 and $1.5 billion in 20162016. Operating earnings and $1.7 billion in 2015. Adjustedadjusted operating earnings decreasedincreased in 20162017 due to increasedincreases in the CI, AFP, and AM segment earnings more thansegments partially offset by lower earnings in the otherdecreased Fibers segment operating segments. Operating earnings were positively impacted by cost reduction actions of approximately $100 million taken throughout 2016.earnings.
Net earnings and EPS attributable to Eastman and adjusted net earnings and EPS attributable to Eastman were as follows:
| | | | 2016 | | 2015 | 2017 | | 2016 |
| (Dollars in millions, except diluted EPS) | $ | | EPS | | $ | | EPS | $ | | EPS | | $ | | EPS |
| Net earnings attributable to Eastman | $ | 854 |
| | $ | 5.75 |
| | $ | 848 |
| | $ | 5.66 |
| $ | 1,384 |
| | $ | 9.47 |
| | $ | 854 |
| | $ | 5.75 |
|
Total non-core items, net of tax(1) | 149 |
| | 1.01 |
| | 243 |
| | 1.62 |
| |
| Net earnings excluding non-core items | $ | 1,003 |
| | $ | 6.76 |
| | $ | 1,091 |
| | $ | 7.28 |
| |
Total non-core and unusual items, net of tax(1)(2) | | (272 | ) | | (1.86 | ) | | 149 |
| | 1.01 |
|
| Net earnings attributable to Eastman excluding non-core and unusual items | | $ | 1,112 |
| | $ | 7.61 |
| | $ | 1,003 |
| | $ | 6.76 |
|
| |
(1) | See "Results of Operations - Net Earnings from Continuing Operations and Diluted Earnings per Share" for the tax effected amount of each non-core item.and unusual items. |
| |
(2) | The (benefit from) 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. |
The Company generated $1.4$1.7 billion of cash from operating activities in 2016,2017, compared to $1.6$1.4 billion of cash generated from operating activities during 2015. The decrease in cash from operating activities was primarily due to lower net earnings excluding non-core items in 2016 compared with 2015 and management's decision to contribute an additional $150 million to the Company's U.S. defined pension plans2016.
As previously reported, in fourth quarter 2016 rather than2017 an explosion in future years.the Kingsport site's coal gasification area disrupted manufacturing operations, primarily for the Fibers and CI segments which are significant internal users of cellulose and acetyl stream intermediates. While the Company continues to assess the financial impact of the incident, the total impact, net of insurance recoveries, is expected to reduce earnings by a total of between $25 million and $50 million spread across 2017 and 2018. Costs in fourth quarter 2017 of the disruption, repairs, and reconstruction of coal gasification operations were $112 million, net of insurance recoveries.
RESULTS OF OPERATIONS
The Company'sEastman's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below. During 2014, the Company completed four acquisitions as described in Part I, Item 1, "Business - Corporate Overview" of this Annual Report, which are referred to as the "acquired businesses". The inclusion of results of operations of each acquired business in Eastman's consolidated results of operations from the date of acquisitions may limit comparability in certain instances to prior period results.
Sales
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change |
| Sales | $ | 9,008 |
| | $ | 9,648 |
| | (7 | )% | | $ | 9,648 |
| | $ | 9,527 |
| | 1 | % |
| Acquired business effect | | | | | — | % | | | | | | 13 | % |
| Volume / product mix effect | |
| | |
| | 1 | % | | |
| | |
| | (2 | )% |
| Price effect | |
| | |
| | (7 | )% | | |
| | |
| | (8 | )% |
| Exchange rate effect | |
| | |
| | (1 | )% | | |
| | |
| | (2 | )% |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| (Dollars in millions) | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Sales | $ | 9,549 |
| | $ | 9,008 |
| | 6 | % | | $ | 9,008 |
| | $ | 9,648 |
| | (7 | )% |
| Volume / product mix effect | |
| | |
| | 4 | % | | |
| | |
| | 1 | % |
| Price effect | |
| | |
| | 2 | % | | |
| | |
| | (7 | )% |
| Exchange rate effect | |
| | |
| | — | % | | |
| | |
| | (1 | )% |
2017 Compared to 2016
Sales revenue increased $541 million as increases in the AFP, CI, and AM segments more than offset a decline in the Fibers segment.
2016 Compared to 2015
Sales revenue decreased $640 million in 2016 compared to 2015, primarily due to lower selling prices in all operating segments and lower Fibers segment sales volume more than offsetting higher sales volume in the other operating segments.
2015 Compared to 2014
Sales revenue increased $121 million in 2015 compared to 2014, primarily due to sales volume from acquired businesses partially offset by lower selling prices, particularly in the CI segment, primarily attributed to lower raw material prices.
Gross Profit
| | | | 2016 Compared to 2015 | | 2015 Compared to 2014 | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Gross Profit | $ | 2,350 |
| | $ | 2,580 |
| | (9 | )% | | $ | 2,580 |
| | $ | 2,221 |
| | 16 | % | $ | 2,454 |
| | $ | 2,350 |
| | 4 | % | | $ | 2,350 |
| | $ | 2,580 |
| | (9 | )% |
| Mark-to-market pension and other postretirement benefit loss, net | 78 |
| | 84 |
| | | | 84 |
| | 240 |
| | | |
| Mark-to-market pension and other postretirement benefit (gain) loss, net | | (11 | ) | | 78 |
| | | | 78 |
| | 84 |
| | |
| Net costs resulting from coal gasification incident | | 112 |
| | — |
| | | | — |
| | — |
| | |
| Additional costs of acquired inventories | — |
| | 7 |
| | | | 7 |
| | 24 |
| | | — |
| | — |
| | | | — |
| | 7 |
| | |
| Gross Profit excluding non-core items | $ | 2,428 |
| | $ | 2,671 |
| | (9 | )% | | $ | 2,671 |
| | $ | 2,485 |
| | 7 | % | |
| Gross Profit excluding non-core and unusual items | | $ | 2,555 |
| | $ | 2,428 |
| | 5 | % | | $ | 2,428 |
| | $ | 2,671 |
| | (9 | )% |
2017 Compared to 2016
Gross profit included an $11 million MTM pension and other postretirement benefit gain, net in 2017 and a $78 million MTM pension and other postretirement benefit loss, net in 2016. Gross profit in 2017 included $112 million of net costs resulting from the coal gasification incident. Excluding these non-core and unusual items, gross profit increased as a result of increases in the CI, AFP, and AM segments more than offsetting a decline in the Fibers segment. Gross profit in 2017 was increased by lower labor and manufacturing costs from corporate cost reduction actions.
2016 Compared to 2015
Gross profit in 2016 decreased compared with 2015. Gross profit included a $78 million and $84 million MTM pension and other postretirement benefit loss, net in 2016 and 2015, respectively. Gross profit in 2015 was negatively impacted $7 million in the AM segment by the sale of Commonwealth inventories, which were marked to fair value in the acquisition. Excluding these non-core items, gross profit decreased in 2016 compared with 2015 primarily due to CI and Fibers segment results. Gross profit in 2016 includes the benefit of lower labor and manufacturing costs from corporate cost reduction actions taken throughoutin 2016.
2015 Compared to 2014
Gross profit increased $359 million in 2015 compared with 2014, primarily due to a $156 million reduction in the MTM pension and other postretirement benefit loss, net in 2015 compared to 2014. Excluding non-core items, gross profit increased primarily due to lower raw material and energy costs exceeding lower selling prices by $255 million and gross profit from acquired businesses. Gross profit was negatively impacted $201 million by commodity hedges, particularly for propane, lower sales volume of $92 million as lower Fibers segment sales volume was partially offset by higher AM segment sales volume and improved product mix, and an unfavorable shift in foreign currency exchange rates of $66 million.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change |
| Selling, General & Administrative Expenses | $ | 703 |
| | $ | 771 |
| | (9 | )% | | $ | 771 |
| | $ | 755 |
| | 2 | % |
| Mark-to-market pension and other postretirement benefit loss, net | (14 | ) | | (18 | ) | | | | (18 | ) | | (57 | ) | | |
| Acquisition integration and transaction costs | (9 | ) | | (28 | ) | | |
| | (28 | ) | | (46 | ) | | |
| Selling, General, and Administrative Expenses excluding non-core items | $ | 680 |
| | $ | 725 |
| | (6 | )% | | $ | 725 |
| | $ | 652 |
| | 11 | % |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| (Dollars in millions) | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Selling, General & Administrative Expenses | $ | 699 |
| | $ | 703 |
| | (1 | )% | | $ | 703 |
| | $ | 771 |
| | (9 | )% |
| Mark-to-market pension and other postretirement benefit gain (loss), net | 8 |
| | (14 | ) | | | | (14 | ) | | (18 | ) | | |
| Acquisition integration and transaction costs | — |
| | (9 | ) | | |
| | (9 | ) | | (28 | ) | | |
| Selling, General, and Administrative Expenses excluding non-core items | $ | 707 |
| | $ | 680 |
| | 4 | % | | $ | 680 |
| | $ | 725 |
| | (6 | )% |
2017 Compared to 2016
SG&A expenses included an $8 million MTM pension and other postretirement benefit gain, net in 2017 and a $14 million MTM pension and other postretirement benefit loss, net in 2016. Included in 2016 SG&A expenses are transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014. Excluding these non-core items, SG&A expenses increased primarily due to higher performance-based variable compensation costs, and strategic initiative expenditures partially offset by cost reductions resulting from corporate actions taken in 2016.
2016 Compared to 2015
SG&A expenses in 2016 were lower compared to 2015. SG&A expenses included a $14 million and $18 million MTM pension and other postretirement benefit loss, net in 2016 and 2015, respectively. Included in 2016 SG&A expenses are transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014. Included in 2015 SG&A expenses are integration and transaction costs associated with the Taminco and Commonwealth acquisitions. Excluding these non-core items, SG&A expenses decreased in 2016 compared with 2015 primarily due to lower costs resulting from corporate cost reduction actions taken throughout 2016.in 2016 and lower variable compensation costs.
2015 Compared to 2014
SG&A expenses in 2015 were slightly higher compared to 2014. SG&A expenses included an $18 million and $57 million MTM pension and other postretirement benefit loss, net in 2015 and 2014, respectively. Excluding non-core items, SG&A expenses were higher primarily due to the additional SG&A expenses of the acquired businesses and higher variable compensation expense, partially offset by the decrease in expense due to foreign currency exchange rates.
Research and Development Expenses
| | | | 2016 Compared to 2015 | | 2015 Compared to 2014 | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Research & Development Expenses | $ | 219 |
| | $ | 242 |
| | (10 | )% | | $ | 242 |
| | $ | 227 |
| | 7 | % | $ | 215 |
| | $ | 219 |
| | (2 | )% | | $ | 219 |
| | $ | 242 |
| | (10 | )% |
| Mark-to-market pension and other postretirement benefit loss, net | (5 | ) | | (13 | ) | | | | (13 | ) | | (7 | ) | | | |
| Mark-to-market pension and other postretirement benefit gain (loss), net | | 2 |
| | (5 | ) | | | | (5 | ) | | (13 | ) | | |
| Research & Development Expenses excluding non-core item | $ | 214 |
| | $ | 229 |
| | (7 | )% | | $ | 229 |
| | $ | 220 |
| | 4 | % | $ | 217 |
| | $ | 214 |
| | 1 | % | | $ | 214 |
| | $ | 229 |
| | (7 | )% |
2017 Compared to 2016
R&D expenses included a $2 million MTM pension and other postretirement benefit gain, net in 2017 and a $5 million MTM pension and other postretirement benefit loss, net in 2016. Excluding this non-core item, R&D expenses were slightly higher in 2017. The Company has shifted R&D investment by eliminating multiple programs and reallocating resources in the Company's core segments. R&D investments are being focused where disruptive macro trends create unmet needs in attractive niche markets where the Company's core technologies can deliver material solutions.
2016 Compared to 2015
R&D expenses were lower for 2016 compared to 2015. R&D expenses included a $5 million and $13 million MTM pension and other postretirement benefit adjustment loss, net in 2016 and 2015, respectively. Excluding this non-core item, R&D expenses were lower for 2016 compared to 2015 primarily due to corporate cost reduction actions taken throughoutin 2016. The Company continues to focus R&D resources on new product introductions and increased growth related spending.
2015 Compared to 2014
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
R&D expenses were higher for 2015 compared to 2014. R&D expenses included a $13 million and $7 million MTM pension and other postretirement benefit adjustment loss in 2015 and 2014, respectively. Excluding this non-core item, R&D expenses were higher in 2015 compared to 2014 primarily due to the additional R&D expenses of the acquired businesses.FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Asset impairments | $ | 12 |
| | $ | 85 |
| | $ | 28 |
| $ | 1 |
| | $ | 12 |
| | $ | 85 |
|
| Gain on sale of assets, net | (2 | ) | | (1 | ) | | (7 | ) | — |
| | (2 | ) | | (1 | ) |
| Intangible asset and goodwill impairments | — |
| | 22 |
| | 24 |
| — |
| | — |
| | 22 |
|
| Severance charges | 32 |
| | 68 |
| | 13 |
| 6 |
| | 32 |
| | 68 |
|
| Site closure and restructuring charges | 3 |
| | 9 |
| | 19 |
| 1 |
| | 3 |
| | 9 |
|
| Total | $ | 45 |
| | $ | 183 |
| | $ | 77 |
| $ | 8 |
| | $ | 45 |
| | $ | 183 |
|
2017
In fourth quarter 2017 asset impairments and restructuring charges, net included $3 million of asset impairments and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China. Additionally, the Company recognized restructuring charges of approximately $5 million for severance.
2016
In fourth quarter 2016 theThe Company impaired a capital project in the AFP segment that resulted in a charge of $12 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the Company's previouslyan announced plan to reduce costs, the Company recognized restructuring charges of $34 million primarily for severance in 2016.severance. Management anticipatesanticipated and realized total cost savings of approximately $50 million to be recognized mostly in 2017 primarily in SG&A expenses and cost of sales.
In 2016, there wasThe Company recognized a gain of $2 million in the AFP segment for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France.
2015
The Company took actions during fourth quarter 2015 to reduce non-operations workforce resulting in restructuring charges of $51 million for severance. These actions were taken to offset the impacts of low oil prices, a strengthened U.S. dollar, and the continued weak worldwide economic and business conditions. Management expected total cost savings of approximately $55 million, which were realized in 2016, primarily in SG&A expenses and cost of sales.
As a result of the annual impairment testing of indefinite-lived intangible assets, in 2015, the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-KOOL® window films products tradename to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia in 2012. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.
In 2015, netNet asset impairments and restructuring charges included $81 million of asset impairments and $17 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing site. Management expected annual cost savings in the Fibers segment of approximately $20 million as a result of the closure which cost savings have been realized as of the end of 2016. Additionally, in 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $3 million.
Additionally, during 2015, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.
2014
In 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for costs of the closure of a Crystex® insoluble sulfur R&D facility in France.
As a result of the annual impairment testing of indefinite-lived intangible assets in 2014, the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex® tradename to the estimated fair value. This impairment resulted from a decrease in projected revenue since the tradename was acquired as part of the Solutia acquisition. The estimated fair value was determined using an income approach, specifically the relief from royalty method.
In addition, during 2014, a change in estimate of certain costs for the 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a restructuring charge of $5 million to previously recognized asset impairments and restructuring charges.
During 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.
In 2014, charges in the AM segment included $10 million of asset impairments, including intangible assets, and $2 million of restructuring charges primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. In addition, there were $5 million of restructuring charges for severance associated with the integration of Solutia.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Earnings
| | | | 2016 Compared to 2015 | 2015 Compared to 2014 | 2017 Compared to 2016 | 2016 Compared to 2015 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Operating earnings | $ | 1,383 |
| | $ | 1,384 |
| | — | % | | $ | 1,384 |
| | $ | 1,162 |
| | 19 | % | $ | 1,532 |
| | $ | 1,383 |
| | 11 | % | | $ | 1,383 |
| | $ | 1,384 |
| | — | % |
| Mark-to-market pension and other postretirement benefit loss, net | 97 |
| | 115 |
| | |
| | 115 |
| | 304 |
| | |
| |
| Mark-to-market pension and other postretirement benefit (gain) loss, net | | (21 | ) | | 97 |
| | |
| | 97 |
| | 115 |
| | |
|
| Net costs resulting from coal gasification incident | | 112 |
| | — |
| | | | — |
| | — |
| | |
| Asset impairments and restructuring charges, net | 45 |
| | 183 |
| | |
| | 183 |
| | 77 |
| | |
| 8 |
| | 45 |
| | |
| | 45 |
| | 183 |
| | |
|
| Acquisition integration and transaction costs | 9 |
| | 28 |
| | | | 28 |
| | 46 |
| | | — |
| | 9 |
| | | | 9 |
| | 28 |
| | |
| Additional costs of acquired inventories | — |
| | 7 |
| | | | 7 |
| | 24 |
| | | — |
| | — |
| | | | — |
| | 7 |
| | |
| Operating earnings excluding non-core items | $ | 1,534 |
| | $ | 1,717 |
| | (11 | )% | | $ | 1,717 |
| | $ | 1,613 |
| | 6 | % | |
| Operating earnings excluding non-core and unusual items | | $ | 1,631 |
| | $ | 1,534 |
| | 6 | % | | $ | 1,534 |
| | $ | 1,717 |
| | (11 | )% |
Net Interest Expense
| | | | 2016 Compared to 2015 | 2015 Compared to 2014 | 2017 Compared to 2016 | 2016 Compared to 2015 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change | 2017 | | 2016 | | Change | | 2016 | | 2015 | | Change |
| Gross interest costs | $ | 288 |
| | $ | 286 |
| | | | $ | 286 |
| | $ | 210 |
| | | |
| Gross interest expense | | $ | 251 |
| | $ | 265 |
| | | | $ | 265 |
| | $ | 273 |
| | |
| Less: Capitalized interest | 7 |
| | 7 |
| | | | 7 |
| | 7 |
| | | 7 |
| | 7 |
| | | | 7 |
| | 7 |
| | |
| Interest expense | 281 |
| | 279 |
| | 1 | % | | 279 |
| | 203 |
|
| 37 | % | |
| Interest Expense | | 244 |
| | 258 |
| | | | 258 |
| | 266 |
| | |
| Less: Interest income | 26 |
| | 16 |
| | |
| | 16 |
| | 16 |
| | |
| 3 |
| | 3 |
| | | | 3 |
| | 3 |
| | |
| Net interest expense | $ | 255 |
| | $ | 263 |
| | (3 | )% | | $ | 263 |
| | $ | 187 |
|
| 41 | % | $ | 241 |
| | $ | 255 |
| | (5 | )% | | $ | 255 |
| | $ | 263 |
|
| (3 | )% |
| Less: Taminco acquisition financing costs | — |
| | — |
| | | | — |
| | 3 |
| | | |
| Net interest expense excluding non-core item | $ | 255 |
| | $ | 263 |
| | (3 | )% | | $ | 263 |
| | $ | 184 |
|
| 43 | % | |
2017 Compared to 2016
Net interest expense decreased $14 million primarily as a result of prior year refinancing of certain outstanding public debt and repayment of term loan borrowings in 2017.
2016 Compared to 2015
Net interest expense decreased $8 million in 2016 compared to 2015primarily as a result of the Company refinancing certain outstanding public debt with proceeds of the sale of new euro-denominated debt securities and term loan borrowings. These transactions will result in an estimated net reduction of interest expense of approximately $20 million in 2017.second quarter 2016.
Net interest expense increased $76 million in 2015 compared to 2014, primarily due to interest on the additional $3 billion of debt incurred in fourth quarter 2014 to finance the Taminco acquisition.
Early Debt Extinguishment and Other Related Costs
In November 2016, the Company sold additional euro-denominated 1.50% notes due May 2023 in the principal amount of €200 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million). In December 2016, the Company borrowed $300 million under a second five-year term loan agreement ("2021 Term Loan"). Proceeds from the notes and 2021 Term Loan borrowings were used for the early repayment of the 2.4% notes due June 2017 ($500 million principal) and 6.30% notes due November 2018 ($160 million principal) and partial redemptions of the 4.5% notes due January 2021 ($65 million principal), 3.6% notes due August 2022 ($150 million principal), 7 1/4% debentures due January 2024 ($47 million principal), 7 5/8% debentures due June 2024 ($11 million principal), 3.8% notes due March 2025 ($100 million principal), and 7.60% debentures due February 2027 ($28 million principal). The early repayments resulted in a charge of $76 million for early debt extinguishment costs and related derivatives and hedging items.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 26, 2016, the Company sold euro-denominated 1.50% notes due 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs.
For additional information regarding the early debt extinguishment costs, see Note 9,8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Other (Income) Charges, Net
| | | (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Foreign currency transaction losses (gains), net | $ | 27 |
| | $ | 6 |
| | $ | (7 | ) | $ | 5 |
| | $ | 27 |
| | $ | 6 |
|
| Financing costs related to the acquisition of Taminco | — |
| | — |
| | 10 |
| |
| (Income) loss from equity investments and other investment (gains) losses, net | (15 | ) | | (15 | ) | | (13 | ) | (14 | ) | | (15 | ) | | (15 | ) |
| Gain from sale of equity investment in Primester joint venture | (17 | ) | | — |
| | — |
| |
Cost of disposition of claims against discontinued Solutia operations
| | 9 |
| | 5 |
| | — |
|
| Gains from sale of businesses | | (3 | ) | | (17 | ) | | — |
|
| Other, net | (1 | ) | | 1 |
| | (5 | ) | 5 |
| | (6 | ) | | 1 |
|
| Other (income) charges, net | $ | (6 | ) | | $ | (8 | ) | | $ | (15 | ) | $ | 2 |
| | $ | (6 | ) | | $ | (8 | ) |
| Financing costs related to the acquisition of Taminco | — |
| | — |
| | (10 | ) | |
| Cost of disposition of claims against discontinued Solutia operations | (5 | ) | | — |
| | — |
| (9 | ) | | (5 | ) | | — |
|
| Gain from sale of equity investment in Primester joint venture | 17 |
| | — |
| | — |
| |
| Gains from sale of businesses | | 3 |
| | 17 |
| | — |
|
| Other (income) charges, net excluding non-core items | $ | 6 |
| | $ | (8 | ) | | $ | (25 | ) | $ | (4 | ) | | $ | 6 |
| | $ | (8 | ) |
Included in other (income) charges, net are primarily losses or gains on foreign exchange transactions, equity investments, business venture investments, and non-operating assets. Net losses from foreign exchange non-qualifying derivatives were partially offset by foreign currency transaction gains,
In 2017, the net which includeloss on the revaluation of foreign entity assets and liabilities was partially offset by a net gain on the foreign exchange non-qualifying derivatives, both items impacted primarily by the euro in 2016.euro. See Note 10,9, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Also included in 2017 other (income) charges, net is a $9 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012 and a $3 million gain from the sale of the formulated electronics cleaning solutions business.
In 2016, the net loss from foreign exchange non-qualifying derivatives was partially offset by the net gain on the revaluation of foreign entity assets and liabilities, both items impacted primarily by the euro. Included in 2016 other (income) charges, net is $5 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012. Also included in 2016 other (income) charges, net is a gain of $17 million from the sale of the Company's interest in the Primester joint venture equity investment. For additional information, see Note 6,5, "Equity Investments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Also included in
In 2015, the net loss from foreign exchange non-qualifying derivatives was partially offset by the net gain on the revaluation of foreign entity assets and liabilities, both items impacted primarily by the euro.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Benefit from) Provision for Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 Compared to 2016 | 2016 Compared to 2015 |
| (Dollars in millions) | 2017 | | 2016 | | 2016 | | 2015 |
| | $ | | % | | $ | | % | | $ | | % | | $ | | % |
| (Benefit from) provision for income taxes and effective tax rate | $ | (99 | ) | | (8 | )% | | $ | 190 |
| | 18 | % | | $ | 190 |
| | 18 | % | | $ | 275 |
| | 24 | % |
| Tax provision for non-core and unusual items | 30 |
| | | | 75 |
| | | | 75 |
| |
|
| | 90 |
| | |
| Tax benefit associated with previously impaired site | 8 |
| | | | — |
| | | | — |
| | | | — |
| | |
| Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | 339 |
| | | | — |
| | | | — |
| |
|
| | — |
| | |
| Adjusted provision for income taxes and effective tax rate | $ | 278 |
| | 20 | % | | $ | 265 |
| | 21% | | $ | 265 |
| | 21 | % | | $ | 365 |
| | 25 | % |
The 2017 effective tax rate was lower than the 2016 other charges (income),effective tax rate due to a $339 million net is costbenefit resulting from tax law changes (primarily the Tax Reform Act) and a tax loss from outside-U.S. entity reorganizations as part of dispositionthe formation of claims against operations that were discontinued by Solutia prioran international treasury services center (see Note 7, "Income Taxes", to the Company's acquisitionconsolidated financial statements in Part II, Item 8 of Solutiathis Annual Report, for principal impacts of the tax law change that resulted in 2012.
Provision for Income Taxes from Continuing Operations
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2016 Compared to 2015 | 2015 Compared to 2014 |
| (Dollars in millions) | 2016 | | 2015 | | Change | | 2015 | | 2014 | | Change |
| Provision for income taxes from continuing operations | $ | 190 |
| | $ | 275 |
| | (31 | )% | | $ | 275 |
| | $ | 235 |
| | 17 | % |
| Effective tax rate | 18 | % | | 24 | % | | | | 24 | % | | 24 | % | | |
The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate includes a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The effective tax rate was 24 percent for both 2015 and 2014. The 2015 effective tax rate reflected a benefit from both the U.S. federal tax manufacturing deduction dueNet Earnings Attributable to an increase in domestic taxable income and increased U.S. federal tax credits, compared to 2014. This was offset by a reduction in the foreign rate variance as a result of an unfavorable shift in foreign income to higher tax jurisdictions and limited benefit from the asset impairment of the Workington, UK acetate tow manufacturing facility. Both years reflect a benefit from the extension of favorable U.S. federal tax provisions, which resulted in a net benefit of approximately $15 million primarily related to R&D credits, and deferral of certain earnings of foreign subsidiaries from U.S. income taxes.
Earnings from Continuing OperationsEastman and Diluted Earnings per Share
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| (Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | $ | | EPS |
| Earnings from continuing operations, net of tax | $ | 854 |
| | $ | 5.75 |
| | $ | 848 |
| | $ | 5.66 |
| | $ | 749 |
| | $ | 4.95 |
|
Mark-to-market pension and other postretirement benefit loss, net of tax (1) | 68 |
| | 0.46 |
| | 70 |
| | 0.47 |
| | 202 |
| | 1.34 |
|
Asset impairments and restructuring charges, net of tax (1) | 28 |
| | 0.19 |
| | 151 |
| | 1.00 |
| | 63 |
| | 0.42 |
|
Acquisition transaction, integration, and financing costs, net of tax (2) | 5 |
| | 0.04 |
| | 18 |
| | 0.12 |
| | 39 |
| | 0.26 |
|
Additional costs of acquired inventories, net of tax (2) | — |
| | — |
| | 4 |
| | 0.03 |
| | 15 |
| | 0.10 |
|
Early debt extinguishment and other related costs, net of tax (2) (3) | 56 |
| | 0.37 |
| | — |
| | — |
| | — |
| | — |
|
Cost of disposition of claims against discontinued Solutia operations, net of tax (2) | 3 |
| | 0.02 |
| | — |
| | — |
| | — |
| | — |
|
Gain from sale of equity investment in Primester joint venture, net of tax (2) | (11 | ) | | (0.07 | ) | | — |
| | — |
| | — |
| | — |
|
| Earnings from continuing operations excluding non-core items, net of tax | $ | 1,003 |
| | $ | 6.76 |
| | $ | 1,091 |
| | $ | 7.28 |
| | $ | 1,068 |
| | $ | 7.07 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| (Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | $ | | EPS |
| Net earnings and diluted earnings per share attributable to Eastman | $ | 1,384 |
| | $ | 9.47 |
| | $ | 854 |
| | $ | 5.75 |
| | $ | 848 |
| | $ | 5.66 |
|
Non-core items, net of tax: (1) | | | | | | | | | | | |
| Mark-to-market pension and other postretirement benefit (gain) loss, net | (14 | ) | | (0.09 | ) | | 68 |
| | 0.46 |
| | 70 |
| | 0.47 |
|
Asset impairments and restructuring charges, net
| (3 | ) | | (0.02 | ) | | 28 |
| | 0.19 |
| | 151 |
| | 1.00 |
|
| Acquisition transaction, integration, and financing costs | — |
| | — |
| | 5 |
| | 0.04 |
| | 18 |
| | 0.12 |
|
| Additional costs of acquired inventories | — |
| | — |
| | — |
| | — |
| | 4 |
| | 0.03 |
|
| Early debt extinguishment and other related costs | — |
| | — |
| | 56 |
| | 0.37 |
| | — |
| | — |
|
| Cost of disposition of claims against discontinued Solutia operations | 5 |
| | 0.03 |
| | 3 |
| | 0.02 |
| | — |
| | — |
|
| Gains from sale of businesses | (1 | ) | | (0.01 | ) | | (11 | ) | | (0.07 | ) | | — |
| | — |
|
Unusual items, net of tax: (1) | | | | | | | | | | | |
| Net costs resulting from coal gasification incident | 80 |
| | 0.55 |
| | — |
| | — |
| | — |
| | — |
|
| Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | (339 | ) | | (2.32 | ) | | — |
| | — |
| | — |
| | — |
|
| Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 1,112 |
| | $ | 7.61 |
| | $ | 1,003 |
| | $ | 6.76 |
| | $ | 1,091 |
| | $ | 7.28 |
|
| |
(1) | BlendedThe (benefit from) provision for income taxes for non-core and unusual items is calculated using the tax ratesrate for the tax jurisdictionsjurisdiction where the gains are taxable and the expenses are deductible were used. |
| |
(2)
| A U.S. corporate tax rate comprised of the U.S. federal rate plus a blended state rate was used. |
| |
(3)
| For more information, see Note 9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.deductible. |
Net Earnings and Diluted Earnings per ShareMANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| (Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | $ | | EPS |
| Earnings from continuing operations, net of tax | $ | 854 |
| | $ | 5.75 |
| | $ | 848 |
| | $ | 5.66 |
| | $ | 749 |
| | $ | 4.95 |
|
| Earnings from discontinued operations, net of tax | — |
| | — |
| | — |
| | — |
| | 2 |
| | 0.02 |
|
| Net earnings | $ | 854 |
| | $ | 5.75 |
| | $ | 848 |
| | $ | 5.66 |
| | $ | 751 |
| | $ | 4.97 |
|
In 2014, the Company recognized $2 million, net of tax, in earnings from discontinued operations from final settlement of commercial litigation related to the previously discontinued polyethylene terephthalate ("PET") business.
SUMMARY BY OPERATING SEGMENT
The Company'sEastman's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. For additional financial and product information for each operating segment, see "Business - Business Segments" in Part I, Item 1 of this Annual Report and Note 20,19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | Additives & Functional Products Segment | | | | | | | | | | |
| | | 2016 Compared to 2015 | | 2015 Compared to 2014 | | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| | | | | | | Change | | | | | | Change | | | | | | Change | | | | | | Change |
| (Dollars in millions) | | 2016 | | 2015 | | $ | | % | | 2015 | | 2014 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2016 | | 2015 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | $ | 2,979 |
| $ | 3,159 |
| $ | (180 | ) | | (6 | )% | $ | 3,159 |
| $ | 2,640 |
| $ | 519 |
| | 20 | % | $ | 3,343 |
| $ | 2,979 |
| $ | 364 |
| | 12 | % | $ | 2,979 |
| $ | 3,159 |
| $ | (180 | ) | | (6 | )% |
| Acquired business effect | | | | | | — |
| | — | % | | | | | | 750 |
| | 29 | % | |
| Volume / product mix effect | | | | | | 46 |
| | 1 | % | | | | | | (43 | ) | | (2 | )% | | | | | | 313 |
| | 10 | % | | | | | | 46 |
| | 1 | % |
| Price effect | | | | | | (214 | ) | | (7 | )% | | | | | | (97 | ) | | (4 | )% | | | | | | 45 |
| | 2 | % | | | | | | (214 | ) | | (7 | )% |
| Exchange rate effect | | | | | | (12 | ) | | — | % | | | | | | (91 | ) | | (3 | )% | | | | | | 6 |
| | — | % | | | | | | (12 | ) | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating earnings | | 601 |
| | 660 |
| | (59 | ) | | (9 | )% | | 660 |
| | 462 |
| | 198 |
| | 43 | % | | 646 |
| | 601 |
| | 45 |
| | 7 | % | | 601 |
| | 660 |
| | (59 | ) | | (9 | )% |
| Asset impairments and restructuring charges, net |
| 10 |
| | — |
| | 10 |
| | | | — |
| | 62 |
| | (62 | ) | | |
| 3 |
| | 10 |
| | (7 | ) | | | | 10 |
| | — |
| | 10 |
| | |
| Additional costs of acquired inventories | | — |
| | — |
| | — |
| | | | — |
| | 15 |
| | (15 | ) | | | |
| Operating earnings excluding non-core items |
| 611 |
| | 660 |
| | (49 | ) | | (7 | )% | | 660 |
| | 539 |
| | 121 |
| | 22 | % | |
| Net costs resulting from coal gasification incident | | | 8 |
| | — |
| | 8 |
| | | | — |
| | — |
| | — |
| | |
| Operating earnings excluding non-core and unusual items | |
| 657 |
| | 611 |
| | 46 |
| | 8 | % | | 611 |
| | 660 |
| | (49 | ) | | (7 | )% |
2017 Compared to 2016
Sales revenue increased primarily due to higher sales volume across the segment, including for specialty fluids due to the timing of customer solar energy project completions, animal nutrition products, and tire additives products.
Operating earnings in 2017 included $3 million of asset impairment and restructuring charges, including severance, related to the closure of a facility in China and $8 million of net costs resulting from the coal gasification incident. Operating earnings in 2016 included $10 million of asset impairment and restructuring charges, net including the impairment of a capital project resulting in a charge of $12 million partially offset by a $2 million gain for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France. Excluding these non-core and unusual items, operating earnings increased primarily due to higher sales volume of $97 million partially offset by higher raw material and energy costs, including the reduced negative impact of hedges of commodity prices on raw material costs, exceeding higher selling prices by $60 million.
2016 Compared to 2015
Sales revenue in 2016 decreased compared to 2015, due to lower selling prices primarily attributed to lower raw material prices and competitive pressure across the segment, particularly in Asia Pacific. The impact of lower selling prices was partially offset by higher sales volume across the segment.
Operating earnings in 2016 included $10 million of asset impairment and restructuring charges, net including the impairment of a capital project resulting in a charge of $12 million partially offset by a $2 million gain for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France. Excluding these non-core items, operating earnings decreased in 2016 compared to 2015 primarily due to lower selling prices more than offsetting lower raw material and energy costs by $74 million, partially offset by higher sales volumes of $20 million.
2015 Compared to 2014
Sales revenue in 2015 increased compared to 2014, primarily due to sales of products of the acquired Taminco specialty amines and crop protection businesses and aviation turbine oil business. These revenues were partially offset by lower coatings and inks products selling prices, primarily attributed to lower raw material prices, and an unfavorable shift in foreign currency exchange rates.
Operating earnings in 2015 increased compared to 2014. Operating earnings in 2014 included $62 million of asset impairments and restructuring charges, net, primarily $42 million for the closure of a Crystex® insoluble sulfur R&D facility in France and a $22 million intangible asset impairment of the Crystex® tradename. The impairment of the Crystex® tradename was a result of a decrease in projected revenue since the tradename was acquired. Operating earnings in 2014 included $7 million of additional costs of the acquired Taminco specialty amines and crop protection business inventories and $8 million of additional costs of the acquired aviation turbine oil business inventories.
Excluding non-core items, operating earnings increased in 2015 compared to 2014 primarily due to earnings of the acquired businesses, and lower raw material and energy costs exceeding lower selling prices. These items were partially offset by the negative impact of commodity hedges, primarily for propane and an unfavorable shift in foreign currency exchange rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Growth Initiatives
In 2016, the Company continued expansion of the Crystex® insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in second half 2017, and retrofitted part of an existing manufacturing facility in Nienburg, Germany. These actions are expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and introducing new products for the tire markets.
An example of the Company's continuing innovation and market development efforts is the recently commercialized Eastman Tetrashield™ performance polyester resins. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets. Additional examples where the Company is pursuing innovation through other technologies include next generation Crystex® and resins and cellulose esters for tires.
The Company'sEastman's global manufacturing presence is a key element of the AFP segment's growth strategy. For example, the segment expects to capitalize on industrial growth in Asia from its manufacturing capacity expansion in Kuantan, Malaysia and cellulose ester products sourced from our low costthe Company's low-cost cellulose and acetyl manufacturing stream in North America.
In 2017, the Company advanced growth and innovation of Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and facilitating the introduction of new products into the tire markets.
| | Advanced Materials Segment | | | | | | | | | | |
| | | 2016 Compared to 2015 | | 2015 Compared to 2014 | | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| | | | | | | Change | | | | | | Change | | | | | | Change | | | | | | Change |
| (Dollars in millions) | | 2016 | | 2015 | | $ | | % | | 2015 | | 2014 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2016 | | 2015 | | $ | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | $ | 2,457 |
| $ | 2,414 |
| $ | 43 |
| | 2 | % | $ | 2,414 |
| $ | 2,378 |
| $ | 36 |
| | 2 | % | $ | 2,572 |
| $ | 2,457 |
| $ | 115 |
| | 5 | % | $ | 2,457 |
| $ | 2,414 |
| $ | 43 |
| | 2 | % |
| Acquired business effect | | | | | | — |
| | — | % | | | | | | 123 |
| | 5 | % | |
| Volume / product mix effect | | | | | | 119 |
| | 5 | % | | | | | | 88 |
| | 4 | % | | | | | | 113 |
| | 5 | % | | | | | | 119 |
| | 5 | % |
| Price effect | | | | | | (67 | ) | | (3 | )% | | | | | | (84 | ) | | (3 | )% | | | | | | 1 |
| | — | % | | | | | | (67 | ) | | (3 | )% |
| Exchange rate effect | | | | | | (9 | ) | | — | % | | | | | | (91 | ) | | (4 | )% | | | | | | 1 |
| | — | % | | | | | | (9 | ) | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating earnings | | 471 |
| | 384 |
| | 87 |
| | 23 | % | | 384 |
| | 276 |
| | 108 |
| | 39 | % | | 482 |
| | 471 |
| | 11 |
| | 2 | % | | 471 |
| | 384 |
| | 87 |
| | 23 | % |
| Additional costs of acquired inventories | | — |
| | 7 |
| | (7 | ) | | | | 7 |
| | 1 |
| | 6 |
| | | | — |
| | — |
| | — |
| | | | — |
| | 7 |
| | (7 | ) | | |
| Asset impairments and restructuring charges, net |
| — |
| | 18 |
| | (18 | ) | | | | 18 |
| | 16 |
| | 2 |
| | |
| — |
| | — |
| | — |
| | | | — |
| | 18 |
| | (18 | ) | | |
| Operating earnings excluding non-core items |
| 471 |
| | 409 |
| | 62 |
| | 15 | % | | 409 |
| | 293 |
| | 116 |
| | 40 | % | |
| Net costs resulting from coal gasification incident | | | 11 |
| | — |
| | 11 |
| | | | — |
| | — |
| | — |
| | |
| Operating earnings excluding non-core and unusual items | |
| 493 |
| | 471 |
| | 22 |
| | 5 | % | | 471 |
| | 409 |
| | 62 |
| | 15 | % |
2017 Compared to 2016
Sales revenue increased primarily due to higher sales volume across the segment, including of premium products such as automotive performance films, Tritan® copolyester, and Saflex® acoustic interlayers.
Operating earnings in 2017 included $11 million of net costs resulting from the coal gasification incident. Excluding this unusual item, operating earnings increased primarily due to the combined impact of higher sales volume, lower unit costs due to higher capacity utilization, and improved product mix of premium products of $83 million. The increase was partially offset by higher raw material and energy costs of $48 million and increased costs of growth initiatives.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2016 Compared to 2015
Sales revenue in 2016 increased compared to 2015 due to higher sales volume of premium products, including Eastman Tritan® copolyester, Saflex® acoustic interlayers, and automotive performance films, partially offset by lower selling prices, primarily for other copolyesters, primarily attributed to lower raw material prices.
Operating earnings in 2015 included $18 million of indefinite-lived intangible asset impairments, primarily to reduce the carrying value of trade names in the window films market to their estimated current fair value. Operating earnings in 2015 also included additional costs of acquired Commonwealth inventories of $7 million.
Excluding these non-core items, operating earnings in 2016 increased compared to 2015 primarily due to the combined impact of higher sales volume and improved product mix of premium products and lower unit costs due to higher capacity utilization of $71 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2015 Compared to 2014
Sales revenue in 2015 increased compared to 2014, due to sales of products of the acquired Commonwealth performance films business and increased sales volume, partially offset by an unfavorable shift in foreign currency exchange rates and lower selling prices, primarily for copolyesters, primarily attributed to lower raw material prices.
Operating earnings in 2015 increased compared to 2014. Operating earnings in 2015 included $18 million of indefinite-lived intangible asset impairments, primarily to reduce the carrying value of tradenames in the window films market to their estimated current fair value. Operating earnings in 2015 also included additional costs of acquired Commonwealth inventories of $7 million. Included in 2014 operating earnings are asset impairments, including intangible assets, and restructuring charges of $12 million primarily for the closure of a production facility in Taiwan for the Flexvue® product line and $4 million of asset impairments related to a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site.
Excluding these non-core items, operating earnings in 2015 increased compared to 2014 due to lower raw material and energy costs exceeding lower selling prices by $76 million and higher sales volume and improved product mix, especially relative increased sales of optical film solutions and premium interlayers products, of $46 million. Operating earnings also benefited from earnings of the acquired business. These items were partially offset by the negative impact of commodity hedges of $22 million and an unfavorable shift in foreign currency exchange rates of $13 million.
Growth Initiatives
The acquisition of Commonwealth in December 2014 further expanded the AM segment's product portfolio and sales channel network in the diverse window film markets, enabled further manufacturing and distribution efficiencies, and added industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.
TheIn 2017, the Company is continuingadvanced the continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Eastman Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018 to meet expected future demand in2018.
In 2017, the durable goodsCompany advanced growth and health and wellness markets. Through recent debottlenecks and working capital management, management expects to have adequate Eastman Tritaninnovation of Saflex® copolyester manufacturing capacity to meet demand growthand head up displays acoustic interlayers used in advance of the capacity expansion in 2018.
The Company continuedtransportation and building and construction markets, supported by construction of a manufacturing facility for polyvinyl butyral ("PVB") resin at the Kuantan, Malaysia site expected to bewhich became fully operational in second half 2017. This manufacturing capacity will support expected global growth infirst quarter 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Chemical Intermediates Segment |
| | | | |
| | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| | | | | | | Change | | | | | | Change |
| (Dollars in millions) | | 2017 | | 2016 | | $ | | % | | 2016 | | 2015 | | $ | | % |
| | | | | | | | | | | | | | | | | |
| Sales | $ | 2,728 |
| $ | 2,534 |
| $ | 194 |
| | 8 | % | $ | 2,534 |
| $ | 2,811 |
| $ | (277 | ) | | (10 | )% |
| Volume / product mix effect | | | | | | (55 | ) | | (2 | )% | | | | | | 48 |
| | 2 | % |
| Price effect | | | | | | 253 |
| | 10 | % | | | | | | (317 | ) | | (11 | )% |
| Exchange rate effect | | | | | | (4 | ) | | — | % | | | | | | (8 | ) | | (1 | )% |
| | | | | | | | | | | | | | | | | |
| Operating earnings | | 255 |
| | 171 |
| | 84 |
| | 49 | % | | 171 |
| | 294 |
| | (123 | ) | | (42 | )% |
| Net costs resulting from coal gasification incident | | 44 |
| | — |
| | 44 |
| | | | — |
| | — |
| | — |
| | |
| Operating earnings excluding unusual item |
| 299 |
| | 171 |
| | 128 |
| | 75 | % | | 171 |
| | 294 |
| | (123 | ) | | (42 | )% |
2017 Compared to 2016
Sales revenue increased due to higher selling prices attributed to higher raw material prices and improved market conditions. The increase was partially offset by lower intermediates sales volume due to the transportation and building and construction markets and allow the Company to better serve customers in the Asia Pacific region.coal gasification incident.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Chemical Intermediates Segment |
| | | | |
| | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| | | | | | | Change | | | | | | Change |
| (Dollars in millions) | | 2016 | | 2015 | | $ | | % | | 2015 | | 2014 | | $ | | % |
| | | | | | | | | | | | | | | | | |
| Sales | $ | 2,534 |
| $ | 2,811 |
| $ | (277 | ) | | (10 | )% | $ | 2,811 |
| $ | 3,034 |
| $ | (223 | ) | | (7 | )% |
| Acquired business effect | | | | | | — |
| | — | % | | | | | | 373 |
| | 12 | % |
| Volume / product mix effect | | | | | | 48 |
| | 2 | % | | | | | | (47 | ) | | (1 | )% |
| Price effect | | | | | | (317 | ) | | (11 | )% | | | | | | (527 | ) | | (17 | )% |
| Exchange rate effect | | | | | | (8 | ) | | (1 | )% | | | | | | (22 | ) | | (1 | )% |
| | | | | | | | | | | | | | | | | |
| Operating earnings | | 171 |
| | 294 |
| | (123 | ) | | (42 | )% | | 294 |
| | 352 |
| | (58 | ) | | (16 | )% |
| Additional costs of acquired inventories | | — |
| | — |
| | — |
| | | | — |
| | 8 |
| | (8 | ) | | |
| Operating earnings excluding non-core items |
| 171 |
| | 294 |
| | (123 | ) | | (42 | )% | | 294 |
| | 360 |
| | (66 | ) | | (18 | )% |
2016 Compared to 2015
Sales revenue in 2016 decreased compared to 2015, due to lower selling prices partially offset by higher sales volume of olefin-based and functional amines products. The lower selling prices were primarily attributed to the lower raw material prices and competitive pressures due to lower oil prices for most of the year.
Operating earnings decreased in 2016 compared to 2015 primarily due to lower selling prices more than offsetting lower raw material and energy costs by $181 million, partially offset by the reduced impact of commodity hedge losses on raw material costs of $28 million and higher sales volume of $16 million.
2015 Compared to 2014
Sales revenue in 2015 decreased compared to 2014, primarily due to lower selling prices more than offsetting sales of products of the acquired Taminco functional amines business. The lower selling prices were primarily in response to lower raw material prices and competitive pressures resulting from weakened demand in Asia Pacific.
Operating earnings in 2014 included $8 million of additional costs of the acquired Taminco functional amines product lines inventories. Excluding this non-core item, operating earnings decreased in 2015 compared to 2014, primarily due to the negative impact of commodity hedges, primarily for propane, partially offset by earnings from the acquired Taminco functional amines businesses and lower raw material and energy costs exceeding lower selling prices.
Cost and StrategicGrowth Initiatives
In 2016,2017, to support the Company announced that as part of its strategy to increaseincreased emphasis on specialty businesses and products, it is pursuingthe Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines. Eastman will retainlines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company. This process is expected to continue through first half 2017.
In 2012, theThe Company entered intois party to an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant to further improve the Company's long-term competitive cost position. ThisThe Company expects to begin purchasing propylene from this plant is expected to be operational in 2017.first half 2018. Prior to completion of the plant,beginning these purchases, the Company continueswill continue to benefit from a propylene market contract with an advantaged cost position for purchased propylene.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fibers Segment |
| | | | |
| | | | |
| | 2017 Compared to 2016 | | 2016 Compared to 2015 |
| (Dollars in millions) | | | | | Change | | | | | | Change |
| | 2017 | | 2016 | | $ | | % | | 2016 | | 2015 | | $ | | % |
| | | | | | | | | | | | | | | | |
| Sales | $ | 852 |
| $ | 992 |
| $ | (140 | ) | | (14 | )% | $ | 992 |
| $ | 1,219 |
| $ | (227 | ) | | (19 | )% |
| Volume / product mix effect | | | | | | (53 | ) | | (5 | )% | | | | | | (150 | ) | | (13 | )% |
| Price effect | | | | | | (86 | ) | | (9 | )% | | | | | | (74 | ) | | (6 | )% |
| Exchange rate effect | | | | | | (1 | ) | | — | % | | | | | | (3 | ) | | — | % |
| | | | | | | | | | | | | | | | | |
| Operating earnings | | 175 |
| | 310 |
| | (135 | ) | | (44 | )% | | 310 |
| | 292 |
| | 18 |
| | 6 | % |
| Asset impairments and restructuring charges, net | | — |
| | — |
| | — |
| | | | — |
| | 98 |
| | (98 | ) | | |
| Net costs resulting from coal gasification incident | | 49 |
| | — |
| | 49 |
| | | | — |
| | — |
| | | | |
| Operating earnings excluding non-core and unusual items | | 224 |
| | 310 |
| | (86 | ) | | (28 | )% | | 310 |
| | 390 |
| | (80 | ) | | (21 | )% |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fibers Segment |
| | | | |
| | | | |
| | 2016 Compared to 2015 | | 2015 Compared to 2014 |
| (Dollars in millions) | | | | | Change | | | | | | Change |
| | 2016 | | 2015 | | $ | | % | | 2015 | | 2014 | | $ | | % |
| | | | | | | | | | | | | | | | |
| Sales | $ | 992 |
| $ | 1,219 |
| $ | (227 | ) | | (19 | )% | $ | 1,219 |
| $ | 1,457 |
| $ | (238 | ) | | (16 | )% |
| Volume / product mix effect | | | | | | (150 | ) | | (13 | )% | | | | | | (219 | ) | | (15 | )% |
| Price effect | | | | | | (74 | ) | | (6 | )% | | | | | | (10 | ) | | (1 | )% |
| Exchange rate effect | | | | | | (3 | ) | | — | % | | | | | | (9 | ) | | — | % |
| | | | | | | | | | | | | | | | | |
| Operating earnings | | 310 |
| | 292 |
| | 18 |
| | 6 | % | | 292 |
| | 474 |
| | (182 | ) | | (38 | )% |
| Asset impairments and restructuring charges, net | | — |
| | 98 |
| | (98 | ) | | | | 98 |
| | — |
| | 98 |
| | |
| Operating earnings excluding non-core item | | 310 |
| | 390 |
| | (80 | ) | | (21 | )% | | 390 |
| | 474 |
| | (84 | ) | | (18 | )% |
Sales revenue decreased primarily due to lower selling prices and lower sales volume, particularly for acetate tow. Lower acetate tow selling prices were primarily attributed to lower industry capacity utilization rates. Lower acetate tow sales volume was primarily attributed to reduced sales in China.
Operating earnings in 2017 included $49 million of net costs resulting from the coal gasification incident. Excluding this unusual item, operating earnings decreased primarily due to approximately $103 million of lower selling prices and lower sales volume, partially offset by lower operating costs resulting from changes in segment business operations and assets.
2016 Compared to 2015
Sales revenue in 2016 decreased compared to 2015, primarily due to lower sales volume and lower selling prices, particularly for acetate tow. Lower acetate tow sales volume was primarily due to reduced sales in China attributed to weaker demand and customer backward integration and inventory destocking. Lower acetate tow selling prices were primarily due to lower industry capacity utilization rates.
Excluding the non-core item, operating earnings in 2016 decreased compared to 2015 due primarily to approximately $90 million of lower sales volume and lower selling prices exceeding lower raw material and energy costs, partially offset by lower operating costs resulting from changes in segment business operations and assets.
2015 Compared to 2014Costs and Growth Initiatives
Sales revenueThe Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in 2015 decreased comparednew markets, optimizing asset productivity, and working with suppliers to 2014, primarily due to lowerreduce costs. For acetate tow, sales volume attributed to customer inventory destocking, especiallythese efforts are assisting customers in China, and lower acetyl chemicals sales volume due to decreased sales to the cellulose acetate flake joint venture in Kingsport, Tennessee.
Operating earnings in 2015 included asset impairments and restructuring charges, net of $98 million for the closureeffective use of the Workington, UKsegment's products and customers' product development efforts. Beyond acetate tow, manufacturing site. Excluding this non-core item, operating earnings in 2015 decreased compared to 2014 primarily due to $112 million of lower acetate tow and acetyl chemicals sales volume, partially offset by approximately $10 million of cost savings resulting from closurethese efforts are using the elements of the Workington, UK acetate tow manufacturing facilityinnovation-driven growth model to focus on innovation in 2015.
Cost Initiativesthe textiles market.
As a result of challenging market conditions for acetate tow, the Company closed its Workington, UK acetate tow manufacturing facility in 2015. Management expected annual cost savings in the Fibers segment of approximately $20 million as a result of the closure, which cost savings havehad been realized as of the end of 2016. Following an increase in flake capacity at the Kingsport, Tennessee site in 2015, the Fibers segment could supply all its acetate tow and yarn spinning capacity from this low costlow-cost flake asset. In order to fully utilize the increased capacity and reduce fixed costs, in June 2016, the Company sold its 50 percent interest in Primester, which manufactures cellulose acetate at the Company's Kingsport, Tennessee site.
Other
|
| | | | | | | | | | | | |
| (Dollars in millions) | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Sales | | $ | 54 |
| | $ | 46 |
| | $ | 45 |
|
| | | | | | | |
| Operating loss | | | | | | |
| Growth initiatives and businesses not allocated to operating segments | | $ | (114 | ) | | $ | (82 | ) | | $ | (87 | ) |
| Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | | 93 |
| | (44 | ) | | (76 | ) |
| Restructuring and acquisition integration and transaction costs | | (5 | ) | | (44 | ) | | (83 | ) |
| Operating loss before non-core items | | (26 | ) | | (170 | ) | | (246 | ) |
| Mark-to-market pension and other postretirement benefit plans (gain) loss, net | | (21 | ) | | 97 |
| | 115 |
|
| Acquisition integration and transaction costs | | — |
| | 9 |
| | 28 |
|
Asset impairments and restructuring charges, net
| | 5 |
| | 35 |
| | 67 |
|
| Operating loss excluding non-core items | | $ | (42 | ) | | $ | (29 | ) | | $ | (36 | ) |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other
|
| | | | | | | | | | | | |
| (Dollars in millions) | | 2016 | | 2015 | | 2014 |
| | | | | | | |
| Sales | | $ | 46 |
| | $ | 45 |
| | $ | 18 |
|
| | | | | | | |
| Operating loss | | | | | | |
| Growth initiatives and businesses not allocated to operating segments | | $ | (82 | ) | | $ | (87 | ) | | $ | (58 | ) |
| Pension and other postretirement benefits expenses, net not allocated to operating segments | | (44 | ) | | (76 | ) | | (293 | ) |
| Restructuring and acquisition integration and transaction costs | | (44 | ) | | (83 | ) | | (51 | ) |
| Operating loss before non-core items | | (170 | ) | | (246 | ) | | (402 | ) |
| Mark-to-market pension and other postretirement benefit plans loss, net | | 97 |
| | 115 |
| | 304 |
|
| Acquisition integration and transaction costs | | 9 |
| | 28 |
| | 46 |
|
| Asset impairments and restructuring charges, net | | 35 |
| | 67 |
| | (1 | ) |
| Operating loss excluding non-core items | | $ | (29 | ) | | $ | (36 | ) | | $ | (53 | ) |
Sales revenue and costs related to growth initiatives, R&D costs, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are included in "Other". Sales revenue in 2016 and 2015 isall periods presented above are primarily sales from the microfiber technology platform. Sales revenue
Included in 2015 increased compared to 2014, primarily due to sales2017 operating losses are restructuring charges of products of the acquired Knowlton business, part of the Eastman microfiber technology platform.approximately $5 million for severance.
Included in 2016 operating losses are restructuring costs of $34 million primarily for severance resulting from the Company's previously announced plan to reduce costs, primarily in 2017. Also included in 2016 operating losses were transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014.
Included in 2015 operating losses are integration and transaction costs of $28 million, primarily for the acquired Taminco and Commonwealth businesses. Included in 2015 operating losses are $51 million of severance costs for a corporate reduction in force, $11 million of asset impairments and restructuring charges resulting from management's decision not to continue a growth initiative, and $4 million of severance associated with the integration of Taminco.
Included in 2014 operating losses were transaction costs of $22 million for the acquisitions of Taminco, Commonwealth, the aviation turbine oil business, and Knowlton. Also included in 2014 operating losses were integration costs of $24 million for the acquired Solutia, aviation turbine oil, Commonwealth, Knowlton, and Taminco businesses. Included in 2014 operating losses were $4 million for severance related to the integration of Solutia. Included in 2014 was a $5 million gain for sales of previously impaired assets at the former Photovoltaics production facility in Germany.
The Company continues to explore and invest in R&D initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials and advanced cellulosics.cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES BY CUSTOMER LOCATION
| | | | Sales Revenue | Sales Revenue |
| | | | | | Change | | | | | Change | | | | | Change | | | | | Change |
| (Dollars in millions) | 2016 | | 2015 | | $ | % | | 2015 | | 2014 | | $ | % | 2017 | | 2016 | | $ | % | | 2016 | | 2015 | | $ | % |
| United States and Canada | $ | 4,025 |
| | $ | 4,350 |
| | $ | (325 | ) | (7 | )% | | $ | 4,350 |
| | $ | 4,384 |
| | $ | (34 | ) | (1 | )% | $ | 4,189 |
| | $ | 4,025 |
| | $ | 164 |
| 4 | % | | $ | 4,025 |
| | $ | 4,350 |
| | $ | (325 | ) | (7 | )% |
| Asia Pacific | 2,163 |
| | 2,333 |
| | (170 | ) | (7 | )% | | 2,333 |
| | 2,540 |
| | (207 | ) | (8 | )% | 2,306 |
| | 2,163 |
| | 143 |
| 7 | % | | 2,163 |
| | 2,333 |
| | (170 | ) | (7 | )% |
| Europe, Middle East, and Africa | 2,305 |
| | 2,422 |
| | (117 | ) | (5 | )% | | 2,422 |
| | 2,091 |
| | 331 |
| 16 | % | 2,539 |
| | 2,305 |
| | 234 |
| 10 | % | | 2,305 |
| | 2,422 |
| | (117 | ) | (5 | )% |
| Latin America | 515 |
| | 543 |
| | (28 | ) | (5 | )% | | 543 |
| | 512 |
| | 31 |
| 6 | % | 515 |
| | 515 |
| | — |
| — | % | | 515 |
| | 543 |
| | (28 | ) | (5 | )% |
| | $ | 9,008 |
| | $ | 9,648 |
| | $ | (640 | ) | (7 | )% | | $ | 9,648 |
| | $ | 9,527 |
| | $ | 121 |
| 1 | % | $ | 9,549 |
| | $ | 9,008 |
| | $ | 541 |
| 6 | % | | $ | 9,008 |
| | $ | 9,648 |
| | $ | (640 | ) | (7 | )% |
2017 Compared to 2016
Sales revenue in United States and Canada increased primarily due to higher CI segment selling prices.
Sales revenue in Asia Pacific increased primarily due to higher AFP, AM, and CI segments sales volume partially offset by lower Fibers segment sales volume.
Sales revenue in Europe, Middle East, and Africa increased primarily due to higher AFP and Fibers segments sales volume. Higher AFP segment sales volume is primarily due to higher sales volume across the segment, including specialty fluids due to the timing of customer solar energy project completions, tire additives products, and animal nutrition products.
Sales revenue in Latin America was unchanged.
2016 Compared to 2015
Sales revenue in United States and Canada decreased in 2016 compared to 2015, primarily due to lower selling prices in all operating segments, particularly in the CI and AFP segments.
Sales revenue in Asia Pacific decreased in 2016 compared to 2015, primarily due to lower selling prices in all operating segments and lower Fibers segment sales volume partially offset by higher sales volume in the other operating segments.
Sales revenue in Europe, Middle East, and Africa decreased in 2016 compared to 2015, primarily due to lower selling prices in all operating segments.
Sales revenue in Latin America decreased in 2016 compared to 2015, primarily due to lower selling prices in all operating segments, particularly in the CI and AFP segments, partially offset by higher CI, Fibers, and AFP segments sales volume.
2015 Compared to 2014
Sales revenue in United States and Canada decreased slightly in 2015 compared to 2014, primarily due to lower selling prices in all operating segments, particularly in the CI segment, mostly offset by sales of products of the acquired Taminco, Commonwealth, Knowlton, and aviation turbine oil businesses.
Sales revenue in Asia Pacific decreased in 2015 compared to 2014, primarily due to lower Fibers segment sales volume, particularly for acetate tow, and lower selling prices, partially offset by sales of products of the acquired Taminco, Commonwealth and aviation turbine oil businesses.
Sales revenue in Europe, Middle East, and Africa increased in 2015 compared to 2014, primarily due to sales of products of the acquired Taminco businesses, partially offset by an unfavorable shift in foreign currency exchange rates.
Sales revenue in Latin America increased slightly in 2015 compared to 2014, primarily due to sales of products of the acquired Taminco and Commonwealth businesses, partially offset by lower sales volume and lower selling prices in all operating segments.
See "Business - Business Segments" in Part I, Item 1 of this Annual Report for regional segment sales revenues by customer location.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
Cash Flows
| | | (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Net cash provided by (used in): | | | | | | | | | | |
| Operating activities | $ | 1,385 |
| | $ | 1,624 |
| | $ | 1,433 |
| $ | 1,657 |
| | $ | 1,385 |
| | $ | 1,624 |
|
| Investing activities | (655 | ) | | (693 | ) | | (4,091 | ) | (643 | ) | | (655 | ) | | (693 | ) |
| Financing activities | (838 | ) | | (844 | ) | | 2,639 |
| (1,006 | ) | | (838 | ) | | (844 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (4 | ) | | (8 | ) | | (4 | ) | 2 |
| | (4 | ) | | (8 | ) |
| Net change in cash and cash equivalents | (112 | ) | | 79 |
| | (23 | ) | 10 |
| | (112 | ) | | 79 |
|
| Cash and cash equivalents at beginning of period | 293 |
| | 214 |
| | 237 |
| 181 |
| | 293 |
| | 214 |
|
| Cash and cash equivalents at end of period | $ | 181 |
| | $ | 293 |
| | $ | 214 |
| $ | 191 |
| | $ | 181 |
| | $ | 293 |
|
2017 Compared to 2016
Cash provided by operating activities increased $272 million in 2017 compared with 2016. The increase was primarily due to higher earnings and lower pension and other postretirement contributions due to the advanced funding of U.S. defined pension plans in 2016.
Cash used in investing activities in 2017 was primarily for capital expenditures and was relatively unchanged compared with 2016.
Cash used in financing activities increased $168 million in 2017 compared with 2016. The increase was primarily due to increases in both share repurchases and dividend payments partially offset by less net debt repayments in 2017.
2016 Compared to 2015
Cash provided by operating activities decreased $239 million in 2016 compared with 2015. The decrease in cash from operating activities was primarily due to lower net earnings excluding non-core items in 2016 compared with 2015 and management's decision to contribute an additional $150 million to the Company's U.S. defined pension plans in fourth quarter 2016 rather than in future years.
Cash used in investing activities decreased $38 million in 2016 compared with 2015. The decrease was primarily due to $37 million higher proceeds primarily from the sale of Eastman's ownership interest in the Primester cellulose acetate joint venture, $26 million less additions to properties and equipment, and $19 million less cash used for acquisitions partially offset by $44 million of cash used for the December 2016 settlement of a 2017 forward starting interest rate swap in connection with early debt repayment, which was included in "Other items, net" in the Consolidated Statements of Cash Flows.Flows in Part II, Item 8 of this Annual Report.
Total financing cash used in 2016 was similar to that of 2015 with $77 million less used in the net repayment of borrowings offset by increases in share repurchases and dividend payments of $42 million and $34 million, respectively. Cash used in financing activities in 2016 included cash used in repayment of $1.6 billion of outstanding debt (including $67 million early redemption premium and related fees), $400 million total repayments of accounts receivable securitization agreement (the "A/R Facility") borrowings, repayment of $100 million of the first five-year term loan agreement ("2019 Term Loan") borrowings, and $150 million net decrease in commercial paper borrowings partially offset by proceeds from the $1.3 billion sale of public debt securities due 2023 and 2026, $298 million of 2021 Term Loan borrowings net of issuance fees, and $200 million of A/R Facility borrowings. For additional information, see Note 9,8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
2015 Compared to 2014
Cash provided by operating activities increased $191 million in 2015 compared with 2014. The increase in cash from operating activities was primarily due to higher earnings and lower working capital requirements partially offset by higher interest payments. The decrease in working capital requirements was primarily due to the impact of declining raw material and energy costs in 2015 compared with 2014. Interest payments were higher in 2015 as compared with 2014 primarily due to a full year of interest payments on borrowings for the 2014 acquisitions.
Cash used in investing activities decreased $3.4 billion in 2015 compared with 2014. The decrease was primarily due to cash used for acquisitions in 2014. Cash used for additions to properties and equipment was $652 million in 2015 and $593 million in 2014.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash used in financing activities was $844 million in 2015 compared with cash provided by financing activities of $2.6 billion in 2014. The increase in cash used is primarily due to the repayment of borrowings in 2015 compared to proceeds from borrowings in 2014 used for acquisitions. During 2015, the Company repaid $650 million of borrowings under the 2019 Term Loan agreement and the $250 million 3% notes due 2015 using available cash and $200 million borrowings under the A/R Facility and $195 million commercial paper borrowings. During 2014, the Company had net proceeds of $3.4 billion from new debt and repaid $190 million of commercial paper borrowings. Share repurchases totaled $103 million in 2015 compared with $410 million in 2014. Dividend payments were $238 million in 2015 and $210 million in 2014.
Liquidity and Capital Resources
The Company had cash and cash equivalents as follows:
| | | (Dollars in millions) | December 31, | December 31, |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Cash and cash equivalents | $ | 181 |
| | $ | 293 |
| | $ | 214 |
| $ | 191 |
| | $ | 181 |
| | $ | 293 |
|
The CompanyEastman has access to a $1.25 billion revolving credit agreement (the "Credit Facility") expiring October 2021. 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 support for general corporate purposes and supports commercial paper borrowings and general corporate purposes.borrowings. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company also has access to a $250 million A/R Facility agreement that expires April 2019. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Credit and A/R Facilities and other borrowing agreementsarrangements contain a number of customary covenants and events of default, including requirementssome of which require the Company to maintain certain financial ratios.ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all such covenants for all periods presented. Totalat both December 31, 2017 and December 31, 2016. The amount of available borrowings under the Credit and A/R and Credit Facilities were $1.50 billionwas approximately $866 million as of December 31, 2016. Changes in2017. The amount of available borrowings were primarily due to repayment of borrowingswas limited by a financial ratio covenant under the A/RCredit Facility. For additional information, see Section 5.03 of the Credit Facility at Exhibit 10.02 to the Company's 2016 Annual Report on Form 10-K.
The Company wouldhas access to borrowings of up to €150 million ($180 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not have violated applicable covenantsterminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above EURIBOR for these periods ifeuro denominated drawings and the total available amountscounterparty's cost of the facilities had been borrowed. For information, seefunds for drawings in any other currencies, plus administration and insurance fees and are classified as short-term. See Note 9,8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
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 of Eastman's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Eastman management believes maintaining a financial profile consistent with an investment grade credit rating is important to its long-term strategic and financial flexibility.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Debt and Other Commitments
Debt and other commitments are summarized in the following table:
| | | (Dollars in millions) | | Payments Due for | | Payments Due for |
| Period | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities (1) | | Total | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities | | Total |
| 2017 | | $ | — |
| | $ | 283 |
| | $ | 229 |
| | $ | 211 |
| | $ | 62 |
| | $ | 239 |
| | $ | 1,024 |
| |
| 2018 | | — |
| | 37 |
| | 231 |
| | 208 |
| | 49 |
| | 82 |
| | 607 |
| | $ | — |
| | $ | 393 |
| | $ | 228 |
| | $ | 230 |
| | $ | 67 |
| | $ | 234 |
| | $ | 1,152 |
|
| 2019 | | 249 |
| | 250 |
| | 227 |
| | 186 |
| | 36 |
| | 74 |
| | 1,022 |
| | 250 |
| | 1 |
| | 229 |
| | 222 |
| | 55 |
| | 85 |
| | 842 |
|
| 2020 | | 796 |
| | 30 |
| | 199 |
| | 186 |
| | 29 |
| | 88 |
| | 1,328 |
| | 797 |
| | — |
| | 207 |
| | 184 |
| | 44 |
| | 90 |
| | 1,322 |
|
| 2021 | | 184 |
| | 232 |
| | 185 |
| | 160 |
| | 24 |
| | 84 |
| | 869 |
| | 185 |
| | 200 |
| | 190 |
| | 92 |
| | 34 |
| | 91 |
| | 792 |
|
| 2022 and beyond | | 4,533 |
| | — |
| | 1,788 |
| | 2,052 |
| | 65 |
| | 1,074 |
| | 9,512 |
| |
| 2022 | | | 738 |
| | — |
| | 178 |
| | 160 |
| | 23 |
| | 92 |
| | 1,191 |
|
| 2023 and beyond | | | 3,976 |
| | — |
| | 1,619 |
| | 2,032 |
| | 47 |
| | 1,056 |
| | 8,730 |
|
| Total | | $ | 5,762 |
| | $ | 832 |
| | $ | 2,859 |
| | $ | 3,003 |
| | $ | 265 |
| | $ | 1,641 |
| | $ | 14,362 |
| | $ | 5,946 |
| | $ | 594 |
| | $ | 2,651 |
| | $ | 2,920 |
| | $ | 270 |
| | $ | 1,648 |
| | $ | 14,029 |
|
| |
(1)
| Amounts 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 "2022 and beyond" line item. |
At December 31, 2016, the Company's2017, Eastman's borrowings totaled approximately $6.6$6.5 billion with various maturities. During 2016, the Company refinanced certain outstanding public debt with proceeds of the sale of new euro-denominated debt securities and term loan borrowings, resulting in lowered interest expense and extended weighted average maturity of outstanding debt while retaining adequate levels of pre-payable debt for efficient future deleveraging. These transactions will resultEstimated 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 an estimated net reductionthe terms of interest expense of approximately $20 million in 2017.such debt prior to maturity. For information on debt securities, credit facilities and other, and interest payable, see Note 9,8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
For information about purchase obligations and operating leases, see Note 12,11, "Commitments and Off Balance Sheet Arrangements", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, environmental loss contingency reserves, accrued compensation benefits, uncertain tax liabilities, one-time transition tax on deferred foreign income under the 2017 Tax Cuts and Jobs Act, 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 "2023 and beyond" line item.
The amount and timing of such pension and other postretirement benefit payments included in other liabilities is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company's U.S. defined benefit pension plans are not currently under any benefit restrictions. See Note 11,10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for more information regarding pension and other postretirement benefit obligations.
The resolution of uncertainties related to environmental matters included in other liabilities may have a material adverse effect on the Company's consolidated results of operations in the period recognized, however, because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for the Company's accounting policy for environmental costs and see Note 13,12, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for more information regarding outstanding environmental matters and asset retirement obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Off Balance Sheet Arrangements
For information about off balance sheet arrangements, see Note 12,11, "Commitments and Off Balance Sheet Arrangements" - "Guarantees" and "Other Off Balance Sheet Arrangements", to the Company'sEastman's consolidated financial statements in Part II, Item 8 of this Annual Report. Management's current expectation is that the likelihood of material residual guarantee payments or future payment or performance related to non-performance under other guarantees is remote.
Capital Expenditures
Capital expenditures were $649 million, $626 million, and $652 million in 2017, 2016, and $593 million in 2016, 2015, and 2014, respectively. Capital expenditures in 20162017 were primarily for AFP and AM segmentsegments manufacturing expansions in Kuantan, Malaysia, an AM segment expansion of Eastman Tritan® copolyester capacity in Kingsport, Tennessee, an AFP segment expansion of specialty ketones manufacturing capacity in Kingsport, Tennessee, and Longview, Texas site modernization projects.projects in Longview, Texas. Capital expenditures in 2017 included $49 million for repair and reconstruction of the manufacturing facilities damaged in the previously reported fourth quarter 2017 coal gasification incident. The Company expects that 20172018 capital spending will be approximately $575 million.$550 million primarily for targeted growth initiatives and maintenance.
The Company had capital expenditures related to environmental protection and improvement of approximately $38 million, $45 million, and $52 million in 2017, 2016, and $69 million in 2016, 2015, and 2014, respectively. The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities.
Stock Repurchases and Dividends
In February 2014, the Company'sEastman's Board of Directors authorized repurchase of up to an additional $1 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 interests of the Company. As of December 31, 2016,2017, a total of 6,542,19010,726,827 shares have been repurchased under this authorization for a total amount of $498$848 million.
In February 2018, Eastman's Board of Directors authorized the repurchase of up to an additional $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interests of the Company.
The Board of Directors has declared a cash dividend of $0.51$0.56 per share during the first quarter of 2017,2018, payable on April 3, 20176, 2018 to stockholders of record on March 15, 2017.2018.
Other
Eastman did not have any material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes. Thus, the Company is not materially exposed to any financing, liquidity, market, or credit risk related to any such relationships.
INFLATION
In recent years, general economic inflation has not had a material adverse impact on Eastman's costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy costs to continue and the Company will continue to pursue pricing and hedging strategies and ongoing cost control initiatives to offset the effects. For additional information see Note 10,9, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards, see Note 23,22, "Recently Issued Accounting Standards", to the Company'sEastman's consolidated financial statements in Part II, Item 8 of this Annual Report.
OUTLOOK
Eastman is focused on consistent earningsuses 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 R&D and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a market-driven approachdeeper understanding of the value of Eastman's products and how they perform within customers' and end user products. Key areas of application development include thermoplastic processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, non-wovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. Management believes that takes advantagethese elements of the Company's existing technology platforms, global marketinnovation-driven growth model combined with disciplined portfolio management and manufacturing presence, leading positionsbalanced capital deployment will result in key end markets, vertically integrated manufacturing streams,consistent, sustainable earnings growth and advantaged cost positions. This focus is supported by the Company's end-market and geographic diversity as it serves global markets and offers both original equipment manufacturing and after-market products in a variety of end markets, such as transportation, building and construction, and consumables.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
strong cash flow.
Management expects continued slow global economicFor 2018, management expects:
earnings to benefit from a robust portfolio of specialty businesses in attractive niche end-markets, strong growth in high margin, innovative products, and challenges in the Fibers segment. Management expects thata modestly lower tax rate;
earnings to be negatively impacted by higher costs of strategic growth initiatives, higher scheduled maintenance costs, and volatile market prices for commodity products and raw materialmaterials and energy, costs will continue to be volatile, and will continue to evaluate and use pricing strategies to mitigate this volatility. The negative impact of our current commodity hedges is expected to be less than in recent years. Management also expects the strength of the U.S. dollar to continue to have an overall negative impact on the Company's results, partially offset by hedging of foreign currencies, particularly the euro.
For 2017, management also expects:
operating results to continue to benefit from organic growth and improved product mix from continued market adoption of specialty products;
cost reduction actions to result in cost savings of approximately $100 million;for olefins;
cash generated by operating activities of approximately $1.6 billion;
capital spending to beof approximately $575$550 million;
priorities for uses of available cash in 20172018 to include payment of the quarterly dividend, repayment of debt, funding targeted organic and inorganic growth initiatives, and repurchasing shares; and
the full year effective tax rate on reported earnings before income tax to be approximately 2318 to 20 percent, excluding non-core, unusual, or non-recurring items.
While the Company continues to assess the financial impact of the coal gasification incident, the total impact, net of insurance recoveries, is expected to reduce earnings by a total of between $25 million and $50 million spread across 2017 and 2018. The Company anticipates that in 2018 insurance recoveries will more than offset costs of the incident recognized in 2018.
Based on the foregoing expectations and assumptions, management expects adjusted 20172018 earnings per share, excluding any non-core, unusual, or non-recurring items, to be eight to twelve percent higher than adjusted 20162017 earnings per share excluding non-core and unusual items of $6.76.$7.61. The Company's 20172018 financial results forecasts do not include non-core, items (such as MTM pension and other post-retirement benefit gains and losses) and any unusual, or non-recurring items. Accordingly, management is unable to reconcile projected 2017full-year 2018 earnings excluding non-core, and any unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts.
See "Risk Factors" below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward-Looking"Forward-looking Statements".
Continued uncertain conditions in the global economy and the financial markets could negatively impact the Company.
Continued uncertain conditions in the global economy and global capital markets may adversely affect the Company'sEastman's results of operations, financial condition, and cash flows. The Company's business and operating results were affected by the impact of the last global recession, includingand its related impacts, such as, the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. Continuing deterioration and weakness ofuncertainty in the global economy and financial markets and uncertainty over timing and extent of recovery havemay adversely affectedaffect the Company's results of operations, financial condition, and cash flows. In addition, the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect ourthe Company's financial results.
The CompanyEastman 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 cannotdo not eliminate all exposure to market fluctuations and havemay limit the Company fully benefiting from time to time reducedlower raw material costs and, conversely, offset the positive impact of unexpected decreases of the market price of purchasedhigher raw materials.material costs. In addition, natural disasters, plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loss or financial weakness of any of the Company's largest customers could adversely affect ourthe Company's financial results.
Although the CompanyEastman has an extensive customer base, loss of, or material financial weakness of, certain of ourthe Company's largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced. No assurances can be made that the Company would be able to regain or replace any lost customers.
The Company's business is subject to operating risks common to chemical manufacturing businesses, including cyber risks, any of which could disrupt manufacturing operations or related infrastructure and adversely affect results of operations.
As a global specialty chemicals manufacturing company, ourEastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse effect on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber attacks and breaches of its computer information systems, and although none of these has had a material adverse effect on the Company's operations, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. SuchUnplanned disruptions could result in an unplanned event thatof 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, in fourth quarter 2017 the Company had an operational incident in the Kingsport manufacturing site coal gasification operations area that negatively impacted manufacturing operations and earnings.
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 a significant use of resources in excess of those estimated or budgeted for such initiatives.
The CompanyEastman continues to identify and pursue growth opportunities through both organic growth initiatives and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, and skill development and retention, expansion into new markets and geographic regions, and alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses 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 regarding the timing of completion of proposed acquisitions or licensing, expected benefits of proposed acquisitions or licensing, completion of integration plans, and synergies therefrom. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed or current investments and projects.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.
While acquisitions have been and continue to be a part of the Company's growth strategy, acquisitions of large companies (such as the acquisition of Taminco and Solutia) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to the possibilities that the financial performance of the acquired business may be significantly worse than expected; 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 into Eastman or that the integration efforts will not achieve the expected benefits.
The Company's substantial global operations subject it to risks of doing business in foreignother countries, which could adversely affect its business, financial condition and results of operations.
More than half of the Company'sEastman's sales for 20162017 were to customers outside of North America. The Company expects sales from international markets to continue to represent a significant portion of the its sales. Also, a significant portion of manufacturing capacity is located outside of the United States. Accordingly, the Company's business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements and economic conditions of many jurisdictions. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. or foreign countries may impose additional taxes or otherwise tax Eastman's foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls or limitations on imports or exports. Certain legal and political risks are also inherent in the operation of a company with Eastman's global scope. For example, it may be more difficult for Eastman 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 the United States. Failure of foreign countries to have laws to protect Eastman'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 where Eastman operates. Social and cultural norms in certain countries may not support compliance with Eastman's corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where Eastman operates are a risk to the Company's financial performance. As Eastman continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect on Eastman's business, financial condition or results of operations.
Legislative or regulatory actions could increase the Company's future compliance costs.
The CompanyEastman and its facilities and businesses are subject to complex health, safety, and environmental laws and regulations, both in the U.S. and internationally, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations. 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 testing requirements could result in higher costs. Specifically, pending and proposedfuture changes in U.S. Federal legislation and regulation may increase the likelihood that the Company's manufacturing sites will in the future be impacted by regulation of greenhouse gas emissions and energy policy, which legislation and regulation, if enacted, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.
While acquisitions have been and continue to be a part of Eastman's growth strategy, acquisitions of large companies (such as the previous acquisitions of Taminco and Solutia) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to, the possibilities that the financial performance of the acquired business may be significantly worse than expected; 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 into Eastman or that the integration efforts will not achieve the expected benefits.
In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance. This disclosure, including that under "Outlook" and other forward-looking statements and related disclosures made by the Company in this Annual Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Eastman has exposure to various market risks principally due to changes in foreign currency exchange rates, the pricing of various commodities, and interest rates. In an effort to manage these risks, the Company employs various strategies, including pricing, inventory management, and hedging. The Company enters into derivative contracts which are governed by policies, procedures, and internal processes set forth by its Board of Directors.
The Company determines its exposures to market risk by utilizing sensitivity analyses, which measure the potential losses in fair value resulting from one or more selected hypothetical changes in foreign currency exchange rates, commodity prices, or interest rates.
Foreign Currency Risk
Due to a portion of the Company's operating cash flows and borrowings being denominated in foreign currencies, the Company is exposed to market risk from changes in foreign currency exchange rates. The Company continually evaluates its foreign currency exposure based on current market conditions and the locations in which the Company conducts business. The Company manages most foreign currency exposures on a consolidated basis, which allows the Company to net certain exposures and take advantage of natural offsets. In order toTo mitigate foreign currency risk, the Company from time to time, the Company enters into derivative instruments to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies, and enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. The gains and losses on these contracts offset changes in the value of related exposures. Additionally, to mitigate foreign currency risk, the Company, from time to time, enters into non-derivative instruments to hedge the foreign currency exposure of the net investment in certain foreign operations. The foreign currency change in the designated investment values of the foreign subsidiaries will generally be offset by a foreign currency change in the carrying value of the euro-denominated borrowings. It is the Company's policy to enter into foreign currency derivative and non-derivative instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency derivative financial instruments for speculative purposes.
At December 31, 2016,2017, the market risk associated with certain cash flows under these derivative transactions assuming a 10 percent adverse move in the U.S. dollar relative to these foreign currencies was $39$45 million, with an additional $4$5 million exposure for each additional one percentage point adverse change in those foreign currency rates. At December 31, 2015,2016, the market risk associated with cash flows under these derivative transactions assuming a 10 percent adverse move in the U.S. dollar relative to those currencies was $67$39 million, with an additional $7$4 million exposure for each additional one percentage point adverse change in those exchange rates. Since the Company utilizes currency-sensitive derivative instruments for hedging anticipated foreign currency transactions, a loss in fair value from those instruments is generally offset by an increase in the value of the underlying anticipated transactions.
In fourth quarter 2016, contemporaneous with its sale on November 21, 2016 of additional euro-denominated 1.50% notes due May 2023At December 31, 2017, a 10 percent fluctuation in the principal amount of €200euro currency rate would have had a $149 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million), the Company designated these borrowings as non-derivative hedges of a portion of their net investment in one of their euro functional currency denominated subsidiaries to protectimpact on the designated net investment against foreign currency fluctuations.
In second quarter 2016, contemporaneous with its sale on May 26, 2016 of euro-denominated 1.50% notes due May 2023values in the principal amount of €550 million ($614 million), the Company designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries to protect the designated net investment against foreign currency fluctuations.
subsidiaries. At December 31, 2016, a 10 percent fluctuation in the euro currency rate would have had a $131 million impact on the designated net investment values in the foreign subsidiaries. Though, a foreign currency change in the designated investment values of the foreign subsidiaries will generally be offset by a foreign currency change in the carrying value of the euro-denominated borrowings. As a result of the designation of the euro-denominated borrowings as hedges of the net investments, foreign currency translation gains and losses on the borrowings are recorded as a component of the "Change in cumulative translation adjustment" within "Other comprehensive income (loss), net of tax" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Earnings in Part II, Item 8 of this Annual Report.
Commodity Risk
The Company is exposed to fluctuations in market prices for certain of its raw materials and energy, as well as contract sales of certain commodity products. To mitigate short-term fluctuations in market prices for certain commodities, principally propane, ethane, natural gas, paraxylene, ethylene, and benzene, as well as selling prices for ethylene, the Company from time and time enters into derivative transactions to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period. At December 31, 20162017 and December 31, 2015,2016, the market risk associated with these derivative contracts, assuming an instantaneous parallel shift in the underlying commodity price of 10 percent and no corresponding change in the selling price of finished goods, was $37$30 million and $41$37 million, respectively, with an additional $3 million and $4 million, respectively, of exposure at each date for each one percentage point move in closing price thereafter.
Interest Rate Risk
The CompanyEastman is exposed to interest rate risksrisk primarily as a result of its borrowing and investing activities, which include long-term borrowings used to maintain liquidity and to fund its business operations and capital requirements. The nature and amount of the Company's long-term and short-term debt may vary from time to time as a result of business requirements, market conditions, and other factors. The Company manages global interest rate exposure as part of our regular operational and financing strategies. The Company had variable interest rate borrowings (including credit facility borrowings and commercial paper borrowings) of $829$589 million and $980$829 million at December 31, 20162017 and 2015,2016, respectively. These borrowings represented approximately 10 percent and 15 percent of total outstanding debt and bore weighted average interest rates of 1.691.89 percent and 1.171.69 percent at December 31, 20162017 and 2015,2016, respectively. A hypothetical 10 percent increase in the average interest rate applicable to these borrowings would change our annualized interest expense by approximately $1 million as of both December 31, 20162017 and 2015.2016.
The CompanyEastman may enter into interest rate swaps, collars, or similar instruments with the objective of reducing interest rate volatility relating to ourthe Company's borrowing costs. As of both December 31, 20162017 and 2015,2016, the Company had an interest rate swapsswap outstanding with a notional values totalingvalue of $75 million and $500 million, respectively.million. For purposes of calculating the market risks associated with the fair value of interest-rate-sensitive instruments, the Company uses a hypothetical 10 percent increase in interest rates. The corresponding market risk associated withof the interest rate swapsswap hedging the interest rate risk on the 3.8% bonds maturing March 2025 was $1 million atas of both December 31, 2016. The corresponding market risk associated with interest rate swaps hedging the interest rate risk for the future issuance of debt was $10 million at2017 and December 31, 2015.2016.
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company") appearing on pages 67 through 126.. Eastman has prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States, and the statements of necessity include some amounts that are based on management's best estimates and judgments.
Eastman's accounting systems include extensive internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. The Company's policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner that is above reproach.
The accompanying consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who were responsible for conducting their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report is included herein.
The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of non-management Board members. The independent registered public accounting firmPricewaterhouseCoopers LLP, and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with PricewaterhouseCoopers LLP and Eastman's directorDirector of internal auditing,Corporate Audit Services, both privately and with management present, to discuss accounting, auditing, policies and procedures, internal controls, and financial reporting matters.
|
| | |
| /s/ Mark J. Costa | | /s/ Curtis E. Espeland |
| Mark J. Costa | | Curtis E. Espeland |
| Chief Executive Officer | | Executive Vice President and |
| | | Chief Financial Officer |
February 27, 2017March 1, 2018 | | February 27, 2017March 1, 2018 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Eastman Chemical Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Eastman Chemical Company (the “Company”)and its subsidiaries as of December 31, 2017and December 31, 2016,and the related consolidated statements of earnings, comprehensive income and retained earnings and of cash flowsfor each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, theconsolidated financial statements listed in the accompanying indexreferred to above present fairly, in all material respects, the financial position of Eastman Chemicalthe Company (the “Company”) and its subsidiaries atas of December 31, 20162017 and 2015, December 31, 2016, and the results of theiroperations and theircash flows for each of the three years in the period ended December 31, 2016 2017in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control-IntegratedControl - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Cincinnati, OH
February 27, 2017March 1, 2018
We have served as the Company’s auditor since 1993.
CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions, except per share amounts) | 2016 | | 2015 | | 2014 |
| Sales | $ | 9,008 |
| | $ | 9,648 |
| | $ | 9,527 |
|
| Cost of sales | 6,658 |
| | 7,068 |
| | 7,306 |
|
| Gross profit | 2,350 |
| | 2,580 |
| | 2,221 |
|
| Selling, general and administrative expenses | 703 |
| | 771 |
| | 755 |
|
| Research and development expenses | 219 |
| | 242 |
| | 227 |
|
| Asset impairments and restructuring charges, net | 45 |
| | 183 |
| | 77 |
|
| Operating earnings | 1,383 |
| | 1,384 |
| | 1,162 |
|
| Net interest expense | 255 |
| | 263 |
| | 187 |
|
| Early debt extinguishment and other related costs | 85 |
| | — |
| | — |
|
| Other (income) charges, net | (6 | ) | | (8 | ) | | (15 | ) |
| Earnings from continuing operations before income taxes | 1,049 |
| | 1,129 |
| | 990 |
|
| Provision for income taxes from continuing operations | 190 |
| | 275 |
| | 235 |
|
| Earnings from continuing operations | 859 |
| | 854 |
| | 755 |
|
| Earnings from discontinued operations, net of tax | — |
| | — |
| | 2 |
|
| Net earnings | 859 |
| | 854 |
| | 757 |
|
| Less: Net earnings attributable to noncontrolling interest | 5 |
| | 6 |
| | 6 |
|
| Net earnings attributable to Eastman | $ | 854 |
| | $ | 848 |
| | $ | 751 |
|
| Amounts attributable to Eastman stockholders | | | | | |
| Earnings from continuing operations, net of tax | $ | 854 |
| | $ | 848 |
| | $ | 749 |
|
| Earnings from discontinued operations, net of tax | — |
| | — |
| | 2 |
|
| Net earnings attributable to Eastman | $ | 854 |
| | $ | 848 |
| | $ | 751 |
|
| Basic earnings per share attributable to Eastman | |
| | |
| | |
|
| Earnings from continuing operations | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.01 |
|
| Earnings from discontinued operations | — |
| | — |
| | 0.02 |
|
| Basic earnings per share attributable to Eastman | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.03 |
|
| Diluted earnings per share attributable to Eastman | |
| | |
| | |
|
| Earnings from continuing operations | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.95 |
|
| Earnings from discontinued operations | — |
| | — |
| | 0.02 |
|
| Diluted earnings per share attributable to Eastman | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.97 |
|
CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS (continued) |
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions, except per share amounts) | 2017 | | 2016 | | 2015 |
| Sales | $ | 9,549 |
| | $ | 9,008 |
| | $ | 9,648 |
|
| Cost of sales | 7,095 |
| | 6,658 |
| | 7,068 |
|
| Gross profit | 2,454 |
| | 2,350 |
| | 2,580 |
|
| Selling, general and administrative expenses | 699 |
| | 703 |
| | 771 |
|
| Research and development expenses | 215 |
| | 219 |
| | 242 |
|
Asset impairments and restructuring charges, net
| 8 |
| | 45 |
| | 183 |
|
| Operating earnings | 1,532 |
| | 1,383 |
| | 1,384 |
|
| Net interest expense | 241 |
| | 255 |
| | 263 |
|
| Early debt extinguishment and other related costs | — |
| | 85 |
| | — |
|
| Other (income) charges, net | 2 |
| | (6 | ) | | (8 | ) |
| Earnings before income taxes | 1,289 |
| | 1,049 |
| | 1,129 |
|
| (Benefit from) provision for income taxes | (99 | ) | | 190 |
| | 275 |
|
| Net earnings | 1,388 |
| | 859 |
| | 854 |
|
| Less: Net earnings attributable to noncontrolling interest | 4 |
| | 5 |
| | 6 |
|
| Net earnings attributable to Eastman | $ | 1,384 |
| | $ | 854 |
| | $ | 848 |
|
| | | | | | |
| Basic earnings per share attributable to Eastman | $ | 9.56 |
| | $ | 5.80 |
| | $ | 5.71 |
|
| Diluted earnings per share attributable to Eastman | $ | 9.47 |
| | $ | 5.75 |
| | $ | 5.66 |
|
| | | | For years ended December 31, | |
| (Dollars in millions, except per share amounts) | 2016 | | 2015 | | 2014 | |
| Comprehensive Income | | | | | | | | | | |
| Net earnings including noncontrolling interest | $ | 859 |
| | $ | 854 |
| | $ | 757 |
| $ | 1,388 |
| | $ | 859 |
| | $ | 854 |
|
| Other comprehensive income (loss), net of tax | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in cumulative translation adjustment | (97 | ) | | (216 | ) | | (201 | ) | 85 |
| | (97 | ) | | (216 | ) |
| Defined benefit pension and other postretirement benefit plans: | | | | | | | | | | |
| Prior service credit arising during the period | 64 |
| | 87 |
| | — |
| — |
| | 64 |
| | 87 |
|
| Amortization of unrecognized prior service credits included in net periodic costs | (30 | ) | | (19 | ) | | (17 | ) | (27 | ) | | (30 | ) | | (19 | ) |
| Derivatives and hedging: | | | | | | | | | | |
| Unrealized gain (loss) during period | 93 |
| | (48 | ) | | (230 | ) | 7 |
| | 93 |
| | (48 | ) |
| Reclassification adjustment for losses included in net income, net | 79 |
| | 83 |
| | — |
| 7 |
| | 79 |
| | 83 |
|
| Total other comprehensive income (loss), net of tax | 109 |
| | (113 | ) | | (448 | ) | 72 |
| | 109 |
| | (113 | ) |
| Comprehensive income including noncontrolling interest | 968 |
| | 741 |
| | 309 |
| 1,460 |
| | 968 |
| | 741 |
|
| Comprehensive income attributable to noncontrolling interest | 5 |
| | 6 |
| | 6 |
| |
| Less: Comprehensive income attributable to noncontrolling interest | | 4 |
| | 5 |
| | 6 |
|
| Comprehensive income attributable to Eastman | $ | 963 |
| | $ | 735 |
| | $ | 303 |
| $ | 1,456 |
| | $ | 963 |
| | $ | 735 |
|
| Retained Earnings | | | | | | | | | | |
| Retained earnings at beginning of period | $ | 5,146 |
| | $ | 4,545 |
| | $ | 4,012 |
| $ | 5,721 |
| | $ | 5,146 |
| | $ | 4,545 |
|
| Net earnings attributable to Eastman | 854 |
| | 848 |
| | 751 |
| 1,384 |
| | 854 |
| | 848 |
|
| Cash dividends declared | (279 | ) | | (247 | ) | | (218 | ) | (303 | ) | | (279 | ) | | (247 | ) |
| Retained earnings at end of period | $ | 5,721 |
| | $ | 5,146 |
| | $ | 4,545 |
| $ | 6,802 |
| | $ | 5,721 |
| | $ | 5,146 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| | | | December 31, | | December 31, | December 31, | | December 31, |
| (Dollars in millions, except per share amounts) | 2016 | | 2015 | 2017 | | 2016 |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | $ | 181 |
| | $ | 293 |
| $ | 191 |
| | $ | 181 |
|
| Trade receivables, net of allowance for doubtful accounts | 812 |
| | 792 |
| 1,026 |
| | 812 |
|
| Miscellaneous receivables | 399 |
| | 246 |
| 360 |
| | 399 |
|
| Inventories | 1,404 |
| | 1,479 |
| 1,509 |
| | 1,404 |
|
| Other current assets | 70 |
| | 68 |
| 57 |
| | 70 |
|
| Total current assets | 2,866 |
| | 2,878 |
| 3,143 |
| | 2,866 |
|
| Properties | | | | | | |
| Properties and equipment at cost | 11,699 |
| | 11,234 |
| 12,370 |
| | 11,699 |
|
| Less: Accumulated depreciation | 6,423 |
| | 6,104 |
| 6,763 |
| | 6,423 |
|
| Net properties | 5,276 |
| | 5,130 |
| 5,607 |
| | 5,276 |
|
| Goodwill | 4,461 |
| | 4,518 |
| 4,527 |
| | 4,461 |
|
| Intangible assets, net of accumulated amortization | 2,469 |
| | 2,650 |
| 2,373 |
| | 2,479 |
|
| Other noncurrent assets | 385 |
| | 404 |
| 349 |
| | 375 |
|
| Total assets | $ | 15,457 |
| | $ | 15,580 |
| $ | 15,999 |
| | $ | 15,457 |
|
| Liabilities and Stockholders' Equity | | | | | | |
| Current liabilities | | | | | | |
| Payables and other current liabilities | $ | 1,512 |
| | $ | 1,625 |
| $ | 1,589 |
| | $ | 1,512 |
|
| Borrowings due within one year | 283 |
| | 431 |
| 393 |
| | 283 |
|
| Total current liabilities | 1,795 |
| | 2,056 |
| 1,982 |
| | 1,795 |
|
| Long-term borrowings | 6,311 |
| | 6,577 |
| 6,147 |
| | 6,311 |
|
| Deferred income tax liabilities | 1,206 |
| | 928 |
| 893 |
| | 1,206 |
|
| Post-employment obligations | 1,018 |
| | 1,297 |
| 963 |
| | 1,018 |
|
| Other long-term liabilities | 519 |
| | 701 |
| 534 |
| | 519 |
|
| Total liabilities | 10,849 |
| | 11,559 |
| 10,519 |
| | 10,849 |
|
| Commitments and contingencies (Note 12) | | | | |
| Commitments and contingencies (Note 11) | | | | |
| Stockholders' equity | | | | | | |
| Common stock ($0.01 par value per share – 350,000,000 shares authorized; shares issued – 217,707,600 and 216,899,964 for 2016 and 2015, respectively) | 2 |
| | 2 |
| |
| Common stock ($0.01 par value per share – 350,000,000 shares authorized; shares issued – 218,369,992 and 217,707,600 for 2017 and 2016, respectively) | | 2 |
| | 2 |
|
| Additional paid-in capital | 1,915 |
| | 1,863 |
| 1,983 |
| | 1,915 |
|
| Retained earnings | 5,721 |
| | 5,146 |
| 6,802 |
| | 5,721 |
|
| Accumulated other comprehensive loss | (281 | ) | | (390 | ) | (209 | ) | | (281 | ) |
| | 7,357 |
| | 6,621 |
| 8,578 |
| | 7,357 |
|
| Less: Treasury stock at cost (71,269,474 shares for 2016 and 69,137,973 shares for 2015) | 2,825 |
| | 2,680 |
| |
| Less: Treasury stock at cost (75,454,111 shares for 2017 and 71,269,474 shares for 2016) | | 3,175 |
| | 2,825 |
|
| Total Eastman stockholders' equity | 4,532 |
| | 3,941 |
| 5,403 |
| | 4,532 |
|
| Noncontrolling interest | 76 |
| | 80 |
| 77 |
| | 76 |
|
| Total equity | 4,608 |
| | 4,021 |
| 5,480 |
| | 4,608 |
|
| Total liabilities and stockholders' equity | $ | 15,457 |
| | $ | 15,580 |
| $ | 15,999 |
| | $ | 15,457 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 |
| 2015 |
| 2014 | 2017 |
| 2016 |
| 2015 |
| Operating activities | | | | | | | | | | |
| Net earnings | $ | 859 |
| | $ | 854 |
| | $ | 757 |
| $ | 1,388 |
| | $ | 859 |
| | $ | 854 |
|
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 580 |
| | 571 |
| | 450 |
| 587 |
| | 580 |
| | 571 |
|
| Mark-to-market loss on pension and other postretirement benefit plans | 97 |
| | 115 |
| | 304 |
| |
| Mark-to-market pension and other postretirement benefit plans (gain) loss, net | | (21 | ) | | 97 |
| | 115 |
|
| Asset impairment charges | 9 |
| | 107 |
| | 52 |
| 1 |
| | 9 |
| | 107 |
|
| Early debt extinguishment and other related costs | 85 |
| | — |
| | — |
| — |
| | 85 |
| | — |
|
| Gains on sale of assets | (17 | ) | | — |
| | (5 | ) | |
| Provision for deferred income taxes | 177 |
| | 107 |
| | 99 |
| |
| Gains from sale of businesses | | (3 | ) | | (17 | ) | | — |
|
| (Benefit from) provision for deferred income taxes | | (394 | ) | | 177 |
| | 107 |
|
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | | | | | | |
| (Increase) decrease in trade receivables | (29 | ) | | 114 |
| | 19 |
| (53 | ) | | (29 | ) | | 114 |
|
| (Increase) decrease in inventories | 54 |
| | (26 | ) | | (61 | ) | (71 | ) | | 54 |
| | (26 | ) |
| Increase (decrease) in trade payables | 7 |
| | (102 | ) | | (30 | ) | 123 |
| | 7 |
| | (102 | ) |
| Pension and other postretirement contributions in excess of expenses | (329 | ) | | (217 | ) | | (176 | ) | (115 | ) | | (329 | ) | | (217 | ) |
| Variable compensation less than expenses | 17 |
| | 71 |
| | 27 |
| 71 |
| | 17 |
| | 71 |
|
| Other items, net | (125 | ) | | 30 |
| | (3 | ) | 144 |
| | (125 | ) | | 30 |
|
| Net cash provided by operating activities | 1,385 |
|
| 1,624 |
|
| 1,433 |
| 1,657 |
|
| 1,385 |
|
| 1,624 |
|
| Investing activities | | | | | | | | | | |
| Additions to properties and equipment | (626 | ) | | (652 | ) | | (593 | ) | (649 | ) | | (626 | ) | | (652 | ) |
| Proceeds from sale of assets | 41 |
| | 4 |
| | 13 |
| |
| Proceeds from sale of businesses and assets | | 14 |
| | 41 |
| | 4 |
|
| Acquisitions, net of cash acquired | (26 | ) | | (45 | ) | | (3,509 | ) | (4 | ) | | (26 | ) | | (45 | ) |
| Other items, net | (44 | ) | | — |
| | (2 | ) | (4 | ) | | (44 | ) | | — |
|
| Net cash used in investing activities | (655 | ) |
| (693 | ) |
| (4,091 | ) | (643 | ) |
| (655 | ) |
| (693 | ) |
| Financing activities | | | | | | | | | | |
| Net increase (decrease) in commercial paper and other borrowings | (150 | ) | | 195 |
| | (190 | ) | (19 | ) | | (150 | ) | | 195 |
|
| Proceeds from borrowings | 1,848 |
| | 250 |
| | 3,565 |
| 675 |
| | 1,848 |
| | 250 |
|
| Repayment of borrowings | (2,126 | ) | | (950 | ) | | (125 | ) | (1,025 | ) | | (2,126 | ) | | (950 | ) |
| Dividends paid to stockholders | (272 | ) | | (238 | ) | | (210 | ) | (296 | ) | | (272 | ) | | (238 | ) |
| Treasury stock purchases | (145 | ) | | (103 | ) | | (410 | ) | (350 | ) | | (145 | ) | | (103 | ) |
| Dividends paid to noncontrolling interests | (8 | ) | | (6 | ) | | (9 | ) | (7 | ) | | (8 | ) | | (6 | ) |
| Proceeds from stock option exercises and other items, net | 15 |
| | 8 |
| | 18 |
| 16 |
| | 15 |
| | 8 |
|
| Net cash (used in) provided by financing activities | (838 | ) |
| (844 | ) |
| 2,639 |
| |
| Net cash used in financing activities | | (1,006 | ) |
| (838 | ) |
| (844 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (4 | ) |
| (8 | ) |
| (4 | ) | 2 |
|
| (4 | ) |
| (8 | ) |
| Net change in cash and cash equivalents | (112 | ) | | 79 |
| | (23 | ) | 10 |
| | (112 | ) | | 79 |
|
| Cash and cash equivalents at beginning of period | 293 |
| | 214 |
| | 237 |
| 181 |
| | 293 |
| | 214 |
|
| Cash and cash equivalents at end of period | $ | 181 |
|
| $ | 293 |
|
| $ | 214 |
| $ | 191 |
|
| $ | 181 |
|
| $ | 293 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
Financial Statement Presentation
The consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company") and subsidiaries are prepared in conformity with accounting principles generally accepted ("GAAP") in the United States and of necessity include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The consolidated financial statements include assets, liabilities, sales revenue, and expenses of all majority-owned subsidiaries and joint ventures in which a controlling interest is maintained. Eastman accounts for other joint ventures and investments in minority-owned companies where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the Consolidated Financial Statements and accompanying footnotes to conform to current period presentation. Results for 2016 include a $47 million correction of prior periods' cumulative foreign currency translation adjustment related to the Solutia Inc. ("Solutia") and Taminco Corporation ("Taminco") acquisitions. See Note 5, "Goodwill and Other Intangible Assets" and Note 15, "Stockholders' Equity".
In April 2015, the Financial Accounting Standards Board ("FASB") issued new guidance for debt issuance costs as a part of the simplification initiative. Under this guidance, debt issuance costs are to be presented as a direct reduction from the carrying amount of the debt liability, consistent with the presentation of debt discounts. The amortization of debt issuance costs will be reported as interest expense. The recognition and measurement guidance for debt issuance costs is not affected by the guidance. Beginning March 31, 2016, the new guidance was applied on a retrospective basis which resulted in a reclassification of $31 million from "Other noncurrent assets" to "Long-term borrowings" in the Unaudited Consolidated Statements of Financial Position at December 31, 2015. See Note 9, "Borrowings".
In January 2016, Eastman changed its organizational and management structure following completion of the integration of recently acquired businesses to better align similar strategies and business models. As a result, beginning first quarter 2016, the Company'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 further information, see Note 5, "Goodwill and Other Intangible Assets" and Note 20, "Segment Information".
Information related to the Commonwealth Laminating and Coating, Inc. acquisition completed on December 11, 2014, the Taminco acquisition completed on December 5, 2014, the Knowlton Technologies, LLC acquisition completed on August 6, 2014, and the BP plc Global Aviation Turbine Engine Oil Business acquisition completed on June 2, 2014 is in Note 2, "Acquisitions". As of the date of acquisition, results of the acquired businesses are included in Eastman results.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, and readily marketable securities with original maturities of three months or less.
Fair Value Measurements
The CompanyEastman records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The CompanyEastman maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances are based on the number of days an individual receivable is delinquent and management's regular assessment of the financial condition of the Company's customers. The Company considers a receivable delinquent if it is unpaid after the terms of the related invoice have expired. The Company evaluates the allowance based on a monthly assessment of the aged receivables. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accounts was $10$12 million and $13$10 million at December 31, 20162017 and 2015,2016, respectively. The Company does not enter into receivables of a long-term nature, also known as financing receivables, in the normal course of business.
Inventories
Inventories are valued at the lower of cost or market. The CompanyEastman determines the cost of most raw materials, work in process, and finished goods inventories in the United States and Switzerland by the last-in, first-out ("LIFO") method. The cost of all other inventories is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method. The Company writes-down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Properties
The CompanyEastman records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition into earnings. Asset impairments are reflected as increases in accumulated depreciation for properties that have been placed in service. In instances when an asset has not been placed in service and is impaired, the associated costs are removed from the appropriate property accounts.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization
Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method. Estimated useful lives for buildings and building equipment generally range from 20 to 50 years. Estimated useful lives generally ranging from 3 to 33 years are applied to machinery and equipment in the following categories: computer software (3 to 5 years); office furniture and fixtures and computer equipment (5 to 10 years); vehicles, railcars, and general machinery and equipment (5 to 20 years); and manufacturing-related improvements (20 to 33 years). Accelerated depreciation is reported when the estimated useful life is shortened and continues to be reported in cost of sales.
Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset.
For additional information, see Note 5,4, "Goodwill and Other Intangible Assets".
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by the CompanyEastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is either salvage value determined throughthe price that would be received to sell an asset in an orderly transaction between market analysis or alternative future use.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
participants.
Goodwill
The CompanyEastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 20162017 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate and a projected long-term growth rate. The Company believes these assumptions are consistent with those of 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 determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. 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.
If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including an allocationa valuation of the estimated fair value toof the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Indefinite-lived Intangible Assets
The CompanyEastman 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 assetsasset 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, primarily consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of the tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
Investments
The consolidated financial statements include the accounts of the CompanyEastman and all its subsidiaries and entities or joint ventures in which a controlling interest is maintained.
Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Under the equity method of accounting, these investments are included in other noncurrent assets. The Company includes its share of earnings and losses of such investments in other"Other (income) charges, net,net", and its share of "Other comprehensive income (loss), net of tax" ("OCI") located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and in the appropriate component of Accumulated"Accumulated other comprehensive income (loss)" ("AOCI") located in the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pension and Other Postretirement Benefits
The CompanyEastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Additionally,Under its other postretirement benefit plans in the U.S., Eastman provides a subsidy toward life insurance health care, and dental benefits for eligible retirees hired prior to January 1, 2007, and2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for retirees' eligible survivors.Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits reflect the Company's assumptions related to general economic conditions (particularly interest rates),discount rates, expected return on plan assets, rate of compensation increase or decrease for employees, and health care cost trends. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
Eastman's pension and other postretirement benefit plans costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) mark-to-market ("MTM") gains and losses recognized annually, in the fourth quarter of each year, primarily resulting from changes in actuarial assumptions for discount rates and the differences between actual and expected returns on plan assets. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized as an MTM adjustment in the quarter in which such remeasurement event occurs.
For additional information, see Note 11,10, "Retirement Plans".
Environmental Costs
The CompanyEastman accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum undiscounted amount. This undiscounted accrued amount reflects liabilities expected to be paid out within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged into earnings over the estimated useful life of the assets. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, the expenses charged to earnings will be impacted. The Company also monitors conditional obligations and recognizes loss contingencies associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs.
The current portion of accruals for environmental liabilities is included in payables and other current liabilities and the long-term portion is included in other long-term liabilities. These accruals exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred.
For additional information see Note 13,12, "Environmental Matters and Asset Retirement Obligations".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Derivative and Non-Derivative Financial Instruments
The Company is exposedEastman uses derivative and non-derivative instruments to manage its exposure to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments when appropriate. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
In relationCounterparties to foreign currency exchange rate risk, from time to time,the derivative contracts are highly rated financial institutions which the Company may enter into currency option and forward contracts to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies (principally the eurobelieves carry minimal risk of nonperformance, and the Japanese yen);Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. Additionally,credit losses. The Company monitors the Company may enter into derivative or non-derivative net investment hedges to hedge the foreign currency exposurecreditworthiness of its net investments in certain foreign operations.
In relation to commodity price risk, from time to time, the Company may enter into option and forward commodity contracts to hedge probable costs or sales of certain raw material and energy sources used by the Company. These commodity and energy sources are primarily related to propane, ethane, natural gas, paraxylene, ethylene, and benzene. The Company currently hedges commodity price risks using derivative financial instruments within a rolling three year period beyond its current fiscal year. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.
In relation to interest rate risk, from time to time, the Company may enter into interest rate derivative instruments to assist in managing interest expense using a mix of fixed and variable rate debt. These interest rate derivative instruments include primarily cash flow forward starting interest rate swaps, cash flow Treasury locks, and fair value fixed-to-floating swaps.counterparties on an on-going basis.
The Company's qualifying derivative contracts are accounted for as hedges because the derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and measured at fair value. For qualifying derivatives designated and demonstrated to beas cash flow hedges, the effective as hedgesportion of the underlying risks. Gains and losses resulting from effective hedges of existing liabilities, firm commitments, or anticipated transactions are deferred and recognized whenchanges in the offsetting gains and losses are recognized on the related hedged items andfair value are reported as a component of operatingAOCI in the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. Derivative assets and liabilities are recorded atFor qualifying derivatives designated as fair value.
Thevalue hedges, the effective portion of the gain or losschanges in the fair value are reported as "Long-term borrowings" on the non-derivativeConsolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying non-derivatives designated as net investment hedges, the effective portion of the changes in fair value are reported as a component oftranslation adjustment in the "Change in cumulative translation adjustment" ("CTA") within OCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Gains and losses representing either hedge ineffectiveness orThe ineffective portion of hedges, hedge components excluded from the assessment of effectiveness, are recognizedand changes in current earnings.
The gains or losses onthe fair value of nonqualifying derivatives or derivatives that are not designated as hedges, are marked to market and immediately recorded into earningsrecognized in current earnings. Hedge accounting will be discontinued prospectively for all hedges that no longer qualify for hedge accounting treatment. Cash flows from continuing operations.
Deferred option premiumsderivative instruments designated as hedges are includedreported in the fair market value ofsame category as the hedges. The related obligation for payment is generally included in other liabilities and is paid incash flows from the period in which the options are exercised or expire.items being hedged.
For additional information, see Note 10,9, "Derivative and Non-Derivative Financial Instruments".
Litigation and Contingent Liabilities
The CompanyEastman and its operations from time to time are, and in the future, may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Customer Incentives
The CompanyEastman recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. Revenue for products is recognized when title and risk of loss transfer to the customer.
The Company records estimated obligations for customer programs and incentive offerings, which consist primarily of revenue or volume-based amounts that a customer must achieve over a specified period of time, as a reduction of revenue from each underlying revenue transaction as the customer progresses toward goals specified in incentive agreements. These estimates are based on a combination of forecasts of customer sales and actual sales volume and revenues against established goals, the customer's current level of purchases, Eastman's knowledge of customer purchasing habits, and industry pricing practice. The incentive payment rate may be variable, based upon the customer reaching higher sales volume or revenuepurchasing levels over a specified period of time in order to receive an agreed upon incentive payment.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are billed to customers and are recorded as sales revenue. Shipping and handling costs incurred are recorded in cost of sales.
Restructuring of Operations
The CompanyEastman records restructuring charges for costs incurred in connection with consolidation of operations, exited business or product lines, or shutdowns of specific sites that are expected to be substantially completed within twelve months. These restructuring charges are recorded as incurred, and are associated with site closures, legal and environmental matters, demolition, contract terminations, obsolete inventory, or other costs and charges directly related to the restructuring. The Company records severance charges for employee separations when the separation is probable and reasonably estimable. In the event employees are required to perform future service, the Company records severance charges ratably over the remaining service period of those employees. For additional information, see Note 15, "Asset Impairments and Restructuring Charges, Net".
Share-based Compensation
The CompanyEastman recognizes compensation expense in the financial statements for stock options and other share-based compensation awards based upon the grant-date fair value over the substantive vesting period. For additional information, see Note 18,17, "Share-Based Compensation Plans and Awards" and Note 23, "Recently Issued Accounting Standards".
Research and Development
All costs identified as research and development ("R&D") costs are charged to expense when incurred with the exception of third-party reimbursed and government-funded R&D. Expenses for third-party reimbursed and government-funded R&D are deferred until reimbursement is received to ensure appropriate matching of revenue and expense, provided specific criteria are met.
Income Taxes
The (benefit from) provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The (benefit from) provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company'sEastman's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely reinvested.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Acquisition Accounting
In general, the acquisition method of accounting requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. For assets and liabilities other than intangible assets and property, plant, and equipment, the Company estimates fair value using the exit price approach which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly market. An exit price is determined from the viewpoint of unrelated market participants as a whole, in the principal or most advantageous market, and may result in the Company valuing assets or liabilities at a fair value that is not reflective of the Company's intended use of the assets or liabilities. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired or liabilities assumed is recorded in the line item goodwill on the Company's consolidated balance sheets.
For intangible assets, the Company uses the income, market, or cost approach (or a combination thereof) for the valuation as appropriate, and uses valuation inputs in these models and analyses that are based on market participant assumptions. Management values property, plant, and equipment using the cost approach supported where available by observable market data which includes consideration of obsolescence. See Note 2, "Acquisitions". Management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, as well as asset lives for property, plant, and equipment and amortization periods for intangible assets, and can materially affect the Company's results of operations.
Taminco Corporation
On December 5, 2014, the Company completed its acquisition of the Taminco Corporation ("Taminco"), a global specialty chemical company. In the acquisition, each outstanding share of Taminco common stock was cancelled and converted automatically into the right to receive $26.00 in cash ("Acquisition Consideration"). Additionally, each outstanding option to acquire shares of Taminco common stock issued under any of Taminco's equity incentive plans, whether or not then vested, was converted into the right to receive, in cash and for each share of Taminco common stock subject to such option, the amount by which the value of the Acquisition Consideration exceeded such option's exercise price. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Taminco's debt of $1.1 billion. The acquisition was accounted for as a business combination. Taminco's former specialty amines and crop protection businesses are now operated as part of the AFP segment and its former functional amines business is now operated as part of the CI segment. The businesses acquired from Taminco are providing additional opportunities for growth to Eastman in agriculture, personal care, coatings, and oil and gas markets.
The funding of the cash portion of the purchase price, repayment of Taminco's debt, and acquisition costs were provided primarily from borrowings, including the $2.0 billion net proceeds from the public offering of notes on November 20, 2014 and borrowings of $1.0 billion on December 5, 2014 under a five-year term loan agreement ("2019 Term Loan"). See Note 9, "Borrowings".
The following table summarizes the final purchase price allocation for the Taminco acquisition:
|
| | | | | | | | | | | |
| Assets acquired and liabilities assumed | | | | | |
| (Dollars in millions) | As of December 5, 2014 | | 2015 Net Adjustments to Fair Value | | December 31, 2015 |
| Current assets | $ | 266 |
| | $ | 1 |
| | $ | 267 |
|
| Properties and equipment | 658 |
| | 3 |
| | 661 |
|
| Intangible assets | 1,002 |
| | (17 | ) | | 985 |
|
| Other noncurrent assets | 37 |
| | 5 |
| | 42 |
|
| Goodwill | 1,509 |
| | 46 |
| | 1,555 |
|
| Current liabilities | (161 | ) | | 4 |
| | (157 | ) |
| Long-term liabilities | (546 | ) | | (42 | ) | | (588 | ) |
| Total purchase price, net of cash acquired | $ | 2,765 |
| | $ | — |
| | $ | 2,765 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company used the income, market, or cost approach (or a combination thereof) for the valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Eastman in the principal or most advantageous market for the asset or liability. For certain items, the carrying value was determined to be a reasonable approximation of fair value based on information available to Eastman management. Current assets consist primarily of inventory, cash, and trade receivables. The fair value and gross contractual amounts trade receivables acquired from Taminco on December 5, 2014 was $94 million. Properties acquired included a number of manufacturing, sales, and distribution sites and related facilities, land and leased sites that include leasehold improvements, and machinery and equipment for use in manufacturing operations. Management valued properties using the cost approach supported where available by observable market data which includes consideration of obsolescence.
Acquired intangible assets are definite-lived assets and consist primarily of customer relationships, developed technologies, and contracts. Customer relationships acquired are in industries such as agriculture and personal care. The Company has concluded that it has a favorable methanol supply contract. In addition, assets acquired include technologies related to many products protected by a number of existing patents and trade secrets. Management valued customer relationships using the excess from earnings method, contracts using the Black Scholes model, and developed technologies using the relief from royalty method. All valuation methods are forms of the income approach supported by observable market data for peer chemical companies.
|
| | | | | |
| Intangible assets acquired | | | |
| (Dollars in millions) | Fair Value | | Weighted-Average Amortization Period (Years) |
| Amortizable intangible assets | | | |
| Customer relationships | $ | 604 |
| | 24 |
| Developed technologies | 201 |
| | 17 |
| Contracts | 180 |
| | 5 |
| Total | $ | 985 |
| | |
Other noncurrent assets consist primarily of deferred tax assets and investments. In connection with the acquisition, the Company recorded goodwill, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of liabilities assumed. The goodwill is attributed primarily to Taminco as a going concern and the fair value of expected cost synergies and revenue growth from combining the Eastman and Taminco businesses. The going concern element represents the ability to earn a higher return on the combined assembled collection of assets and businesses of Taminco than if those assets and businesses were to be acquired and managed separately. Other relevant elements of goodwill are the benefits of access to certain markets and work force. Goodwill from the Taminco acquisition has been allocated to certain of the Company's operating segments as set out in the table below. None of the goodwill is deductible for tax purposes.
|
| | | |
Goodwill by segment
| |
| (Dollars in millions) | |
| Additives & Functional Products | $ | 916 |
|
| Chemical Intermediates | 639 |
|
| Total | $ | 1,555 |
|
Current liabilities consist primarily of trade payables, deferred tax liabilities, and accrued charges. Long-term liabilities are primarily deferred tax liabilities, pension and other postretirement welfare plan obligations, and asset retirement liabilities. Management also evaluated probable loss contingencies, including those for legal, asset retirement, and environmental matters, as prescribed under GAAP. Due to the lack of observable market inputs, assumed liabilities for asset retirement and environmental loss contingencies that were both probable and estimable were recorded based upon estimates of future cash outflows for such contingencies as of the acquisition date. See Note 13, "Environmental Matters and Asset Retirement Obligations".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In 2015 and 2014, the Company recognized $3 million and $14 million, respectively, in transaction costs, and $15 million and $1 million, respectively, in integration costs. In 2014 the Company recognized $13 million in pre-close financing costs related to the acquisition. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item and pre-close financing costs are included in the "Other (income) charges, net" and "Net interest expense" line items in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. These inventories were sold in 2014 resulting in a $15 million increase in cost of sales.
Beginning December 2014, the Company's consolidated results of operations included the results of the acquired Taminco businesses. Sales revenue of $84 million and an operating loss of $9 million from the acquired Taminco businesses were included in the Company's consolidated results of operations for 2014. The operating loss includes the additional costs of acquired inventories, transaction costs, integration costs, and pre-close financing costs.
The unaudited pro forma financial results for the years ended December 31, 2014 and 2013 combine the consolidated results of Eastman and Taminco giving effect to the acquisition of Taminco as if it had been completed on January 1, 2013, the beginning of the comparable annual reporting period prior to the year of acquisition. Such unaudited pro forma financial results do not give pro forma effect to any other transaction or event. The unaudited pro forma financial results presented below do not include any anticipated synergies or other expected benefits of the acquisition. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2013 or any other date.
The unaudited pro forma financial results include certain adjustments for additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Taminco depreciable fixed assets and definite-life amortizable assets acquired in the transaction. The unaudited pro forma results also include adjustments to net interest expense. The provision for income taxes from continuing operations also has been adjusted for all periods, based upon the foregoing adjustments to historical results.
|
| | | | | | | |
| | Years Ended December 31, |
| (Unaudited, dollars in millions) | 2014 | | 2013 |
| Pro forma sales | $ | 10,819 |
| | $ | 10,550 |
|
| Pro forma earnings from continuing operations | 834 |
| | 1,101 |
|
Unaudited pro forma earnings from continuing operations for 2013 have been adjusted to include certain items, such as pre-close financing, integration, and transaction costs historically recorded by Eastman and Taminco in 2014 and directly attributable to the acquisition, which will not have an ongoing impact. Additionally, the unaudited pro forma financial results for 2013 have been adjusted to reflect the additional costs of acquired inventories. These non-recurring costs have been eliminated from unaudited pro forma earnings from continuing operations for 2014.
Commonwealth Laminating and Coating, Inc.
On December 11, 2014, the Company acquired Commonwealth Laminating and Coating, Inc. ("Commonwealth") for a total cash purchase price of $438 million. The acquisition was accounted for as a business combination and is reported in the AM segment. The acquisition of Commonwealth strengthens the Company's window film product portfolio, adds industry leading protective film technology, and increases scale cost efficiencies. There was no change to the final purchase price allocation from the preliminary allocation in the Company's 2014 Annual Report on Form 10-K, see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the final purchase price allocation for the Commonwealth acquisition: |
| | | |
| Assets acquired and liabilities assumed | |
| (Dollars in millions) | As of December 11, 2014 |
| Current assets | $ | 51 |
|
| Machinery and equipment | 38 |
|
| Goodwill | 274 |
|
| Intangible assets | 125 |
|
| Long-term liabilities | (50 | ) |
| Total purchase price | $ | 438 |
|
Current assets consist primarily of inventory acquired. Machinery and equipment acquired included a manufacturing operation in Martinsville, Virginia. Management valued machinery and equipment using the cost approach supported by published industry sources.
Acquired intangible assets included customer relationships and developed technologies in the window film industry. Also acquired was the SunTek® brand name that is business-to-business in nature. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.
|
| | | | | |
| Intangible assets acquired | | | |
| (Dollars in millions) | Fair Value | | Weighted-Average Amortization Period (Years) |
| Amortizable intangible assets | | | |
| Customer relationships | $ | 72 |
| | 14 |
| Developed technologies | 41 |
| | 18 |
| Indefinite-lived intangible asset | | | |
| Brand name | 12 |
| | |
| Total | $ | 125 |
| | |
In connection with this acquisition, the Company recorded goodwill equal to the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. None of the goodwill is deductible for tax purposes.
In 2014, the Company recognized $5 million in transaction costs. In 2015 and 2014, the Company recognized $7 million and $2 million, respectively, in integration costs. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. In 2015, the remaining portion of these inventories was sold resulting in an increase in cost of sales of $7 million. Approximately one fifth of these inventories were sold in December 2014 resulting in a $1 million increase in cost of sales.
Beginning in December 2014, the Company's consolidated results of operations included the results of Commonwealth. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.
BP plc's Global Aviation Turbine Engine Oil Business
On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and is reported in the AFP segment. In combination with Eastman's Skydrol® aviation hydraulic fluids business, the acquired aviation turbine oil business enables Eastman to better supply the global aviation industry.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
There was no change to the final purchase price allocation from the preliminary allocation in the Company's 2014 Annual Report on Form 10-K, see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
The following table summarizes the final purchase price allocation for the aviation turbine oil business acquisition:
|
| | | | |
| Assets acquired and liabilities assumed | | |
| (Dollars in millions) | | As of June 2, 2014 |
| Current assets | | $ | 42 |
|
| Machinery and equipment | | 10 |
|
| Goodwill | | 92 |
|
| Intangible assets | | 139 |
|
| Total purchase price | | $ | 283 |
|
Current assets consist primarily of inventory acquired. Machinery and equipment acquired included manufacturing operations in Linden, New Jersey and technology resources in Naperville, Illinois. Management valued machinery and equipment using the cost approach supported by published industry sources.
In connection with this acquisition, the Company recorded goodwill equal to the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. All goodwill is expected to be deductible for tax purposes.
Intangible assets acquired included brands that are business-to-business in nature. Also acquired were customer relationships in the aviation industry. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.
|
| | | | | |
| Intangible Assets acquired | | | |
| (Dollars in millions) | Fair Value | | Weighted-Average Amortization Period (Years) |
| Amortizable intangible assets | | | |
| Brands | $ | 74 |
| | 30 |
| Customer relationships | 65 |
| | 16 |
| Total | $ | 139 |
| | |
In 2014, the Company recognized $3 million in transaction costs. In 2015 and 2014, the Company recognized $1 million and $3 million, respectively, in integration costs. Transaction costs and integration costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Earnings, Comprehensive Income, and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. These inventories were sold in 2014 resulting in an $8 million increase in cost of sales.
Beginning in June 2014, the Company's consolidated results of operations included the results of the acquired aviation turbine oil business. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Knowlton Technologies, LLC
On August 6, 2014, the Company acquired Knowlton Technologies, LLC. ("Knowlton"), a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs, for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the Eastman microfiber technology platform, the financial results of which are not identifiable to an operating segment and included in "Other". Current assets consisted primarily of $14 million in accounts receivable and inventory acquired. Management valued properties and equipment, totaling $19 million, using the cost approach supported where available by observable market data which includes consideration of obsolescence. Goodwill of $7 million, which represents the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed, is expected to be deductible for tax purposes. Acquired intangible assets of $6 million consist primarily of developed technologies with an amortization period of 15 years. Management valued intangible assets using the relief from royalty method, a form of the income approach supported by observable market data from peer chemical companies. Current liabilities of $4 million consisted primarily of accounts payable. Values assigned were finalized in 2014.
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| | | | | | | |
| Finished goods | $ | 997 |
| | $ | 1,063 |
| $ | 1,114 |
| | $ | 997 |
|
| Work in process | 198 |
| | 212 |
| 213 |
| | 198 |
|
| Raw materials and supplies | 473 |
| | 500 |
| 470 |
| | 473 |
|
| Total inventories at FIFO or average cost | 1,668 |
| | 1,775 |
| 1,797 |
| | 1,668 |
|
| Less: LIFO reserve | 264 |
| | 296 |
| 288 |
| | 264 |
|
| Total inventories | $ | 1,404 |
| | $ | 1,479 |
| $ | 1,509 |
| | $ | 1,404 |
|
Inventories valued on the LIFO method were approximately 60 percent of total inventories at both December 31, 20162017 and 2015.2016.
| |
4.3. | PROPERTIES AND ACCUMULATED DEPRECIATION |
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| Properties | | | | | | |
| Land | $ | 157 |
| | $ | 163 |
| $ | 161 |
| | $ | 157 |
|
| Buildings and building equipment | 1,256 |
| | 1,148 |
| |
| Buildings | | 1,325 |
| | 1,256 |
|
| Machinery and equipment | 9,646 |
| | 9,333 |
| 10,122 |
| | 9,646 |
|
| Construction in progress | 640 |
| | 590 |
| 762 |
| | 640 |
|
| Properties and equipment at cost | $ | 11,699 |
| | $ | 11,234 |
| $ | 12,370 |
| | $ | 11,699 |
|
| Less: Accumulated depreciation | 6,423 |
| | 6,104 |
| 6,763 |
| | 6,423 |
|
| Net properties | $ | 5,276 |
| | $ | 5,130 |
| $ | 5,607 |
| | $ | 5,276 |
|
Depreciation expense was $420 million, $412 million, and $402 million and $355 million for 2017, 2016, 2015, and 20142015, respectively.
Cumulative construction-period interest of $169$111 million and $163$169 million, reduced by accumulated depreciation of $111$49 million and $107$111 million, is included in net properties at December 31, 20162017 and 2015,2016, respectively.
The CompanyEastman capitalized $8 million of interest in 2017 and $7 million of interest in each yearboth 2016 2015, and 2014.2015.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
5.4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
In first quarter 2016, as a result of the changes in Eastman's organizational and management structure, goodwill was reassigned to operating segments using a relative fair value allocation. In conjunction with the organizational changes, during first quarter 2016 Eastman performed an impairment assessment and concluded that no indication of an impairment existed. For further information on the organizational changes, see Note 1, "Significant Accounting Policies", and Note 20, "Segment Information".
Changes in the carrying amount of goodwill follow:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Additives & Functional Products | | Adhesives & Plasticizers | | Advanced Materials | | Chemical Intermediates | | Other Segments | | Total |
| Balance at December 31, 2014 | $ | 1,858 |
| | $ | 118 |
| | $ | 1,297 |
| | $ | 1,200 |
| | $ | 13 |
| | $ | 4,486 |
|
| Impairments | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
| Adjustments resulting from the finalization of fair values related to the Taminco acquisition | 8 |
| | — |
| | — |
| | 38 |
| | — |
| | 46 |
|
| Currency translation adjustments and other | (1 | ) | | (7 | ) | | (4 | ) | | 1 |
| | — |
| | (11 | ) |
| Balance at December 31, 2015 | $ | 1,865 |
| | $ | 111 |
| | $ | 1,293 |
| | $ | 1,239 |
| | $ | 10 |
| | $ | 4,518 |
|
| Transfers of goodwill resulting from resegmentation | 583 |
| | (111 | ) | | — |
| | (472 | ) | | — |
| | — |
|
Currency translation adjustments (1) | (32 | ) | | — |
| | (18 | ) | | (7 | ) | | — |
| | (57 | ) |
| Balance at December 31, 2016 | $ | 2,416 |
| | $ | — |
| | $ | 1,275 |
|
| $ | 760 |
|
| $ | 10 |
|
| $ | 4,461 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Additives & Functional Products | | Adhesives & Plasticizers | | Advanced Materials | | Chemical Intermediates | | Other | | Total |
| Balance at December 31, 2015 | $ | 1,865 |
| | $ | 111 |
| | $ | 1,293 |
| | $ | 1,239 |
| | $ | 10 |
| | $ | 4,518 |
|
| Transfers of goodwill resulting from resegmentation | 583 |
| | (111 | ) | | — |
| | (472 | ) | | — |
| | — |
|
| Currency translation adjustments | (32 | ) | | — |
| | (18 | ) | | (7 | ) | | — |
| | (57 | ) |
| Balance at December 31, 2016 | 2,416 |
| | — |
| | 1,275 |
|
| 760 |
|
| 10 |
|
| 4,461 |
|
| Acquisitions | 17 |
| | — |
| | — |
| | — |
| | — |
| | 17 |
|
| Goodwill written off as a result of sale of business | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Currency translation adjustments | 27 |
| | — |
| | 14 |
| | 9 |
| | — |
| | 50 |
|
| Balance at December 31, 2017 | $ | 2,459 |
| | $ | — |
| | $ | 1,289 |
| | $ | 769 |
| | $ | 10 |
| | $ | 4,527 |
|
| |
(1)
| See Note 1, "Significant Accounting Policies", regarding correction of prior period foreign currency translation. |
As of December 31, 2017 and 2016, the reported balance of goodwill included accumulated impairment losses of $23 million, $12 million, and $14 million in the AFPAdditives & Functions Products ("AFP") segment, CI segment, and other segments, respectively. As of December 31, 2015, the reported balance of goodwill included accumulated impairment losses of $35 million and $14 million in the Adhesives & PlasticizersChemical Intermediates ("CI") segment, and other segments, respectively.
The carrying amountamounts of intangible assets follow:
| | | | | December 31, 2016 | | December 31, 2015 | | December 31, 2017 | | December 31, 2016 |
| (Dollars in millions) | Estimated Useful Life in Years | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | Estimated Useful Life in Years | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer relationships | 15 | - | 25 | $ | 1,542 |
| | $ | 267 |
| | $ | 1,275 |
| | $ | 1,547 |
| | $ | 187 |
| | $ | 1,360 |
| 8 | - | 25 | $ | 1,583 |
| | $ | 345 |
| | $ | 1,238 |
| | $ | 1,542 |
| | $ | 267 |
| | $ | 1,275 |
|
| Technology | 7 | - | 20 | 675 |
| | 196 |
| | 479 |
| | 680 |
| | 146 |
| | 534 |
| 7 | - | 20 | 690 |
| | 247 |
| | 443 |
| | 675 |
| | 196 |
| | 479 |
|
| Contracts | | 5 |
| 180 |
| | 75 |
| | 105 |
| | 180 |
| | 39 |
| | 141 |
| | 5 |
| 180 |
| | 111 |
| | 69 |
| | 180 |
| | 75 |
| | 105 |
|
| Other | 5 | - | 37 | 99 |
| | 14 |
| | 85 |
| | 99 |
| | 10 |
| | 89 |
| 5 | - | 37 | 102 |
| | 19 |
| | 83 |
| | 99 |
| | 14 |
| | 85 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Tradenames | | 525 |
| | — |
| | 525 |
| | 526 |
| | — |
| | 526 |
| | 530 |
| | — |
| | 530 |
| | 525 |
| | — |
| | 525 |
|
| Other | | | 10 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 10 |
|
| Total identified intangible assets | | $ | 3,021 |
| | $ | 552 |
| | $ | 2,469 |
| | $ | 3,032 |
| | $ | 382 |
| | $ | 2,650 |
| | $ | 3,095 |
| | $ | 722 |
| | $ | 2,373 |
| | $ | 3,031 |
| | $ | 552 |
| | $ | 2,479 |
|
Amortization expense of definite-lived intangible assets related to continuing operations was $166$164 million, $163$166 million, and $90163 million for 2017, 2016, 2015, and 2014,2015, respectively. Estimated amortization expense for future periods is $165 million in each year for 20172018 through 2019 and $125 million in each year for 2020 through 2021.2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the annual impairment testing of indefinite-lived intangible assets in 2015, the Company recognized intangible asset impairments of $18 million on tradenames. See Note 16, "Asset Impairments and Restructuring", for additional information regarding impairments of tradenames.
In June 2016, Eastman sold its 50 percent interest in Primester, a joint venture which manufactures cellulose acetate at the Company's Kingsport, Tennessee site, to an affiliate of the joint venture partner for $35 million. This investment was accounted for under the equity method. Eastman's net investment in the joint venture at the date of sale was $18 million. Such amounts were included in "Other noncurrent assets" in the Unaudited Consolidated Statements of Financial Position and the gain of $17 million was recorded in "Other (income) charges, (income), net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Eastman owns 50 percent or less interest in other joint ventures which are accounted for under the equity method and included in "Other noncurrent assets". These include a 50 percent interest in a joint venture that has a manufacturing facility in Nanjing, China. The Nanjing facility produces Eastotac® hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants. These also include a joint venture with a 50 percent interest for the manufacture of compounded cellulose diacetate ("CDA") in Shenzhen, China. CDA is a bio-derived material, which is used in various injection molded applications, including but not limited to ophthalmic frames, tool handles, and other end use products. The Company owns a 45 percent interest in a joint venture with China National Tobacco Corporation that manufactures acetate tow in Hefei, China, for which the Company supplies 100 percent of the acetate flake raw material to the joint venture from the Company's manufacturing facility in Kingsport, Tennessee. Eastman also acquired in the Taminco acquisition, a 50 percent interest in a joint venture with Mitsubishi Gas Chemical Company in Nanjing, China, which manufactures amines and amine derivatives.China. At December 31, 20162017 and 2015,2016, the Company's total investment in these joint ventures was approximately $107$95 million and $97$107 million, respectively.
| |
7.6. | PAYABLES AND OTHER CURRENT LIABILITIES |
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| Trade creditors | $ | 704 |
| | $ | 699 |
| $ | 842 |
| | $ | 704 |
|
| Accrued payrolls, vacation, and variable-incentive compensation | 196 |
| | 227 |
| 199 |
| | 196 |
|
| Accrued taxes | 106 |
| | 80 |
| 111 |
| | 106 |
|
| Post-employment obligations | 110 |
| | 120 |
| 89 |
| | 110 |
|
| Derivative hedging liability | 72 |
| | 218 |
| |
| Other | 324 |
| | 281 |
| 348 |
| | 396 |
|
| Total payables and other current liabilities | $ | 1,512 |
| | $ | 1,625 |
| $ | 1,589 |
| | $ | 1,512 |
|
The "Other" above consists primarily of accruals for other miscellaneous payables, dividends payable, interest payable, hedging liability, and the current portion of environmental liabilities.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
8.7. | PROVISION FOR INCOME TAXES |
On December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for the impacts of newly enacted tax legislation are generally required to be completed in the period of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because the enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017.
The Company recognized a $339 million estimated net tax benefit in 2017, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The net tax benefit included a $533 million benefit from the one-time revaluation of deferred tax liabilities, partially offset by a one-time transition tax on deferred foreign income of $71 million and $123 million in changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
The income tax payable for the transition tax will be paid over eight years. As of December 31, 2017, a non-current income tax payable of approximately $60 million attributable to the transition tax is reflected in “Other long term liabilities” of the Consolidated Statement of Financial Position.
As of December 31, 2017, the Company considers the accounting for the following impacts of the Tax Reform Act to be provisional and, accordingly, subject to adjustment in future periods: the transition tax on deferred foreign income (which consists of post-1986 accumulated earnings and profits of controlled foreign corporations and the determination of cash versus non-cash balances), the impact of the change in income tax rates on deferred tax assets and liabilities, and the evaluation of gross foreign tax credit carryforwards and related valuation allowances. In preparing the provisional estimates for the year ended December 31, 2017, the Company has considered notices and revenue procedures issued by the Internal Revenue Service and authoritative accounting guidance issued through February 12, 2018.
Certain of the provisional amounts will be finalized in conjunction with the filing of the Company's U.S. federal income tax return for the year ended December 31, 2017 that will not be finalized until later in 2018. While historically differences between amounts reported in the Company’s consolidated financial statements and the Company’s U.S. federal income tax return have resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in adjustments to the Company's income tax (benefit) provision when recognized. The Company also considers it likely that further technical guidance regarding certain aspects of the new provisions included in the Tax Reform Act, as well as clarity regarding state income tax conformity to current federal tax code, may be issued which could result in changes to the provisional amounts reported as of December 31, 2017 and related state income tax effects.
The Company is analyzing the future impact of the Tax Reform Act for the fiscal year beginning January 1, 2018, including the new provisions known as the base erosion anti-abuse tax (“BEAT”) and global intangible low-tax income (“GILTI”) tax, as well as other provisions. Under U.S. GAAP, companies can make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided under SAB 118.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of earnings from continuing operations before income taxes and the (benefit from) provision (benefit) for U.S. and other income taxes from continuing operations follow:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Earnings from continuing operations before income taxes | | | | | | |
| Earnings before income taxes | | | | | | |
| United States | $ | 422 |
| | $ | 618 |
| | $ | 627 |
| $ | 654 |
| | $ | 422 |
| | $ | 618 |
|
| Outside the United States | 627 |
| | 511 |
| | 363 |
| 635 |
| | 627 |
| | 511 |
|
| Total | $ | 1,049 |
| | $ | 1,129 |
| | $ | 990 |
| $ | 1,289 |
| | $ | 1,049 |
| | $ | 1,129 |
|
| Provision (benefit) for income taxes on earnings from continuing operations | |
| | |
| | |
| |
| (Benefit from) provision for income taxes | | |
| | |
| | |
|
| United States Federal | |
| | |
| | |
| |
| | |
| | |
|
| Current | $ | (80 | ) | | $ | 87 |
| | $ | 64 |
| |
Current (1) | | $ | 220 |
| | $ | (80 | ) | | $ | 87 |
|
Deferred | 214 |
| | 119 |
| | 135 |
| (383 | ) | | 214 |
| | 119 |
|
| Outside the United States | | | | | | | | | | |
| Current | 91 |
| | 59 |
| | 66 |
| 62 |
| | 91 |
| | 59 |
|
| Deferred | (18 | ) | | 16 |
| | (35 | ) | 2 |
| | (18 | ) | | 16 |
|
| State and other | | | | | | | | | | |
| Current | 2 |
| | 22 |
| | 6 |
| 13 |
| | 2 |
| | 22 |
|
| Deferred | (19 | ) | | (28 | ) | | (1 | ) | (13 | ) | | (19 | ) | | (28 | ) |
| Total | $ | 190 |
| | $ | 275 |
| | $ | 235 |
| $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| |
(1) | Includes a one-time transition tax of $71 million on deferred foreign income. |
| |
(2) | Includes one-time benefit of $517 million primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate and a one-time $72 million valuation allowance on deferred tax assets for foreign tax credit carryforwards. |
The following represents the deferred tax (benefit) charge (benefit) recorded as a component of accumulated other comprehensive lossAOCI in stockholders' equity:the Consolidated Statements of Financial Position:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Defined benefit pension and other postretirement benefit plans | $ | 21 |
| | $ | 42 |
| | $ | (11 | ) | $ | (16 | ) | | $ | 21 |
| | $ | 42 |
|
| Cumulative translation adjustment | — |
| | — |
| | — |
| |
| Derivatives and hedging | 105 |
| | 21 |
| | (141 | ) | 8 |
| | 105 |
| | 21 |
|
| Total | $ | 126 |
| | $ | 63 |
| | $ | (152 | ) | $ | (8 | ) | | $ | 126 |
| | $ | 63 |
|
Total income tax (benefit) expense (benefit) included in the consolidated financial statements was composed of the following:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Continuing operations | $ | 190 |
| | $ | 275 |
| | $ | 235 |
| |
| Discontinued operations | — |
| | — |
| | 2 |
| |
| Earnings before income taxes | | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| Other comprehensive income | 126 |
| | 63 |
| | (152 | ) | (8 | ) | | 126 |
| | 63 |
|
| Total | $ | 316 |
| | $ | 338 |
| | $ | 85 |
| $ | (107 | ) | | $ | 316 |
| | $ | 338 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences between the (benefit from) provision for income taxes on earnings from continuing operations and income taxes computed using the U.S. Federal statutory income tax rate follow:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Amount computed using the statutory rate | $ | 366 |
| | $ | 393 |
| | $ | 345 |
| $ | 450 |
| | $ | 366 |
| | $ | 393 |
|
| State income taxes, net | (18 | ) | | (3 | ) | | 4 |
| (4 | ) | | (18 | ) | | (3 | ) |
| Foreign rate variance | (121 | ) | | (93 | ) | | (105 | ) | (150 | ) | | (121 | ) | | (93 | ) |
| Domestic manufacturing deduction | (7 | ) | | (12 | ) | | (6 | ) | (18 | ) | | (7 | ) | | (12 | ) |
| Change in reserves for tax contingencies | — |
| | (7 | ) | | (6 | ) | 20 |
| | — |
| | (7 | ) |
| General business credits | (20 | ) | | (15 | ) | | (8 | ) | (65 | ) | | (20 | ) | | (15 | ) |
| U.S. tax on foreign earnings | 25 |
| | 7 |
| | 5 |
| 29 |
| | 25 |
| | 7 |
|
| Foreign tax credits | | (26 | ) | | (10 | ) | | (9 | ) |
Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | | (339 | ) | | — |
| | — |
|
| Other | (35 | ) | | 5 |
| | 6 |
| 4 |
| | (25 | ) | | 14 |
|
| Provision for income taxes | $ | 190 |
| | $ | 275 |
| | $ | 235 |
| |
| (Benefit from) provision for income taxes | | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| | | | | | | | | | | |
| Effective income tax rate | 18 | % | | 24 | % | | 24 | % | (8 | )% | | 18 | % | | 24 | % |
| |
(1) | Includes one-time net benefit primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate partially offset by the transition tax on deferred foreign income and changes in the valuation of deferred tax assets associated with tax law changes and the tax impact from intercompany reorganization activities. |
The 2017 effective tax rate was lower than the 2016 effective tax rate due to a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years’ domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years’ foreign income tax returns. The 2016 effective tax rate included one-time tax benefits discussed immediately below.
The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate included a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns.
The 2015 effective tax rate reflected a benefit from both the U.S. federal tax manufacturing deduction, due to an increase in domestic taxable income, and increased U.S. federal tax credits compared to 2014. This was offset by a reduction in the foreign rate variance as a result of an unfavorable shift in foreign income to higher tax jurisdictions and limited benefit from the asset impairment of the Workington, UK acetate tow manufacturing facility. Both years reflect a benefit from the extension of favorable U.S. federal tax provisions, which resulted in a net benefit of approximately $15 million primarily related to R&D credits and deferral of certain earnings of foreign subsidiaries from U.S. income taxes.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| Deferred tax assets | | | | | | |
| Post-employment obligations | $ | 378 |
| | $ | 471 |
| $ | 242 |
| | $ | 378 |
|
| Net operating loss carryforwards | 337 |
| | 349 |
| 690 |
| | 337 |
|
| Tax credit carryforwards | 248 |
| | 276 |
| 202 |
| | 248 |
|
| Environmental reserves | 119 |
| | 122 |
| 72 |
| | 119 |
|
| Unrealized derivative loss | 50 |
| | 162 |
| 17 |
| | 50 |
|
| Other | 186 |
| | 193 |
| 90 |
| | 186 |
|
| Total deferred tax assets | 1,318 |
| | 1,573 |
| 1,313 |
| | 1,318 |
|
| Less valuation allowance | 278 |
| | 254 |
| |
| Less: Valuation allowance | | 410 |
| | 278 |
|
| Deferred tax assets less valuation allowance | $ | 1,040 |
| | $ | 1,319 |
| $ | 903 |
| | $ | 1,040 |
|
| Deferred tax liabilities | |
| | |
| |
| | |
|
| Property, plant, and equipment | $ | (1,237 | ) | | $ | (1,176 | ) | $ | (835 | ) | | $ | (1,237 | ) |
| Intangible assets | (847 | ) | | (902 | ) | (535 | ) | | (847 | ) |
| Investments | | (274 | ) | | — |
|
| Other | (128 | ) | | (142 | ) | (131 | ) | | (128 | ) |
| Total deferred tax liabilities | $ | (2,212 | ) | | $ | (2,220 | ) | $ | (1,775 | ) | | $ | (2,212 | ) |
| Net deferred tax liabilities | $ | (1,172 | ) | | $ | (901 | ) | $ | (872 | ) | | $ | (1,172 | ) |
| As recorded in the Consolidated Statements of Financial Position: | |
| | |
| |
| | |
|
| Other noncurrent assets | $ | 34 |
| | $ | 27 |
| $ | 21 |
| | $ | 34 |
|
| Deferred income tax liabilities | (1,206 | ) | | (928 | ) | (893 | ) | | (1,206 | ) |
| Net deferred tax liabilities | $ | (1,172 | ) | | $ | (901 | ) | $ | (872 | ) | | $ | (1,172 | ) |
Unremitted earningsAs of subsidiaries outside the United States, considered to be reinvested indefinitely, totaled approximately $2.1 billion at December 31, 2016. It is not practicable2017, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion which was subject to determine the one-time transition tax of approximately $71 million on deferred tax liability for temporary differences relatedforeign income as required by the Tax Reform Act. We continue to those unremitted earnings.consider these earnings as reinvested indefinitely.
For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the United States. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the United States, a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the United States statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $18$17 million at December 31, 20162017 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2016,2017, foreign net operating loss carryforwards totaled $914 million.$2.5 billion. Of this total, $49$285 million will expire in 1 to 20 years and $865 million$2.2 billion have no expiration date. A valuation allowance of approximately $209$260 million has been provided against such net operating loss carryforwards.
At December 31, 2016,2017, federal net operating loss carryforwards of $20$16 million were available to offset future taxable income, which expire from 2027 to 2030. At December 31, 2016,2017, foreign tax credit carryforwards of approximately $140$72 million were available to reduce possible future U.S. income taxes and which expire from 20172018 to 2021. As a result of the Tax Reform Act, the Company may no longer be able to utilize the Solutia, Inc. ("Solutia") U.S. foreign tax credit carryforwards; therefore, management established a full valuation allowance of $72 million on the remaining deferred tax asset as of December 31, 2017.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A partial valuation allowance of $45$54 million has been providedestablished for Solutia'sthe Solutia state net operating loss carryforwards. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized or the related statute expires.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Solutia acquisition transaction, Solutia realized a change of ownership for purposes of Section 382 of the Internal Revenue Code. Management does not currently expect this change to significantly limit the Company's ability to utilize Solutia's U.S. foreign tax credit carryforwards estimated to be approximately $140 million at December 31, 2016.
Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| Miscellaneous receivables | $ | 235 |
| | $ | 92 |
| $ | 215 |
| | $ | 235 |
|
| | | | | | | |
| Payables and other current liabilities | $ | 56 |
| | $ | 33 |
| $ | 58 |
| | $ | 56 |
|
| Other long-term liabilities | 60 |
| | 32 |
| 137 |
| | 60 |
|
| Total income taxes payable | $ | 116 |
| | $ | 65 |
| $ | 195 |
| | $ | 116 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| | | (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Balance at January 1 | $ | 125 |
| | $ | 117 |
| | $ | 51 |
| $ | 114 |
| | $ | 125 |
| | $ | 117 |
|
| Adjustments based on tax positions related to current year | (7 | ) | | (12 | ) | (1) | — |
| 29 |
| | (7 | ) | | (12 | ) |
| Additions based on acquisitions | — |
| | 27 |
| | 72 |
| — |
| | — |
| | 27 |
|
| Lapse of statute of limitations | (4 | ) | | (7 | ) | | (6 | ) | (1 | ) | | (4 | ) | | (7 | ) |
| Settlements | — |
| | — |
| | — |
| |
| Balance at December 31 | $ | 114 |
| | $ | 125 |
| | $ | 117 |
| $ | 142 |
| | $ | 114 |
| | $ | 125 |
|
| |
(1)
| Revised from Note 8, "Provision For Income Taxes" to the Company's 2015 Annual Report on Form 10-K, which incorrectly reported Additions based on tax positions related to current year as zero. |
AsAll of December 31, 2016, 2015, and 2014, $114 million, $125 million, and $117 million, respectively, ofthe unrecognized tax benefits would, if recognized, impact the Company's effective tax rate.
Interest, net of tax, related to unrecognized tax benefits is recorded as a component of income tax expense. As of January 1, 2017, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for estimated tax penalties. During 2017, the Company recognized $3 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2017, the Company had accrued balances of $6 million for interest, net of tax benefit, and $1 million for penalties.
As of January 1, 2016, the Company had accrued a liability of $4 million for interest, net of tax, and had accrued $1 million for estimated tax penalties, net of tax benefit.penalties. During 2016, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, net of tax, associated with the expiration of the statute of limitations. At December 31, 2016, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties, net of tax benefit.penalties.
As of January 1, 2015, the Company had accrued a liability of $4 million for interest, net of tax, and had $3 million for tax penalties, net of tax benefit.penalties. During 2015, the Company recognized $2 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, and $2 million of penalties, net of tax, associated with the expiration of the statute of limitations. At December 31, 2015, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties, net of tax benefit.
As of January 1, 2014, the Company had accrued a liability of $4 million for interest, net of tax, and had $3 million for tax penalties, net of tax benefit. During 2014, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, associated with the expiration of the statute of limitations. At December 31, 2014, the Company had accrued balances of $4 million for interest, net of tax benefit, and $3 million for penalties, net of tax benefit.penalties.
The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Eastman and Solutia respectively.legal entities. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2010. Solutia and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2007.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
It is reasonably possible that, within the next twelve months, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits could decrease within the next twelve months by up to $20 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| Borrowings consisted of: | | | | | | |
| 2.4% notes due June 2017 | $ | — |
| | $ | 998 |
| |
| 6.30% notes due November 2018 | — |
| | 166 |
| |
| 5.5% notes due November 2019 | 249 |
| | 249 |
| $ | 250 |
| | $ | 249 |
|
| 2.7% notes due January 2020 | 796 |
| | 794 |
| 797 |
| | 796 |
|
| 4.5% notes due January 2021 | 184 |
| | 249 |
| 185 |
| | 184 |
|
| 3.6% notes due August 2022 | 741 |
| | 896 |
| 738 |
| | 741 |
|
| 1.50% notes due May 2023 | 786 |
| | — |
| |
1.50% notes due May 2023 (1) | | 895 |
| | 786 |
|
| 7 1/4% debentures due January 2024 | 197 |
| | 244 |
| 197 |
| | 197 |
|
| 7 5/8% debentures due June 2024 | 43 |
| | 54 |
| 43 |
| | 43 |
|
| 3.8% notes due March 2025 | 689 |
| | 791 |
| 690 |
| | 689 |
|
| 1.875% notes due November 2026 | 519 |
| | — |
| |
1.875% notes due November 2026 (1) | | 592 |
| | 519 |
|
| 7.60% debentures due February 2027 | 195 |
| | 222 |
| 195 |
| | 195 |
|
| 4.8% notes due September 2042 | 493 |
| | 492 |
| 493 |
| | 493 |
|
| 4.65% notes due October 2044 | 870 |
| | 869 |
| 871 |
| | 870 |
|
| Commercial paper and short-term borrowings | | 389 |
| | 280 |
|
| Credit facilities borrowings | 549 |
| | 550 |
| 200 |
| | 549 |
|
| Commercial paper borrowings | 280 |
| | 430 |
| |
| Capital leases | 3 |
| | 4 |
| |
| Capital leases and other | | 5 |
| | 3 |
|
| Total borrowings | 6,594 |
| | 7,008 |
| 6,540 |
| | 6,594 |
|
| Borrowings due within one year | 283 |
| | 431 |
| 393 |
| | 283 |
|
| Long-term borrowings | $ | 6,311 |
| | $ | 6,577 |
| $ | 6,147 |
| | $ | 6,311 |
|
| |
(1) | The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations. During the twelve months ended December 31, 2017, pre-tax losses of $180 million were recognized in "Other comprehensive income (loss)" for revaluation of these notes. |
In November 2016, the CompanyEastman sold additional euro-denominated 1.50% notes due May 2023 in the principal amount of €200 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million). Net proceeds from the euro-denominated notes were €695 million ($742 million). In conjunction with the euro-denominated public debt offerings, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 10,9, "Derivative and Non-Derivative Financial Instruments".
In fourth quarter 2016, proceeds from the notes and the second five-year term loan agreement ("2021 Term Loan") borrowings (see "Credit Facility and Commercial Paper Borrowings") were used for the early and full repayment of the 2.4% notes due June 2017 ($500 million principal) and 6.30% notes due November 2018 ($160 million principal) as well as the partial redemptions of the 4.5% notes due January 2021 ($65 million principal), 3.6% notes due August 2022 ($150 million principal), 7 1/4% debentures due January 2024 ($47 million principal), 7 5/8% debentures due June 2024 ($11 million principal), 3.8% notes due March 2025 ($100 million principal), and 7.60% debentures due February 2027 ($28 million principal). Total consideration for these redemptions were $1,119 million ($1,061 million total principal and $58 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $76 million for early debt extinguishment costs and related derivatives and hedging items. The early debt extinguishment costs were primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $1,061 million. For further information on the related derivatives and hedging items, see Note 10,9, "Derivative and Non-Derivative Financial Instruments". The book value of the redeemed debt was $1,061 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
On May 26, 2016, the Company sold euro-denominated 1.50% notes due May 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were €544 million ($607 million) and were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. Total consideration for the partial redemption of 2.4% notes due June 2017 was $507 million ($500 million for the principal amount and $7 million for the early redemption premium) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $498 million. In conjunction with the euro-denominated public debt offering, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 10,9, "Derivative and Non-Derivative Financial Instruments".
In December 2015, the Company repaid the $250 million principal amount of the 3% notes due 2015 using available cash and other borrowings.
Credit FacilityFacilities and Commercial Paper Borrowings
In connection with theDecember 2014, acquisition of Taminco, Eastman borrowed $1.0 billion under the a five-year term loan ("2019 Term Loan.Loan"). As of December 31, 2017, the Company had repaid the remaining balance of $250 million using available cash. As of December 31, 2016, the 2019 Term Loan agreement balance outstanding was $250 million with an interest rate of 2.02 percent. In second quarter 2016, $100 million of the Company's borrowings under the 2019 Term Loan were repaid using available cash. As of December 31, 2015, the 2019 Term Loan agreement balance outstanding was $350 million with an interest rate of 1.67 percent. In December 2016, the Company borrowed $300 million under the 2021 Term Loan. As of December 31, 2017, the 2021 Term Loan agreement balance outstanding was $200 million with an interest rate of 2.60 percent. In 2017, $99 million of the Company's borrowings under the 2021 Term Loan agreement were repaid using available cash. As of December 31, 2016, the 2021 Term Loan agreement balance outstanding was $299 million net of debt issue costs, with an interest rate of 1.95 percent. Borrowings under the 2019 Term Loan and 2021 Term Loan agreementsagreement are subject to interest at varying spreads above quoted market rates.
The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") expiring October 2021. 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 support for general corporate purposes and supports commercial paper borrowings and general corporate purposes.borrowings. Commercial paper borrowings are classified as short-term. At December 31, 20162017 and 2015,2016, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2017, the Company's commercial paper borrowings were $280 million with a weighted average interest rate of 1.61 percent. At December 31, 2016, the Company's commercial paper borrowings were $280 million with a weighted average interest rate of 1.12 percent. At December 31, 2015, the Company's commercial paper borrowings were $430 million with a weighted average interest rate of 0.80 percent.
The Company has access to a $250 million accounts receivable securitization agreement (the "A/R Facility") that expires April 2019. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2017 and 2016, the Company had no borrowings under the A/R Facility. In 2016, $400 million of borrowings under the A/R Facility was repaid and $200 million borrowed. At December 31, 2015, the Company's borrowings under the A/R Facility were $200 million supported by trade receivables with an interest rate of 1.11 percent.
The Credit and A/R Facilities and the other borrowing agreements contain a number of customary covenants and events of default, including requirementssome of which require the Company to maintain certain financial ratios.ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all such covenants at both December 31, 2017 and December 31, 2016.
The Company has access to borrowings of up to €150 million ($180 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for all periods presented. Total availableanother one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above EURIBOR for euro denominated drawings and the counterparty's cost of funds for drawings in any other currencies, plus administration and insurance fees and are classified as short-term. The amount of outstanding borrowings under the Credit and A/R Facilitiesthis facility were $1.50 billion as of$109 million at December 31, 2016. Changes in available borrowings were primarily due to repayment2017 with a weighted average interest rate of borrowings under the A/R Facility. The Company would not have violated applicable covenants for these periods if the total available amounts of the facilities had been borrowed.1.31 percent.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Borrowings
The CompanyEastman has classified its long-termtotal borrowings at December 31, 20162017 and 20152016 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies". The fair value for fixed-rate borrowingsdebt securities is based on current market prices and is classified inas Level 1. The fair value for the Company's floating-rateother borrowings which relate toprimarily under the term loans, the A/R Facility,Term Loans, commercial paper, and capital leases,a receivables facility equals the carrying value and is classified withinas Level 2. The Company had no borrowings classified as Level 3 as of December 31, 2017 and December 31, 2016.
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| | | | Fair Value Measurements at December 31, 2016 | | | | Fair Value Measurements at December 31, 2017 |
| (Dollars in millions) | | Recorded Amount
December 31, 2016 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Recorded Amount
December 31, 2017 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Long-term borrowings | | $ | 6,311 |
| | $ | 6,586 |
| | $ | 6,036 |
| | $ | 550 |
| | $ | — |
| |
| Total borrowings | | | $ | 6,540 |
| | $ | 6,980 |
| | $ | 6,386 |
| | $ | 594 |
| | $ | — |
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| | | | | | | Fair Value Measurements at December 31, 2015 | | | | Fair Value Measurements at December 31, 2016 |
| (Dollars in millions) | | Recorded Amount
December 31, 2015 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Recorded Amount
December 31, 2016 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Long-term borrowings | | $ | 6,577 |
| | $ | 6,647 |
| | $ | 6,094 |
| | $ | 553 |
| | $ | — |
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| Total borrowings | | | $ | 6,594 |
| | $ | 6,868 |
| | $ | 6,036 |
| | $ | 832 |
| | $ | — |
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10.9. | DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS |
Overview of Hedging Programs
The CompanyEastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are recordedreported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The effective portionnet of the change in the hedge instrument and item being hedged for qualifying cash flow hedges areis reported as a component of AOCI located in the Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Foreign Currency Exchange Rate Hedging
The CompanyEastman manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, from time to time, the Company enters into currency option and forward cash flow hedges to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies (principally the euro and Japanese yen). Additionally, the Company, from time to time, enters into forward exchange contract cash flow hedges to hedge certain firm commitments denominated in foreign currencies.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commodity Hedging
Certain raw material and energy sources used by the Company,Eastman, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the market pricing of propane, ethane, natural gas, paraxylene, ethylene, and benzene. In order to mitigate expected fluctuations in market prices, from time to time the Company enters into option and forward contracts and designates these contracts as cash flow hedges. The Company currently hedges commodity price risks using derivative financial instrument transactions within a rolling three year period beyond its current fiscal year.period. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.
Interest Rate Hedging
The Company'sEastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, the Company, from time to time, enters into cash flow interest rate derivative instruments, primarily forward starting swaps and treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges and are typically 100 percent effective. As a result, there is normally no impact on earnings due to hedge ineffectiveness.
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The effective portionnet of the change in the hedge instrument and item being hedged for qualifying fair value hedges areis reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings.
Interest Rate Hedging
The Company'sEastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage the Company's mix of fixed and variable rate debt effectively, the Company, from time to time, the Company enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. As these instruments are typically 100 percent effective, there is normally no impact on earnings due to hedge ineffectiveness.
In second quarter 2016, the Company entered into a $75 million notional fixed-to-floating interest rate swap on a portion of the 3.8% notes due March 2025 in order to manage the Company's mix of fixed and variable rate debt.
Net Investment HedgesFair Value Measurements
Net investment hedgesEastman records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Eastman maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances are based on the number of days an individual receivable is delinquent and management's regular assessment of the financial condition of the Company's customers. The Company considers a receivable delinquent if it is unpaid after the terms of the related invoice have expired. The Company evaluates the allowance based on a monthly assessment of the aged receivables. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accounts was $12 million and $10 million at December 31, 2017 and 2016, respectively. The Company does not enter into receivables of a long-term nature, also known as financing receivables, in the normal course of business.
Inventories
Inventories are valued at the lower of cost or market. Eastman determines the cost of most raw materials, work in process, and finished goods inventories in the United States and Switzerland by the last-in, first-out ("LIFO") method. The cost of all other inventories is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method. The Company writes-down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Properties
Eastman records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition into earnings. Asset impairments are reflected as increases in accumulated depreciation for properties that have been placed in service. In instances when an asset has not been placed in service and is impaired, the associated costs are removed from the appropriate property accounts.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization
Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method. Estimated useful lives for buildings and building equipment generally range from 20 to 50 years. Estimated useful lives generally ranging from 3 to 33 years are applied to machinery and equipment in the following categories: computer software (3 to 5 years); office furniture and fixtures and computer equipment (5 to 10 years); vehicles, railcars, and general machinery and equipment (5 to 20 years); and manufacturing-related improvements (20 to 33 years). Accelerated depreciation is reported when the estimated useful life is shortened and continues to be reported in cost of sales.
Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset.
For additional information, see Note 4, "Goodwill and Other Intangible Assets".
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Goodwill
Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as derivativean operating segment or non-derivative instruments designatedone level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2017 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate 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 determinations. In order to hedgedetermine the foreign currency exposurediscount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. 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.
If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net investmentassets of the reporting unit including goodwill, additional steps, including a valuation of the estimated fair value of the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, primarily consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of the tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
Investments
The consolidated financial statements include the accounts of Eastman and all its subsidiaries and entities or joint ventures in which a controlling interest is maintained.
Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Under the equity method of accounting, these investments are included in other noncurrent assets. The Company includes its share of earnings and losses of such investments in "Other (income) charges, net", and its share of "Other comprehensive income (loss), net of tax" ("OCI") located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and in the appropriate component of "Accumulated other comprehensive income (loss)" ("AOCI") located in the Consolidated Statements of Financial Position.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits reflect the Company's assumptions related to discount rates, expected return on plan assets, rate of compensation increase or decrease for employees, and health care cost trends. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
Eastman's pension and other postretirement benefit plans costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) mark-to-market ("MTM") gains and losses recognized annually, in the fourth quarter of each year, primarily resulting from changes in actuarial assumptions for discount rates and the differences between actual and expected returns on plan assets. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized in the quarter in which such remeasurement event occurs.
For additional information, see Note 10, "Retirement Plans".
Environmental Costs
Eastman accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum undiscounted amount. This undiscounted accrued amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged into earnings over the estimated useful life of the assets. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, the expenses charged to earnings will be impacted.
The current portion of accruals for environmental liabilities is included in payables and other current liabilities and the long-term portion is included in other long-term liabilities. These accruals exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred.
For additional information see Note 12, "Environmental Matters and Asset Retirement Obligations".
Derivative and Non-Derivative Financial Instruments
Eastman uses derivative and non-derivative instruments to manage its exposure to market risks, such as changes in foreign operations.currency exchange rates, commodity prices, and interest rates. The Company does not enter into derivative transactions for speculative purposes.
Counterparties to the derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an on-going basis.
The Company's derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and measured at fair value. For qualifying derivatives designated as cash flow hedges, the effective portion of the gain or loss onchanges in the net investment hedgesfair value are reported as a component of AOCI in the CTAConsolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying derivatives designated as fair value hedges, the effective portion of the changes in the fair value are reported as "Long-term borrowings" on the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying non-derivatives designated as net investment hedges, the effective portion of the changes in fair value are reported as a translation adjustment in the "Change in cumulative translation adjustment" ("CTA") within OCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Gains and losses representing either hedge ineffectiveness orThe ineffective portion of hedges, hedge components excluded from the assessment of effectiveness, and changes in the fair value of nonqualifying derivatives or derivatives that are not designated as hedges, are recognized in current earnings. Hedge accounting will be discontinued prospectively for all hedges that no longer qualify for hedge accounting treatment. Cash flows from derivative instruments designated as hedges are reported in the same category as the cash flows from the items being hedged.
For additional information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
Litigation and Contingent Liabilities
Eastman and its operations from time to time are, and in the future, may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Customer Incentives
Eastman recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. Revenue for products is recognized when title and risk of loss transfer to the customer.
The Company records estimated obligations for customer programs and incentive offerings, which consist primarily of revenue or volume-based amounts that a customer must achieve over a specified period of time, as a reduction of revenue from each underlying revenue transaction as the customer progresses toward goals specified in incentive agreements. These estimates are based on a combination of forecasts of customer sales and actual sales volume and revenues against established goals, the customer's current level of purchases, Eastman's knowledge of customer purchasing habits, and industry pricing practice. The incentive payment rate may be variable, based upon the customer reaching higher purchasing levels over a specified period of time in order to receive an agreed upon incentive payment.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are billed to customers and are recorded as sales revenue. Shipping and handling costs incurred are recorded in cost of sales.
Restructuring of Operations
Eastman records restructuring charges for costs incurred in connection with consolidation of operations, exited business or product lines, or shutdowns of specific sites that are expected to be substantially completed within twelve months. These restructuring charges are recorded as incurred, and are associated with site closures, legal and environmental matters, demolition, contract terminations, obsolete inventory, or other costs and charges directly related to the restructuring. The Company records severance charges for employee separations when the separation is probable and reasonably estimable. In the event employees are required to perform future service, the Company records severance charges ratably over the remaining service period of those employees. For additional information, see Note 15, "Asset Impairments and Restructuring Charges, Net".
Share-based Compensation
Eastman recognizes compensation expense in the financial statements for stock options and other share-based compensation awards based upon the grant-date fair value over the substantive vesting period. For additional information, see Note 17, "Share-Based Compensation Plans and Awards".
Income Taxes
The (benefit from) provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The (benefit from) provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of Eastman's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely reinvested.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| | | | |
| Finished goods | $ | 1,114 |
| | $ | 997 |
|
| Work in process | 213 |
| | 198 |
|
| Raw materials and supplies | 470 |
| | 473 |
|
| Total inventories at FIFO or average cost | 1,797 |
| | 1,668 |
|
| Less: LIFO reserve | 288 |
| | 264 |
|
| Total inventories | $ | 1,509 |
| | $ | 1,404 |
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Inventories valued on the LIFO method were approximately 60 percent of total inventories at both December 31, 2017 and 2016.
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| 3. | PROPERTIES AND ACCUMULATED DEPRECIATION |
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Properties | | | |
| Land | $ | 161 |
| | $ | 157 |
|
| Buildings | 1,325 |
| | 1,256 |
|
| Machinery and equipment | 10,122 |
| | 9,646 |
|
| Construction in progress | 762 |
| | 640 |
|
| Properties and equipment at cost | $ | 12,370 |
| | $ | 11,699 |
|
| Less: Accumulated depreciation | 6,763 |
| | 6,423 |
|
| Net properties | $ | 5,607 |
| | $ | 5,276 |
|
Depreciation expense was $420 million, $412 million, and $402 million for 2017, 2016, and 2015, respectively.
Cumulative construction-period interest of $111 million and $169 million, reduced by accumulated depreciation of $49 million and $111 million, is included in net properties at December 31, 2017 and 2016, respectively.
Eastman capitalized $8 million of interest in 2017 and $7 million of interest in both 2016 and 2015.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
| 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill follow:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Additives & Functional Products | | Adhesives & Plasticizers | | Advanced Materials | | Chemical Intermediates | | Other | | Total |
| Balance at December 31, 2015 | $ | 1,865 |
| | $ | 111 |
| | $ | 1,293 |
| | $ | 1,239 |
| | $ | 10 |
| | $ | 4,518 |
|
| Transfers of goodwill resulting from resegmentation | 583 |
| | (111 | ) | | — |
| | (472 | ) | | — |
| | — |
|
| Currency translation adjustments | (32 | ) | | — |
| | (18 | ) | | (7 | ) | | — |
| | (57 | ) |
| Balance at December 31, 2016 | 2,416 |
| | — |
| | 1,275 |
|
| 760 |
|
| 10 |
|
| 4,461 |
|
| Acquisitions | 17 |
| | — |
| | — |
| | — |
| | — |
| | 17 |
|
| Goodwill written off as a result of sale of business | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Currency translation adjustments | 27 |
| | — |
| | 14 |
| | 9 |
| | — |
| | 50 |
|
| Balance at December 31, 2017 | $ | 2,459 |
| | $ | — |
| | $ | 1,289 |
| | $ | 769 |
| | $ | 10 |
| | $ | 4,527 |
|
As of December 31, 2017 and 2016, the reported balance of goodwill included accumulated impairment losses of $23 million, $12 million, and $14 million in the Additives & Functions Products ("AFP") segment, Chemical Intermediates ("CI") segment, and other segments, respectively.
The carrying amounts of intangible assets follow:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2017 | | December 31, 2016 |
| (Dollars in millions) | Estimated Useful Life in Years | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Amortizable intangible assets: | | | | | | | | | | | | | | |
| Customer relationships | 8 | - | 25 | $ | 1,583 |
| | $ | 345 |
| | $ | 1,238 |
| | $ | 1,542 |
| | $ | 267 |
| | $ | 1,275 |
|
| Technology | 7 | - | 20 | 690 |
| | 247 |
| | 443 |
| | 675 |
| | 196 |
| | 479 |
|
| Contracts | | 5 |
| 180 |
| | 111 |
| | 69 |
| | 180 |
| | 75 |
| | 105 |
|
| Other | 5 | - | 37 | 102 |
| | 19 |
| | 83 |
| | 99 |
| | 14 |
| | 85 |
|
| | | | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | |
| Tradenames | | | | 530 |
| | — |
| | 530 |
| | 525 |
| | — |
| | 525 |
|
| Other | | | | 10 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 10 |
|
| Total identified intangible assets | | | | $ | 3,095 |
| | $ | 722 |
| | $ | 2,373 |
| | $ | 3,031 |
| | $ | 552 |
| | $ | 2,479 |
|
Amortization expense of definite-lived intangible assets was $164 million, $166 million, and $163 million for 2017, 2016, and 2015, respectively. Estimated amortization expense for future periods is $165 million in each year for 2018 through 2019 and $125 million in each year for 2020 through 2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In fourth quarterJune 2016, contemporaneousEastman sold its 50 percent interest in Primester, a joint venture which manufactures cellulose acetate at the Company's Kingsport, Tennessee site, to an affiliate of the joint venture partner for $35 million. This investment was accounted for under the equity method. Eastman's net investment in the joint venture at the date of sale was $18 million. Such amounts were included in "Other noncurrent assets" in the Consolidated Statements of Financial Position and the gain of $17 million was recorded in "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Eastman owns 50 percent or less interest in other joint ventures which are accounted for under the equity method and included in "Other noncurrent assets". These include a 50 percent interest in a joint venture that has a manufacturing facility in Nanjing, China. The Nanjing facility produces Eastotac® hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants. These also include a joint venture with a 50 percent interest for the manufacture of compounded cellulose diacetate ("CDA") in Shenzhen, China. CDA is a bio-derived material, which is used in various injection molded applications, including but not limited to ophthalmic frames, tool handles, and other end use products. The Company owns a 45 percent interest in a joint venture with China National Tobacco Corporation that manufactures acetate tow in Hefei, China. At December 31, 2017 and 2016, the Company's total investment in these joint ventures was $95 million and $107 million, respectively.
| |
| 6. | PAYABLES AND OTHER CURRENT LIABILITIES |
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Trade creditors | $ | 842 |
| | $ | 704 |
|
| Accrued payrolls, vacation, and variable-incentive compensation | 199 |
| | 196 |
|
| Accrued taxes | 111 |
| | 106 |
|
| Post-employment obligations | 89 |
| | 110 |
|
| Other | 348 |
| | 396 |
|
| Total payables and other current liabilities | $ | 1,589 |
| | $ | 1,512 |
|
The "Other" above consists primarily of accruals for other miscellaneous payables, dividends payable, interest payable, hedging liability, and the current portion of environmental liabilities.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
On December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for the impacts of newly enacted tax legislation are generally required to be completed in the period of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because the enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017.
The Company recognized a $339 million estimated net tax benefit in 2017, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The net tax benefit included a $533 million benefit from the one-time revaluation of deferred tax liabilities, partially offset by a one-time transition tax on deferred foreign income of $71 million and $123 million in changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
The income tax payable for the transition tax will be paid over eight years. As of December 31, 2017, a non-current income tax payable of approximately $60 million attributable to the transition tax is reflected in “Other long term liabilities” of the Consolidated Statement of Financial Position.
As of December 31, 2017, the Company considers the accounting for the following impacts of the Tax Reform Act to be provisional and, accordingly, subject to adjustment in future periods: the transition tax on deferred foreign income (which consists of post-1986 accumulated earnings and profits of controlled foreign corporations and the determination of cash versus non-cash balances), the impact of the change in income tax rates on deferred tax assets and liabilities, and the evaluation of gross foreign tax credit carryforwards and related valuation allowances. In preparing the provisional estimates for the year ended December 31, 2017, the Company has considered notices and revenue procedures issued by the Internal Revenue Service and authoritative accounting guidance issued through February 12, 2018.
Certain of the provisional amounts will be finalized in conjunction with the filing of the Company's U.S. federal income tax return for the year ended December 31, 2017 that will not be finalized until later in 2018. While historically differences between amounts reported in the Company’s consolidated financial statements and the Company’s U.S. federal income tax return have resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in adjustments to the Company's income tax (benefit) provision when recognized. The Company also considers it likely that further technical guidance regarding certain aspects of the new provisions included in the Tax Reform Act, as well as clarity regarding state income tax conformity to current federal tax code, may be issued which could result in changes to the provisional amounts reported as of December 31, 2017 and related state income tax effects.
The Company is analyzing the future impact of the Tax Reform Act for the fiscal year beginning January 1, 2018, including the new provisions known as the base erosion anti-abuse tax (“BEAT”) and global intangible low-tax income (“GILTI”) tax, as well as other provisions. Under U.S. GAAP, companies can make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided under SAB 118.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of earnings before income taxes and the (benefit from) provision for U.S. and other income taxes from operations follow:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Earnings before income taxes | | | | | |
| United States | $ | 654 |
| | $ | 422 |
| | $ | 618 |
|
| Outside the United States | 635 |
| | 627 |
| | 511 |
|
| Total | $ | 1,289 |
| | $ | 1,049 |
| | $ | 1,129 |
|
| (Benefit from) provision for income taxes | |
| | |
| | |
|
| United States Federal | |
| | |
| | |
|
Current (1) | $ | 220 |
| | $ | (80 | ) | | $ | 87 |
|
Deferred (2) | (383 | ) | | 214 |
| | 119 |
|
| Outside the United States | | | | | |
| Current | 62 |
| | 91 |
| | 59 |
|
| Deferred | 2 |
| | (18 | ) | | 16 |
|
| State and other | | | | | |
| Current | 13 |
| | 2 |
| | 22 |
|
| Deferred | (13 | ) | | (19 | ) | | (28 | ) |
| Total | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| |
(1) | Includes a one-time transition tax of $71 million on deferred foreign income. |
| |
(2) | Includes one-time benefit of $517 million primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate and a one-time $72 million valuation allowance on deferred tax assets for foreign tax credit carryforwards. |
The following represents the deferred tax (benefit) charge recorded as a component of AOCI in the Consolidated Statements of Financial Position:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Defined benefit pension and other postretirement benefit plans | $ | (16 | ) | | $ | 21 |
| | $ | 42 |
|
| Derivatives and hedging | 8 |
| | 105 |
| | 21 |
|
| Total | $ | (8 | ) | | $ | 126 |
| | $ | 63 |
|
Total income tax (benefit) expense included in the consolidated financial statements was composed of the following:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Earnings before income taxes | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| Other comprehensive income | (8 | ) | | 126 |
| | 63 |
|
| Total | $ | (107 | ) | | $ | 316 |
| | $ | 338 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences between the (benefit from) provision for income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Amount computed using the statutory rate | $ | 450 |
| | $ | 366 |
| | $ | 393 |
|
| State income taxes, net | (4 | ) | | (18 | ) | | (3 | ) |
| Foreign rate variance | (150 | ) | | (121 | ) | | (93 | ) |
| Domestic manufacturing deduction | (18 | ) | | (7 | ) | | (12 | ) |
| Change in reserves for tax contingencies | 20 |
| | — |
| | (7 | ) |
| General business credits | (65 | ) | | (20 | ) | | (15 | ) |
| U.S. tax on foreign earnings | 29 |
| | 25 |
| | 7 |
|
| Foreign tax credits | (26 | ) | | (10 | ) | | (9 | ) |
Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | (339 | ) | | — |
| | — |
|
| Other | 4 |
| | (25 | ) | | 14 |
|
| (Benefit from) provision for income taxes | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| | | | | | |
| Effective income tax rate | (8 | )% | | 18 | % | | 24 | % |
| |
(1) | Includes one-time net benefit primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate partially offset by the transition tax on deferred foreign income and changes in the valuation of deferred tax assets associated with tax law changes and the tax impact from intercompany reorganization activities. |
The 2017 effective tax rate was lower than the 2016 effective tax rate due to a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years’ domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years’ foreign income tax returns. The 2016 effective tax rate included one-time tax benefits discussed immediately below.
The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate included a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Deferred tax assets | | | |
| Post-employment obligations | $ | 242 |
| | $ | 378 |
|
| Net operating loss carryforwards | 690 |
| | 337 |
|
| Tax credit carryforwards | 202 |
| | 248 |
|
| Environmental reserves | 72 |
| | 119 |
|
| Unrealized derivative loss | 17 |
| | 50 |
|
| Other | 90 |
| | 186 |
|
| Total deferred tax assets | 1,313 |
| | 1,318 |
|
| Less: Valuation allowance | 410 |
| | 278 |
|
| Deferred tax assets less valuation allowance | $ | 903 |
| | $ | 1,040 |
|
| Deferred tax liabilities | |
| | |
|
| Property, plant, and equipment | $ | (835 | ) | | $ | (1,237 | ) |
| Intangible assets | (535 | ) | | (847 | ) |
| Investments | (274 | ) | | — |
|
| Other | (131 | ) | | (128 | ) |
| Total deferred tax liabilities | $ | (1,775 | ) | | $ | (2,212 | ) |
| Net deferred tax liabilities | $ | (872 | ) | | $ | (1,172 | ) |
| As recorded in the Consolidated Statements of Financial Position: | |
| | |
|
| Other noncurrent assets | $ | 21 |
| | $ | 34 |
|
| Deferred income tax liabilities | (893 | ) | | (1,206 | ) |
| Net deferred tax liabilities | $ | (872 | ) | | $ | (1,172 | ) |
As of December 31, 2017, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion which was subject to the one-time transition tax of approximately $71 million on deferred foreign income as required by the Tax Reform Act. We continue to consider these earnings as reinvested indefinitely.
For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the United States. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the United States, a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the United States statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $17 million at December 31, 2017 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2017, foreign net operating loss carryforwards totaled $2.5 billion. Of this total, $285 million will expire in 1 to 20 years and $2.2 billion have no expiration date. A valuation allowance of approximately $260 million has been provided against such net operating loss carryforwards.
At December 31, 2017, federal net operating loss carryforwards of $16 million were available to offset future taxable income, which expire from 2027 to 2030. At December 31, 2017, foreign tax credit carryforwards of approximately $72 million were available to reduce possible future U.S. income taxes and which expire from 2018 to 2021. As a result of the Tax Reform Act, the Company may no longer be able to utilize the Solutia, Inc. ("Solutia") U.S. foreign tax credit carryforwards; therefore, management established a full valuation allowance of $72 million on the remaining deferred tax asset as of December 31, 2017.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A partial valuation allowance of $54 million has been established for the Solutia state net operating loss carryforwards. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized or the related statute expires.
Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Miscellaneous receivables | $ | 215 |
| | $ | 235 |
|
| | | | |
| Payables and other current liabilities | $ | 58 |
| | $ | 56 |
|
| Other long-term liabilities | 137 |
| | 60 |
|
| Total income taxes payable | $ | 195 |
| | $ | 116 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Balance at January 1 | $ | 114 |
| | $ | 125 |
| | $ | 117 |
|
| Adjustments based on tax positions related to current year | 29 |
| | (7 | ) | | (12 | ) |
| Additions based on acquisitions | — |
| | — |
| | 27 |
|
| Lapse of statute of limitations | (1 | ) | | (4 | ) | | (7 | ) |
| Balance at December 31 | $ | 142 |
| | $ | 114 |
| | $ | 125 |
|
All of the unrecognized tax benefits would, if recognized, impact the Company's effective tax rate.
Interest, net of tax, related to unrecognized tax benefits is recorded as a component of income tax expense. As of January 1, 2017, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for estimated tax penalties. During 2017, the Company recognized $3 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2017, the Company had accrued balances of $6 million for interest, net of tax benefit, and $1 million for penalties.
As of January 1, 2016, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for tax penalties. During 2016, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2016, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties.
As of January 1, 2015, the Company had accrued a liability of $4 million for interest, net of tax, and $3 million for tax penalties. During 2015, the Company recognized $2 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, and $2 million of penalties, associated with the expiration of the statute of limitations. At December 31, 2015, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties.
The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Solutia legal entities. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2010. Solutia and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2007.
It is reasonably possible that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits could decrease within the next twelve months by up to $20 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Borrowings consisted of: | | | |
| 5.5% notes due November 2019 | $ | 250 |
| | $ | 249 |
|
| 2.7% notes due January 2020 | 797 |
| | 796 |
|
| 4.5% notes due January 2021 | 185 |
| | 184 |
|
| 3.6% notes due August 2022 | 738 |
| | 741 |
|
1.50% notes due May 2023 (1) | 895 |
| | 786 |
|
| 7 1/4% debentures due January 2024 | 197 |
| | 197 |
|
| 7 5/8% debentures due June 2024 | 43 |
| | 43 |
|
| 3.8% notes due March 2025 | 690 |
| | 689 |
|
1.875% notes due November 2026 (1) | 592 |
| | 519 |
|
| 7.60% debentures due February 2027 | 195 |
| | 195 |
|
| 4.8% notes due September 2042 | 493 |
| | 493 |
|
| 4.65% notes due October 2044 | 871 |
| | 870 |
|
| Commercial paper and short-term borrowings | 389 |
| | 280 |
|
| Credit facilities borrowings | 200 |
| | 549 |
|
| Capital leases and other | 5 |
| | 3 |
|
| Total borrowings | 6,540 |
| | 6,594 |
|
| Borrowings due within one year | 393 |
| | 283 |
|
| Long-term borrowings | $ | 6,147 |
| | $ | 6,311 |
|
| |
(1) | The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations. During the twelve months ended December 31, 2017, pre-tax losses of $180 million were recognized in "Other comprehensive income (loss)" for revaluation of these notes. |
In November 2016, sale ofEastman sold additional euro-denominated 1.50% notes due May 2023 in the principal amount of €200 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million),. Net proceeds from the euro-denominated notes were €695 million ($742 million). In conjunction with the euro-denominated public debt offerings, the Company designated these borrowings as non-derivative hedges of a portion of their net investment in one of their euro functional currency denominated subsidiaries to protect the designated net investment against foreign currency fluctuations.
In second quarter 2016, contemporaneous with its May 2016 sale of euro-denominated 1.50% notes due May 2023 in the principal amount of €550 million ($614 million), the Companycontemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiariessubsidiaries. For further information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
In fourth quarter 2016, proceeds from the notes and the second five-year term loan agreement ("2021 Term Loan") borrowings (see "Credit Facility and Commercial Paper Borrowings") were used for the early and full repayment of the 2.4% notes due June 2017 ($500 million principal) and 6.30% notes due November 2018 ($160 million principal) as well as the partial redemptions of the 4.5% notes due January 2021 ($65 million principal), 3.6% notes due August 2022 ($150 million principal), 7 1/4% debentures due January 2024 ($47 million principal), 7 5/8% debentures due June 2024 ($11 million principal), 3.8% notes due March 2025 ($100 million principal), and 7.60% debentures due February 2027 ($28 million principal). Total consideration for these redemptions were $1,119 million ($1,061 million total principal and $58 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $76 million for early debt extinguishment costs and related derivatives and hedging items. The early debt extinguishment costs were primarily attributable to protect the designated net investment against foreign currency fluctuations.early redemption premium and related unamortized costs. The book value of the redeemed debt was $1,061 million. For further information on the related derivatives and hedging items, see Note 9, "Derivative and Non-Derivative Financial Instruments".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
SummaryOn May 26, 2016, the Company sold euro-denominated 1.50% notes due May 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were €544 million ($607 million) and were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. Total consideration for the partial redemption of 2.4% notes due June 2017 was $507 million ($500 million for the principal amount and $7 million for the early redemption premium) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $498 million. In conjunction with the euro-denominated public debt offering, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 9, "Derivative and Non-Derivative Financial Position and Financial Performance of Hedging InstrumentsInstruments".
The following table showsCredit Facilities and Commercial Paper Borrowings
In December 2014, Eastman borrowed $1.0 billion under a five-year term loan ("2019 Term Loan"). As of December 31, 2017, the notional amounts outstanding atCompany had repaid the remaining balance of $250 million using available cash. As of December 31, 2016, and 2015associatedthe 2019 Term Loan agreement balance outstanding was $250 million with an interest rate of 2.02 percent. In December 2016, the Company borrowed $300 million under the 2021 Term Loan. As of December 31, 2017, the 2021 Term Loan agreement balance outstanding was $200 million with an interest rate of 2.60 percent. In 2017, $99 million of the Company's hedging programs.borrowings under the 2021 Term Loan agreement were repaid using available cash. As of December 31, 2016, the 2021 Term Loan agreement balance outstanding was $299 million with an interest rate of 1.95 percent. Borrowings under the 2021 Term Loan agreement are subject to interest at varying spreads above quoted market rates.
|
| | | | | | |
| Notional Outstanding | December 31, 2016 | | December 31, 2015 |
| | | | | |
| Derivatives designated as cash flow hedges: | | | |
| Foreign Exchange Forward and Option Contracts (in millions) | | | |
| | EUR/USD (in EUR) | €378 | | €618 |
| | EUR/USD (in approximate USD equivalent) | $398 | | $689 |
| | JPY/USD (in JPY) | ¥1,800 | | ¥2,400 |
| | JPY/USD (in approximate USD equivalent) | $15 | | $20 |
| Commodity Forward and Collar Contracts | | | |
| | Feedstock (in million barrels) | 11 |
| | 22 |
|
| | Energy (in million million british thermal units) | 23 |
| | 32 |
|
| Interest rate swaps for the future issuance of debt (in millions) | — |
| | $500 |
| | | | |
| Derivatives designated as fair value hedges: | | | |
| Fixed-for-floating interest rate swaps (in millions) | $75 | | — |
|
| | | | |
| Non-derivatives designated as net investment hedges: | | | |
| Foreign Currency Net Investment Hedges (in millions) | | | |
| | EUR/USD (in EUR) | €1,238 | | — |
|
The Company has access to a $250 million accounts receivable securitization agreement (the "A/R Facility") that expires April 2019. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2017 and 2016, the Company had no borrowings under the A/R Facility.
The Credit and A/R Facilities and other borrowing agreements contain customary covenants and events of default, some of which require the Company to maintain certain financial ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all covenants at both December 31, 2017 and December 31, 2016.
The Company has access to borrowings of up to €150 million ($180 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above EURIBOR for euro denominated drawings and the counterparty's cost of funds for drawings in any other currencies, plus administration and insurance fees and are classified as short-term. The amount of outstanding borrowings under this facility were $109 million at December 31, 2017 with a weighted average interest rate of 1.31 percent.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Borrowings
Eastman has classified its total borrowings at December 31, 2017 and 2016 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies". The following table showsfair value for fixed-rate debt securities is based on current market prices and is classified as Level 1. The fair value for the financial assetsCompany's other borrowings primarily under the Term Loans, commercial paper, and liabilities valued on a recurringreceivables facility equals the carrying value and gross basisis classified as Level 2. The Company had no borrowings classified as Level 3 as of December 31, 20162017 and 2015. Additionally,December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2017 |
| (Dollars in millions) | | Recorded Amount
December 31, 2017 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Total borrowings | | $ | 6,540 |
| | $ | 6,980 |
| | $ | 6,386 |
| | $ | 594 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2016 |
| (Dollars in millions) | | Recorded Amount
December 31, 2016 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Total borrowings | | $ | 6,594 |
| | $ | 6,868 |
| | $ | 6,036 |
| | $ | 832 |
| | $ | — |
|
| |
| 9. | DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS |
Overview of Hedging Programs
Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the table below represents wherecash flows of the derivativesunderlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
Cash Flow Hedges
Cash flow hedges are included withinderivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying cash flow hedges is reported as a component of AOCI located in the Consolidated Statements of Financial Position. DuringPosition and reclassified into earnings in the same period or periods presented, there were no transfers between fair value hierarchy levels.
|
| | | | | | | | | | |
| The Financial Position and Gross Fair Value Measurements of Hedging Instruments |
| (Dollars in millions) | | | | | | |
| Derivative Type | | Statements of Financial Position Location | | December 31, 2016 Level 2 | | December 31, 2015 Level 2 |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity contracts | | Other current assets | | $ | 5 |
| | $ | — |
|
| Commodity contracts | | Other noncurrent assets | | 2 |
| | — |
|
| Foreign exchange contracts | | Other current assets | | 49 |
| | 65 |
|
| Foreign exchange contracts | | Other noncurrent assets | | 47 |
| | 79 |
|
| | | | | | | |
| Derivatives designated as fair value hedges: | | | | | | |
| Fixed-for-floating interest rate swap | | Other current assets | | 1 |
| | — |
|
| Total Derivative Assets on Gross Basis | | | | $ | 104 |
| | $ | 144 |
|
| | | | | | | |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity contracts | | Payables and other current liabilities | | $ | 62 |
| | $ | 194 |
|
| Commodity contracts | | Other long-term liabilities | | 69 |
| | 242 |
|
| Forward starting interest rate swaps | | Other long-term liabilities | | — |
| | 30 |
|
| | | | | | | |
| Derivatives designated as fair value hedges: | | | | | | |
| Fixed-for-floating interest rate swap | | Long-term borrowings | | 4 |
| | — |
|
| Total Derivative Liabilities on Gross Basis | | | | $ | 135 |
| | $ | 466 |
|
| Total Net Derivative Liabilities on Gross Basis | | | | $ | 31 |
| | $ | 322 |
|
In additionForeign Currency Exchange Rate Hedging
Eastman manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into currency option and forward cash flow hedges to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies (principally the euro and Japanese yen). Additionally, the Company, from time to time, enters into forward exchange contract cash flow hedges to hedge certain firm commitments denominated in foreign currencies.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commodity Hedging
Certain raw material and energy sources used by Eastman, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the fair value associatedmarket pricing of propane, ethane, natural gas, paraxylene, ethylene, and benzene. In order to mitigate expected fluctuations in market prices, the Company enters into option and forward contracts and designates these contracts as cash flow hedges. The Company currently hedges commodity price risks using derivative financial instrument transactions within a rolling three year period. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, the Company, from time to time, enters into cash flow interest rate derivative instruments, primarily forward starting swaps and treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges and fairare typically 100 percent effective. As a result, there is normally no impact on earnings due to hedge ineffectiveness.
Fair Value Hedges
Fair value hedges noted in the table above, the Company had a carrying value of $1,305 million associated withare defined as derivative or non-derivative instruments designated as foreign currency net investmentand used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges asare recorded on the balance sheet at fair value and the changes in fair value of December 31, 2016. There were no non-derivativethese hedging instruments designated as foreign currency net investment hedges outstanding as of December 31, 2015. The designated foreign currency-denominated borrowings are included asoffset in part of "Long-term borrowings" withinor in whole by corresponding changes in the Consolidated Statements of Financial Position.
Allanticipated cash flows of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provideunderlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for the option to settle contracts on a net basis when they settle on the same day andqualifying fair value hedges is reclassified into earnings in the same currency. In addition,period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings.
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage the Company's mix of fixed and variable rate debt effectively, from time to time, the Company enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. As these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangementinstruments are typically 100 percent effective, there is terminatednormally no impact on earnings due to the occurrence of default or a termination event. The Company has elected to present the derivative contracts on a gross basis in the Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $103 million and a derivative in a net liability position of $134 million as of December 31, 2016. The Company does not have any cash collateral due under such agreements.hedge ineffectiveness.
In 2016, the Company entered into a $75 million notional fixed-to-floating interest rate swap on the 3.8% notes due March 2025 in order to manage the Company's mix of fixed and variable rate debt.
Fair Value Measurements
Eastman records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Eastman maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowances are based on the number of days an individual receivable is delinquent and management's regular assessment of the financial condition of the Company's customers. The Company considers a receivable delinquent if it is unpaid after the terms of the related invoice have expired. The Company evaluates the allowance based on a monthly assessment of the aged receivables. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accounts was $12 million and $10 million at December 31, 2017 and 2016, respectively. The Company does not enter into receivables of a long-term nature, also known as financing receivables, in the normal course of business.
Inventories
Inventories are valued at the lower of cost or market. Eastman determines the cost of most raw materials, work in process, and finished goods inventories in the United States and Switzerland by the last-in, first-out ("LIFO") method. The cost of all other inventories is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method. The Company writes-down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Properties
Eastman records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition into earnings. Asset impairments are reflected as increases in accumulated depreciation for properties that have been placed in service. In instances when an asset has not been placed in service and is impaired, the associated costs are removed from the appropriate property accounts.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization
Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method. Estimated useful lives for buildings and building equipment generally range from 20 to 50 years. Estimated useful lives generally ranging from 3 to 33 years are applied to machinery and equipment in the following categories: computer software (3 to 5 years); office furniture and fixtures and computer equipment (5 to 10 years); vehicles, railcars, and general machinery and equipment (5 to 20 years); and manufacturing-related improvements (20 to 33 years). Accelerated depreciation is reported when the estimated useful life is shortened and continues to be reported in cost of sales.
Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset.
For additional information, see Note 4, "Goodwill and Other Intangible Assets".
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Goodwill
Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2017 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate 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 determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. 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.
If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including a valuation of the estimated fair value of the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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, primarily consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of the tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
Investments
The consolidated financial statements include the accounts of Eastman and all its subsidiaries and entities or joint ventures in which a controlling interest is maintained.
Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Under the equity method of accounting, these investments are included in other noncurrent assets. The Company includes its share of earnings and losses of such investments in "Other (income) charges, net", and its share of "Other comprehensive income (loss), net of tax" ("OCI") located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and in the appropriate component of "Accumulated other comprehensive income (loss)" ("AOCI") located in the Consolidated Statements of Financial Position.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits reflect the Company's assumptions related to discount rates, expected return on plan assets, rate of compensation increase or decrease for employees, and health care cost trends. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
Eastman's pension and other postretirement benefit plans costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) mark-to-market ("MTM") gains and losses recognized annually, in the fourth quarter of each year, primarily resulting from changes in actuarial assumptions for discount rates and the differences between actual and expected returns on plan assets. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized in the quarter in which such remeasurement event occurs.
For additional information, see Note 10, "Retirement Plans".
Environmental Costs
Eastman accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum undiscounted amount. This undiscounted accrued amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged into earnings over the estimated useful life of the assets. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, the expenses charged to earnings will be impacted.
The current portion of accruals for environmental liabilities is included in payables and other current liabilities and the long-term portion is included in other long-term liabilities. These accruals exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred.
For additional information see Note 12, "Environmental Matters and Asset Retirement Obligations".
Derivative and Non-Derivative Financial Instruments
Eastman uses derivative and non-derivative instruments to manage its exposure to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. The Company does not enter into derivative transactions for speculative purposes.
Counterparties to the derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an on-going basis.
The Company's derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and measured at fair value. For qualifying derivatives designated as cash flow hedges, the effective portion of the changes in the fair value are reported as a component of AOCI in the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying derivatives designated as fair value hedges, the effective portion of the changes in the fair value are reported as "Long-term borrowings" on the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying non-derivatives designated as net investment hedges, the effective portion of the changes in fair value are reported as a translation adjustment in the "Change in cumulative translation adjustment" ("CTA") within OCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The ineffective portion of hedges, hedge components excluded from the assessment of effectiveness, and changes in the fair value of nonqualifying derivatives or derivatives that are not designated as hedges, are recognized in current earnings. Hedge accounting will be discontinued prospectively for all hedges that no longer qualify for hedge accounting treatment. Cash flows from derivative instruments designated as hedges are reported in the same category as the cash flows from the items being hedged.
For additional information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
Litigation and Contingent Liabilities
Eastman and its operations from time to time are, and in the future, may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Customer Incentives
Eastman recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectability is reasonably assured. Revenue for products is recognized when title and risk of loss transfer to the customer.
The Company records estimated obligations for customer programs and incentive offerings, which consist primarily of revenue or volume-based amounts that a customer must achieve over a specified period of time, as a reduction of revenue from each underlying revenue transaction as the customer progresses toward goals specified in incentive agreements. These estimates are based on a combination of forecasts of customer sales and actual sales volume and revenues against established goals, the customer's current level of purchases, Eastman's knowledge of customer purchasing habits, and industry pricing practice. The incentive payment rate may be variable, based upon the customer reaching higher purchasing levels over a specified period of time in order to receive an agreed upon incentive payment.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are billed to customers and are recorded as sales revenue. Shipping and handling costs incurred are recorded in cost of sales.
Restructuring of Operations
Eastman records restructuring charges for costs incurred in connection with consolidation of operations, exited business or product lines, or shutdowns of specific sites that are expected to be substantially completed within twelve months. These restructuring charges are recorded as incurred, and are associated with site closures, legal and environmental matters, demolition, contract terminations, obsolete inventory, or other costs and charges directly related to the restructuring. The Company records severance charges for employee separations when the separation is probable and reasonably estimable. In the event employees are required to perform future service, the Company records severance charges ratably over the remaining service period of those employees. For additional information, see Note 15, "Asset Impairments and Restructuring Charges, Net".
Share-based Compensation
Eastman recognizes compensation expense in the financial statements for stock options and other share-based compensation awards based upon the grant-date fair value over the substantive vesting period. For additional information, see Note 17, "Share-Based Compensation Plans and Awards".
Income Taxes
The (benefit from) provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The (benefit from) provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of Eastman's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely reinvested.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| | | | |
| Finished goods | $ | 1,114 |
| | $ | 997 |
|
| Work in process | 213 |
| | 198 |
|
| Raw materials and supplies | 470 |
| | 473 |
|
| Total inventories at FIFO or average cost | 1,797 |
| | 1,668 |
|
| Less: LIFO reserve | 288 |
| | 264 |
|
| Total inventories | $ | 1,509 |
| | $ | 1,404 |
|
Inventories valued on the LIFO method were approximately 60 percent of total inventories at both December 31, 2017 and 2016.
| |
| 3. | PROPERTIES AND ACCUMULATED DEPRECIATION |
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Properties | | | |
| Land | $ | 161 |
| | $ | 157 |
|
| Buildings | 1,325 |
| | 1,256 |
|
| Machinery and equipment | 10,122 |
| | 9,646 |
|
| Construction in progress | 762 |
| | 640 |
|
| Properties and equipment at cost | $ | 12,370 |
| | $ | 11,699 |
|
| Less: Accumulated depreciation | 6,763 |
| | 6,423 |
|
| Net properties | $ | 5,607 |
| | $ | 5,276 |
|
Depreciation expense was $420 million, $412 million, and $402 million for 2017, 2016, and 2015, respectively.
Cumulative construction-period interest of $111 million and $169 million, reduced by accumulated depreciation of $49 million and $111 million, is included in net properties at December 31, 2017 and 2016, respectively.
Eastman capitalized $8 million of interest in 2017 and $7 million of interest in both 2016 and 2015.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
| 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill follow:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Additives & Functional Products | | Adhesives & Plasticizers | | Advanced Materials | | Chemical Intermediates | | Other | | Total |
| Balance at December 31, 2015 | $ | 1,865 |
| | $ | 111 |
| | $ | 1,293 |
| | $ | 1,239 |
| | $ | 10 |
| | $ | 4,518 |
|
| Transfers of goodwill resulting from resegmentation | 583 |
| | (111 | ) | | — |
| | (472 | ) | | — |
| | — |
|
| Currency translation adjustments | (32 | ) | | — |
| | (18 | ) | | (7 | ) | | — |
| | (57 | ) |
| Balance at December 31, 2016 | 2,416 |
| | — |
| | 1,275 |
|
| 760 |
|
| 10 |
|
| 4,461 |
|
| Acquisitions | 17 |
| | — |
| | — |
| | — |
| | — |
| | 17 |
|
| Goodwill written off as a result of sale of business | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Currency translation adjustments | 27 |
| | — |
| | 14 |
| | 9 |
| | — |
| | 50 |
|
| Balance at December 31, 2017 | $ | 2,459 |
| | $ | — |
| | $ | 1,289 |
| | $ | 769 |
| | $ | 10 |
| | $ | 4,527 |
|
As of December 31, 2017 and 2016, the reported balance of goodwill included accumulated impairment losses of $23 million, $12 million, and $14 million in the Additives & Functions Products ("AFP") segment, Chemical Intermediates ("CI") segment, and other segments, respectively.
The carrying amounts of intangible assets follow:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2017 | | December 31, 2016 |
| (Dollars in millions) | Estimated Useful Life in Years | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Amortizable intangible assets: | | | | | | | | | | | | | | |
| Customer relationships | 8 | - | 25 | $ | 1,583 |
| | $ | 345 |
| | $ | 1,238 |
| | $ | 1,542 |
| | $ | 267 |
| | $ | 1,275 |
|
| Technology | 7 | - | 20 | 690 |
| | 247 |
| | 443 |
| | 675 |
| | 196 |
| | 479 |
|
| Contracts | | 5 |
| 180 |
| | 111 |
| | 69 |
| | 180 |
| | 75 |
| | 105 |
|
| Other | 5 | - | 37 | 102 |
| | 19 |
| | 83 |
| | 99 |
| | 14 |
| | 85 |
|
| | | | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | |
| Tradenames | | | | 530 |
| | — |
| | 530 |
| | 525 |
| | — |
| | 525 |
|
| Other | | | | 10 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 10 |
|
| Total identified intangible assets | | | | $ | 3,095 |
| | $ | 722 |
| | $ | 2,373 |
| | $ | 3,031 |
| | $ | 552 |
| | $ | 2,479 |
|
Amortization expense of definite-lived intangible assets was $164 million, $166 million, and $163 million for 2017, 2016, and 2015, respectively. Estimated amortization expense for future periods is $165 million in each year for 2018 through 2019 and $125 million in each year for 2020 through 2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In June 2016, Eastman sold its 50 percent interest in Primester, a joint venture which manufactures cellulose acetate at the Company's Kingsport, Tennessee site, to an affiliate of the joint venture partner for $35 million. This investment was accounted for under the equity method. Eastman's net investment in the joint venture at the date of sale was $18 million. Such amounts were included in "Other noncurrent assets" in the Consolidated Statements of Financial Position and the gain of $17 million was recorded in "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Eastman owns 50 percent or less interest in other joint ventures which are accounted for under the equity method and included in "Other noncurrent assets". These include a 50 percent interest in a joint venture that has a manufacturing facility in Nanjing, China. The Nanjing facility produces Eastotac® hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants. These also include a joint venture with a 50 percent interest for the manufacture of compounded cellulose diacetate ("CDA") in Shenzhen, China. CDA is a bio-derived material, which is used in various injection molded applications, including but not limited to ophthalmic frames, tool handles, and other end use products. The Company owns a 45 percent interest in a joint venture with China National Tobacco Corporation that manufactures acetate tow in Hefei, China. At December 31, 2017 and 2016, the Company's total investment in these joint ventures was $95 million and $107 million, respectively.
| |
| 6. | PAYABLES AND OTHER CURRENT LIABILITIES |
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Trade creditors | $ | 842 |
| | $ | 704 |
|
| Accrued payrolls, vacation, and variable-incentive compensation | 199 |
| | 196 |
|
| Accrued taxes | 111 |
| | 106 |
|
| Post-employment obligations | 89 |
| | 110 |
|
| Other | 348 |
| | 396 |
|
| Total payables and other current liabilities | $ | 1,589 |
| | $ | 1,512 |
|
The "Other" above consists primarily of accruals for other miscellaneous payables, dividends payable, interest payable, hedging liability, and the current portion of environmental liabilities.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
On December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for the impacts of newly enacted tax legislation are generally required to be completed in the period of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because the enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017.
The Company recognized a $339 million estimated net tax benefit in 2017, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The net tax benefit included a $533 million benefit from the one-time revaluation of deferred tax liabilities, partially offset by a one-time transition tax on deferred foreign income of $71 million and $123 million in changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
The income tax payable for the transition tax will be paid over eight years. As of December 31, 2017, a non-current income tax payable of approximately $60 million attributable to the transition tax is reflected in “Other long term liabilities” of the Consolidated Statement of Financial Position.
As of December 31, 2017, the Company considers the accounting for the following impacts of the Tax Reform Act to be provisional and, accordingly, subject to adjustment in future periods: the transition tax on deferred foreign income (which consists of post-1986 accumulated earnings and profits of controlled foreign corporations and the determination of cash versus non-cash balances), the impact of the change in income tax rates on deferred tax assets and liabilities, and the evaluation of gross foreign tax credit carryforwards and related valuation allowances. In preparing the provisional estimates for the year ended December 31, 2017, the Company has considered notices and revenue procedures issued by the Internal Revenue Service and authoritative accounting guidance issued through February 12, 2018.
Certain of the provisional amounts will be finalized in conjunction with the filing of the Company's U.S. federal income tax return for the year ended December 31, 2017 that will not be finalized until later in 2018. While historically differences between amounts reported in the Company’s consolidated financial statements and the Company’s U.S. federal income tax return have resulted in offsetting changes in estimates in current and deferred taxes for items which are timing related, the reduction of the U.S. tax rate will result in adjustments to the Company's income tax (benefit) provision when recognized. The Company also considers it likely that further technical guidance regarding certain aspects of the new provisions included in the Tax Reform Act, as well as clarity regarding state income tax conformity to current federal tax code, may be issued which could result in changes to the provisional amounts reported as of December 31, 2017 and related state income tax effects.
The Company is analyzing the future impact of the Tax Reform Act for the fiscal year beginning January 1, 2018, including the new provisions known as the base erosion anti-abuse tax (“BEAT”) and global intangible low-tax income (“GILTI”) tax, as well as other provisions. Under U.S. GAAP, companies can make an accounting policy election to either treat taxes resulting from GILTI as a current-period expense when incurred or factor such amounts into the measurement of deferred taxes. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election within the measurement period as provided under SAB 118.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of earnings before income taxes and the (benefit from) provision for U.S. and other income taxes from operations follow:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Earnings before income taxes | | | | | |
| United States | $ | 654 |
| | $ | 422 |
| | $ | 618 |
|
| Outside the United States | 635 |
| | 627 |
| | 511 |
|
| Total | $ | 1,289 |
| | $ | 1,049 |
| | $ | 1,129 |
|
| (Benefit from) provision for income taxes | |
| | |
| | |
|
| United States Federal | |
| | |
| | |
|
Current (1) | $ | 220 |
| | $ | (80 | ) | | $ | 87 |
|
Deferred (2) | (383 | ) | | 214 |
| | 119 |
|
| Outside the United States | | | | | |
| Current | 62 |
| | 91 |
| | 59 |
|
| Deferred | 2 |
| | (18 | ) | | 16 |
|
| State and other | | | | | |
| Current | 13 |
| | 2 |
| | 22 |
|
| Deferred | (13 | ) | | (19 | ) | | (28 | ) |
| Total | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| |
(1) | Includes a one-time transition tax of $71 million on deferred foreign income. |
| |
(2) | Includes one-time benefit of $517 million primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate and a one-time $72 million valuation allowance on deferred tax assets for foreign tax credit carryforwards. |
The following represents the deferred tax (benefit) charge recorded as a component of AOCI in the Consolidated Statements of Financial Position:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Defined benefit pension and other postretirement benefit plans | $ | (16 | ) | | $ | 21 |
| | $ | 42 |
|
| Derivatives and hedging | 8 |
| | 105 |
| | 21 |
|
| Total | $ | (8 | ) | | $ | 126 |
| | $ | 63 |
|
Total income tax (benefit) expense included in the consolidated financial statements was composed of the following:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Earnings before income taxes | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| Other comprehensive income | (8 | ) | | 126 |
| | 63 |
|
| Total | $ | (107 | ) | | $ | 316 |
| | $ | 338 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences between the (benefit from) provision for income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow:
|
| | | | | | | | | | | |
| | For years ended December 31, |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Amount computed using the statutory rate | $ | 450 |
| | $ | 366 |
| | $ | 393 |
|
| State income taxes, net | (4 | ) | | (18 | ) | | (3 | ) |
| Foreign rate variance | (150 | ) | | (121 | ) | | (93 | ) |
| Domestic manufacturing deduction | (18 | ) | | (7 | ) | | (12 | ) |
| Change in reserves for tax contingencies | 20 |
| | — |
| | (7 | ) |
| General business credits | (65 | ) | | (20 | ) | | (15 | ) |
| U.S. tax on foreign earnings | 29 |
| | 25 |
| | 7 |
|
| Foreign tax credits | (26 | ) | | (10 | ) | | (9 | ) |
Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | (339 | ) | | — |
| | — |
|
| Other | 4 |
| | (25 | ) | | 14 |
|
| (Benefit from) provision for income taxes | $ | (99 | ) | | $ | 190 |
| | $ | 275 |
|
| | | | | | |
| Effective income tax rate | (8 | )% | | 18 | % | | 24 | % |
| |
(1) | Includes one-time net benefit primarily due to the re-measurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate partially offset by the transition tax on deferred foreign income and changes in the valuation of deferred tax assets associated with tax law changes and the tax impact from intercompany reorganization activities. |
The 2017 effective tax rate was lower than the 2016 effective tax rate due to a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years’ domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years’ foreign income tax returns. The 2016 effective tax rate included one-time tax benefits discussed immediately below.
The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate included a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Deferred tax assets | | | |
| Post-employment obligations | $ | 242 |
| | $ | 378 |
|
| Net operating loss carryforwards | 690 |
| | 337 |
|
| Tax credit carryforwards | 202 |
| | 248 |
|
| Environmental reserves | 72 |
| | 119 |
|
| Unrealized derivative loss | 17 |
| | 50 |
|
| Other | 90 |
| | 186 |
|
| Total deferred tax assets | 1,313 |
| | 1,318 |
|
| Less: Valuation allowance | 410 |
| | 278 |
|
| Deferred tax assets less valuation allowance | $ | 903 |
| | $ | 1,040 |
|
| Deferred tax liabilities | |
| | |
|
| Property, plant, and equipment | $ | (835 | ) | | $ | (1,237 | ) |
| Intangible assets | (535 | ) | | (847 | ) |
| Investments | (274 | ) | | — |
|
| Other | (131 | ) | | (128 | ) |
| Total deferred tax liabilities | $ | (1,775 | ) | | $ | (2,212 | ) |
| Net deferred tax liabilities | $ | (872 | ) | | $ | (1,172 | ) |
| As recorded in the Consolidated Statements of Financial Position: | |
| | |
|
| Other noncurrent assets | $ | 21 |
| | $ | 34 |
|
| Deferred income tax liabilities | (893 | ) | | (1,206 | ) |
| Net deferred tax liabilities | $ | (872 | ) | | $ | (1,172 | ) |
As of December 31, 2017, the Company has accumulated undistributed earnings generated by our foreign subsidiaries of approximately $1.2 billion which was subject to the one-time transition tax of approximately $71 million on deferred foreign income as required by the Tax Reform Act. We continue to consider these earnings as reinvested indefinitely.
For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the United States. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the United States, a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the United States statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $17 million at December 31, 2017 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2017, foreign net operating loss carryforwards totaled $2.5 billion. Of this total, $285 million will expire in 1 to 20 years and $2.2 billion have no expiration date. A valuation allowance of approximately $260 million has been provided against such net operating loss carryforwards.
At December 31, 2017, federal net operating loss carryforwards of $16 million were available to offset future taxable income, which expire from 2027 to 2030. At December 31, 2017, foreign tax credit carryforwards of approximately $72 million were available to reduce possible future U.S. income taxes and which expire from 2018 to 2021. As a result of the Tax Reform Act, the Company may no longer be able to utilize the Solutia, Inc. ("Solutia") U.S. foreign tax credit carryforwards; therefore, management established a full valuation allowance of $72 million on the remaining deferred tax asset as of December 31, 2017.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A partial valuation allowance of $54 million has been established for the Solutia state net operating loss carryforwards. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized or the related statute expires.
Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Miscellaneous receivables | $ | 215 |
| | $ | 235 |
|
| | | | |
| Payables and other current liabilities | $ | 58 |
| | $ | 56 |
|
| Other long-term liabilities | 137 |
| | 60 |
|
| Total income taxes payable | $ | 195 |
| | $ | 116 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| Balance at January 1 | $ | 114 |
| | $ | 125 |
| | $ | 117 |
|
| Adjustments based on tax positions related to current year | 29 |
| | (7 | ) | | (12 | ) |
| Additions based on acquisitions | — |
| | — |
| | 27 |
|
| Lapse of statute of limitations | (1 | ) | | (4 | ) | | (7 | ) |
| Balance at December 31 | $ | 142 |
| | $ | 114 |
| | $ | 125 |
|
All of the unrecognized tax benefits would, if recognized, impact the Company's effective tax rate.
Interest, net of tax, related to unrecognized tax benefits is recorded as a component of income tax expense. As of January 1, 2017, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for estimated tax penalties. During 2017, the Company recognized $3 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2017, the Company had accrued balances of $6 million for interest, net of tax benefit, and $1 million for penalties.
As of January 1, 2016, the Company had accrued a liability of $4 million for interest, net of tax, and $1 million for tax penalties. During 2016, the Company recognized $1 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $1 million of income for interest, net of tax, and no penalties, associated with the expiration of the statute of limitations. At December 31, 2016, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties.
As of January 1, 2015, the Company had accrued a liability of $4 million for interest, net of tax, and $3 million for tax penalties. During 2015, the Company recognized $2 million of expense for interest, net of tax, and no penalties associated with unrecognized tax benefits, offset by $2 million of income for interest, net of tax, and $2 million of penalties, associated with the expiration of the statute of limitations. At December 31, 2015, the Company had accrued balances of $4 million for interest, net of tax benefit, and $1 million for penalties.
The Company files income tax returns in the United States and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Solutia legal entities. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2010. Solutia and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2007.
It is reasonably possible that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits could decrease within the next twelve months by up to $20 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | |
| | December 31, |
| (Dollars in millions) | 2017 | | 2016 |
| Borrowings consisted of: | | | |
| 5.5% notes due November 2019 | $ | 250 |
| | $ | 249 |
|
| 2.7% notes due January 2020 | 797 |
| | 796 |
|
| 4.5% notes due January 2021 | 185 |
| | 184 |
|
| 3.6% notes due August 2022 | 738 |
| | 741 |
|
1.50% notes due May 2023 (1) | 895 |
| | 786 |
|
| 7 1/4% debentures due January 2024 | 197 |
| | 197 |
|
| 7 5/8% debentures due June 2024 | 43 |
| | 43 |
|
| 3.8% notes due March 2025 | 690 |
| | 689 |
|
1.875% notes due November 2026 (1) | 592 |
| | 519 |
|
| 7.60% debentures due February 2027 | 195 |
| | 195 |
|
| 4.8% notes due September 2042 | 493 |
| | 493 |
|
| 4.65% notes due October 2044 | 871 |
| | 870 |
|
| Commercial paper and short-term borrowings | 389 |
| | 280 |
|
| Credit facilities borrowings | 200 |
| | 549 |
|
| Capital leases and other | 5 |
| | 3 |
|
| Total borrowings | 6,540 |
| | 6,594 |
|
| Borrowings due within one year | 393 |
| | 283 |
|
| Long-term borrowings | $ | 6,147 |
| | $ | 6,311 |
|
| |
(1) | The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations. During the twelve months ended December 31, 2017, pre-tax losses of $180 million were recognized in "Other comprehensive income (loss)" for revaluation of these notes. |
In November 2016, Eastman sold additional euro-denominated 1.50% notes due May 2023 in the principal amount of €200 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million). Net proceeds from the euro-denominated notes were €695 million ($742 million). In conjunction with the euro-denominated public debt offerings, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
In fourth quarter 2016, proceeds from the notes and the second five-year term loan agreement ("2021 Term Loan") borrowings (see "Credit Facility and Commercial Paper Borrowings") were used for the early and full repayment of the 2.4% notes due June 2017 ($500 million principal) and 6.30% notes due November 2018 ($160 million principal) as well as the partial redemptions of the 4.5% notes due January 2021 ($65 million principal), 3.6% notes due August 2022 ($150 million principal), 7 1/4% debentures due January 2024 ($47 million principal), 7 5/8% debentures due June 2024 ($11 million principal), 3.8% notes due March 2025 ($100 million principal), and 7.60% debentures due February 2027 ($28 million principal). Total consideration for these redemptions were $1,119 million ($1,061 million total principal and $58 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $76 million for early debt extinguishment costs and related derivatives and hedging items. The early debt extinguishment costs were primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $1,061 million. For further information on the related derivatives and hedging items, see Note 9, "Derivative and Non-Derivative Financial Instruments".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
On May 26, 2016, the Company sold euro-denominated 1.50% notes due May 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were €544 million ($607 million) and were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. Total consideration for the partial redemption of 2.4% notes due June 2017 was $507 million ($500 million for the principal amount and $7 million for the early redemption premium) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs. The book value of the redeemed debt was $498 million. In conjunction with the euro-denominated public debt offering, the Company contemporaneously designated these borrowings as a non-derivative hedge of a portion of its net investment in one of its euro functional currency denominated subsidiaries. For further information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
Credit Facilities and Commercial Paper Borrowings
In December 2014, Eastman borrowed $1.0 billion under a five-year term loan ("2019 Term Loan"). As of December 31, 2017, the Company had repaid the remaining balance of $250 million using available cash. As of December 31, 2016, the 2019 Term Loan agreement balance outstanding was $250 million with an interest rate of 2.02 percent. In December 2016, the Company borrowed $300 million under the 2021 Term Loan. As of December 31, 2017, the 2021 Term Loan agreement balance outstanding was $200 million with an interest rate of 2.60 percent. In 2017, $99 million of the Company's borrowings under the 2021 Term Loan agreement were repaid using available cash. As of December 31, 2016, the 2021 Term Loan agreement balance outstanding was $299 million with an interest rate of 1.95 percent. Borrowings under the 2021 Term Loan agreement are subject to interest at varying spreads above quoted market rates.
The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") expiring October 2021. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At December 31, 2017 and 2016, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2017, the Company's commercial paper borrowings were $280 million with a weighted average interest rate of 1.61 percent. At December 31, 2016, the Company's commercial paper borrowings were $280 million with a weighted average interest rate of 1.12 percent.
The Company has access to a $250 million accounts receivable securitization agreement (the "A/R Facility") that expires April 2019. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2017 and 2016, the Company had no borrowings under the A/R Facility.
The Credit and A/R Facilities and other borrowing agreements contain customary covenants and events of default, some of which require the Company to maintain certain financial ratios that determine the amounts available and terms of borrowings. The Company was in compliance with all covenants at both December 31, 2017 and December 31, 2016.
The Company has access to borrowings of up to €150 million ($180 million) under a receivables facility based on the discounted value of selected customer accounts receivable. This facility expires December 2020 and renews for another one year period if not terminated with 90 days notice by either party. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. Borrowings under this facility are subject to interest at an agreed spread above EURIBOR for euro denominated drawings and the counterparty's cost of funds for drawings in any other currencies, plus administration and insurance fees and are classified as short-term. The amount of outstanding borrowings under this facility were $109 million at December 31, 2017 with a weighted average interest rate of 1.31 percent.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Borrowings
Eastman has classified its total borrowings at December 31, 2017 and 2016 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies". The fair value for fixed-rate debt securities is based on current market prices and is classified as Level 1. The fair value for the Company's other borrowings primarily under the Term Loans, commercial paper, and a receivables facility equals the carrying value and is classified as Level 2. The Company had no borrowings classified as Level 3 as of December 31, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2017 |
| (Dollars in millions) | | Recorded Amount
December 31, 2017 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Total borrowings | | $ | 6,540 |
| | $ | 6,980 |
| | $ | 6,386 |
| | $ | 594 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2016 |
| (Dollars in millions) | | Recorded Amount
December 31, 2016 | | Total Fair Value | | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Total borrowings | | $ | 6,594 |
| | $ | 6,868 |
| | $ | 6,036 |
| | $ | 832 |
| | $ | — |
|
| |
| 9. | DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS |
Overview of Hedging Programs
Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying cash flow hedges is reported as a component of AOCI located in the Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Foreign Currency Exchange Rate Hedging
Eastman manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into currency option and forward cash flow hedges to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies (principally the euro and Japanese yen). Additionally, the Company, from time to time, enters into forward exchange contract cash flow hedges to hedge certain firm commitments denominated in foreign currencies.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Commodity Hedging
Certain raw material and energy sources used by Eastman, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the market pricing of propane, ethane, natural gas, paraxylene, ethylene, and benzene. In order to mitigate expected fluctuations in market prices, the Company enters into option and forward contracts and designates these contracts as cash flow hedges. The Company currently hedges commodity price risks using derivative financial instrument transactions within a rolling three year period. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, the Company, from time to time, enters into cash flow interest rate derivative instruments, primarily forward starting swaps and treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges and are typically 100 percent effective. As a result, there is normally no impact on earnings due to hedge ineffectiveness.
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges are recorded on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized in current earnings.
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage the Company's mix of fixed and variable rate debt effectively, from time to time, the Company enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. As these instruments are typically 100 percent effective, there is normally no impact on earnings due to hedge ineffectiveness.
In 2016, the Company entered into a $75 million notional fixed-to-floating interest rate swap on the 3.8% notes due March 2025 in order to manage the Company's mix of fixed and variable rate debt.
Net Investment Hedges
Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the CTA within OCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Gains and losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The Company designated the euro-denominated 1.50% notes due May 2023 in the principal amounts of €200 million ($213 million) in fourth quarter 2016 and €550 million ($614 million) in second quarter 2016 and the euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million) in fourth quarter 2016 as non-derivative net investment hedges of a portion of the Company's net investments in euro functional currency-denominated subsidiaries to offset foreign currency fluctuations.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Financial Position and Financial Performance of Hedging Instruments
The following table presents the notional amounts outstanding at December 31, 2017 and 2016associated with Eastman's hedging programs.
|
| | | | | | |
| Notional Outstanding | December 31, 2017 | | December 31, 2016 |
| | | | | |
| Derivatives designated as cash flow hedges: | | | |
| Foreign Exchange Forward and Option Contracts (in millions) | | | |
| | EUR/USD (in EUR) | €525 | | €378 |
| | EUR/USD (in approximate USD equivalent) | $630 | | $398 |
| | JPY/USD (in JPY) | ¥0 | | ¥1,800 |
| | JPY/USD (in approximate USD equivalent) | $0 | | $15 |
| Commodity Forward and Collar Contracts | | | |
| | Feedstock (in million barrels) | 7 |
| | 11 |
|
| | Energy (in million million british thermal units) | 23 |
| | 23 |
|
| | | | |
| Derivatives designated as fair value hedges: | | | |
| Fixed-for-floating interest rate swaps (in millions) | $75 | | $75 |
| | | | |
| Non-derivatives designated as net investment hedges: | | | |
| Foreign Currency Net Investment Hedges (in millions) | | | |
| | EUR/USD (in EUR) | €1,240 | | €1,238 |
Fair Value Measurements
For additional information on fair value measurement, see Note 1, "Significant Accounting Policies".
The fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroborations, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
All of the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs that are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties in order to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an on-going basis. The Company did not realize a credit loss during the yearyears ended December 31, 2017 or 2016 and 2015..
From timeAll the Company's derivative contracts are subject to time,master netting arrangements, or similar agreements, which provide for the Company holds Level 3 assetsoption to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for commodity hedges. The fair valuesa net settlement of Level 3 instruments are determined using pricing data similarall contracts with a given counterparty in the event that the arrangement is terminated due to that used in Level 2 financial instruments described above, and reflect adjustments for less liquid marketsthe occurrence of default or longer contractual terms. Level 3 hedges typically will mature within one year or less.a termination event. The Company determines the fair value of Level 3 ethylene derivative forward contracts using an average of unadjusted forward ethylene prices provided by industry recognized experts to value its ethylene positions.does not have any cash collateral due under such agreements.
The table below presents a rollforward of activity for the level 3 inputs for the period ended December 31, 2016 and 2015: |
| | | | | | | | |
| Fair Value Measurements Using Level 3 Inputs | | |
| Commodity Contracts | | December 31, |
| (Dollars in millions) | | 2016 | | 2015 |
| Beginning balance at January 1 | | $ | — |
| | $ | 2 |
|
| Realized gain in sales revenue | | — |
| | 4 |
|
| Change in unrealized loss in Other Comprehensive Income | | — |
| | (2 | ) |
| Purchases, sales and settlements | | — |
| | (4 | ) |
| Ending balance at December 31 | | $ | — |
| | $ | — |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company elected to present derivative contracts on a gross basis within the Consolidated Statements of Financial Position. The following table belowpresents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are located within the Consolidated Statements of Financial Position as of December 31, 2017 and 2016.
|
| | | | | | | | | | |
| The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis |
| (Dollars in millions) | | | | | | |
| Derivative Type | | Statements of Financial Position Location | | December 31, 2017 Level 2 | | December 31, 2016 Level 2 |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity contracts | | Other current assets | | $ | 9 |
| | $ | 5 |
|
| Commodity contracts | | Other noncurrent assets | | 4 |
| | 2 |
|
| Foreign exchange contracts | | Other current assets | | 23 |
| | 49 |
|
| Foreign exchange contracts | | Other noncurrent assets | | 2 |
| | 47 |
|
| | | | | | | |
| Derivatives designated as fair value hedges: | | | | | | |
| Fixed-for-floating interest rate swap | | Other current assets | | 1 |
| | 1 |
|
| Total Derivative Assets | | | | $ | 39 |
| | $ | 104 |
|
| | | | | | | |
| Derivatives designated as cash flow hedges: | | | | | | |
| Commodity contracts | | Payables and other current liabilities | | $ | 28 |
| | $ | 62 |
|
| Commodity contracts | | Other long-term liabilities | | 10 |
| | 69 |
|
| Foreign exchange contracts | | Payables and other current liabilities | | 6 |
| | — |
|
| Foreign exchange contracts | | Other long-term liabilities | | 4 |
| | — |
|
| | | | | | | |
| Derivatives designated as fair value hedges: | | | | | | |
| Fixed-for-floating interest rate swap | | Long-term borrowings | | 4 |
| | 4 |
|
| Total Derivative Liabilities | | | | $ | 52 |
| | $ | 135 |
|
| Total Net Derivative Liabilities | | | | $ | 13 |
| | $ | 31 |
|
In addition to the fair value associated with derivative instruments designated as cash flow hedges and fair value hedges noted in the table above, the Company had a carrying value of $1.5 billion and $1.3 billion associated with non-derivative instruments designated as foreign currency net investment hedges as of December 31, 2017 and 2016, respectively. The designated foreign currency-denominated borrowings are included as part of "Long-term borrowings" within the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the effect of the Company's hedging instruments on OCI and the financial performance for the twelve months ended December 31, 20162017 and 2015:2016:
| | | (Dollars in millions) | | Change in amount of after tax gain/(loss) recognized in OCI on Derivatives (effective portion) | | Pre-tax amount of gain/(loss) reclassified from Accumulated OCI into income (effective portion) | | Additional gain/(loss) recognized in earnings (effective portion) | | | Change in amount of after tax gain/(loss) recognized in OCI on Derivatives (effective portion) | | Pre-tax amount of gain/(loss) reclassified from AOCI into income (effective portion) | | Additional gain/(loss) recognized in earnings (effective portion) | |
| | | December 31 | | December 31 | | December 31 | | | | December 31 | | December 31 | | December 31 | | |
| Hedging Relationships | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | Income Statement Classification | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | Income Statement Classification |
| Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commodity contracts | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | Sales | | $ | 62 |
| | $ | 193 |
| | $ | (43 | ) | | $ | (168 | ) | | $ | — |
| | $ | — |
| | Cost of sales |
| Commodity contracts | | 193 |
| | 26 |
| | (168 | ) | | (217 | ) | | — |
| | — |
| | Cost of sales | |
| Foreign exchange contracts | | (29 | ) | | 13 |
| | 63 |
| | 86 |
| | — |
| | — |
| | Sales | | (50 | ) | | (29 | ) | | 35 |
| | 63 |
| | — |
| | — |
| | Sales |
| Forward starting interest rate and treasury lock swap contracts | | (2 | ) | | (4 | ) | | (7 | ) | | (7 | ) | | — |
| | — |
| | Net interest expense | | 3 |
| | (2 | ) | | (5 | ) | | (7 | ) | | — |
| | — |
| | Net interest expense |
| Derivatives in fair value hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed-for-floating interest rate swaps | | — |
| | — |
| | — |
| | — |
| | 11 |
| | 13 |
| | Net interest expense | | — |
| | — |
| | — |
| | — |
| | 4 |
| | 11 |
| | Net interest expense |
| Non-derivatives in net investment hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment hedges (pre-tax) | | 43 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | N/A | | (180 | ) | | 43 |
| | — |
| | — |
| | — |
| | — |
| | N/A |
Nonqualifying derivatives(1): | | | | | | | | | | | | | | |
| Foreign Exchange Contracts | | — |
| | — |
| | — |
| | — |
| | (34 | ) | | (28 | ) | | Other (income) charges, net | |
Derivatives not designated as hedges(1): | | | | | | | | | | | | | | |
| Foreign exchange contracts | | | — |
| | — |
| | — |
| | — |
| | 1 |
| | (34 | ) | | Other (income) charges, net |
| |
(1) | The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to marketmarked-to-market and represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter. |
Pre-tax monetized positions and MTM gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included losses of $214 million at December 31, 2017 and losses of $57 million at December 31, 2016 and losses of $376 million at December 31, 2015.2016. Losses in AOCI decreasedincreased in 20162017 compared to 20152016 primarily as a result of an increase in commodity prices, particularly propane, and a decrease in foreign currency exchange rates, particularly the euro.euro, partially offset by an increase in commodity prices, particularly propane. If realized, approximately $12$6 million in pre-tax losses will be reclassified into earnings during the next 12 months.
Any ineffective portions associated withThe Company had no material ineffectiveness from the hedging programs are immediately recognized in earnings. The Company recognized pre-tax losses for ineffectiveness of the commodity hedging portfolio of $3 million during the twelve monthsyears ended December 31, 2017 or 2016.
In fourth quarter 2016 as a result of the early repayments of borrowings, the Company settled the notional amount of $500 million associated with the 2017 forward starting interest rate swap, which had a MTM loss on the settlement date of $44 million and was included as part of investing activities in the Consolidated Statements of Cash Flows. The early repayment of borrowings resulted in a charge of $18 million for cash flow hedges and a gain of $4 million for fair value hedges, which is included within the $76 million of debt extinguishment costs and related derivatives and hedging items on the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. For further information, see Note 9,8, "Borrowings".
With the exception of the ineffectiveness items previously noted, there was no material ineffectiveness associated with the remaining hedging programs during the twelve months ended 2016 or 2015.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As described in more detail below, Eastman offers various postretirement benefits to its employees.
Defined Contribution Plans
The CompanyEastman sponsors a defined contribution employee stock ownership plan (the "ESOP"), which is a component of the Eastman Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP"), a plan under Section 401(a) of the Internal Revenue Code. Eastman made a contribution in February 20172018 to the EIP/ESOP for substantially all U.S. employees equal to 5 percent of their eligible compensation for the 20162017 plan year. Employees may allocate contributions to other investment funds within the EIP from the ESOP at any time without restrictions. Allocated shares in the ESOP totaled 2,130,176; 2,183,950; 2,199,000; and 2,197,7402,199,000 shares as of December 31, 2017, 2016, 2015, and 2014,2015, respectively. Dividends on shares held by the EIP/ESOP are charged to retained earnings. All shares held by the EIP/ESOP are treated as outstanding in computing earnings per share.
In 2006, the Company amended its EIP/ESOP to provide a Company match of 50 percent of the first 7 percent of an employee's compensation contributed to the plan for employees who are hired on or after January 1, 2007. Employees who are hired on or after January 1, 2007, are also eligible for the contribution to the ESOP as described above.
Charges for domestic contributions to the EIP/ESOP were $64 million, $63 million, and $62 million for 2017, 2016, and $56 million for 2016, 2015, and 2014, respectively.
Defined Benefit Pension Plans and Other Postretirement Benefit Plans
Pension Plans
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits.
Effective January 1, 2000, the Company's Eastman Retirement Assistance Plan, a U.S. defined benefit pension plan, was amended. Employees' accrued pension benefits earned prior to January 1, 2000 are calculated based on previous plan provisions using the employee's age, years of service, and final average compensation as defined in the plans. The amended plan uses a pension equity formula to calculate an employee's retirement benefits from January 1, 2000 forward. Benefits payable will be the combined pre-2000 and post-1999 benefits. Employees hired on or after January 1, 2007 are not eligible to participate in Eastman's U.S. defined benefit pension plans.
In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. For more information on this acquisition, see Note 2, "Acquisitions".
Benefits are paid to employees from trust funds. Contributions to the trust funds are made as permitted by laws and regulations. The pension trust funds do not directly own any of the Company's common stock.
Pension coverage for employees of Eastman's non-U.S. operations is provided, to the extent deemed appropriate, through separate plans. The Company systematically provides for obligations under such plans by depositing funds with trustees, under insurance policies, or by book reserves.
Other Postretirement Benefit Plans
Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for life insurance,pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 and a subsidythat will end on December 31, 2021. Company funding is also provided for health care and dental benefits to retirees' eligible survivors. In general, Eastman provides those benefits toMedicare retirees eligible under the Company's U.S. plans. Similar benefits are also made available to retirees of Holston Defense Corporation, a wholly-owned subsidiary of the Company that,hired prior to January 1, 1999, operated2007 with a government-owned ammunition plant.
Employees in the U.S. hired on or after January 1, 2007 do not have access to postretirement health care benefits.reimbursement arrangement. A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.
In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's U.S. postretirement benefit plan. For more information on this acquisition, see Note 2, "Acquisitions".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary balance sheet of the change in plan assets during 20162017 and 2015,2016, the funded status of the plans and amounts recognized in the Consolidated Statements of Financial Position, and a summary of amounts recognized in accumulated other comprehensive income.Position.
Summary of Changes
| | | | Pension Plans | | Postretirement Benefit Plans | Pension Plans | | Postretirement Benefit Plans |
| | 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | |
| Change in projected benefit obligation: | | | | | | | | | | | | | | | | | | | | | | |
| Benefit obligation, beginning of year | $ | 2,262 |
| | $ | 763 |
| | $ | 2,356 |
| | $ | 867 |
| | $ | 853 |
| | $ | 1,014 |
| $ | 2,141 |
| | $ | 801 |
| | $ | 2,262 |
| | $ | 763 |
| | $ | 737 |
| | $ | 853 |
|
| Service cost | 39 |
| | 12 |
| | 39 |
| | 15 |
| | 5 |
| | 8 |
| 37 |
| | 13 |
| | 39 |
| | 12 |
| | 3 |
| | 5 |
|
| Interest cost | 74 |
| | 23 |
| | 87 |
| | 26 |
| | 27 |
| | 39 |
| 66 |
| | 20 |
| | 74 |
| | 23 |
| | 23 |
| | 27 |
|
| Actuarial (gain) loss | 38 |
| | 123 |
| | (31 | ) | | (50 | ) | | 12 |
| | (13 | ) | 94 |
| | (11 | ) | | 38 |
| | 123 |
| | 30 |
| | 12 |
|
| Curtailment gain | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (2 | ) | |
| Settlement | (54 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (54 | ) | | — |
| | — |
| | — |
|
| Acquisitions | — |
| | — |
| | — |
| | (10 | ) | | — |
| | — |
| |
| Plan amendments and other | 2 |
| | — |
| | — |
| | — |
| | (106 | ) | | (140 | ) | — |
| | — |
| | 2 |
| | — |
| | — |
| | (106 | ) |
| Plan participants' contributions | — |
| | 1 |
| | — |
| | 2 |
| | 14 |
| | 15 |
| — |
| | 1 |
| | — |
| | 1 |
| | 12 |
| | 14 |
|
| Effect of currency exchange | — |
| | (100 | ) | | — |
| | (61 | ) | | — |
| | (2 | ) | — |
| | 90 |
| | — |
| | (100 | ) | | 1 |
| | — |
|
| Federal subsidy on benefits paid | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Benefits paid | (220 | ) | | (21 | ) | | (189 | ) | | (22 | ) | | (69 | ) | | (67 | ) | (184 | ) | | (21 | ) | | (220 | ) | | (21 | ) | | (69 | ) | | (69 | ) |
| Benefit obligation, end of year | $ | 2,141 |
| | $ | 801 |
| | $ | 2,262 |
| | $ | 763 |
| | $ | 737 |
| | $ | 853 |
| $ | 2,154 |
| | $ | 893 |
| | $ | 2,141 |
| | $ | 801 |
| | $ | 738 |
| | $ | 737 |
|
| Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | $ | 1,887 |
| | $ | 650 |
| | $ | 1,968 |
| | $ | 699 |
| | $ | 157 |
| | $ | 176 |
| $ | 1,959 |
| | $ | 667 |
| | $ | 1,887 |
| | $ | 650 |
| | $ | 149 |
| | $ | 157 |
|
| Actual return on plan assets | 142 |
| | 103 |
| | (23 | ) | | 7 |
| | 12 |
| | (1 | ) | 271 |
| | 31 |
| | 142 |
| | 103 |
| | 22 |
| | 12 |
|
| Effect of currency exchange | — |
| | (84 | ) | | — |
| | (48 | ) | | — |
| | — |
| — |
| | 76 |
| | — |
| | (84 | ) | | — |
| | — |
|
| Company contributions | 204 |
| | 18 |
| | 131 |
| | 21 |
| | 39 |
| | 34 |
| 8 |
| | 19 |
| | 204 |
| | 18 |
| | 43 |
| | 39 |
|
| Reserve for third party contributions | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (1 | ) | — |
| | — |
| | — |
| | — |
| | (10 | ) | | (5 | ) |
| Plan participants' contributions | — |
| | 1 |
| | — |
| | 2 |
| | 14 |
| | 15 |
| — |
| | 1 |
| | — |
| | 1 |
| | 12 |
| | 14 |
|
| Benefits paid | (220 | ) | | (21 | ) | | (189 | ) | | (22 | ) | | (69 | ) | | (67 | ) | (184 | ) | | (21 | ) | | (220 | ) | | (21 | ) | | (69 | ) | | (69 | ) |
| Federal subsidy on benefits paid | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
| — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Settlements | (54 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | (54 | ) | | — |
| | — |
| | — |
|
| Acquisitions | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| |
| Fair value of plan assets, end of year | $ | 1,959 |
| | $ | 667 |
| | $ | 1,887 |
| | $ | 650 |
| | $ | 149 |
| | $ | 157 |
| $ | 2,054 |
| | $ | 773 |
| | $ | 1,959 |
| | $ | 667 |
| | $ | 148 |
| | $ | 149 |
|
| Funded status at end of year | $ | (182 | ) | | $ | (134 | ) | | $ | (375 | ) | | $ | (113 | ) | | $ | (588 | ) | | $ | (696 | ) | $ | (100 | ) | | $ | (120 | ) | | $ | (182 | ) | | $ | (134 | ) | | $ | (590 | ) | | $ | (588 | ) |
| Amounts recognized in the Consolidated Statements of Financial Position consist of: | | | | | | | | | | | | | | | | | | | | | | |
| Other noncurrent assets | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | 30 |
| | $ | 19 |
| $ | 12 |
| | $ | 8 |
| | $ | 3 |
| | $ | — |
| | $ | 38 |
| | $ | 30 |
|
| Current liabilities | (7 | ) | | (1 | ) | | (3 | ) | | — |
| | (42 | ) | | (43 | ) | (3 | ) | | (1 | ) | | (7 | ) | | (1 | ) | | (44 | ) | | (42 | ) |
| Post-employment obligations | (178 | ) | | (133 | ) | | (372 | ) | | (120 | ) | | (576 | ) | | (672 | ) | (109 | ) | | (127 | ) | | (178 | ) | | (133 | ) | | (584 | ) | | (576 | ) |
| Net amount recognized, end of year | $ | (182 | ) | | $ | (134 | ) | | $ | (375 | ) | | $ | (113 | ) | | $ | (588 | ) | | $ | (696 | ) | $ | (100 | ) | | $ | (120 | ) | | $ | (182 | ) | | $ | (134 | ) | | $ | (590 | ) | | $ | (588 | ) |
| Accumulated benefit obligation | $ | 2,030 |
| | $ | 753 |
| | $ | 2,146 |
| | $ | 721 |
| | | | | $ | 2,031 |
| | $ | 845 |
| | $ | 2,030 |
| | $ | 753 |
| | | | |
| Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | | | | | | | | | | | | | | | | |
| Prior service (credit) cost | $ | (3 | ) | | $ | 2 |
| | $ | (10 | ) | | $ | 2 |
| | $ | (262 | ) | | $ | (200 | ) | $ | 1 |
| | $ | 1 |
| | $ | (3 | ) | | $ | 2 |
| | $ | (222 | ) | | $ | (262 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information for pension plans with projected benefit obligations in excess of plan assets:
| | | (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| Projected benefit obligation | $ | 1,865 |
| | $ | 801 |
| | $ | 2,262 |
| | $ | 622 |
| $ | 1,709 |
| | $ | 658 |
| | $ | 1,865 |
| | $ | 801 |
|
| Fair value of plan assets | 1,680 |
| | 667 |
| | 1,887 |
| | 501 |
| 1,597 |
| | 530 |
| | 1,680 |
| | 667 |
|
Information for pension plans with accumulated benefit obligations in excess of plan assets:
| | | (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | U.S. (1) | | Non-U.S. | | U.S. | | Non-U.S. |
| Projected benefit obligation | $ | 1,865 |
| | $ | 557 |
| | $ | 2,262 |
| | $ | 622 |
| $ | 170 |
| | $ | 618 |
| | $ | 1,865 |
| | $ | 557 |
|
| Accumulated benefit obligation | 1,754 |
| | 535 |
| | 2,146 |
| | 584 |
| 159 |
| | 596 |
| | 1,754 |
| | 535 |
|
| Fair value of plan assets | 1,680 |
| | 434 |
| | 1,887 |
| | 501 |
| 117 |
| | 492 |
| | 1,680 |
| | 434 |
|
Components of net periodic benefit (credit) cost were as follows: | |
(1) | Return on assets during 2017, including returns on $200 million contributions made in 2016, resulted in the fair value of plan assets exceeding the accumulated benefit obligation for a significant U.S. pension plan. |
Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income
| | | | Pension Plans | | Postretirement Benefit Plans | Pension Plans | | Postretirement Benefit Plans |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | |
| Components of net periodic benefit (credit) cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | $ | 39 |
| | $ | 12 |
| | $ | 39 |
| | $ | 15 |
| | $ | 40 |
| | $ | 14 |
| | $ | 5 |
| | $ | 8 |
| | $ | 8 |
| $ | 37 |
| | $ | 13 |
| | $ | 39 |
| | $ | 12 |
| | $ | 39 |
| | $ | 15 |
| | $ | 3 |
| | $ | 5 |
| | $ | 8 |
|
| Interest cost | 74 |
| | 23 |
| | 87 |
| | 26 |
| | 100 |
| | 31 |
| | 27 |
| | 39 |
| | 45 |
| 66 |
| | 20 |
| | 74 |
| | 23 |
| | 87 |
| | 26 |
| | 23 |
| | 27 |
| | 39 |
|
| Expected return on plan assets | (138 | ) | | (32 | ) | | (148 | ) | | (37 | ) | | (143 | ) | | (38 | ) | | (6 | ) | | (6 | ) | | (7 | ) | (140 | ) | | (35 | ) | | (138 | ) | | (32 | ) | | (148 | ) | | (37 | ) | | (5 | ) | | (6 | ) | | (6 | ) |
Curtailment gain (1) | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (2 | ) | | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (2 | ) |
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service cost (credit) | (4 | ) | | — |
| | (4 | ) | | 1 |
| | (4 | ) | | — |
| | (44 | ) | | (24 | ) | | (24 | ) | |
| Prior service (credit) cost | | (4 | ) | | 1 |
| | (4 | ) | | — |
| | (4 | ) | | 1 |
| | (40 | ) | | (44 | ) | | (24 | ) |
| Mark-to-market pension and other postretirement benefits (gain) loss, net | 34 |
| | 52 |
| | 140 |
| | (20 | ) | | 166 |
| | 95 |
| | 11 |
| | (5 | ) | | 43 |
| (37 | ) | | (7 | ) | | 34 |
| | 52 |
| | 140 |
| | (20 | ) | | 23 |
| | 11 |
| | (5 | ) |
| Net periodic benefit (credit) cost | $ | 5 |
| | $ | 55 |
| | $ | 114 |
| | $ | (22 | ) | | $ | 159 |
| | $ | 102 |
| | $ | (7 | ) | | $ | 10 |
| | $ | 65 |
| $ | (78 | ) | | $ | (8 | ) | | $ | 5 |
| | $ | 55 |
| | $ | 114 |
| | $ | (22 | ) | | $ | 4 |
| | $ | (7 | ) | | $ | 10 |
|
| Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Curtailment gain | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Current year prior service credit (cost) | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 106 |
| | 140 |
| | — |
| — |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | 106 |
| | 140 |
|
| Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service cost (credit) | (4 | ) | | — |
| | (4 | ) | | 1 |
| | (4 | ) | | — |
| | (44 | ) | | (24 | ) | | (24 | ) | |
| Prior service (credit) cost | | (4 | ) | | 1 |
| | (4 | ) | | — |
| | (4 | ) | | 1 |
| | (40 | ) | | (44 | ) | | (24 | ) |
| Total | $ | (7 | ) | | $ | — |
| | $ | (4 | ) | | $ | (2 | ) | | $ | (4 | ) | | $ | — |
| | $ | 62 |
| | $ | 116 |
| | $ | (24 | ) | $ | (4 | ) | | $ | 1 |
| | $ | (7 | ) | | $ | — |
| | $ | (4 | ) | | $ | (2 | ) | | $ | (40 | ) | | $ | 62 |
| | $ | 116 |
|
| |
(1) | Gain of $7 million in 2015 in the Fibers segment related to the remeasurement of the Workington, UK pension plan, triggered by the closure of the Workington, UK acetate tow manufacturing facility. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In fourth quarter 2016, the CompanyEastman changed benefits provided to retirees by an Eastman other postretirement benefit plan which triggered a remeasurement of the plan's obligation. The remeasurement resulted in a pre-tax reduction in the accumulated postretirement benefit obligation of approximately $106 million which will be amortized as a prior service credit from accumulated other comprehensive incomeAOCI over approximately eight years. The remeasurement was included in the 2016 year end remeasurement process.
In third quarter 2016, the Company announced a change to a UK defined benefit pension plan which triggered an interim remeasurement of the plan obligation resulting in a MTM loss of $30 million. The MTM loss was primarily due to a lower discount rate at the third quarter 2016 remeasurement date compared to December 31, 2015. The lower discount rate was reflective of changes in global market conditions and interest rates on high-grade corporate bonds. The plan was remeasured in fourth quarter 2016 as part of the annual MTM remeasurement process.
In first quarter 2016, the Company changed the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the MTM actuarial gain or loss which typically is recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. The change in the approach for full-year 2016 pre-tax expense was an increase to service cost of approximately $2 million and a reduction in interest cost of approximately $22 million compared to the previous method. The net reduction of approximately $20 million was offset by a MTM loss as part of the annual remeasurement of the plans in fourth quarter 2016.
In fourth quarter 2015, the Company changed benefits provided to retirees by the Eastman other postretirement benefit plan which triggered a remeasurement of the plan's obligation. The remeasurement resulted in a reduction in the accumulated postretirement benefit obligation of approximately $140 million which will be amortized as a prior service credit from accumulated other comprehensive incomeAOCI over approximately eight years. The remeasurement was included in the 2015 year end remeasurement process.
The estimated prior service credit for the U.S. pension and other postretirement benefit plans that will be amortized from accumulated other comprehensive incomeAOCI into net periodic cost in 20172018 is $4$1 million and $40 million, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Plan Assumptions
The assumptions used to develop the projected benefit obligation for the Company'sEastman's significant U.S. and non-U.S. defined benefit pension plans and U.S. postretirement benefit plans are provided in the following tables.
| | | | Pension Plans | | Postretirement Benefit Plans | Pension Plans | | Postretirement Benefit Plans |
| Weighted-average assumptions used to determine benefit obligations for years ended December 31: | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | |
| Discount rate | 3.89 | % | 2.33 | % | | 4.13 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 3.91 | % | | 4.17 | % | | 3.91 | % | 3.57 | % | 2.25 | % | | 3.89 | % | 2.33 | % | | 4.13 | % | 3.26 | % | | 3.54 | % | | 3.91 | % | | 4.17 | % |
| Rate of compensation increase | 3.25 | % | 2.94 | % | | 3.50 | % | 3.00 | % | | 3.50 | % | 3.24 | % | | 3.25 | % | | 3.50 | % | | 3.50 | % | 3.25 | % | 2.95 | % | | 3.25 | % | 2.94 | % | | 3.50 | % | 3.00 | % | | 3.25 | % | | 3.25 | % | | 3.50 | % |
| Health care cost trend | | | | | | | | | | | | | | | | | | | | | | |
| Initial | | | | | | | 7.00 | % | | 7.50 | % | | 7.50 | % | | | | | | | 6.75 | % | | 7.00 | % | | 7.50 | % |
| Decreasing to ultimate trend of | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % |
| in year | | | | | | | 2021 |
| | 2021 |
| | 2020 |
| | | | | | | 2025 |
| | 2021 |
| | 2021 |
|
| Weighted-average assumptions used to determine net periodic cost for years ended December 31: | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | |
| Discount rate | 4.13 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 4.59 | % | 4.18 | % | | 4.17 | % | | 3.91 | % | | 4.75 | % | 3.89 | % | 2.33 | % | | 4.13 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 3.91 | % | | 4.17 | % | | 3.91 | % |
| Discount rate for service cost | 4.13 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 4.59 | % | 4.18 | % | | 4.57 | % | | 3.91 | % | | 4.75 | % | 3.89 | % | 2.33 | % | | 4.13 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 4.31 | % | | 4.57 | % | | 3.91 | % |
| Discount rate for interest cost | 3.33 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 4.59 | % | 4.18 | % | | 3.42 | % | | 3.91 | % | | 4.75 | % | 3.24 | % | 2.33 | % | | 3.33 | % | 3.26 | % | | 3.80 | % | 3.10 | % | | 3.28 | % | | 3.42 | % | | 3.91 | % |
| Expected return on assets | 7.60 | % | 5.11 | % | | 7.78 | % | 5.50 | % | | 7.83 | % | 5.78 | % | | 3.75 | % | | 3.75 | % | | 3.75 | % | 7.49 | % | 5.02 | % | | 7.60 | % | 5.11 | % | | 7.78 | % | 5.50 | % | | 3.75 | % | | 3.75 | % | | 3.75 | % |
| Rate of compensation increase | 3.50 | % | 3.00 | % | | 3.50 | % | 3.24 | % | | 3.50 | % | 3.49 | % | | 3.50 | % | | 3.50 | % | | 3.50 | % | 3.25 | % | 2.94 | % | | 3.50 | % | 3.00 | % | | 3.50 | % | 3.24 | % | | 3.25 | % | | 3.50 | % | | 3.50 | % |
| Health care cost trend | | | | | | | | | | | | | | | | | | | | | | |
| Initial | | | | | | | 7.50 | % | | 7.50 | % | | 8.00 | % | | | | | | | 7.00 | % | | 7.50 | % | | 7.50 | % |
| Decreasing to ultimate trend of | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % |
| in year | | | | | | | 2021 |
| | 2020 |
| | 2020 |
| | | | | | | 2021 |
| | 2021 |
| | 2020 |
|
A seven6.75 percent rate of increase in per capita cost of covered health care benefits is assumed for 2017.2018. The rate is assumed to decrease gradually to five percent in 20212025 and remain at that level thereafter. A one percent increase or decrease in health care cost trend would have had no material impact on the 20162017 service and interest costs or the 20162017 benefit obligation, because the Company's contributions for benefits are fixed.
TheIn 2017, the Company performed a five year experience study on assumptions for the U.S. plans, in 2014 which includedincluding a review of the mortality tables. As a result of the study, the Company continueshas updated the mortality assumptions used to use the RP-2000a modified RP-2017 table with scale AA statica modified MP-2017 improvement scale and no collar adjustment as it most closely aligns with the Company's experience.adjustment.
The fair value of plan assets for the U.S. pension plans at December 31, 2017 and 2016 and 2015 was $2.0$2.1 billion and $1.9$2.0 billion, respectively, while the fair value of plan assets at December 31, 20162017 and 20152016 for non-U.S. pension plans was $667$773 million and $650$667 million, respectively. At December 31, 20162017 and 2015,2016, the expected weighted-average long-term rate of return on U.S. pension plan assets was 7.497.48 percent and 7.607.49 percent, respectively. The expected weighted-average long-term rate of return on non-U.S. pension plans assets was 5.024.83 percent and 5.115.02 percent at December 31, 20162017 and 2015,2016, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
The following chartstables reflect the fair value of the defined benefit pension plans assets as of December 31, 2016 and 2015.assets.
| | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2016 | | | | | Fair Value Measurements at December 31, 2017 |
| Description | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | December 31, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Pension Assets: | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Cash & Cash Equivalents (1) | $ | 41 |
| | $ | 25 |
| | $ | 41 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 20 |
| | $ | 57 |
| | $ | 20 |
| | $ | 57 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Public Equity - United States (2) | 4 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 4 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other Investments (3) | — |
| | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
| — |
| | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
|
| Total Assets at Fair Value | $ | 45 |
| | $ | 69 |
| | $ | 45 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44 |
| $ | 24 |
| | $ | 108 |
| | $ | 24 |
| | $ | 57 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51 |
|
Investments Measured at Net Asset Value (4) | 1,914 |
| | 598 |
| | | | | | | | | | | | | 2,030 |
| | 665 |
| | | | | | | | | | | | |
| Total Assets | $ | 1,959 |
| | $ | 667 |
| | | | | | | | | | | | | $ | 2,054 |
| | $ | 773 |
| | | | | | | | | | | | |
| | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2015 | | | | | Fair Value Measurements at December 31, 2016 |
| Description | December 31, 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs
(Level 3) |
| Pension Assets: | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Cash & Cash Equivalents (1) | $ | 66 |
| | $ | 7 |
| | $ | 66 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 41 |
| | $ | 25 |
| | $ | 41 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Public Equity - United States (2) | | 4 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other Investments (3) | — |
| | 42 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 42 |
| — |
| | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44 |
|
| Total Assets at Fair Value | $ | 66 |
| | $ | 49 |
| | $ | 66 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 42 |
| $ | 45 |
| | $ | 69 |
| | $ | 45 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44 |
|
Investments Measured at Net Asset Value (4) | 1,821 |
| | 601 |
| | | | | | | | | | | | | 1,914 |
| | 598 |
| | | | | | | | | | | | |
| Total Assets | $ | 1,887 |
| | $ | 650 |
| | | | | | | | | | | | | $ | 1,959 |
| | $ | 667 |
| | | | | | | | | | | | |
| |
(1) | Cash & Cash Equivalents: Amounts areFunds generally invested in actively managed collective trust funds or interest bearing accounts. |
| |
(2) | Public Equity - United States: Amount for commonCommon stock equity securities which are primarily valued using a market approach based on the quoted market prices. |
| |
(3) | Other Investments: Primarily consist of insurance contractcontracts which are generally valued using a crediting rate that approximates market returns and investinvestments in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques. |
| |
(4) | Investments Measured at Net Asset Value: The underlying debt and public equity investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date. The other alternative investments in this category are valued under the practical expedient method which is based on the most recently reported net asset value provided by the management of each private investment fund, adjusted as appropriate, for any lag between the date of the financial reports and the measurement date. The disclosure of investments measured at net asset value, as a practical expedient for fair value, have been conformed to the disclosure provisions under updates to fair value measurement issued in 2015. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following chartstables reflect the fair value of the postretirement benefit plan assets as of December 31, 2016 and 2015.assets. The postretirement benefit plan is for the voluntary employees' beneficiary association ("VEBA") trust the Company assumed as part of the Solutia acquisition.
| | | (Dollars in millions) | | | Fair Value Measurements at December 31, 2016 | | | Fair Value Measurements at December 31, 2017 |
| Description | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | December 31, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Postretirement Benefit Plan Assets: | | | | | | | | | | | | | | |
Cash & Cash Equivalents (1) | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Debt (2): | | | | | | | | | | | | | | |
| Fixed Income (U.S.) | 82 |
| | — |
| | 82 |
| | — |
| 82 |
| | — |
| | 82 |
| | — |
|
| Fixed Income (Non-U.S.) | 30 |
| | — |
| | 30 |
| | — |
| 31 |
| | — |
| | 31 |
| | — |
|
| Total | $ | 115 |
| | $ | 3 |
| | $ | 112 |
| | $ | — |
| $ | 115 |
| | $ | 2 |
| | $ | 113 |
| | $ | — |
|
| | | (Dollars in millions) | | | Fair Value Measurements at December 31, 2015 | | | Fair Value Measurements at
December 31, 2016 |
| Description | December 31, 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| Postretirement Benefit Plan Assets: | | | | | | | | | | | | | | |
Cash & Cash Equivalents (1) | | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
|
Debt (2): | | | | | | | | | | | | | | |
| Fixed Income (U.S.) | $ | 86 |
| | $ | — |
| | $ | 86 |
| | $ | — |
| 82 |
| | — |
| | 82 |
| | — |
|
| Fixed Income (Non-U.S.) | 34 |
| | — |
| | 34 |
| | — |
| 30 |
| | — |
| | 30 |
| | — |
|
| Total | $ | 120 |
| | $ | — |
| | $ | 120 |
| | $ | — |
| $ | 115 |
| | $ | 3 |
| | $ | 112 |
| | $ | — |
|
| |
(1) | Cash & Cash Equivalents: Amounts areFunds generally invested in actively managed collective trust funds or interest bearing accounts. |
| |
(2) | Debt: The fixed income securities are primarily valued upon a market approach, using matrix pricing and considering a security’s relationship to other securities for which quoted prices in an active market may be available, or an income approach, converting future cash flows to a single present value amount. Inputs used in developing fair value estimates include reported trades, broker quotes, benchmark yields, and base spreadsspreads. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company valued assets with unobservable inputs (Level 3), primarily insurance contracts, using a crediting rate that approximates market returns and investinvestments in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.
| | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Other Investments(1) | | Other Investments(1) |
| (Dollars in millions) | U.S. Pension Plans | | Non-U.S. Pension Plans | | Non-U.S. Pension Plans |
| Balance at December 31, 2014 | $ | 4 |
| | $ | 55 |
| |
| Distributions | (4 | ) | | — |
| |
| Balance at December 31, 2015 | | | $ | 42 |
|
| Unrealized gains | — |
| | (5 | ) | | 2 |
|
| Purchases, contributions, and other | — |
| | (8 | ) | |
| Balance at December 31, 2015 | — |
| | 42 |
| |
| Distributions | — |
| | — |
| |
| Balance at December 31, 2016 | | | 44 |
|
| Unrealized gains | — |
| | 2 |
| | 7 |
|
| Purchases, contributions, and other | — |
| | — |
| |
| Balance at December 31, 2016 | $ | — |
| | $ | 44 |
| |
| Balance at December 31, 2017 | | | $ | 51 |
|
| |
(1) | Primarily consists of insurance contracts. |
The following charttable reflects the target allocation for the Company's U.S. and non-U.S. pension and postretirement benefit plans assets for 20172018 and the asset allocation at December 31, 20162017 and 2015,2016, by asset category. The postretirement benefit plan is for the VEBA trust the Company assumed as part of the Solutia acquisition.
| | | | U.S. Pension Plans | | Non-U.S. Pension Plans | | Postretirement Benefit Plan | U.S. Pension Plans | | Non-U.S. Pension Plans | | Postretirement Benefit Plan |
| | Target Allocation | Plan Assets at December 31, 2016 | Plan Assets at December 31, 2015 | | Target Allocation | Plan Assets at December 31, 2016 | Plan Assets at December 31, 2015 | | Target Allocation | Plan Assets at December 31, 2016 | Plan Assets at December 31, 2015 | 2018 Target Allocation | Plan Assets at
December 31, 2017 | Plan Assets at
December 31, 2016 | | 2018 Target Allocation | Plan Assets at
December 31, 2017 | Plan Assets at
December 31, 2016 | | 2018 Target Allocation | Plan Assets at
December 31, 2017 | Plan Assets at
December 31, 2016 |
| Asset category | | |
| Equity securities | 45% | 47% | 44% | | 33% | 30% | 36% | | —% | 44% | 48% | 47% | | 26% | 22% | 30% | | —% |
| Debt securities | 39% | 41% | 41% | | 47% | 52% | 46% | | 100% | 40% | 41% | | 51% | 55% | 52% | | 100% |
| Real estate | 3% | 2% | 4% | | 2% | | —% | 3% | 2% | 2% | | 5% | 7% | 2% | | —% |
Other investments (1) | 13% | 10% | 11% | | 18% | 16% | | —% | 13% | 10% | 10% | | 18% | 16% | | —% |
| Total | 100% | | 100% | | 100% | 100% | | 100% | | 100% |
| |
(1) | U.S. primarily consists of private equity and natural resource and energy related limited partnership investments. Non-U.S. primarily consists of annuity contracts and alternative investments. |
The Company'sInvestment Strategy
Eastman's investment strategy for its defined benefit pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to meet or exceed the plan's actuarially assumed long-term rate of return and to minimize the cost of providing pension benefits. A periodic asset/liability study is conducted in order to assist in the determination and, if necessary, modification of the appropriate long-term investment policy for the plan. The investment policy establishes a target allocation range for each asset class and the fund is managed within those ranges. The plans use a number of investment approaches including investments in equity, real estate, and fixed income funds in which the underlying securities are marketable in order to achieve this target allocation. The plans also invest in private equity and other funds. Diversification is created through investmentinvestments across various asset classes, geographies, fund managers, and individual securities. This investment process is designed to provide for a well-diversified portfolio with no significant concentration of risk. The investment process is monitored by an investment committee comprised of variousthat includes senior executives from within Eastman.management.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In December 2014, as part of its acquisition of Taminco, the Company assumed Taminco's non-U.S. defined benefit pension plans in Belgium and Finland. The pension plans' assets consist of guaranteed investment contracts with an insurance company. The Company also assumed Taminco's U.S. postretirement benefit plan which has no plan assets.
In July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's defined benefit pension and other postretirement benefit plans. The Solutia defined benefit pension plans adhere to the Company's defined benefit plan investment strategy. The Solutia defined benefit pension plans also utilize a dynamic de-risking strategy to shift from growth assets to liability matching assets as the plan's funded status improves. TheEastman's investment strategy with respect to Solutia's other postretirement benefits planfor its VEBA trust is to invest in an intermediate-term, well diversified, high quality investment instruments, with a primary objective of capital preservation.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The expected rate of return for all plans was determined primarily by modeling the expected long-term rates of return for the categories of investments held by the plans and the targeted allocation percentage against various potential economic scenarios.
The Company funded its U.S. defined benefit pension plans in the amount of $200 million in 2016 and $125 millionmade no contributions in 2015.2017. For 2017,2018, there are no minimum required cash contributions for the U.S. defined benefit pension plans under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.
The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows: | | | | Pension Plans | | Postretirement Benefit Plans | Pension Plans | | Postretirement Benefit Plans |
| (Dollars in millions) | U.S. | | Non-U.S. | | | U.S. | | Non-U.S. | | |
| 2017 | $ | 236 |
| | $ | 21 |
| | $ | 57 |
| |
| 2018 | 191 |
| | 21 |
| | 56 |
| $ | 197 |
| | $ | 23 |
| | $ | 58 |
|
| 2019 | 188 |
| | 21 |
| | 57 |
| 165 |
| | 23 |
| | 58 |
|
| 2020 | 186 |
| | 22 |
| | 57 |
| 162 |
| | 25 |
| | 58 |
|
| 2021 | 179 |
| | 24 |
| | 56 |
| 154 |
| | 25 |
| | 57 |
|
| 2022-2026 | 803 |
| | 139 |
| | 232 |
| |
| 2022 | | 151 |
| | 26 |
| | 53 |
|
| 2023-2027 | | 722 |
| | 164 |
| | 220 |
|
| |
12.11. | COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS |
Purchase Obligations and Lease CommitmentsEastman's obligations are summarized in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Payments Due for |
| Period | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities | | Total |
| 2018 | | $ | — |
| | $ | 393 |
| | $ | 228 |
| | $ | 230 |
| | $ | 67 |
| | $ | 234 |
| | $ | 1,152 |
|
| 2019 | | 250 |
| | 1 |
| | 229 |
| | 222 |
| | 55 |
| | 85 |
| | 842 |
|
| 2020 | | 797 |
| | — |
| | 207 |
| | 184 |
| | 44 |
| | 90 |
| | 1,322 |
|
| 2021 | | 185 |
| | 200 |
| | 190 |
| | 92 |
| | 34 |
| | 91 |
| | 792 |
|
| 2022 | | 738 |
| | — |
| | 178 |
| | 160 |
| | 23 |
| | 92 |
| | 1,191 |
|
| 2023 and beyond | | 3,976 |
| | — |
| | 1,619 |
| | 2,032 |
| | 47 |
| | 1,056 |
| | 8,730 |
|
| Total | | $ | 5,946 |
| | $ | 594 |
| | $ | 2,651 |
| | $ | 2,920 |
| | $ | 270 |
| | $ | 1,648 |
| | $ | 14,029 |
|
The CompanyEstimated 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.
Eastman had various purchase obligations at December 31, 20162017 totaling $3approximately $2.9 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business. Commitments for purchases increased in 2016 as compared to 2015 primarily as a result of new purchase commitments for raw materials of $1.5 billion spanning over approximately 25 years. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling approximately $265$270 million over a period of approximately 40 years. Of the total lease commitments, approximately 50 percent relate to real property, including office space, storage facilities, and land; approximately 40 percent relate to railcars; and approximately 10 percent relate to machinery and equipment, including computer and communications equipment and production equipment. Rental expense, net of sublease income, was $94 million, $90 million, and $79 million in 2017, 2016, and $69 million2015, respectively.
Amounts in 2016, 2015,other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and 2014, respectively (prior years rental expense has been revised from Note 12, "Commitments",other postretirement benefits, environmental loss contingency reserves, accrued compensation benefits, uncertain tax liabilities, one-time transition tax on deferred foreign income under the 2017 Tax Cuts and Jobs Act, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the Company's 2015 Annual Report on Form 10-K, which incorrectly reported rental expensetiming of $91 millionthe 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 $80 million for 2015these amounts are included in the "2023 and 2014, respectively).
beyond" line item.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The obligations described above, debt repayment obligations, and credit facilities and commercial paper borrowings, are summarized in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Payments Due for |
| Period | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities (1) | | Total |
| 2017 | | $ | — |
| | $ | 283 |
| | $ | 229 |
| | $ | 211 |
| | $ | 62 |
| | $ | 239 |
| | $ | 1,024 |
|
| 2018 | | — |
| | 37 |
| | 231 |
| | 208 |
| | 49 |
| | 82 |
| | 607 |
|
| 2019 | | 249 |
| | 250 |
| | 227 |
| | 186 |
| | 36 |
| | 74 |
| | 1,022 |
|
| 2020 | | 796 |
| | 30 |
| | 199 |
| | 186 |
| | 29 |
| | 88 |
| | 1,328 |
|
| 2021 | | 184 |
| | 232 |
| | 185 |
| | 160 |
| | 24 |
| | 84 |
| | 869 |
|
| 2022 and beyond | | 4,533 |
| | — |
| | 1,788 |
| | 2,052 |
| | 65 |
| | 1,074 |
| | 9,512 |
|
| Total | | $ | 5,762 |
| | $ | 832 |
| | $ | 2,859 |
| | $ | 3,003 |
| | $ | 265 |
| | $ | 1,641 |
| | $ | 14,362 |
|
| |
(1)
| Amounts 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 "2022 and beyond" line item. |
Guarantees
The CompanyEastman has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease as well as other guarantees. Disclosures about each group of similar guarantees are provided below.
Residual Value Guarantees
The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees totaled $94$71 million at December 31, 20162017 and consist primarily of leases for railcars and the Company aircraft mostly expiringthat will expire beginning in 2017.third quarter 2018. Residual guarantee payments that become probable and estimable are accrued to rent expense over the remaining life of the applicable lease. Management's current expectation is that the likelihood of material residual guarantee payments is remote.
Other Guarantees
Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating primarily to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $35 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. The Company's current expectation is that future payment or performance related to non-performance under other guarantees is remote.
Other Off Balance Sheet Arrangements
The Company has off balance sheet non-recourse factoring facilities with various commitment dates. These arrangements include customer specific receivables in the United States and Europe. The Company sells the receivables at face value which equals the carrying value and fair value, and thus no gain or loss is recognized. There is no continuing involvement with these receivables once sold and no credit loss exposure. The total amount of cumulative receivables sold in 2017 was $35 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other Off Balance Sheet Arrangements
The Company has rights and obligations under non-recourse factoring facilities, assumed as part of the acquisition of Taminco, that have a combined limit of €150 million ($158 million) as of December 31, 2016 and are committed until December 2017. These arrangements include receivables in the United States, Belgium, and Finland, and are subject to various eligibility requirements. The Company sells the receivables at face value but receives funding (approximately 85 percent) net of a deposit amount until collections are received from customers for the receivables sold. The total amounts of cumulative receivables sold in 2016 and 2015 were approximately $890 million and $995 million, respectively. As part of the program, the Company continues to service the receivables at market rates with no servicing assets or liabilities recognized. The amounts of sold receivables outstanding under the non-recourse factoring facilities were $99 million and $106 million at December 31, 2016 and December 31, 2015, respectively. The fair value of the receivables sold equals the carrying value at the time of the sale, and no gain or loss is recognized. The Company is exposed to a credit loss of up to 10 percent on sold receivables.
| |
13.12. | ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS |
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for suchcertain cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies". Although the resolution of uncertainties related to these environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized, because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. The Company's total reserve for environmental loss contingencies was $321$304 million and $336$321 million at December 31, 20162017 and December 31, 2015,2016, respectively. At both December 31, 2016 and December 31, 2015, thisThe environmental reserve included $8 millionincludes costs related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman but for which the Company retains the environmental liability related to these sites.sites of $7 million and $8 million at December 31, 2017 and December 31, 2016, respectively.
The Company's total environmental reserve that management believes to be probable and estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Payables and other current liabilities" and "Other long-term liabilities" in the Consolidated Statements of Financial Position as follows:
| | | | December 31, | | | | | |
| (Dollars in millions) | 2016 | | 2015 | December 31, |
| | | 2017 | | 2016 |
| Environmental contingent liabilities, current | $ | 30 |
| | $ | 35 |
| $ | 25 |
| | $ | 30 |
|
| Environmental contingent liabilities, long-term | 291 |
| | 301 |
| 279 |
| | 291 |
|
| Total | $ | 321 |
| | $ | 336 |
| $ | 304 |
| | $ | 321 |
|
Environmental Remediation
Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $295$280 million to the maximum of $503$483 million and from the best estimate or minimum of $308$295 million to the maximum of $516$503 million at December 31, 20162017 and December 31, 2015,2016, respectively. The best estimate or minimum estimated future costsenvironmental expenditures are considered to be probable and reasonably possibleestimable and include the amounts accrued at both December 31, 20162017 and December 31, 20152016.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Costs of certain remediation projects included in the environmental reserve are subject to a cost-sharing arrangement with Monsanto Company ("Monsanto") under the provisions of the Amended and Restated Settlement Agreement effective February 28, 2008 (the "Effective Date"), into which Solutia entered with Monsanto upon its emergence from bankruptcy (the "Monsanto Settlement Agreement"). Under the provisions of the Monsanto Settlement Agreement, Solutia, which became a wholly-owned subsidiary of Eastman on July 2, 2012, shares responsibility with Monsanto for remediation at certain locations outside of the boundaries of plant sites in Anniston, Alabama and Sauget, Illinois (the "Shared Sites"). Solutia is responsible for the funding of environmental liabilities at the Shared Sites up to a total of $325 million from the Effective Date. If remediation costs for the Shared Sites exceed this amount, such costs will thereafter be shared equally between Solutia and Monsanto. Including payments by Solutia prior to its acquisition by Eastman, $77$84 million had been paid for costs at the Shared Sites as of December 31, 2016.2017. As of December 31, 2016,2017, an additional $208$204 million has been accrued for estimated future remediation costs at the Shared Sites, over a period of approximately 30 years.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reserves for environmental remediation include liabilities expected to be paid within approximately 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included within "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Changes in the reserves for environmental remediation liabilities duringfor twelve months ended 20162017 are summarized below:
| | | (Dollars in millions) | Environmental Remediation Liabilities | Environmental Remediation Liabilities |
| Balance at December 31, 2015 | $ | 308 |
| |
| Changes in estimates recorded to earnings and other | 11 |
| |
| Balance at December 31, 2016 | | $ | 295 |
|
| Cash reductions | (24 | ) | (15 | ) |
| Balance at December 31, 2016 | $ | 295 |
| |
| Balance at December 31, 2017 | | $ | 280 |
|
Closure/Post-ClosureAsset Retirement Obligations
An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The CompanyEastman recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist of primarily closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate accrued to date over the sites' estimated useful lives for these asset retirement obligation costs was $26$24 million and $28$26 million at December 31, 20162017 and December 31, 2015,2016, respectively.
Other
Environmental costs are capitalized if they extend the life of the related property, increase its capacity, and/or mitigate or preventthe possibility of future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred. The Company'sEastman's cash expenditures related to environmental protection and improvement were $257 million, $267 million, and $290 million in 2017, 2016, and $319 million in 2016, 2015, and 2014, respectively, and include operating costs associated with environmental protection equipment and facilities, engineering costs, and construction costs. The cash expenditures above include environmental capital expenditures of approximately $38 million and $45 million in 2017 and $52 million in 2016, and 2015, respectively.
The Company also has contractual asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland. These accrued non-environmental asset retirement obligations were $49 million and $46 million at bothDecember 31, 2017 and December 31, 2016, and December 31, 2015.respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
General
From time to time, the CompanyEastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
15.14. | STOCKHOLDERS' EQUITY |
A reconciliation of the changes in stockholders' equity for 20162017, 20152016, and 20142015 is provided below:
| | | (Dollars in millions) | Common Stock at Par Value | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock at Cost | | Total Stockholders' Equity Attributed to Eastman | | Noncontrolling Interest | | Total Stockholders' Equity | Common Stock at Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock at Cost | | Total Eastman Stockholders' Equity | | Noncontrolling Interest | | Total Equity |
| Balance at December 31, 2013 | $ | 2 |
| | $ | 1,778 |
| | $ | 4,012 |
| | $ | 171 |
| | $ | (2,167 | ) | | $ | 3,796 |
| | $ | 79 |
| | $ | 3,875 |
| |
| Net Earnings | — |
| | — |
| | 751 |
| | — |
| | — |
| | 751 |
| | 6 |
| | 757 |
| |
Cash Dividends (1) | — |
| | — |
| | (218 | ) | | — |
| | — |
| | (218 | ) | | — |
| | (218 | ) | |
| Other Comprehensive Loss | — |
| | — |
| | — |
| | (448 | ) | | — |
| | (448 | ) | | — |
| | (448 | ) | |
Share-Based Compensation Expense (2) | — |
| | 28 |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | 28 |
| |
| Stock Option Exercises | — |
| | 13 |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
| |
Other | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | | (1 | ) | | (3 | ) | |
| Share Repurchase | — |
| | — |
| | — |
| | — |
| | (410 | ) | | (410 | ) | | — |
| | (410 | ) | |
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) | |
| Balance at December 31, 2014 | $ | 2 |
| | $ | 1,817 |
|
| $ | 4,545 |
|
| $ | (277 | ) |
| $ | (2,577 | ) |
| $ | 3,510 |
|
| $ | 80 |
|
| $ | 3,590 |
| $ | 2 |
| | $ | 1,817 |
| | $ | 4,545 |
| | $ | (277 | ) | | $ | (2,577 | ) | | $ | 3,510 |
| | $ | 80 |
| | $ | 3,590 |
|
| Net Earnings | — |
| | — |
| | 848 |
| | — |
| | — |
| | 848 |
| | 6 |
| | 854 |
| — |
| | — |
| | 848 |
| | — |
| | — |
| | 848 |
| | 6 |
| | 854 |
|
Cash Dividends (1)
| — |
| | — |
| | (247 | ) | | — |
| | — |
| | (247 | ) | | — |
| | (247 | ) | — |
| | — |
| | (247 | ) | | — |
| | — |
| | (247 | ) | | — |
| | (247 | ) |
| Other Comprehensive Loss | — |
| | — |
| | — |
| | (113 | ) | | — |
| | (113 | ) | | — |
| | (113 | ) | |
| Other Comprehensive (Loss) | | — |
| | — |
| | — |
| | (113 | ) | | — |
| | (113 | ) | | — |
| | (113 | ) |
Share-Based Compensation Expense (2) | — |
| | 37 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
| — |
| | 37 |
| | — |
| | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
| Stock Option Exercises | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
| — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| Other | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Share Repurchase | — |
| | — |
| | — |
| | — |
| | (103 | ) | | (103 | ) | | — |
| | (103 | ) | — |
| | — |
| | — |
| | — |
| | (103 | ) | | (103 | ) | | — |
| | (103 | ) |
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Balance at December 31, 2015 | $ | 2 |
| | $ | 1,863 |
| | $ | 5,146 |
|
| $ | (390 | ) |
| $ | (2,680 | ) |
| $ | 3,941 |
|
| $ | 80 |
|
| $ | 4,021 |
| $ | 2 |
| | $ | 1,863 |
|
| $ | 5,146 |
|
| $ | (390 | ) |
| $ | (2,680 | ) |
| $ | 3,941 |
|
| $ | 80 |
|
| $ | 4,021 |
|
| Net Earnings | — |
| | — |
| | 854 |
| | — |
| | — |
| | 854 |
| | 5 |
| | 859 |
| — |
| | — |
| | 854 |
| | — |
| | — |
| | 854 |
| | 5 |
| | 859 |
|
Cash Dividends (1)
| — |
| | — |
| | (279 | ) | | — |
| | — |
| | (279 | ) | | — |
| | (279 | ) | — |
| | — |
| | (279 | ) | | — |
| | — |
| | (279 | ) | | — |
| | (279 | ) |
Other Comprehensive Loss (3) | — |
| | — |
| | — |
| | 109 |
| | — |
| | 109 |
| | — |
| | 109 |
| |
| Other Comprehensive Income | | — |
| | — |
| | — |
| | 109 |
| | — |
| | 109 |
| | — |
| | 109 |
|
Share-Based Compensation Expense (2) | — |
| | 35 |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
| — |
| | 35 |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
| Stock Option Exercises | — |
| | 21 |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | 21 |
| — |
| | 21 |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
| Other | — |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) | | (5 | ) | — |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) | | (5 | ) |
| Share Repurchase | — |
| | — |
| | — |
| | — |
| | (145 | ) | | (145 | ) | | — |
| | (145 | ) | — |
| | — |
| | — |
| | — |
| | (145 | ) | | (145 | ) | | — |
| | (145 | ) |
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8 | ) | | (8 | ) |
| Balance at December 31, 2016 | $ | 2 |
| | $ | 1,915 |
|
| $ | 5,721 |
|
| $ | (281 | ) |
| $ | (2,825 | ) |
| $ | 4,532 |
|
| $ | 76 |
|
| $ | 4,608 |
| $ | 2 |
| | $ | 1,915 |
| | $ | 5,721 |
|
| $ | (281 | ) |
| $ | (2,825 | ) |
| $ | 4,532 |
|
| $ | 76 |
|
| $ | 4,608 |
|
| Net Earnings | | — |
| | — |
| | 1,384 |
| | — |
| | — |
| | 1,384 |
| | 4 |
| | 1,388 |
|
Cash Dividends (1)
| | — |
| | — |
| | (303 | ) | | — |
| | — |
| | (303 | ) | | — |
| | (303 | ) |
| Other Comprehensive Income | | — |
| | — |
| | — |
| | 72 |
| | — |
| | 72 |
| | — |
| | 72 |
|
Share-Based Compensation Expense (2) | | — |
| | 52 |
| | — |
| | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
| Stock Option Exercises | | — |
| | 22 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Other | | — |
| | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) | | 1 |
| | (5 | ) |
| Share Repurchase | | — |
| | — |
| | — |
| | — |
| | (350 | ) | | (350 | ) | | — |
| | (350 | ) |
| Distributions to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Balance at December 31, 2017 | | $ | 2 |
| | $ | 1,983 |
|
| $ | 6,802 |
|
| $ | (209 | ) |
| $ | (3,175 | ) |
| $ | 5,403 |
|
| $ | 77 |
|
| $ | 5,480 |
|
| |
(1) | Cash dividends includes cash dividends paid and dividends declared, but unpaid. |
| |
(2) | Share-based compensation expense is the fair value of share-based awards. |
| |
(3)
| See Note 1, "Significant Accounting Policies", regarding correction of prior period foreign currency translation. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The CompanyEastman is authorized to issue 400 million shares of all classes of stock, of which 50 million may be preferred stock, par value $0.01 per share, and 350 million may be common stock, par value $0.01 per share. The Company declared dividends per share of $2.09 in 2017, $1.89 in 2016, and $1.66 in 2015, and $1.45 in 2014.
The Company established a benefit security trust in 1997 to provide a degree of financial security for unfunded obligations under certain unfunded plans and contributed to the trust a warrant to purchase up to 6 million shares of common stock of the Company for par value. The warrant, which remains outstanding, is exercisable by the trustee if the Company does not meet certain funding obligations, which obligations would be triggered by certain occurrences, including a change in control or potential change in control, as defined, or failure by the Company to meet its payment obligations under certain covered unfunded plans. Such warrant is excluded from the computation of diluted earnings per share because the conditions upon which the warrant becomes exercisable have not been met.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The additions to paid-in capital in 2017, 2016, 2015, and 20142015 are primarily for compensation expense of equity awards and employee stock option exercises.
In May 2013, the Company's Board of Directors authorized repurchase of up to $300 million of the Company's outstanding common stock. The Company completed the $300 million repurchase authorization in March 2014, acquiring a total of 3,840,949 shares. In February 2014, the Company's Board of Directors authorized repurchase of up to an additional $1 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 interests of the Company. As of December 31, 2016,2017, a total of 6,542,19010,726,827 shares have been repurchased under this authorization for a total of $498$848 million. During 2017, the Company repurchased 4,184,637 shares of common stock for a cost of approximately $350 million. During 2016, the Company repurchased 2,131,501 shares of common stock for a cost of approximately $145 million. During 2015, the Company repurchased 1,477,660 shares of common stock for a cost of approximately $103 million. During 2014,
In February 2018, the Company repurchased 4,945,452 sharesCompany's Board of Directors authorized the repurchase of up to an additional $2 billion of Eastman's outstanding common stock for a costat such times, in such amounts, and on such terms, as determined by management to be in the best interests of approximately $410 million.the Company.
The Company's charitable foundation held 50,798 shares of the Company's common stock at December 31, 2017, 2016, 2015, and 20142015 which are included in treasury stock.
The following table sets forth the computation of basic and diluted earnings per share ("EPS") from continuing operations:: | | | | For years ended December 31, | For years ended December 31, |
| (In millions, except per share amounts) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Numerator | | | | | | | | | | |
| Earnings attributable to Eastman stockholders: | | | | | | |
| Earnings from continuing operations, net of tax | $ | 854 |
| | $ | 848 |
| | $ | 749 |
| |
| Net earnings attributable to Eastman | | $ | 1,384 |
| | $ | 854 |
| | $ | 848 |
|
| | | | | | | | | | | |
| Denominator | | | | | | | | | | |
| Weighted average shares used for basic EPS | 147.3 |
| | 148.6 |
| | 149.5 |
| 144.8 |
| | 147.3 |
| | 148.6 |
|
| Dilutive effect of stock options and other award plans | 1.1 |
| | 1.2 |
| | 1.6 |
| 1.3 |
| | 1.1 |
| | 1.2 |
|
| Weighted average shares used for diluted EPS | 148.4 |
| | 149.8 |
| | 151.1 |
| 146.1 |
| | 148.4 |
| | 149.8 |
|
| | | | | | | | | | | |
EPS from continuing operations (1) | | | | | | |
EPS (1) | | | | | | |
| Basic | $ | 5.80 |
| | $ | 5.71 |
| | $ | 5.01 |
| $ | 9.56 |
| | $ | 5.80 |
| | $ | 5.71 |
|
| Diluted | $ | 5.75 |
| | $ | 5.66 |
| | $ | 4.95 |
| $ | 9.47 |
| | $ | 5.75 |
| | $ | 5.66 |
|
| |
(1) | Earnings per share are calculated using whole dollars and shares. |
Stock options excluded from the 20162017 calculation of diluted earnings per share were 1,072,468 because the market value of option exercises for these awards was less than the cash proceeds that would be received from these exercises. Stock options excluded from the, 2016, and 2015 and 2014 calculations of diluted earnings per share were 768,134204,978, 1,072,468, and 272,143,768,134, respectively, because the market value of option exercises for these awards waswere less than the cash proceeds that would be received from these exercises.
Shares of common stock issued, including shares held in treasury, are presented below:
|
| | | | | | | | |
| | For years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Balance at beginning of year | 217,707,600 |
| | 216,899,964 |
| | 216,256,971 |
|
| Issued for employee compensation and benefit plans | 662,392 |
| | 807,636 |
| | 642,993 |
|
| Balance at end of year | 218,369,992 |
| | 217,707,600 |
| | 216,899,964 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | |
| | For years ended December 31, |
Shares of common stock issued (1) | 2016 | | 2015 | | 2014 |
| | | | | | |
| Balance at beginning of year | 216,899,964 |
| | 216,256,971 |
| | 215,131,237 |
|
| Issued for employee compensation and benefit plans | 807,636 |
| | 642,993 |
| | 1,125,734 |
|
| Balance at end of year | 217,707,600 |
| | 216,899,964 |
| | 216,256,971 |
|
| |
(1)
| Includes shares held in treasury. |
Accumulated Other Comprehensive Income (Loss), Net of Tax
| | (Dollars in millions) | Cumulative Translation Adjustment | | Benefit Plans Unrecognized Prior Service Credits | | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Losses on Investments | | Accumulated Other Comprehensive Income (Loss) | Cumulative Translation Adjustment | | Benefit Plans Unrecognized Prior Service Credits | | Unrealized Gains (Losses) on Cash Flow Hedges | | Unrealized Losses on Investments | | Accumulated Other Comprehensive Income (Loss) |
| Balance at December 31, 2014 | $ | (68 | ) | | $ | 61 |
| | $ | (269 | ) | | $ | (1 | ) | | $ | (277 | ) | |
| Balance at December 31, 2015 | | $ | (284 | ) | | $ | 129 |
| | $ | (234 | ) | | $ | (1 | ) | | $ | (390 | ) |
| Period change | (216 | ) | | 68 |
| | 35 |
| | — |
| | (113 | ) | (97 | ) | | 34 |
| | 172 |
| | — |
| | 109 |
|
| Balance at December 31, 2015 | (284 | ) | | 129 |
| | (234 | ) | | (1 | ) | | (390 | ) | |
Period change (1) | (97 | ) | | 34 |
| | 172 |
| | — |
| | 109 |
| |
| Balance at December 31, 2016 | $ | (381 | ) | | $ | 163 |
| | $ | (62 | ) | | $ | (1 | ) | | $ | (281 | ) | (381 | ) | | 163 |
| | (62 | ) | | (1 | ) | | (281 | ) |
| Period change | | 85 |
| | (27 | ) | | 14 |
| | — |
| | 72 |
|
| Balance at December 31, 2017 | | $ | (296 | ) | | $ | 136 |
| | $ | (48 | ) | | $ | (1 | ) | | $ | (209 | ) |
| |
(1)
| See Note 1, "Significant Accounting Policies", regarding correction of prior period foreign currency translation. |
Amounts of other comprehensive income (loss) are presented net of applicable taxes. The CompanyEastman records deferred income taxes on the cumulative translation adjustment related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of other subsidiaries outside the United States, as suchthe cumulative translation adjustment is considered to be a component of indefinitely invested, unremitted earnings of these foreign subsidiaries.
Components of total other comprehensive income (loss) recorded in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For years ended December 31, |
| | 2016 | | 2015 | | 2014 |
| (Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax |
| Other comprehensive income (loss) | | | | | | | | | | | |
| Change in cumulative translation adjustment | $ | (97 | ) | | $ | (97 | ) | | $ | (216 | ) | | $ | (216 | ) | | $ | (201 | ) | | $ | (201 | ) |
| Defined benefit pension and other postretirement benefit plans: | | | | | | | |
| | | | |
| Prior service credit arising during the period | 103 |
| | 64 |
| | 140 |
| | 87 |
| | — |
| | — |
|
| Amortization of unrecognized prior service credits included in net periodic costs | (48 | ) | | (30 | ) | | (30 | ) | | (19 | ) | | (28 | ) | | (17 | ) |
| Change in defined benefit pension and other postretirement benefit plans | 55 |
| | 34 |
| | 110 |
| | 68 |
| | (28 | ) | | (17 | ) |
| Derivatives and hedging: | | | | | | | |
| | | | |
| Unrealized gain (loss) | 150 |
| | 93 |
| | (78 | ) | | (48 | ) | | (371 | ) | | (230 | ) |
| Reclassification adjustment for loss included in net income | 127 |
| | 79 |
| | 134 |
| | 83 |
| | — |
| | — |
|
| Change in derivatives and hedging | 277 |
| | 172 |
| | 56 |
| | 35 |
| | (371 | ) | | (230 | ) |
| Total other comprehensive income (loss) | $ | 235 |
| | $ | 109 |
| | $ | (50 | ) | | $ | (113 | ) | | $ | (600 | ) | | $ | (448 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax |
| Change in cumulative translation adjustment | $ | 85 |
| | $ | 85 |
| | $ | (97 | ) | | $ | (97 | ) | | $ | (216 | ) | | $ | (216 | ) |
| Defined benefit pension and other postretirement benefit plans: | | | | | | | |
| | | | |
| Prior service credit arising during the period | — |
| | — |
| | 103 |
| | 64 |
| | 140 |
| | 87 |
|
| Amortization of unrecognized prior service credits included in net periodic costs | (43 | ) | | (27 | ) | | (48 | ) | | (30 | ) | | (30 | ) | | (19 | ) |
| Change in defined benefit pension and other postretirement benefit plans | (43 | ) | | (27 | ) | | 55 |
| | 34 |
| | 110 |
| | 68 |
|
| Derivatives and hedging: | | | | | | | |
| | | | |
| Unrealized gain (loss) during period | 11 |
| | 7 |
| | 150 |
| | 93 |
| | (78 | ) | | (48 | ) |
| Reclassification adjustment for losses included in net income, net | 11 |
| | 7 |
| | 127 |
| | 79 |
| | 134 |
| | 83 |
|
| Change in derivatives and hedging | 22 |
| | 14 |
| | 277 |
| | 172 |
| | 56 |
| | 35 |
|
| Total other comprehensive income (loss) | $ | 64 |
| | $ | 72 |
| | $ | 235 |
| | $ | 109 |
| | $ | (50 | ) | | $ | (113 | ) |
For additional information regarding the impact of reclassifications into earnings, refer to Note 10,9, "Derivative and Non-Derivative Financial Instruments" and Note 11,10, "Retirement Plans".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
16.15. | ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET |
Components of asset impairments and restructuring charges, net, are presented below:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Asset impairments | $ | 12 |
| | $ | 85 |
| | $ | 28 |
| $ | 1 |
| | $ | 12 |
| | $ | 85 |
|
| Gain on sale of assets, net | (2 | ) | | (1 | ) | | (7 | ) | — |
| | (2 | ) | | (1 | ) |
| Intangible asset and goodwill impairments | — |
| | 22 |
| | 24 |
| — |
| | — |
| | 22 |
|
| Severance charges | 32 |
| | 68 |
| | 13 |
| 6 |
| | 32 |
| | 68 |
|
| Site closure and restructuring charges | 3 |
| | 9 |
| | 19 |
| 1 |
| | 3 |
| | 9 |
|
| Total | $ | 45 |
| | $ | 183 |
| | $ | 77 |
| $ | 8 |
| | $ | 45 |
| | $ | 183 |
|
2017
In fourth quarter 2017 asset impairments and restructuring charges, net included $3 million of asset impairment and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China. Additionally, the Company recognized restructuring charges of approximately $5 million for severance.
2016
In fourth quarter 2016 theThe Company impaired a capital project in the AFP segment that resulted in a charge of $12 million.
As part of the Company's previouslyan announced plan to reduce costs primarily in 2017, the Company recognized restructuring charges of $34 million primarily for severance in 2016.severance.
In 2016, there wasThe Company recognized a gain of $2 million in the AFP segment for the sale of previously impaired assets at the Crystex® insoluble sulfur research and development ("R&D&D") site in France.
2015
The Company took actions during 2015 to reduce non-operations workforce resulting in restructuring charges of $51 million for severance. These actions were taken to offset the impacts of low oil prices, a strengthened U.S. dollar, and the continued weak worldwide economic and business conditions.
As a result of the annual impairment testing of indefinite-lived intangible assets, in 2015, the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-KOOL® window films products tradename to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia in 2012. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.
In 2015, netNet asset impairments and restructuring charges included $81 million of asset impairments and $17 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing site which was substantially completed in 2015. Additionally, in 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $3 million.
Additionally, during 2015, netNet asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.
2014
In 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for costs of the closure of a Crystex® insoluble sulfur R&D facility in France.Taminco Corporation.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As a resultReconciliations of the annual impairment testing of indefinite-lived intangible assets, in 2014 the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex® tradename to the estimated fair value. This impairment resulted from a decrease in projected revenue since the tradename was acquired from Solutia in 2012. The estimated fair value was determined using an income approach, specifically the relief from royalty method.beginning and ending restructuring liability amounts are as follows:
In 2014, a change in estimate of certain costs for the 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a restructuring charge of $5 million to previously recognized asset impairments and restructuring charges.
In 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.
Additionally, during 2014, charges in the AM segment included $10 million of asset impairments, including intangible assets, and $2 million of restructuring charges primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. 2014 also included $5 million of restructuring charges for severance associated with the integration of Solutia.
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2017 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash Reductions | | Balance at December 31, 2017 |
| Noncash charges | $ | — |
| | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
|
| Severance costs | 42 |
| | 6 |
| | — |
| | (29 | ) | | 19 |
|
| Site closure & restructuring costs | 13 |
| | 1 |
| | 1 |
| | (5 | ) | | 10 |
|
| Total | $ | 55 |
| | $ | 8 |
| | $ | — |
| | $ | (34 | ) | | $ | 29 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2016 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash Reductions | | Balance at December 31, 2016 |
| Noncash charges | $ | — |
| | $ | 12 |
| | $ | (12 | ) | | $ | — |
| | $ | — |
|
| Severance costs | 55 |
| | 32 |
| | — |
| | (45 | ) | | 42 |
|
| Site closure & restructuring costs | 11 |
| | 1 |
| | 4 |
| | (3 | ) | | 13 |
|
| Total | $ | 66 |
| | $ | 45 |
| | $ | (8 | ) | | $ | (48 | ) | | $ | 55 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2015 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash Reductions | | Balance at December 31, 2015 |
| Noncash charges | $ | — |
| | $ | 107 |
| | $ | (107 | ) | | $ | — |
| | $ | — |
|
| Severance costs | 13 |
| | 67 |
| | 1 |
| | (26 | ) | | 55 |
|
| Site closure & restructuring costs | 15 |
| | 9 |
| | 3 |
| | (16 | ) | | 11 |
|
| Total | $ | 28 |
| | $ | 183 |
| | $ | (103 | ) | | $ | (42 | ) | | $ | 66 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2014 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash Reductions | | Balance at December 31, 2014 |
| Noncash charges | $ | — |
| | $ | 52 |
| | $ | (52 | ) | | $ | — |
| | $ | — |
|
| Severance costs | 22 |
| | 13 |
| | — |
| | (22 | ) | | 13 |
|
| Site closure & restructuring costs | 14 |
| | 12 |
| | (4 | ) | | (7 | ) | | 15 |
|
| Total | $ | 36 |
| | $ | 77 |
| | $ | (56 | ) | | $ | (29 | ) | | $ | 28 |
|
Substantially all costs remaining for severance are expected to be applied to the reserves within one year.
| |
17.16. | OTHER (INCOME) CHARGES, NET |
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Foreign exchange transaction losses (gains), net | $ | 27 |
| | $ | 6 |
| | $ | (7 | ) | $ | 5 |
| | $ | 27 |
| | $ | 6 |
|
| Financing costs related to the acquisition of Taminco | — |
| | — |
| | 10 |
| |
| (Income) loss from equity investments and other investment (gains) losses, net | (15 | ) | | (15 | ) | | (13 | ) | (14 | ) | | (15 | ) | | (15 | ) |
| Gain from sale of equity investment in Primester joint venture | (17 | ) | | — |
| | — |
| |
| Cost of disposition of claims against discontinued Solutia operations | | 9 |
| | 5 |
| | — |
|
| Gains from sale of businesses | | (3 | ) | | (17 | ) | | — |
|
| Other, net | (1 | ) | | 1 |
| | (5 | ) | 5 |
| | (6 | ) | | 1 |
|
| Other (income) charges, net | $ | (6 | ) | | $ | (8 | ) | | $ | (15 | ) | $ | 2 |
| | $ | (6 | ) | | $ | (8 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
IncludedIn 2017, the net loss on the revaluation of foreign entity assets and liabilities was partially offset by a net gain on the foreign exchange non-qualifying derivatives, both items impacted primarily by the euro. See Note 9, "Derivative and Non-Derivative Financial Instruments". Also included in 2017 other (income) charges, net are losses or gains on foreign exchange transactions, equity investments, business venture investments, non-operating assets,is a $9 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012 and certain litigation costs and earnings. Net lossesa $3 million gain from the sale of the formulated electronics cleaning solutions business.
In 2016, the net loss from foreign exchange non-qualifying derivatives werewas partially offset by foreign exchange transaction gains,the net which includegain on the revaluation of foreign entity assets and liabilities, both items impacted primarily by the euroeuro. Included in 2016. See Note 10, "Derivative and Non-Derivative Financial Instruments".
Included2016 other (income) charges, net is $5 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012. Also included in 2016 other (income) charges, net is a gain of $17 million from the sale of the Company's interest in the Primester joint venture equity investment. For additional information, see Note 6,5, "Equity Investments". Additionally, 2016 other (income) charges,
In 2015, the net includes costloss from foreign exchange non-qualifying derivatives was partially offset by the net gain on the revaluation of disposition of claims against operations that were discontinuedforeign entity assets and liabilities, both items impacted primarily by Solutia prior to the Company's acquisition of Solutia in 2012.euro.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
18.17. | SHARE-BASED COMPENSATION PLANS AND AWARDS |
20122017 Omnibus Stock Compensation Plan
Eastman's 20122017 Omnibus Stock Compensation Plan ("20122017 Omnibus Plan") was approved by stockholders at the May 3, 20124, 2017 Annual Meeting of Stockholders and shall remain in effect until its fifth anniversary. The 20122017 Omnibus Plan authorizes the Compensation and Management Development Committee of the Board of Directors to grant awards, designate participants, determine the types and numbers of awards, determine the terms and conditions of awards and determine the form of award settlement. Under the 20122017 Omnibus Plan, the aggregate number of shares reserved and available for issuance is 10 million, which consist of shares not previously authorized for issuance under any other plan. The number of shares covered by an award is counted against this share reserve as of the grant date of the award. Shares covered by full value awards (e.g. performance shares and restricted stock awards) are counted against the total number of shares available for issuance or delivery under the plan as 2.5 shares for every one share covered by the award. Any stock distributed pursuant to an award may consist of, in whole or in part, authorized and unissued stock, treasury stock, or stock purchased on the open market. Under the 20122017 Omnibus Plan and previous plans, the forms of awards have included restricted stock and restricted stock units, stock options, stock appreciation rights ("SARs"), and performance shares. The 20122017 Omnibus Plan is flexible as to the number of specific forms of awards, but provides that stock options and SARs are to be granted at an exercise price not less than 100 percent of the per share fair market value on the date of the grant.
Director Stock Compensation Subplan
Eastman's 20162017 Director Stock Compensation Subplan ("Directors' Subplan"), a component of the 20122017 Omnibus Plan, remains in effect until terminated by the Board of Directors or the earlier termination of the 20122017 Omnibus Plan. The Directors' Subplan provides for structured awards of restricted shares to non-employee members of the Board of Directors. Restricted shares awarded under the Directors' Subplan are subject to the same terms and conditions of the 20122017 Omnibus Plan. The Directors' Subplan does not constitute a separate source of shares for grant of equity awards and all shares awarded are part of the 10 million shares authorized under the 20122017 Omnibus Plan. Shares of restricted stock are granted on the first day of a non-employee director's initial term of service and shares of restricted stock are granted each year to each non-employee director on the date of the annual meeting of stockholders.
General
The Company is authorized by the Board of Directors under the 2012 Omnibus Plan to provide awards to employees and non-employee members of the Board of Directors. It has been the Company's practice to issue new shares rather than treasury shares for equity awards for compensation plans, including the 2017 Omnibus Plan and the Directors' Subplan, that require settlement by the issuance of common stock and to withhold or accept back shares awarded to cover the related income tax obligations of employee participants. Shares of unrestricted common stock owned by non-employee directors are not eligible to be withheld or acquired to satisfy the withholding obligation related to their income taxes. Shares of unrestricted common stock owned by specified senior management level employees are accepted by the Company to pay the exercise price of stock options in accordance with the terms and conditions of their awards.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Compensation Expense
For 2017, 2016, 2015, and 2014,2015, total share-based compensation expense (before tax) of approximately $36$52 million, $36 million, and $2836 million, respectively, was recognized in selling,"Selling, general and administrative expenseexpense" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards of which approximately $7$8 million, $7 million, and $47 million, respectively, related to stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the forms of award notice. For 2017, 2016, 2015, and 2014,2015, approximately $2 million $2 million, and $1 million, respectively, of stock option compensation expense was recognized each year due to qualifying termination eligibility preceding the requisite vesting period.
Stock Option Awards
Options have been granted on an annual basis to non-employee directors under the Directors' Subplan and predecessor plans and by the Compensation and Management Development Committee of the Board of Directors under the 20122017 Omnibus Plan and predecessor plans to employees. Option awards have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is 10 years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted average assumptions used in the determination of fair value for stock options awarded in 2017, 2016, 2015, and 20142015 are provided in the table below:
| | | Assumptions | | 2016 | | 2015 | | 2014 | | 2017 | | 2016 | | 2015 |
| Expected volatility rate | | 23.71% | | 24.11% | | 25.82% | | 20.45% | | 23.71% | | 24.11% |
| Expected dividend yield | | 2.31% | | 1.75% | | 1.70% | | 2.64% | | 2.31% | | 1.75% |
| Average risk-free interest rate | | 1.23% | | 1.45% | | 1.44% | | 1.91% | | 1.23% | | 1.45% |
| Expected term years | | 5.0 | | 4.8 | | 4.7 | | 5.0 | | 5.0 | | 4.8 |
The volatility rate of grants is derived from historical Company common stock price volatility over the same time period as the expected term of each stock option award. The volatility rate is derived by mathematical formula utilizing the weekly high closing stock price data over the expected term.
The expected dividend yield is calculated using the Company's average of the last four quarterly dividend yields.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.
The weighted average expected term reflects the analysis of historical share-based award transactions and includes option swap and reload grants which may have much shorter remaining expected terms than new option grants.
A summary of the activity of the Company's stock option awards for 2017, 2016, 2015, and 20142015 is presented below:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price |
| Outstanding at beginning of year | 2,434,600 |
| | $ | 53 |
| | 2,209,800 |
| | $ | 46 |
| | 2,359,100 |
| | $ | 39 |
|
| Granted | 554,000 |
| | 65 |
| | 512,700 |
| | 74 |
| | 272,100 |
| | 86 |
|
| Exercised | (618,500 | ) | | 33 |
| | (271,200 | ) | | 30 |
| | (419,300 | ) | | 31 |
|
| Cancelled, forfeited, or expired | (6,400 | ) | | 77 |
| | (16,700 | ) | | 77 |
| | (2,100 | ) | | 55 |
|
| Outstanding at end of year | 2,363,700 |
| | $ | 61 |
| | 2,434,600 |
| | $ | 53 |
| | 2,209,800 |
| | $ | 46 |
|
| Options exercisable at year-end | 1,378,000 |
| | | | 1,643,100 |
| | | | 1,726,800 |
| | |
| Available for grant at end of year | 3,807,724 |
| | | | 5,413,250 |
| | | | 7,271,093 |
| | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price |
| Outstanding at beginning of year | 2,363,700 |
| | $ | 61 |
| | 2,434,600 |
| | $ | 53 |
| | 2,209,800 |
| | $ | 46 |
|
| Granted | 745,800 |
| | 80 |
| | 554,000 |
| | 65 |
| | 512,700 |
| | 74 |
|
| Exercised | (489,300 | ) | | 44 |
| | (618,500 | ) | | 33 |
| | (271,200 | ) | | 30 |
|
| Cancelled, forfeited, or expired | (6,100 | ) | | 74 |
| | (6,400 | ) | | 77 |
| | (16,700 | ) | | 77 |
|
| Outstanding at end of year | 2,614,100 |
| | $ | 70 |
| | 2,363,700 |
| | $ | 61 |
| | 2,434,600 |
| | $ | 53 |
|
| Options exercisable at year-end | 1,335,500 |
| | | | 1,378,000 |
| | | | 1,643,100 |
| | |
| Available for grant at end of year | 9,943,033 |
| | | | 3,807,724 |
| | | | 5,413,250 |
| | |
The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable at December 31, 2016:2017:
| | | | | Options Outstanding | | Options Exercisable | | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number Outstanding at December 31, 2016 | | Weighted-Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable at December 31, 2016 | | Weighted-Average Exercise Price | | Number Outstanding at December 31, 2017 | | Weighted-Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable at December 31, 2017 | | Weighted-Average Exercise Price |
| $18-$35 | | 119,600 | | 2.2 | | $ | 28 |
| | 119,600 | | $ | 28 |
| | 62,500 | | 1.7 | | $ | 27 |
| | 62,500 | | $ | 27 |
|
| $36-$50 | | 617,600 | | 4.2 | | 39 |
| | 617,600 | | 39 |
| | 271,500 | | 3.2 | | 39 |
| | 271,500 | | 39 |
|
| $51-$73 | | 867,300 | | 8.1 | | 67 |
| | 313,300 | | 70 |
| | 823,300 | | 7.1 | | 67 |
| | 454,000 | | 68 |
|
| $74-$87 | | 759,200 | | 7.9 | | 78 |
| | 327,500 | | 80 |
| | 1,456,800 | | 8.0 | | 79 |
| | 547,500 | | 80 |
|
| | | 2,363,700 | | 6.7 | | $ | 61 |
| | 1,378,000 | | $ | 55 |
| | 2,614,100 | | 7.1 | | $ | 70 |
| | 1,335,500 | | $ | 65 |
|
The range of exercise prices of options outstanding at December 31, 20162017 is approximately $18 to $87 per share. The aggregate intrinsic value of total options outstanding and total options exercisable at December 31, 20162017 is $36$59 million and $30$37 million, respectively. Intrinsic value is the amount by which the closing market price of the stock at December 31, 20162017 exceeds the exercise price of the option grants.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted average remaining contractual life of all exercisable options at December 31, 20162017 is 5.35.6 years.
The weighted average fair value of options granted during 2017, 2016, and 2015 was $11.79, $10.97, and 2014 was $10.97, $13.89, and $17.12, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015, and 2014, was $19 million, $23 million, $13 million, and $22$13 million, respectively. Cash proceeds received by the Company from option exercises and the related tax benefit totaled $22 million and $5 million, respectively, for 2017, $21 million and $7 million, respectively, for 2016, and $8 million and $4 million, respectively, for 2015, and $13 million and $7 million, respectively, for 2014.2015. The total fair value of shares vested during the years ended December 31, 2017, 2016, 2015, and 20142015 was $6 million, $3$6 million, and $4$3 million, respectively.
A summary of the status ofchanges in the Company's nonvested options as of December 31, 2016 and changes during the year then ended December 31, 2017 is presented below:
| | | Nonvested Options | | Number of Options | | Weighted-Average Grant Date Fair Value | | Number of Options | | Weighted-Average Grant Date Fair Value |
| Nonvested at January 1, 2016 | | 791,500 |
| | $15.17 | |
| Nonvested at January 1, 2017 | | | 985,700 |
| | $12.56 |
| Granted | | 554,000 |
| | $10.97 | | 745,800 |
| | $11.79 |
| Vested | | (353,400 | ) | | $15.88 | | (446,800 | ) | | $13.36 |
| Forfeited or expired | | (6,400 | ) | | $14.57 | | (6,100 | ) | | $13.89 |
| Nonvested options at December 31, 2016 | | 985,700 |
| | $12.56 | |
| Nonvested options at December 31, 2017 | | | 1,278,600 |
| | $11.82 |
For nonvested options at December 31, 2016,2017, approximately $23 million in compensation expense will be recognized over the next two years.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other Share-Based Compensation Awards
In addition to stock option awards, the CompanyEastman has awarded long-term performance share awards, restricted stock awards, and SARs. The long-term performance share awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-rata over the three year performance period. The number of long-term performance award target shares granted for the 2017-2019, 2016-2018, 2015-2017, and 2014-20162015-2017 periods were 357 thousand, 427 thousand, 347 thousand, and 285347 thousand, respectively. The target shares granted are assumed to be 100 percent. At the end of the three-year performance period, the actual number of shares awarded can range from zero percent to 250 percent of the target shares granted based on the award notice. The number of restricted stock awards granted during 2017, 2016, and 2015 and 2014 were 172 thousand, 190 thousand, 233 thousand, and 144233 thousand, respectively. The fair value of a restricted stock award is equal to the closing stock price of the Company's stock on the date of grant and normally vests over a period of three years. The recognized compensation expense before tax for these other share-based awards in the years ended December 31, 2017, 2016, 2015, and 20142015 was approximately $29$44 million, $29 million, and $24$29 million, respectively. The unrecognized compensation expense before tax for these same type awards at December 31, 20162017 was approximately $40$50 million and will be recognized primarily over a period of two years.
| |
19.18. | SUPPLEMENTAL CASH FLOW INFORMATION |
Included in the line item "Other items, net" of the "Operating activities" section of the Consolidated Statements of Cash Flows are specific changes to certain balance sheet accounts as follows:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Current assets | $ | (35 | ) | | $ | 5 |
| | $ | (12 | ) | $ | 13 |
| | $ | (35 | ) | | $ | 5 |
|
| Other assets | 37 |
| | 75 |
| | 45 |
| 29 |
| | 37 |
| | 75 |
|
| Current liabilities | (98 | ) | | 22 |
| | (88 | ) | 59 |
| | (98 | ) | | 22 |
|
| Long-term liabilities | (29 | ) | | (72 | ) | | 52 |
| 43 |
| | (29 | ) | | (72 | ) |
| Total | $ | (125 | ) | | $ | 30 |
| | $ | (3 | ) | $ | 144 |
| | $ | (125 | ) | | $ | 30 |
|
The above changes included transactions such as accrued taxes, deferred taxes, environmental liabilities, monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, value-added taxes, and other miscellaneous accruals.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cash flows from derivative financial instruments accounted for as hedges are classified in the same category as the item being hedged.
Cash paid for interest and income taxes is as follows:
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Cash paid for interest and income taxes is as follows: | | | | | | |
| | | | | | | |
| Interest, net of amounts capitalized | $ | 280 |
| | $ | 265 |
| | $ | 184 |
| $ | 263 |
| | $ | 280 |
| | $ | 265 |
|
| Income taxes | 120 |
| | 124 |
| | 152 |
| 97 |
| | 120 |
| | 124 |
|
| Non-cash investing and financing activities: | | | | | | | | | | |
| Outstanding trade payables related to capital expenditures | 34 |
| | 10 |
| | 19 |
| 27 |
| | 34 |
| | 10 |
|
| (Gain) loss from equity investments | (15 | ) | | (15 | ) | | (13 | ) | (14 | ) | | (15 | ) | | (15 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
20.19. | SEGMENT INFORMATION |
The Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers.
Additives & Functional Products Segment
In the AFP segment, the Company manufactures chemicals for products in the coatings, tires,transportation, consumables, building and construction, industrial applications including solar energy markets, animal nutrition, care chemicals, crop protection, energy, personal and energyhome care, and other markets.
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 |
| Coatings and Inks Additives | 24% | 24% | 31% |
| Adhesives Resins | 21% | 21% | 27% |
| Tire Additives | 17% | 17% | 22% |
| Other | 38% | 38% | 20% |
| Total | 100% | 100% | 100% |
The products Eastmanthe Company manufactures in the coatings and inks additives product line can be broadly classified as polymers which include cellulosics, Eastman Tetrashield™ performance polyester resins, and other polyester-based specialty polymers and paint additives;additives and solvents whichand include specialty coalescents, ketones, esters, glycol ethers,specialty solvents, paint additives, and alcohol solvents.specialty polymers. The adhesives resins product line consists of hydrocarbon resins such as Regalite®and Eastotac®; non-hydrogenated hydrocarbons resins such as Piccotac®; and polymers such as Eastoflex®.rosin resins. The tire additives product line includeincludes insoluble sulfur products, which are vulcanizing agents principally marketed under the Crystex® brand; antidegradants, principally marketed under the Santoflex® brand;rubber additives, antidegradant rubber additives, and performance resins marketed under the ImperaTM brand.resins. The care chemicals additives business consists of amine-derivative basedamine derivative-based building blocks for the production of flocculants and intermediates for surfactants. In the specialty fluids product line, the Company produces Therminol®heat transfer and aviation fluids Eastman Turbo Oils, Eastman Skydrol® aviation hydraulic fluids, and Eastman SkyKleen® aviation solvents.products. The animal nutrition business consists of formic acid basedacid-based solutions product lines. The crop protection business consists of alkylamine derivatives product lines.metam-based soil fumigants, thiram and ziram-based fungicides, and plant growth regulator products.
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2017 | 2016 | 2015 |
| Coatings and Inks Additives | 23% | 24% | 24% |
| Adhesives Resins | 18% | 21% | 21% |
| Tire Additives | 17% | 17% | 17% |
| Care Chemicals | 17% | 15% | 15% |
| Specialty Fluids | 13% | 11% | 11% |
| Animal Nutrition and Crop Protection | 12% | 12% | 12% |
| Total | 100% | 100% | 100% |
Advanced Materials Segment
In the AM segment, the Company produces and markets its polymers, films, and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness markets.
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 |
| Specialty Plastics | 50% | 51% | 54% |
| Advanced Interlayers | 34% | 33% | 34% |
| Performance Films | 16% | 16% | 12% |
| Total | 100% | 100% | 100% |
The specialty plastics product line consists of two primary products: copolyesters and cellulose esters. The advanced interlayers product line includes specialty intermediate polyvinyl butyral ("PVB") sheet and resins. PVB is a specialty resin used in the production of laminated safety glass sheet used in automotive and architectural applications.polyvinyl butyral intermediates. The performance films product line primarily consists of window film and protective film products which arefor aftermarket applied films to enhance the characteristics and functional performance of automotive and architectural glass.films.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2017 | 2016 | 2015 |
| Specialty Plastics | 51% | 50% | 51% |
| Advanced Interlayers | 33% | 34% | 33% |
| Performance Films | 16% | 16% | 16% |
| Total | 100% | 100% | 100% |
Chemical Intermediates Segment
The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support ourthe Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond ourthe Company's internal specialty needs for use ininto markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Certain products are also used internally by other operating segments of the Company.
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 |
| Intermediates | 65% | 65% | 78% |
| Plasticizers | 20% | 20% | 21% |
| Functional Amines | 15% | 15% | 1% |
| Total | 100% | 100% | 100% |
In the intermediates product line, the Company produces oxo alcoholsolefin derivatives, acetyl derivatives, ethylene, and derivatives, acetic acid and derivatives, acetic anhydride, ethylene, glycol ethers, and esters.commodity solvents. The plasticizers product line consists of a unique set of primary non-phthalate and phthalate plasticizers such as Eastman 168®, and a range of niche non-phthalate plasticizers such as Benzoflex®,Eastman TXIB®, and Eastman Effusion™.plasticizers. The functional amines product lines include methylamines and salts, and higher amines and solvents.
|
| | | |
| | Percentage of Total Segment Sales |
| Product Lines | 2017 | 2016 | 2015 |
| Intermediates | 64% | 65% | 65% |
| Plasticizers | 19% | 20% | 20% |
| Functional Amines | 17% | 15% | 15% |
| Total | 100% | 100% | 100% |
Fibers Segment
In the Fibers segment, Eastman manufactures and sells Estron®cellulose acetate tow and Estrobond® triacetin plasticizers for use primarily in the manufacture of cigarette filters; Estron® natural (undyed) and Chromspun® solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; andfiltration media, primarily cigarette filters. The acetyl chemicals product line consists of triacetin, cellulose acetate flake, and acetyl raw materials for other acetate fiber producers. The acetate yarn product line consists of natural (undyed) acetate and polyester yarn and solution-dyed acetate yarn for use in apparel, home furnishings, and industrial fabrics.
| | | | Percentage of Total Segment Sales | Percentage of Total Segment Sales |
| Product Lines | 2016 | 2015 | 2014 | 2017 | 2016 | 2015 |
| Acetate Tow | 80% | 78% | 79% | 77% | 80% | 78% |
| Acetate Yarn and Acetyl Chemical Products | 20% | 22% | 21% | |
| Acetyl Chemical Products | | 15% | 13% | 14% |
| Acetate Yarn | | 8% | 7% | 8% |
| Total | 100% | 100% |
Other
The Company continues to explore and invest in R&D initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials and advanced cellulosics.cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles.
Sales revenue and expense for the Eastman microfiber technology platform growth initiative are shown in the tables below as "Other" sales revenue and operating loss. R&D, pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are shown in the tables below as "Other" operating earnings (loss).
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Sales by Segment | | | | | | | | | | |
| Additives & Functional Products | $ | 2,979 |
| | $ | 3,159 |
| | $ | 2,640 |
| $ | 3,343 |
| | $ | 2,979 |
| | $ | 3,159 |
|
| Advanced Materials | 2,457 |
| | 2,414 |
| | 2,378 |
| 2,572 |
| | 2,457 |
| | 2,414 |
|
| Chemical Intermediates | 2,534 |
| | 2,811 |
| | 3,034 |
| 2,728 |
| | 2,534 |
| | 2,811 |
|
| Fibers | 992 |
| | 1,219 |
| | 1,457 |
| 852 |
| | 992 |
| | 1,219 |
|
| Total Sales by Operating Segment | $ | 8,962 |
| | $ | 9,603 |
| | $ | 9,509 |
| $ | 9,495 |
| | $ | 8,962 |
| | $ | 9,603 |
|
| Other | 46 |
| | 45 |
| | 18 |
| 54 |
| | 46 |
| | 45 |
|
| Total Sales | $ | 9,008 |
| | $ | 9,648 |
| | $ | 9,527 |
| $ | 9,549 |
| | $ | 9,008 |
| | $ | 9,648 |
|
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Operating Earnings (Loss) | | | | | | | | | | |
| Additives & Functional Products | $ | 601 |
| | $ | 660 |
| | $ | 462 |
| $ | 646 |
| | $ | 601 |
| | $ | 660 |
|
| Advanced Materials | 471 |
| | 384 |
| | 276 |
| 482 |
| | 471 |
| | 384 |
|
| Chemical Intermediates | 171 |
| | 294 |
| | 352 |
| 255 |
| | 171 |
| | 294 |
|
| Fibers | 310 |
| | 292 |
| | 474 |
| 175 |
| | 310 |
| | 292 |
|
| Total Operating Earnings by Operating Segment | 1,553 |
| | 1,630 |
| | 1,564 |
| 1,558 |
| | 1,553 |
| | 1,630 |
|
| Other | | | | | | | | | | |
| Growth initiatives and businesses not allocated to operating segments | (82 | ) | | (87 | ) | | (58 | ) | (114 | ) | | (82 | ) | | (87 | ) |
| Pension and other postretirement benefits expenses, net not allocated to operating segments | (44 | ) | | (76 | ) | | (293 | ) | |
| Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | | 93 |
| | (44 | ) | | (76 | ) |
| Restructuring and acquisition integration and transaction costs | (44 | ) | | (83 | ) | | (51 | ) | (5 | ) | | (44 | ) | | (83 | ) |
| Total Operating Earnings | $ | 1,383 |
| | $ | 1,384 |
| | $ | 1,162 |
| $ | 1,532 |
| | $ | 1,383 |
| | $ | 1,384 |
|
| | | | December 31, | December 31, |
| (Dollars in millions) | 2016 | | 2015 | 2017 | | 2016 |
Assets by Segment (1) | | | | | | |
| Additives & Functional Products | $ | 6,255 |
| | $ | 6,370 |
| $ | 6,648 |
| | $ | 6,255 |
|
| Advanced Materials | 4,247 |
| | 4,227 |
| 4,379 |
| | 4,247 |
|
| Chemical Intermediates | 3,084 |
| | 2,930 |
| 3,000 |
| | 2,927 |
|
| Fibers | 763 |
| | 969 |
| 929 |
| | 920 |
|
| Total Assets by Operating Segment | 14,349 |
| | 14,496 |
| 14,956 |
| | 14,349 |
|
| Corporate Assets | 1,108 |
| | 1,084 |
| 1,043 |
| | 1,108 |
|
| Total Assets | $ | 15,457 |
| | $ | 15,580 |
| $ | 15,999 |
| | $ | 15,457 |
|
| |
(1) | The chief operating decision maker holds operating segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangible assets. Segment asset balances for shared fixed assets within the CI and Fibers segments as of December 31, 2016 have been reclassified to conform to current period allocation methodology. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Depreciation and Amortization Expense by Segment | | | | | | | | | | |
| Additives & Functional Products | $ | 208 |
| | $ | 203 |
| | $ | 140 |
| $ | 213 |
| | $ | 208 |
| | $ | 203 |
|
| Advanced Materials | 160 |
| | 161 |
| | 143 |
| 164 |
| | 160 |
| | 161 |
|
| Chemical Intermediates | 157 |
| | 149 |
| | 99 |
| 148 |
| | 157 |
| | 149 |
|
| Fibers | 51 |
| | 55 |
| | 66 |
| 58 |
| | 51 |
| | 55 |
|
| Total Depreciation and Amortization Expense by Operating Segment | 576 |
| | 568 |
| | 448 |
| 583 |
| | 576 |
| | 568 |
|
| Other | 4 |
| | 3 |
| | 2 |
| 4 |
| | 4 |
| | 3 |
|
| Total Depreciation and Amortization Expense | $ | 580 |
| | $ | 571 |
| | $ | 450 |
| $ | 587 |
| | $ | 580 |
| | $ | 571 |
|
| | | | For years ended December 31, | For years ended December 31, |
| (Dollars in millions) | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Capital Expenditures by Segment | | | | | | | | | | |
| Additives & Functional Products | $ | 212 |
| | $ | 227 |
| | $ | 225 |
| $ | 229 |
| | $ | 212 |
| | $ | 227 |
|
| Advanced Materials | 244 |
| | 225 |
| | 176 |
| 248 |
| | 244 |
| | 225 |
|
| Chemical Intermediates | 128 |
| | 139 |
| | 131 |
| 116 |
| | 128 |
| | 139 |
|
| Fibers | 38 |
| | 57 |
| | 53 |
| 52 |
| | 38 |
| | 57 |
|
| Total Capital Expenditures by Operating Segment | 622 |
| | 648 |
| | 585 |
| 645 |
| | 622 |
| | 648 |
|
| Other | 4 |
| | 4 |
| | 8 |
| 4 |
| | 4 |
| | 4 |
|
| Total Capital Expenditures | $ | 626 |
| | $ | 652 |
| | $ | 593 |
| $ | 649 |
| | $ | 626 |
| | $ | 652 |
|
Sales are attributed to geographic areas based on customer location;location and long-lived assets are attributed to geographic areas based on asset location.
| | | (Dollars in millions) | For years ended December 31, | For years ended December 31, |
| Geographic Information | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Sales | | | | | | | | | | |
| United States | $ | 3,803 |
| | $ | 4,096 |
| | $ | 4,162 |
| $ | 3,999 |
| | $ | 3,803 |
| | $ | 4,096 |
|
| All foreign countries | 5,205 |
| | 5,552 |
| | 5,365 |
| 5,550 |
| | 5,205 |
| | 5,552 |
|
| Total | $ | 9,008 |
| | $ | 9,648 |
| | $ | 9,527 |
| $ | 9,549 |
| | $ | 9,008 |
| | $ | 9,648 |
|
| | | | | | | | | | | |
| | | | | | | | | | | |
| | December 31, | December 31, |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Net properties | | | | | | | | | | |
| United States | $ | 4,066 |
| | $ | 3,939 |
| | $ | 3,753 |
| $ | 4,203 |
| | $ | 4,066 |
| | $ | 3,939 |
|
| All foreign countries | 1,210 |
| | 1,191 |
| | 1,334 |
| 1,404 |
| | 1,210 |
| | 1,191 |
|
| Total | $ | 5,276 |
| | $ | 5,130 |
| | $ | 5,087 |
| $ | 5,607 |
| | $ | 5,276 |
| | $ | 5,130 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| |
21.20. | QUARTERLY SALES AND EARNINGS DATA – UNAUDITED |
| | | (Dollars in millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2016 | | | | | | | | |
| 2017 | | | | | | | | |
| Sales | $ | 2,236 |
| | $ | 2,297 |
| | $ | 2,287 |
| | $ | 2,188 |
| $ | 2,303 |
| | $ | 2,419 |
| | $ | 2,465 |
| | $ | 2,362 |
|
| Gross profit | 634 |
| | 605 |
| | 621 |
| | 490 |
| 625 |
| | 651 |
| | 691 |
| | 487 |
|
| Asset impairments and restructuring (gains) charges, net | (2 | ) | | — |
| | 30 |
| | 17 |
| |
Asset impairments and restructuring charges, net
| | — |
| | — |
| | — |
| | 8 |
|
| Net earnings attributable to Eastman | 251 |
| | 255 |
| | 232 |
| | 116 |
| 278 |
| | 292 |
| | 323 |
| | 491 |
|
Net earnings per share attributable to Eastman(1) | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Basic | $ | 1.70 |
| | $ | 1.73 |
| | $ | 1.57 |
| | $ | 0.79 |
| $ | 1.90 |
| | $ | 2.01 |
| | $ | 2.24 |
| | $ | 3.42 |
|
| Diluted | 1.69 |
| | 1.71 |
| | 1.56 |
| | 0.79 |
| 1.89 |
| | 2.00 |
| | 2.22 |
| | 3.39 |
|
| |
(1) | Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount. |
| | | (Dollars in millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| 2015 | | | | | | | | |
| 2016 | | | | | | | | |
| Sales | $ | 2,443 |
| | $ | 2,533 |
| | $ | 2,447 |
| | $ | 2,225 |
| $ | 2,236 |
| | $ | 2,297 |
| | $ | 2,287 |
| | $ | 2,188 |
|
| Gross profit | 656 |
| | 720 |
| | 695 |
| | 509 |
| 634 |
| | 605 |
| | 621 |
| | 490 |
|
| Asset impairments and restructuring charges, net | 109 |
| | — |
| | 21 |
| | 53 |
| |
Asset impairments and restructuring (gains) charges, net
| | (2 | ) | | — |
| | 30 |
| | 17 |
|
| Net earnings attributable to Eastman | 171 |
| | 297 |
| | 256 |
| | 124 |
| 251 |
| | 255 |
| | 232 |
| | 116 |
|
Net earnings per share attributable to Eastman(1) | | | | | | | | | | | | | | |
| Basic | $ | 1.15 |
| | $ | 2.00 |
| | $ | 1.73 |
| | $ | 0.83 |
| $ | 1.70 |
| | $ | 1.73 |
| | $ | 1.57 |
| | $ | 0.79 |
|
| Diluted | 1.14 |
| | 1.98 |
| | 1.71 |
| | 0.83 |
| 1.69 |
| | 1.71 |
| | 1.56 |
| | 0.79 |
|
| |
(1) | Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount. |
| |
22.21. | RESERVE ROLLFORWARDS |
Valuation and Qualifying Accounts
| | | (Dollars in millions) | | | Additions | | | | | | | Additions | | | | |
| | Balance at January 1, 2016 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2016 | Balance at January 1, 2017 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2017 |
| Reserve for: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Doubtful accounts and returns | $ | 13 |
| | $ | (2 | ) | | $ | — |
| | $ | 1 |
| | $ | 10 |
| $ | 10 |
| | $ | 3 |
| | $ | — |
| | $ | 1 |
| | $ | 12 |
|
| LIFO inventory | 296 |
| | (32 | ) | | — |
| | — |
| | 264 |
| 264 |
| | 24 |
| | — |
| | — |
| | 288 |
|
| Non-environmental asset retirement obligations | 46 |
| | — |
| | — |
| | — |
| | 46 |
| 46 |
| | 2 |
| | 1 |
| | — |
| | 49 |
|
| Environmental contingencies | 336 |
| | 10 |
| | 1 |
| | 26 |
| | 321 |
| 321 |
| | 8 |
| | 4 |
| | 29 |
| | 304 |
|
| Deferred tax valuation allowance | 254 |
| | 20 |
| | 4 |
| | — |
| | 278 |
| 278 |
| | 126 |
| | 6 |
| | — |
| | 410 |
|
| | $ | 945 |
| | $ | (4 | ) | | $ | 5 |
| | $ | 27 |
| | $ | 919 |
| $ | 919 |
| | $ | 163 |
| | $ | 11 |
| | $ | 30 |
| | $ | 1,063 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | Additions | | | | | |
| (Dollars in millions) | | | | Additions | | | | |
| | Balance at January 1, 2015 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2015 | Balance at January 1, 2016 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2016 |
| Reserve for: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Doubtful accounts and returns | $ | 10 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | 13 |
| $ | 13 |
| | $ | (2 | ) | | $ | — |
| | $ | 1 |
| | $ | 10 |
|
| LIFO inventory | 462 |
| | (166 | ) | | — |
| | — |
| | 296 |
| 296 |
| | (32 | ) | | — |
| | — |
| | 264 |
|
| Non-environmental asset retirement obligations | 44 |
| | 4 |
| | — |
| | 2 |
| | 46 |
| 46 |
| | — |
| | — |
| | — |
| | 46 |
|
| Environmental contingencies | 345 |
| | 9 |
| | 11 |
| | 29 |
| | 336 |
| 336 |
| | 10 |
| | 1 |
| | 26 |
| | 321 |
|
| Deferred tax valuation allowance | 264 |
| | 58 |
| | (18 | ) | | 50 |
| | 254 |
| 254 |
| | 20 |
| | 4 |
| | — |
| | 278 |
|
| | $ | 1,125 |
| | $ | (94 | ) |
| $ | (5 | ) |
| $ | 81 |
|
| $ | 945 |
| $ | 945 |
| | $ | (4 | ) | | $ | 5 |
| | $ | 27 |
| | $ | 919 |
|
| | | | | | Additions | | | | | |
| (Dollars in millions) | | | | Additions | | | | |
| | Balance at January 1, 2014 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2014 | Balance at January 1, 2015 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2015 |
| Reserve for: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Doubtful accounts and returns | $ | 12 |
| | $ | 1 |
| | $ | — |
| | $ | 3 |
| | $ | 10 |
| $ | 10 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | 13 |
|
| LIFO inventory | 506 |
| | (44 | ) | | — |
| | — |
| | 462 |
| 462 |
| | (166 | ) | | — |
| | — |
| | 296 |
|
| Non-environmental asset retirement obligations | — |
| | — |
| | 44 |
| | — |
| | 44 |
| 44 |
| | 4 |
| | — |
| | 2 |
| | 46 |
|
| Environmental contingencies | 368 |
| | 2 |
| | 2 |
| | 27 |
| | 345 |
| 345 |
| | 9 |
| | 11 |
| | 29 |
| | 336 |
|
| Deferred tax valuation allowance | 204 |
| | 58 |
| | 2 |
| | — |
| | 264 |
| 264 |
| | 58 |
| | (18 | ) | | 50 |
| | 254 |
|
| | $ | 1,090 |
| | $ | 17 |
|
| $ | 48 |
|
| $ | 30 |
|
| $ | 1,125 |
| $ | 1,125 |
| | $ | (94 | ) |
| $ | (5 | ) |
| $ | 81 |
|
| $ | 945 |
|
| |
23.22. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In May 2014, the FASBFinancial Accounting Standards Board ("FASB") and International Accounting Standards Board jointly issued new principles-based accounting guidance for revenue recognition that will supersede virtually all existing revenue guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve the core principle, the guidance establishes the following five steps: 1) identify the contract(s) withprovides a customer, 2) identify the performance obligation in the contract, 3) determine the transaction price, 4) allocate the transaction pricefive-step process to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance also details the accounting treatment for costs to obtain or fulfill a contract. Lastly, disclosure requirements have been enhanced to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.principles-based guidance. In August 2015, the FASB issued new guidance to delay the effective date of the new revenue standard by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted under the original effective date of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. In April 2016, the FASB issued clarifying guidance to the 2014 revenue standard in regardsregard to the identification of performance obligations and licensing. In May 2016, the FASB issued narrow-scope improvements and practical expedients to the new revenue standard that include clarification of the collectability criterion, specification for the measurement of noncash considerations, clarifiesclarification of a completed contract for transition purposes and clarification in regards to the retrospective application, as well as, policy elections, and other practical expedients. In December 2016, the FASB issued additional corrections and improvements that affect various narrow aspects of the guidance. The effective date for all amendments is the same as that of the revenue standard stated above. Management does not expect that changes in its accounting required by this new guidance will materially impact the Company's financial position or results of operationsstatements and related disclosures. Management plans are to adoptThe Company adopted the new guidance when effective and anticipates adopting retrospectively to each prior reporting period presented withstandard under the election of applicable practical expedients.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Inmodified-retrospective approach on January 2016, the FASB issued targeted improvements in regards to the recognition and measurement of financial assets and financial liabilities. The changes are as follows: requires equity investments (except equity method and consolidated investments) to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, when a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and early adoption is permitted but limited. The new guidance is to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and for equity securities without readily determinable fair values, applied prospectively to equity investments that exist as of the date of adoption. Management has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operations and related disclosures.1, 2018.
In February 2016, the FASB issued guidance on lease accounting. The new guidance establishes two types of leases for lessees: finance orand operating. The guidance for lessors is largely unchanged. Under the guidance, a lessee is to recognize a right-of-use asset and lease liability that arises from a lease. A lessee can make a policy election, by asset class, to not recognize lease assets or liabilities for leases with a term of 12 months or less. Both finance and operating leases will have associated right-of-use assets and liabilities initially measured at the present value of the lease payments. Current and noncurrent balance sheet classification will apply. Finance leases will have another reported element for interest associated with the principal lease liability. The component concept from the 2014 revenue recognition standard has been included in the new lease standard which will guide identification of individual assets and non-lease components. As with current GAAP, the guidance does not apply to the following leases: intangible assets to explore for or use minerals, oil, natural gas, and similar nonregenerative resources, biological assets (includes timber), inventory, or assets under construction. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and early adoption is permitted. The new guidance is to be applied under a modified retrospective approach wherein practical expedients have been allowed that will not require reassessment of current leases at the effective date. Management is currently evaluating theimplementation options and impact on the Company's financial position and results of operations and related disclosures.
In March 2016, the FASB issued guidance for derivatives and hedging given lack of specific guidance and diversity in practice. The guidance clarifies that a change in the counterparty to a derivative instrument does not, in and of itself, require dedesignation of that hedge accounting relationship provided all other hedge accounting criteria continue to be met (specifically points to counterparty credit worthiness). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period. The new guidance is to be applied under the prospective method or modified retrospective approach. Management has concluded that changes in its accounting required by this new guidance will not materially impact the Company's financial position or results of operationsstatements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In March 2016, the FASB issued guidance for stock compensation as a part of the simplification initiative that covers related tax accounting, cash flow presentation, and forfeitures. The two tax accounting related amendments are as follows: all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized within income tax expense or benefit in the income statement, the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur, an entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period; and the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The cash flow presentation items sets forth that excess tax benefits should be classified along with other income tax cash flows as an operating activity and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. For forfeitures, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period. The new guidance application is mixed among the various elements that include retrospective, prospective, and modified retrospective transition methods. Management elected to early adopt this standard for annual reporting periods beginning after December 15, 2015 and adopted using the modified retrospective transition method for the tax accounting and forfeiture related aspects of the guidance which did not materially impact the Company's financial position or results of operations and related disclosures. Management adopted the cash flow classification related provisions of the guidance on a retrospective basis, which resulted in the reclassification of cash flows from financing activities to operating activities of $12 million and $25 million in 2015 and 2014, respectively, as reported in the Consolidated Statements of Cash Flows.
In June 2016, the FASB issued guidance relating to credit losses. The amendments require a financial asset (or group of financial assets) measured at amortized cost basis(including trade receivables) to be presented at the net amount expected to be collected through the use of allowances for credit losses valuation account. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period, beginning after December 15, 2018. The new guidance application is mixed among the various elements that include modified retrospective and prospective transition methods. Management is currently evaluatingdoes not expect that changes in its accounting required by the new guidance will materially impact on the Company's financial position andor results of operations and related disclosures.
In August 2016, the FASB issued guidance to reduce existing diversity in practice in regards to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance specifically addresses the following items: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interest in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and early adoption is permitted, including adoption in an interim period. The new guidance is to be applied retrospectively to each period presented at the date of adoption. Management elected to early adopt this standard for annual reporting periods beginning after December 15, 2015 and adopted retrospectively which did not result in changes to related disclosures or classifications.
In October 2016, the FASB issued guidance as a part of the Simplification Initiativeits simplification initiative in regardsregard to income tax of intra-entity asset transfers. The release requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments eliminate the exception for an intra-entity transfer of an asset other than inventory that prohibited recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods and early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The new guidance is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Management is currently evaluatingdoes not expect that changes in its accounting required by this new guidance will materially impact the impact on the Company's financial statements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In December 2016,January 2017, the FASB issued guidance asclarifying the definition of a result of diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. This Update requiresbusiness that provides a statement of cash flows explain the change during the periodtwo-step analysis in the totaldetermination of cash, cash equivalents,whether an acquisition or derecognition is a business or an asset. The update removes the evaluation of whether a market participant could replace any missing elements and amounts generally described as restricted cash or restricted cash equivalents.provides a framework to assist entities in evaluating whether both an input and a substantive process are present. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal yearsannual reporting periods and early adoption is permitted including adoption in an interim period. The newfor transactions that meet specified criteria. This guidance is to be applied usingon a retrospective transition methodprospective basis for transactions that occur after the effective date.
In January 2017, the FASB issued guidance as a part of its simplification initiative that bases the impairment of goodwill on any difference for which the carrying value is greater than the fair value of the reporting unit. This guidance is effective for annual reporting periods, or interim period testing performed, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment testing performed after January 1, 2017. This guidance is to each period presented.be applied on a prospective basis for goodwill testing that occur after the effective date. Management has concludeddoes not expect that changes in its accounting required by thisthe new guidance will not materially impact the Company's financial position or results of operations and related disclosures.
In February 2017, the FASB issued guidance that clarifies the scope of nonfinancial asset derecognition and the accounting for partial sales of nonfinancial assets. This guidance is effective at the same time as the amendments in the revenue recognition standard stated above, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and must be applied in conjunction with that standard. Adoption can be applied either on a retrospective or modified retrospective approach. Management does not expect that changes in its accounting required by the new guidance will materially impact the Company's financial position or results of operations and related disclosures.
In March 2017, the FASB issued guidance to improve the presentation of net periodic pension and postretirement benefit costs that will require the reporting of the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost (interest cost, expected return on plan assets, curtailment gains or losses, amortization of prior service costs or credits, and MTM gains or losses) are to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if presented. In addition, the new requirement prescribes only the service cost component to be eligible for capitalization. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The new guidance is to be applied retrospectively for income statement effect and prospectively for balance sheet effects. The total of other components of net benefit cost for 2017, 2016, and 2015 were $135 million credit, $3 million credit, and $40 million cost, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued guidance to clarify when changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The new guidance is to be applied prospectively to an award modified on or after the adoption date.
In August 2017, the FASB issued guidance to simplify the application of the current hedge accounting guidance and improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the guidance. Income statement impacts are to be adopted on a retrospective basis as of the beginning of the fiscal year of adoption. The amended presentation and disclosure guidance is required only prospectively. Management is currently evaluating the impact on the Company's financial statements and related disclosures.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Eastman Chemical Company ("Eastman" or the "Company") maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of December 31, 2016,2017, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Management, including the CEO and CFO, does not expect that the Company's disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance; judgments in decision-making can be faulty; and breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and while the Company's disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company's internal control over financial reporting includes policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and acquisitions and dispositions of assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of its internal control over financial reporting as of December 31, 20162017 based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2016.2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20162017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 20162017 that has materially affected, or is reasonably likely to materially effect, the Company's internal control over financial reporting.
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ITEM 9B. | OTHER INFORMATION |
None.
PART III
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1--Election of Directors" to (but not including) the subheading "The Board of Directors and Corporate Governance" and under the subheading "Board Committees--Audit Committee" (except for the material under the subheading "Board Committees--Audit Committee--Audit Committee Report", which is not incorporated by reference herein), each as included and to be filed in the definitive Proxy Statement for the 20172018 Annual Meeting of Stockholders (the "2017"2018 Proxy Statement"), is incorporated by reference herein in response to this Item. Certain information concerning executive officers of Eastman Chemical Company ("Eastman" or the "Company") is set forth under the heading "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K.
The Company has adopted a Code of Ethics and Business Conduct applicable to the Chief Executive Officer, the Chief Financial Officer, and the Controller of the Company. The Company has posted such Code of Ethics and Business Conduct on its website (www.eastman.com) in the "Investors -- Corporate Governance" section.
ITEM 11. EXECUTIVE COMPENSATION
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1--Election of Directors—Board Committees – Compensation and Management Development Committee – Compensation Committee Report", under the subheading "Director Compensation", and under the heading "Executive Compensation", each as included and to be filed in the 20172018 Proxy Statement, is incorporated by reference herein in response to this Item.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The material under the headings "Stock Ownership of Directors and Executive Officers--Common Stock" and "Principal Stockholders" as included and to be filed in the 20172018 Proxy Statement is incorporated by reference herein in response to this Item.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plans Approved by Stockholders
Stockholders approved the Company's 2007 Omnibus Long-Term Compensation Plan, the 2012 Omnibus Stock Compensation Plan, and the 2002 Director Long-Term2017 Omnibus Stock Compensation Plan. Although stock and stock-based awards are still outstanding under the 2007 Omnibus Long-Term Compensation Plan, the 2002 Director Long-Term Compensation Plan, the 2007 Director Long-Term Compensation Subplan, a component of the 2007 Omnibus Long-Term Compensation Plan, and the 2012 Omnibus Stock Compensation Plan, the 2013 Director Stock Compensation Subplan, and 2015 Director Long-Term Compensation Subplans, componentsa component of the 2012 Omnibus Stock Compensation Plan, no shares are available under these plans for future awards. All recent and future share-based awards will beare made from the 20122017 Omnibus Stock Compensation Plan and if approved by stockholders at the 2017 Annual MeetingDirector Stock Compensation Subplan, a component of Stockholders, the 2017 Omnibus Stock Compensation Plan.
Equity Compensation Plans Not Approved by Stockholders
Stockholders have approved all compensation plans under which shares of Eastman common stock are authorized for issuance.
Summary Equity Compensation Plan Information Table
The following table sets forth certain information as of December 31, 20162017 with respect to compensation plans under which shares of Eastman common stock may be issued.
| | | Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options (a) | | Weighted-Average Exercise Price of Outstanding Options (b) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities reflected in Column (a)) (c) | | | Number of Securities to be Issued upon Exercise of Outstanding Options (a) | | Weighted-Average Exercise Price of Outstanding Options (b) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities reflected in Column (a)) (c) | |
| Equity compensation plans approved by stockholders | | 2,363,700 |
| (1) | $ | 61 |
| | 3,807,724 |
| (2) | | 2,614,100 |
| (1) | $ | 70 |
| | 9,943,033 |
| (2) |
| Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
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| TOTAL | | 2,363,700 |
| | $ | 61 |
| | 3,807,724 |
| | | 2,614,100 |
| | $ | 70 |
| | 9,943,033 |
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(1) | Represents shares of common stock issuable upon exercise of outstanding options granted under Eastman Chemical Company's 2007 Omnibus Long-Term Compensation Plan; the 2002 Director Long-Term Compensation Plan; the 2007 Director Long-Term Compensation Subplan, a component of the 2007 Omnibus Long-Term Compensation Plan; the 2012 Omnibus Stock Compensation Plan, the 2013 Director Long-Term Compensation Subplan, a component of the 2012 Omnibus Stock Compensation Plan, the 2017 Omnibus Stock Compensation Plan, and the 20122017 Director Stock Compensation Subplan, a component of the 2017 Omnibus Stock Compensation Plan. |
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(2) | Shares of common stock available for future awards under the Company's 20122017 Omnibus Stock Compensation Plan, including the 20162017 Director Stock Compensation Subplan, a component of the 20122017 Omnibus Stock Compensation Plan. |
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1--Election of Directors", subheadings "Director Independence" and "Transactions with Directors, Executive Officers, and Related Persons", each as included and to be filed in the 20172018 Proxy Statement, is incorporated by reference herein in response to this Item.
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ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information concerning amounts billed for professional services rendered by the principal accountant and pre-approval of such services by the Audit Committee of the Company's Board of Directors under the heading "Item 53 - Ratification of Appointment of Independent Auditors"Registered Public Accounting Firm" as included and to be filed in the 20172018 Proxy Statement is incorporated by reference herein in response to this Item.
PART IV
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ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | | | | Page | | Page |
| (a) | 1. | Consolidated Financial Statements: | | 1. | Consolidated Financial Statements: | |
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| (b) | | | | |
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| ITEM 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Eastman Chemical Company |
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By: | | /s/ Mark J. Costa |
| | Mark J. Costa |
| | Chief Executive Officer |
Date: | February 27, 2017 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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SIGNATURE | | TITLE | | DATE |
| | | | |
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: | | | | |
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/s/ Mark J. Costa | | Chief Executive Officer and | | February 27, 2017 |
Mark J. Costa | | Director | | |
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PRINCIPAL FINANCIAL OFFICER: | | | | |
| | | | |
/s/ Curtis E. Espeland | | Executive Vice President and | | February 27, 2017 |
Curtis E. Espeland | | Chief Financial Officer | | |
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PRINCIPAL ACCOUNTING OFFICER: | | | | |
| | | | |
/s/ Scott V. King | | Vice President, Corporate Controller | | February 27, 2017 |
Scott V. King | | and Chief Accounting Officer | | |
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SIGNATURE | | TITLE | | DATE |
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DIRECTORS (other than Mark J. Costa, who also signed as Principal Executive Officer): | | | | |
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/s/ Humberto P. Alfonso | | Director | | February 27, 2017 |
Humberto P. Alfonso | | | | |
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/s/ Gary E. Anderson | | Director | | February 27, 2017 |
Gary E. Anderson | | | | |
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/s/ Brett D. Begemann | | Director | | February 27, 2017 |
Brett D. Begemann | | | | |
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/s/ Michael P. Connors | | Director | | February 27, 2017 |
Michael P. Connors | | | | |
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/s/ Stephen R. Demeritt | | Director | | February 27, 2017 |
Stephen R. Demeritt | | | | |
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/s/ Robert M. Hernandez | | Director | | February 27, 2017 |
Robert M. Hernandez | | | | |
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/s/ Julie F. Holder | | Director | | February 27, 2017 |
Julie F. Holder | | | | |
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/s/ Renée J. Hornbaker | | Director | | February 27, 2017 |
Renée J. Hornbaker | | | | |
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/s/ Lewis M. Kling | | Director | | February 27, 2017 |
Lewis M. Kling | | | | |
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/s/ James J. O'Brien | | Director | | February 27, 2017 |
James J. O'Brien | | | | |
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/s/ David W. Raisbeck | | Director | | February 27, 2017 |
David W. Raisbeck | | | | |
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| Exhibit Number | | EXHIBIT INDEX |
| | Description |
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| 3.01 | | |
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| 3.02 | | |
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| 4.01 | | |
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| 4.02 | | Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (the "Indenture") (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated January 10, 1994) |
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| 4.03 | | |
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| 4.04 | | Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the Company's Current Report on Form 8-K dated January 10, 1994) |
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| 4.05 | | Officers' Certificate pursuant to Sections 201 and 301 of the Indenture related to 7 5/8% Debentures due 2024 (incorporated herein by reference to Exhibit 4(a) to the Company's Current Report on Form 8-K dated June 8, 1994) |
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| 4.06 | | Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the Company's Current Report on Form 8-K dated June 8, 1994) |
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| 4.07 | | |
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| 4.08 | | |
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| 4.09 | | |
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| 4.10 | | |
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| 4.11 | | |
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| 4.12 | | |
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| 4.13 | | |
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| 4.14 | | |
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| 4.15 | | |
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| 4.16 | | |
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| 4.17 | | |
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| 10.01 | | |
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| Exhibit Number | | EXHIBIT INDEX |
| | Description |
| | | |
| 10.02 | | Second Amended and Restated Five-Year Credit Agreement, dated as of October 9, 2014 (amended October 9, 2015 and August 31, 2016), among Eastman Chemical Company, the initial lenders named therein, and Citibank N.A., as administrative agent, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as joint lead arrangers (incorporated(incorporated herein by reference to Exhibit 10.03 to the Company's Current Report on Form 8-K dated October 9, 2014, Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, and Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016)2016) |
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| 10.03 | | Five-Year Senior Term Loan Credit Agreement (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 9, 2014) |
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10.04 | | |
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10.0510.04 | | Amended and Restated Non-Recourse Account Receivable Purchase Agreement dated December 21, 2012 (amended March 28, 2013, July 30, 2013, and March 22, 2016, and December 16, 2016) between BNP Paribas Fortis Factor N.V. and Taminco US LLC (incorporated herein by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016)2016 and Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016) |
| | | |
10.0610.05 | | Amended and Restated Non-Recourse Accounts Receivable Purchase Agreement dated October 31, 2012 (amended March 28, 2013, May 23, 2013, July 30, 2013, December 10, 2013, January 7, 2014, and March 22, 2016, and December 16, 2016) between BNP Paribas Fortis Factor N.V. and Taminco B.V.B.A. (initial(initial agreement incorporated herein by reference to Exhibit 10.8 to Taminco Corporation Amendment No. 1 to Registration Statement on Form S-1, File No. 333-185244, filed with the SEC January 18, 2013 and Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016)2016 and Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016) |
| | | |
10.0710.06 | | Non-Recourse Accounts Receivable Purchase agreement dated April 25, 2014 (amended May 13, 2014, November 21, 2014, and March 22, 2016, and December 16, 2016) between BNP Parisbas Fortis Factor N.V. and Taminco Finland Oy (incorporated(incorporated herein by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016)2016 and Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016) |
| | | |
10.0810.07 | | |
| | | |
10.0910.08 | | |
| | | |
10.1010.09 | | |
| | | |
10.1110.10 | | |
| | | |
10.1210.11 | | |
| | | |
10.1310.12 | | |
| | | |
10.1410.13 | | |
| | | |
10.1510.14 | | |
| | | |
10.1610.15 | | |
| | | |
|
| | |
| Exhibit Number | | EXHIBIT INDEX |
| | Description |
10.1710.16 | | |
| | | |
10.1810.17 | | |
| | | |
10.1910.18 | | |
| | | |
10.2010.19 | | Forms of Performance Share Awards to Executive Officers (2014 – 2016 Performance Period) (incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 2013) ** |
| | |
10.21 | | |
| | | |
10.2210.20 | | |
| | | |
10.23*10.21 | | |
| | | |
10.2410.22* | | |
| | |
| 10.23 | | |
| | | |
10.2510.24 | | UPP performance measures and goals, specific target objectives with respect to such performance goals, the method for computing the amount of the UPP award allocated to the award pool if the performance goals are attained, and the eligibility criteria for employee participation in the UPP, for the 2016 performance year (incorporated herein by reference to the Company's Current Report on Form 8-K dated December 2, 2015) ** |
| | |
10.26 | | |
| | | |
10.2710.25 | | |
| | |
| 10.26 | | |
| | |
| 10.27 | | |
| | | |
| 10.28 | | 2012 Director Stock Compensation Subplan of the 2012 Omnibus Stock Compensation Plan and Form of Restricted Stock Award Notice (incorporated herein by reference to Exhibit 10.06 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012) ** |
| | |
10.29 | | |
| | | |
10.3010.29 | | 2015 |
| | | |
10.3110.30 | | 2016 Director Stock Compensation Subplan of the 2012 Omnibus Stock Compensation Plan and Form of Restricted Stock Award Notice (incorporated herein by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016) ** |
| | |
10.32 | | |
| | | |
|
| | |
Exhibit Number10.31* | | EXHIBIT INDEX |
| | Description | |
10.3310.32 | | |
|
| | |
| Exhibit Number | | EXHIBIT INDEX |
| Description |
| | | |
10.3410.33* | | |
| | | |
10.3510.34* | | |
| | |
| 10.35* | | |
| | | |
| 10.36* | | |
| | | |
| 10.37* | | |
| | |
10.38* | | Amendment dated December 16, 2016 to the Non-Recourse Accounts Receivable Purchase Agreement Dated April 25, 2014 between BNP Paribas Fortis Factor N.V and Taminco Finland Oy |
| | |
10.39 | | 2002 Omnibus Long-Term Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007) ** |
| | |
10.40 | | 2002 Director Long-Term Compensation Plan, as amended (incorporated herein by reference to Appendix B to Eastman Chemical Company's 2002 Annual Meeting Proxy Statement) ** |
| | | |
| 12.01* | | |
| | | |
| 21.01* | | |
| | | |
| 23.01* | | |
| | | |
| 31.01* | | |
| | | |
| 31.02* | | |
| | | |
| 32.01* | | |
| | | |
| 32.02* | | |
| | | |
| 99.01* | | 2016 |
| | | |
| 99.02* | | |
| | | |
| 101.INS* | | XBRL Instance Document |
| | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema |
| | | |
| 101.CAL* | | XBRL Taxonomy Calculation Linkbase |
| | | |
| 101.DEF* | | XBRL Definition Linkbase Document |
| | |
| 101.LAB* | | XBRL Taxonomy Label Linkbase |
| | | |
| 101.PRE* | | XBRL Definition Linkbase Document |
| | |
101.DEF* | | XBRL DefinitionPresentation Linkbase Document |
|
| |
| * | Denotes exhibit filed or furnished herewith. |
| ** | Management contract or compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii) of Regulation S-K. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | Eastman Chemical Company |
| | |
| By: | | /s/ Mark J. Costa |
| | Mark J. Costa |
| | Chief Executive Officer |
| Date: | March 1, 2018 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| SIGNATURE | | TITLE | | DATE |
| | | | |
| PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: | | | | |
| | | | |
| /s/ Mark J. Costa | | Chief Executive Officer and | | March 1, 2018 |
| Mark J. Costa | | Director | | |
| | | | |
| | | | |
| PRINCIPAL FINANCIAL OFFICER: | | | | |
| | | | |
| /s/ Curtis E. Espeland | | Executive Vice President and | | March 1, 2018 |
| Curtis E. Espeland | | Chief Financial Officer | | |
| | | | |
| | | | |
| PRINCIPAL ACCOUNTING OFFICER: | | | | |
| | | | |
| /s/ Scott V. King | | Vice President, Corporate Controller | | March 1, 2018 |
| Scott V. King | | and Chief Accounting Officer | | |
|
| | | | |
| SIGNATURE | | TITLE | | DATE |
| | | | |
| DIRECTORS (other than Mark J. Costa, who also signed as Principal Executive Officer): | | | | |
| | | | |
| | | | |
| /s/ Humberto P. Alfonso | | Director | | March 1, 2018 |
| Humberto P. Alfonso | | | | |
| | | | |
| /s/ Gary E. Anderson | | Director | | March 1, 2018 |
| Gary E. Anderson | | | | |
| | | | |
| /s/ Brett D. Begemann | | Director | | March 1, 2018 |
| Brett D. Begemann | | | | |
| | | | |
| /s/ Michael P. Connors | | Director | | March 1, 2018 |
| Michael P. Connors | | | | |
| | | | |
| /s/ Stephen R. Demeritt | | Director | | March 1, 2018 |
| Stephen R. Demeritt | | | | |
| | | | |
| /s/ Robert M. Hernandez | | Director | | March 1, 2018 |
| Robert M. Hernandez | | | | |
| | | | |
| /s/ Julie F. Holder | | Director | | March 1, 2018 |
| Julie F. Holder | | | | |
| | | | |
| /s/ Renée J. Hornbaker | | Director | | March 1, 2018 |
| Renée J. Hornbaker | | | | |
| | | | |
| /s/ Lewis M. Kling | | Director | | March 1, 2018 |
| Lewis M. Kling | | | | |
| | | | |
| /s/ James J. O'Brien | | Director | | March 1, 2018 |
| James J. O'Brien | | | | |
| | | | |
| /s/ David W. Raisbeck | | Director | | March 1, 2018 |
| David W. Raisbeck | | | | |
| | | | |
| | | | |
| | | | |
