This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (this "Annual Report"). All references to earnings per share ("EPS") contained in this report are to diluted EPS unless otherwise noted. EBIT is the GAAP measure earnings before interest and taxes. For a discussion of the year ended December 31, 2021, compared to the year ended December 31, 2020, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item. 7 of Eastman's Annual Report on Form 10-K for the year ended December 31, 2021.
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, 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, fair value of disposal groups, and related disclosure of contingencies.contingent assets and liabilities. On an ongoing basis, Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting estimates described 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 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 properties and equipment and the review of definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. The Company's assumptions to estimate cash flows in the evaluation of impairment 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,decreased, the carrying amount of the related asset is adjusted,reduced, resulting in a charge to earnings.
Goodwill
Goodwill is an asset determined as the residual of the purchase price over the fair value of identified assets and liabilities acquired in a business combination. Eastman conducts testing of goodwill for impairment annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
A reporting unit's goodwillAn impairment is considered to be impairedrecognized when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach, and appliesspecifically a discounted cash flow model, in testing the carrying value of goodwill for each reporting unit.unit for impairment. Key assumptions and estimates used in the Company's 20192022 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC"), and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculationsestimates of estimated fair value. For additional information, see Note 1, "Significant Accounting Policies",
The Company had $3.7 billion of goodwill as of December 31, 2022. As a result of the goodwill impairment testing performed during fourth quarter 2022, fair values were determined to exceed the Company's consolidated financial statementscarrying values for each reporting unit tested. Declines in Part II, Item 8market conditions or forecasted revenue and EBIT could result in a future impairment of this Annual Report.goodwill.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report). The Company reduced the carrying value of the crop protection reporting unit to its estimated fair value through recognition of a $45 million goodwill impairment. The impairment was primarily due to the impact of recent regulatory changes in the European Union on the current period and forecasted revenue and EBIT and a decrease in the long-term growth rate assumed in the goodwill impairment model. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the WACC. The Company performed a sensitivity analysis of both of those assumptions, assuming a one percent decrease in the expected long-term growth rate or a one percent increase in the WACC, and both scenarios independently yielded an estimated fair value for the crop protection reporting unit below carrying value. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
Indefinite-lived Intangible Assets
Eastman conducts testing of indefinite-lived intangible assets annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company elected to perform a qualitative impairment assessment of indefinite-lived intangible assets in 2022. The qualitative assessment did not identify indicators of impairment, and it was determined that it is more likely than not the fair value of indefinite-lived intangible assets was greater than their carrying value. When a quantitative impairment assessment is performed, the Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets.assets for potential impairment. The estimated fair value of tradenames is determined based on projections of revenue and an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
The Company had $537$359 million in indefinite-lived intangible assets at the time of impairment testing.December 31, 2022. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2019.2022. Declines in market conditions or forecasted revenue could result in impairment of indefinite-lived intangible assets.
The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of events which might require additional testing before the next annual impairment test.test and could result in material impairment charges.
For additional information related to impairment of long-lived assets, see Note 3,1, "Significant Accounting Policies", Note 4, "Properties and Accumulated Depreciation", Note 4,5, "Goodwill and Other Intangible Assets", and Note 15,16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Environmental Costs
Eastman recognizes environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum undiscounted amount. This undiscounted amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $260$245 million to the maximum of $487 million and from the best estimate or minimum of $271 million to the maximum of $508$457 million at December 31, 2019 and December 31, 2018, respectively.2022. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at both December 31, 2019 and December 31, 2018.2022.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged to earnings over the estimated useful life of the assets. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted. For sites that have environmental asset retirement obligations, the best estimate for these asset retirement obligation costs recognized to date was $27 million and $25 million at December 31, 2019 and December 31, 2018, respectively.
The Company's total amount reserved for environmental loss contingencies, including the remediation and closure and post-closure costs described above, was $287 million and $296 million at December 31, 2019 and December 31, 2018, respectively. This loss contingency reserve represents the best estimate or minimum for undiscounted remediation costs and the best estimate of the amount accrued to date for discounted asset retirement obligation costs. For additional information, see Note 12,13, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension and other postretirement benefit 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 primarily reflect the Company's assumptions related to discount rates and expected return on plan assets. For valuing the obligations and assets of the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 3.255.58 percent and 1.564.27 percent, respectively, and weighted average expected returns on plan assets of 7.376.62 percent and 4.263.86 percent, respectively, at December 31, 2019.2022. The Company assumed a weighted average discount rate of 3.215.55 percent for its other postretirement benefit plans.plans at December 31, 2022. 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 2017 which included a review of the mortality tables. As a result of the experience study, the Company has updated the mortality assumptions used to a modified RP-2017 table with modified MP-2017 improvement scale and no collar adjustment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The projected benefit obligation as of December 31, 20192022 and 2020 expense for 2023 are affected by year-end 20192022 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the assumed discount rate and expected return on plan assets for all pension and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | Change in
Assumption
| Impact on 2020
2023 Pre-tax
Benefits Expense
(Excludes mark-to-market impact)
for Pension Plans
| Impact on December 31, 20192022 Projected Benefit Obligation for Pension Plans | Impact on 20202023 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 20192022 Benefit Obligation for Other Postretirement Benefit Plans | | U.S. | Non-U.S. | 25 basis point
decrease in discount
rate
| -$3-1 Million | $+$5332 Million | $+$4922 Million | -$1-1 Million | $+$1710 Million | 25 basis point
increase in discount
rate
| $+$3 Million | -$51 Million | -$44 Million | +$1 Million | -$16-31 Million | $-20 Million | $+1 Million | $-10 Million | 25 basis point
decrease in expected return on plan assets
| $+$74 Million | No Impact | No Impact | <+$0.5 Million | No Impact | 25 basis point
increase in expected
return on plan assets
| -$7-4 Million | No Impact | No Impact | <-$0.5 Million
| No Impact |
The assumed discount rate and expected return on plan assets 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 results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the plans invest their funds, primarily in U.S. and non-U.S. fixed income securities, U.S. and non-U.S. public equity securities, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions.
The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows. This cost approach does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, as described in the next paragraph, is typically recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. For additional information, see Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company uses fair value accounting for plan assets. If actual experience differs from actuarial assumptions, primarily discount rates and long-term assumptions for asset returns which were used in determining the current year expense, the difference is recognized as part of the MTM net gain or loss in fourth quarter each year, and any other quarter in which an interim remeasurement is triggered. TheSee the calculation of the MTM net gain or loss applied to net earnings in 2019, 2018, and 2017 due to the actual experience versus actuarial assumptions for the defined benefit pension and other postretirement benefit plans were a netpost-retirement benefits (gain) loss of $143 million, a net loss of $99 million,table below in "NON-GAAP FINANCIAL MEASURES -Non-GAAP Financial Measures - Non-Core and a net gain of $21 million, respectively. The 2019 MTM net loss includes an actuarial loss of approximately $385 million, resulting primarilyUnusual Items Excluded from the Company's December 31, 2019 weighted-average assumed discount rate of 2.80 percent, which is lower than for the prior year, and changes in other actuarial assumptions. Overall asset values increased approximately $240 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual gain was approximately $405 million, or approximately 15 percent, which was above the expected return of approximately $165 million, or approximately 6 percent.Earnings".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While changes in obligations do not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirements, attrition rates of employees, and other factors.
For further information regarding pension and other postretirement benefit obligations, see Note 10,11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Litigation and Contingent Liabilities
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon currently available facts, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against its overall financial condition, results of operations, or cash flows in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities on Eastman's Consolidated Statements of Financial Position are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the provision for (benefit from) income taxes could have a material impact on the consolidated results of operations and statements of financial position. As of December 31, 2019 and 2018,2022, valuation allowances of $453$258 million and $487 million, respectively, have been provided against the deferred tax assets.
The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and management judgment. Eastman's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has evaluated these potential issues under the more-likely-than-not standard of the accounting literature. Aadjustments which could result in additional income tax position is recognized if it meets this standardliabilities and is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation ofincome tax laws and regulations.expense. Income tax expense could be materially impacted to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits, or valuation allowances have been established, or to the extent payments are required in excess of the established liability for unrecognized tax benefits.
The Company accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet. For further information, see Note 7,8, "Income Taxes", 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
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", and "Liquidity and Other Financial Information", and "Outlook"Information - Cash Flows" in this MD&A.
Management discloses non-GAAP financial measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's and its operating segments' performances, make resource allocation decisions, and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP financial measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP financial measure, but to consider such measures alongside the most directly comparable GAAP financial measure.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items Excluded from Non-GAAP Earnings
In addition to evaluating Eastman's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly result from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature.
•Non-core transactions, costs, and losses or gains relate to, among other things, cost reductions, growth and profitability improvement initiatives, changes in businesses and assets, and other events outside of core business operations, and have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions, closure, or shutdowns of businesses or assets, financing transaction costs, environmental costs related to previously divested businesses or non-operational sites and MTMproduct lines, and mark-to-market losses or gains for pension and other postretirement benefit plans. •In 20182022, the Company recognized unusual income fromcosts, net of insurance in excess of costs for, and in 2017 recognized unusual net costs of, the disruption, repairs, and reconstruction of the Kingsport site's coal gasification operations area resultingproceeds, from the previously reported October 4, 2017 explosionJanuary 31, 2022 operational incident at its Kingsport site as a result of a steam line failure (the "coal gasification"steam line incident"). Management considersconsidered the coal gasificationoperational incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption.
•In 20182021, the Company recognized unusual costs and in both 2019 and 2018 unusual net decreasesdecreased the provision for income taxes due to earnings from adjustmentsadjustment of the net tax benefitamount recognized in fourth quarter 2017,prior years resulting from tax law changes, primarily the 2017 Tax Cuts and Jobs Act (the "Tax("Tax Reform Act"), and related outside-U.S. entity reorganizations as part of. As with the transitionprior years' item to an international treasury services center. Managementwhich this relates, management considers these actions and associated costs and incomethis decrease unusual because of the infrequent nature of such changesthe underlying change in tax law and resulting actions and the significant impacts on earnings.
Because non-core, unusual, or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, management believes it is appropriate to evaluate the financial measures prepared and calculated in accordance with both GAAP and the related non-GAAP financial measures excluding the effect on the Company's results of these non-core, unusual, or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted Tax Rate and Provision for Income Taxes
In interim periods, Eastman discloses non-GAAP earnings with an adjusted effective tax rate and a resulting adjusted provision for income taxes using the Company's forecasted tax rate for the full year as of the end of the interim period. The adjusted effective tax rate and resulting adjusted provision for income taxes are equal to the Company's projected full year effective tax rate and provision for income taxes on earnings excluding non-core, unusual, or non-recurring items for completed periods. The adjusted effective tax rate and resulting adjusted provision for income taxes may fluctuate during the year for changes in events and circumstances that change the Company's forecasted annual effective tax rate and resulting provision for income taxes excluding non-core, unusual, or non-recurring items. Management discloses this adjusted effective tax rate, and the related reconciliation to the GAAP effective tax rate, to provide investors more complete and consistent comparisons of the Company's operational performance on a period-over-period interim basis and on the same basis as management evaluates quarterly financial results to provide a better indication of expected full year results.
Non-GAAP Cash FlowDebt Measure
Eastman regularlyfrom time to time evaluates and discloses to investors and securities and credit analysts an alternativethe non-GAAP debt measure of "free cash flow""net debt", which management defines as net cash provided by operating activities,total borrowings less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment, and in 2018 net of proceeds from property insurance). Such net capital expenditures are generally funded from available cash and as such, management believes they should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of available cash. The priorities for cash after funding operations include payment of quarterly dividends, repayment of debt, funding targeted growth opportunities, and repurchasing shares.equivalents. Management believes this metric is useful to investors and securities and credit analysts in order to provide them with information similar to that used by management in evaluating the Company's overall financial performanceposition, liquidity, and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensationleverage and because management believes investors, and securities analysts, credit analysts and rating agencies, and lenders often use a similar measure of free cash flow to assess and compare the results,companies' relative financial position 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.liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain earnings results in this Annual Report:
MTM•Asset impairments and restructuring charges, net;
•Mark-to-market pension and other postretirement benefit plans gains and losses resulting from the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period; Asset impairments•Environmental and restructuring charges, including severanceother costs from previously divested or non-operational sites and product lines;
•Gains and losses, net on divested businesses and related transaction costs; •Adjustments to contingent considerations; •Accelerated depreciation resulting from the closure of a manufacturing facility as part of site closure or shutdown charges, net, of which asset impairments are non-cash transactions impacting profitability;optimization; and •Early debt extinguishment and other related costs resulting from repayment of borrowings;costs. Cost of disposition of claims against operations that were discontinued by Solutia, Inc. ("Solutia") prior to the Company's acquisition of Solutia in 2012;
Gain from sale of the formulated electronics cleaning solutions business, which was part of the Additives & Functional Products segment; and
Tax benefit associated with a previously impaired site.
The following unusual items are excluded by management in its evaluation of certain earnings results in this Annual Report:
Costs•Steam line incident costs, net of insurance proceeds, and
•Decrease to the provision for income from insurance for,taxes due to adjustment of the coal gasification incident; Costs of currency transaction and professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations; and
Estimated net tax benefitamount recognized in fourth quarter 2017 resulting from tax law changes, primarilyprior years as a result of the Tax Reform Act, and tax impact of related outside-U.S. entity reorganizations and related subsequent adjustments recognized in 2018 and 2019.Act.
As described above, the alternative non-GAAP measure "free cash flow"of debt, "net debt", is also presented in this Annual Report.
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | | | Non-core items impacting EBIT: | | | | | | | Mark-to-market pension and other postretirement benefits loss (gain), net | $ | 19 | | | $ | (267) | | | | | Asset impairments and restructuring charges, net | 52 | | | 47 | | | | | Environmental and other costs | 15 | | | — | | | | | Loss on divested businesses and related transaction costs | 61 | | | 570 | | | | | Adjustments to contingent considerations | (6) | | | — | | | | | Accelerated depreciation | — | | | 4 | | | | | Unusual item impacting EBIT: | | | | | | | Steam line incident costs, net of insurance proceeds | 39 | | | — | | | | | Total non-core and unusual items impacting EBIT | 180 | | | 354 | | | | | Non-core item impacting earnings before income taxes: | | | | | | | Early debt extinguishment | — | | | 1 | | | | | Total non-core item impacting earnings before income taxes | — | | | 1 | | | | | Less: Items impacting provision for income taxes: | | | | | | | Tax effect for non-core and unusual items | (11) | | | (16) | | | | | Adjustments from tax law changes | — | | | 15 | | | | | Total items impacting provision for income taxes | (11) | | | (1) | | | | | Total items impacting net earnings attributable to Eastman | $ | 191 | | | $ | 356 | | | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings
| | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Non-core items impacting EBIT: | | | | | | | Mark-to-market pension and other postretirement benefits (gain) loss, net | $ | 143 |
| | $ | 99 |
| | $ | (21 | ) | | Asset impairments and restructuring charges, net | 126 |
| | 45 |
| | 8 |
| | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | 9 |
| | Gains from sale of businesses | — |
| | — |
| | (3 | ) | | Unusual items impacting EBIT: | | | | | | | Net coal gasification incident (insurance) costs | — |
| | (83 | ) | | 112 |
| | Costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | 20 |
| | — |
| | Total non-core and unusual items impacting EBIT | 269 |
| | 81 |
| | 105 |
| | Non-core item impacting earnings before income taxes: | | | | | | | Early debt extinguishment and other related costs | — |
| | 7 |
| | — |
| | Total non-core item impacting earnings before income taxes | — |
| | 7 |
| | — |
| | Less: Items impacting provision for (benefit from) income taxes: | | | | | | | Tax effect for non-core and unusual items | 47 |
| | 16 |
| | 30 |
| | Tax benefit associated with previously impaired site | — |
| | — |
| | 8 |
| | Estimated net tax (expense) benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | (7 | ) | | (20 | ) | | 339 |
| | Total items impacting provision for (benefit from) income taxes | 40 |
| | (4 | ) | | 377 |
| | Total items impacting net earnings attributable to Eastman | $ | 229 |
| | $ | 92 |
| | $ | (272 | ) |
Below is the calculation of the "Other components of post-employment (benefit) cost, net" that are not included in the above non-core item "mark-to-market pension and other postretirement benefits gain (loss)loss (gain), net" and that are included in the non-GAAP results. | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | | | Other components of post-employment (benefit) cost, net | $ | (101) | | | $ | (412) | | | | | Service cost | 36 | | | 45 | | | | | Net periodic benefit (credit) cost | (65) | | | (367) | | | | | Less: Mark-to-market pension and other postretirement benefits loss (gain), net | 19 | | | (267) | | | | | Components of post-employment (benefit) cost, net included in non-GAAP earnings measures | $ | (84) | | | $ | (100) | | | |
| | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Other components of post-employment (benefit) cost, net | $ | 60 |
| | $ | (21 | ) | | $ | (135 | ) | | Service cost | 41 |
| | 49 |
| | 53 |
| | Net periodic benefit (credit) cost | 101 |
| | 28 |
| | (82 | ) | | Less: Mark-to-market (gain) loss | 143 |
| | 99 |
| | (21 | ) | | Components of post-employment (benefit) cost, net included in non-GAAP earnings measures | $ | (42 | ) | | $ | (71 | ) | | $ | (61 | ) |
Below is the calculation of the MTM pension and other post-retirement benefits (gain) loss disclosed above. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | | | Actual return and percentage of return on assets | $ | (582) | | | (23) | % | | $ | 278 | | | 10 | % | | | | | | Less: expected return on assets | 163 | | | 6 | % | | 168 | | | 6 | % | | | | | | Mark-to-market (loss) gain on assets | (745) | | | | | 110 | | | | | | | | Actuarial gain (1) | 719 | | | | | 157 | | | | | | | | Curtailment gain (2) | 7 | | | | | — | | | | | | | | | Total mark-to-market (loss) gain | $ | (19) | | | | | $ | 267 | | | | | | | | | Global weighted-average assumed discount rate for year ended December 31: | 5.27 | % | | | | 2.52 | % | | | | | | |
(1)Actuarial gain resulted primarily from the change in discount rates from the prior year and changes in other actuarial assumptions. | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Actual return and percentage of return on assets | $ | 406 |
| | 15 | % | | $ | (82 | ) | | (3 | )% | | $ | 314 |
| | 11 | % | | Less: expected return on assets | 165 |
| | 6 | % | | 189 |
| | 7 | % | | 180 |
| | 7 | % | | Mark-to-market (loss) gain on assets | 241 |
| | | | (271 | ) | | | | 134 |
| | | | Actuarial (loss) gain | (384 | ) | |
| | 172 |
| | | | (113 | ) | | | | Total mark-to-market (loss) gain | $ | (143 | ) | | | | $ | (99 | ) | | | | $ | 21 |
| | |
For more detail about MTM pension and other postretirement benefit plans net gains and losses, including actual and expected return on plan assets and the components of the net gain or loss, see "Critical Accounting Estimates - Pension and Other Postretirement Benefits" above, and Note 10,11, "Retirement Plans", "Summary of Changes - Actuarial (gain) loss, Actual return on plan assets, and Reserve for third party contributions", and "Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income - Mark-to-market pension and other postretirement benefits (gain) loss, net" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following GAAP financial measures:
•Gross profit, •Selling, general and administrative ("SG&A") expenses, •Other components of post-employment (benefit) cost, net, •Other (income) charges, net, EBIT,•Earnings before interest and taxes ("EBIT"),
•Provision for (benefit from) income taxes, •Net earnings attributable to Eastman, •Diluted EPS, and Net cash provided by operating activities.•Total borrowings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow MeasureMeasures
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, management may occasionally has evaluatedevaluate and discloseddisclose to investors and securities analysts the non-GAAP measure cash provided by or used in operating activities excluding certain non-core, unusual, or non-recurring sources or uses of cash or including cash from or used by activities that are managed as part of core business operations ("adjusted cash provided by or used in operating activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management has used this non-GAAP measure in conjunction with the GAAP measure cash provided by or used in operating activities because it believes it is an appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, management generally excludes the impact of certain non-core and unusual activities and decisions of management that it considers not core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. Management has disclosed this non-GAAP measure and the related reconciliation to investors, and securities analysts, credit analysts and rating agencies, and lenders to allow them to better understand and evaluate the information used by management in its decision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
From time to time, Eastman may evaluate and disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as net cash provided by or used in operating activities less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment). 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, and "free cash flow conversion", which management defines as annual free cash flow divided by adjusted net income. Management believes these metrics can be useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "EBIT"Adjusted EBIT Margin", "Adjusted EBITDA", "EBITDA"Adjusted EBITDA Margin", and "Return on Invested Capital" (or "ROIC"), and "Adjusted ROIC". Management defines Adjusted EBIT Margin as the GAAP measure EBIT adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods divided by the GAAP measure sales revenue in the Company's income statementConsolidated Statement of Earnings, Comprehensive Income and Retained Earnings for the same period. Adjusted EBITDA is EBITDA (net earnings before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. Adjusted EBITDA Margin is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statementConsolidated Statement of Earnings, Comprehensive Income and Retained Earnings for the same periods. Management defines ROIC as net earnings plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Adjusted ROIC is ROIC adjusted to exclude from net earnings the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. Management believes that Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, ROIC, and Adjusted 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 EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, ROIC, and Adjusted 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
OVERVIEW
Eastman's products and operations are managed and reported in four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Molecular recycling technologies continue to be an area of investment focus for the Company and extends the level of differentiation afforded by its world class technology platforms. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value of Eastman's products and how they perform within customers' and end-user products. Key areas of application development include thermoplastic conversion, functional films, coatings formulations, rubber additive formulations, adhesives formulations,textiles and nonwovens, and textiles, animal nutrition, and chemicalpersonal and plastics recycling technologies.home care formulations. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends. Management believes that these elements of the Company's innovation-driven growth model, combined with disciplined portfolio management and balanced capital deployment, will result in consistent, sustainable earnings growth and strong cash flow.flow from operations.
The Company generated sales revenue of $9.3$10.6 billion and $10.2$10.5 billion for 20192022 and 2018,2021, respectively. EBIT was $1.1$1.2 billion and $1.6$1.3 billion in 20192022 and 2018,2021, respectively. Excluding the non-core and unusual items referenced in "Non-GAAP Financial Measures", adjusted EBIT was $1.4$1.3 billion and $1.6 billion in 20192022 and 2018,2021, respectively.
Sales revenue in 2022 compared to 2021 was relatively unchanged as higher selling prices, resulting from higher raw material, energy, and distribution prices, were mostly offset by lower sales volume. Sales volume was lower due to an unfavorable impact from divested businesses and limited product availability in the first nine months of the year resulting from unplanned outages. The Company experienced significantly lower end-market demand and customer inventory destocking, mostly in fourth quarter 2022. Adjusted EBIT decreased in 2022 compared to 2021 primarily due to lower sales volume; higher manufacturing costs resulting from planned and unplanned outages; an unfavorable shift in foreign currency exchanges rates; and continued investment in growth. These factors were partially offset by higher selling prices, net of higher raw material and energy costs, and distribution costs, as well as lower SG&A costs, primarily due to variable compensation costs.
On January 31, 2022, the Company had an incident at its Kingsport site as a result of a steam line failure (the "steam line incident"). Consistent with Eastman's safety processes, all manufacturing operations at the site were safely shut down following the incident. All impacted areas of the manufacturing facility were operational as of March 31, 2022. The primary impacted area was specialty copolyesters in the AM segment. The Fibers segment was also modestly impacted. Incremental costs, net of insurance proceeds, of $39 million for 2022, primarily related to the repair of damaged infrastructure, were excluded from the Company's adjusted EBIT.
On November 1, 2021, the Company completed the sale of the rubber additives (including Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology of the global tire additives business of its AFP segment ("rubber additives"). The sale did not include the Eastman Impera™ and other performance resins product lines of the tire additives business.
On April 1, 2022, the Company completed the sale of the adhesives resins business, which included hydrocarbon resins (including Eastman Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines, of its AFP segment ("adhesives resins").
For additional information on the sales of the rubber additives business and the adhesive resins business, see Note 2, "Divestitures", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Discussion of sales revenue and EBIT changes is presented in "Results of Operations" and "Summary by Operating Segment" in this MD&A.
Net earnings and EPS and adjusted net earnings and EPS were as follows:
| | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | (Dollars in millions, except diluted EPS) | $ | | EPS | | $ | | EPS | | Net earnings attributable to Eastman | $ | 759 |
| | $ | 5.48 |
| | $ | 1,080 |
| | $ | 7.56 |
| | Total non-core and unusual items, net of tax | 229 |
| | 1.65 |
| | 92 |
| | 0.64 |
| | Net earnings attributable to Eastman excluding non-core and unusual items | $ | 988 |
| | $ | 7.13 |
| | $ | 1,172 |
| | $ | 8.20 |
|
The Company generated $1.5 billion of cash from operating activities in both 2019 and 2018. Free cash flow was $1.1 billion in both 2019 and 2018.
As previously reported, in fourth quarter 2017 an explosion in 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. The incident, net of insurance, reduced 2017 earnings by $112 million and increased 2018 earnings by $83 million. The cumulative net costs of the incident were $29 million. Costs net of insurance of the disruption, repairs, and reconstruction of coal gasification operations in 2017 were recognized in "Cost of sales" and insurance net of costs in 2018 was recognized in "Cost of sales" and "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net earnings and EPS and adjusted net earnings and EPS were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | (Dollars in millions, except diluted EPS) | $ | | EPS | | $ | | EPS | | Net earnings attributable to Eastman | $ | 793 | | | $ | 6.35 | | | $ | 857 | | | $ | 6.25 | | | Total non-core and unusual items, net of tax | 191 | | | 1.53 | | | 356 | | | 2.60 | | | Net earnings attributable to Eastman excluding non-core and unusual items | $ | 984 | | | $ | 7.88 | | | $ | 1,213 | | | $ | 8.85 | |
The Company generated $975 million and $1.6 billion of cash from operating activities in 2022 and 2021, respectively.
RESULTS OF OPERATIONS
Eastman's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below.
Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Sales | $ | 10,580 | | | $ | 10,476 | | | 1 | % | | | | | | | | Volume / product mix effect | | | | | (3) | % | | | | | | | | Price effect | | | | | 14 | % | | | | | | | | Exchange rate effect | | | | | (2) | % | | | | | | | Divested business effect (1) | | | | | (8) | % | | | | | | |
(1)Contribution to sales revenue of businesses divested which are not in 2022 comparable periods. | | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Sales | $ | 9,273 |
| | $ | 10,151 |
| | (9 | )% | | $ | 10,151 |
| | $ | 9,549 |
| | 6 | % | | Volume / product mix effect | |
| | |
| | (4 | )% | | |
| | |
| | 2 | % | | Price effect | |
| | |
| | (4 | )% | | |
| | |
| | 3 | % | | Exchange rate effect | |
| | |
| | (1 | )% | | |
| | |
| | 1 | % |
2019 Compared to 2018
Sales revenue decreasedincreased as a result of decreasesincreases in all operating segments. Further discussion by operating segments is presented in "Summary of Operating Segment" in this MD&A.
2018 Compared to 2017Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Gross profit | $ | 2,137 | | | $ | 2,500 | | | (15) | % | | | | | | | | | | | | | | | | | | | | Steam line incident costs, net of insurance proceeds | 39 | | | — | | | | | | | | | | | Accelerated depreciation | — | | | 4 | | | | | | | | | | | | | | | | | | | | | | | Gross profit excluding non-core and unusual items | $ | 2,176 | | | $ | 2,504 | | | (13) | % | | | | | | |
Sales revenue increasedGross profit in 2022 included incremental costs, net of insurance proceeds, from the steam line incident. Gross profit in 2021 included accelerated depreciation resulting from the closure of an advanced interlayers manufacturing facility in North America in the AM segment as part of site optimization actions.
Excluding these non-core and unusual items, gross profit decreased as a result of increasesdecreases in all operating segments.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Gross profit | $ | 2,234 |
| | $ | 2,479 |
| | (10 | )% | | $ | 2,479 |
| | $ | 2,363 |
| | 5 | % | | Net coal gasification incident (insurance) costs | — |
| | (18 | ) | | | | (18 | ) | | 112 |
| | | | Gross profit excluding unusual item | $ | 2,234 |
| | $ | 2,461 |
| | (9 | )% | | $ | 2,461 |
| | $ | 2,475 |
| | (1 | )% |
2019 Compared to 2018
Gross profit included coal gasification incident insurance in excess of costs in 2018. Excluding this unusual item, gross profit decreased due to lower sales volume and an unfavorable shift in foreign currency exchange rates across all operating segments.segments, except the AFP segment. Further discussion by operating segmentof sales revenue and EBIT changes is presented in "Summary by Operating Segment" in this MD&A.
2018 ComparedSelling, General and Administrative Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Selling, general and administrative expenses | $ | 726 | | | $ | 795 | | | (9) | % | | | | | | | | | | | | | | | | | | | | Transaction costs | (18) | | | (18) | | | | | | | | | | | Selling, general and administrative expenses excluding non-core items | $ | 708 | | | $ | 777 | | | (9) | % | | | | | | |
SG&A expenses in 2022 and 2021 included transaction costs for the divestitures of rubber additives and adhesives resins which were not allocated to 2017an operating segment and reported in "Other".
Gross profit included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, gross profitthe non-core item mentioned above, SG&A expenses decreased primarily due to raw material, energy, and distributionas a result of lower variable compensation costs exceeding selling prices across most segments and higher growth initiative costs being partially offset by higher sales volume in the AM and AFP segments.growth initiative costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Selling, general and administrative expenses | $ | 691 |
| | $ | 721 |
| | (4 | )% | | $ | 721 |
| | $ | 729 |
| | (1 | )% | | Costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | (7 | ) | | | | (7 | ) | | — |
| | | | Selling, general and administrative expenses excluding unusual item | $ | 691 |
| | $ | 714 |
| | (3 | )% | | $ | 714 |
| | $ | 729 |
| | (2 | )% |
2019 Compared to 2018
SG&A expenses in 2018 included $7 million of costs of professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Excluding this item, SG&A expenses decreased primarily due to lower variable compensation costs resulting from Company performance and cost management actions.
2018 Compared to 2017
SG&A expenses in 2018 included $7 million of costs of professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Excluding this item, SG&A expenses decreased primarily due to lower variable compensation costs mostly offset by higher costs of growth initiatives.
Research and Development Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Research and development expenses | $ | 264 | | | $ | 254 | | | 4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Research and development expenses | $ | 234 |
| | $ | 235 |
| | — | % | | $ | 235 |
| | $ | 227 |
| | 4 | % |
2019 Compared to 2018
R&D expenses were relatively unchanged.
2018 Compared to 2017
R&D expenses increased primarily due to higher costs ofspend for growth investment, primarily in the AM and AFP segments including methanolysis and other circular economy initiatives.
Asset Impairments and Restructuring Charges, Net | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | | | Tangible Asset Impairments | | | | | | | CI & AFP - Singapore | $ | — | | | $ | 3 | | | | | Site optimizations | | | | | | | Other - Tire additives | — | | | 12 | | | | | AM - Advanced interlayers | — | | | 1 | | | | | | | | | | | | | | | | | | | | | | | — | | | 16 | | | | | Loss (Gain) on Sale of Previously Impaired Assets | | | | | | | Site optimizations | | | | | | | AM - Advanced interlayers | 16 | | | — | | | | | Other - Tire additives | (1) | | | — | | | | | AFP - Animal nutrition | — | | | (1) | | | | | 15 | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Severance Charges | | | | | | | Cost reduction actions | 22 | | | 1 | | | | | | | | | | | Site optimizations | | | | | | | | | | | | | AM - Advanced interlayers | — | | | 1 | | | | | AM - Performance films | 1 | | | — | | | | | | | | | | | Fibers - Acetate Yarn | 7 | | | — | | | | | 30 | | | 2 | | | | | Other Restructuring Costs | | | | | | | | | | | | | | | | | | | CI & AFP - Singapore | 3 | | | 17 | | | | | Site optimizations | | | | | | | Other - Tire additives | — | | | 6 | | | | | AM - Advanced interlayers | 2 | | | 5 | | | | | AM - Performance films | — | | | 2 | | | | | | | | | | | Fibers - Acetate Yarn | 2 | | | — | | | | | 7 | | | 30 | | | | | | | | | | | Total | $ | 52 | | | $ | 47 | | | |
For detailed information regarding asset impairments and restructuring charges, net see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Asset impairments | $ | 27 |
| | $ | — |
| | $ | 1 |
| | Intangible asset and goodwill impairments | 45 |
| | 39 |
| | — |
| | Severance charges | 45 |
| | 6 |
| | 6 |
| | Site closure and restructuring charges | 9 |
| | — |
| | 1 |
| | Total | $ | 126 |
| | $ | 45 |
| | $ | 8 |
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2019, management approved a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020 resulting in an asset impairment charge of $27 million. Eastman is evaluating alternative uses for the site after the end of 2020. Additional restructuring charges of up to $50 million are expected in 2020. This action is projected to result in an estimated annual earnings benefit of approximately $25 million within the AFP and CI segments beginning mostly in 2021.
As a result of the annual impairment test of goodwill the Company reduced the carrying value of the crop protection reporting unit (part of the AFP segment) to its estimated fair value through recognition of a $45 million goodwill impairment. The impairment was primarily due to the recent and expected continuing impact of recent regulatory changes in the European Union and a decrease in the long-term growth rate assumed for the reporting unit in the goodwill impairment model.
In 2019, as part of business improvement and cost reduction initiatives, the Company recognized restructuring charges of $45 million for severance and $5 million for related costs. Management anticipated total cost savings from these actions of approximately $50 million, most of which was recognized in 2019 primarily in cost of sales and SG&A expenses. Additionally, in 2019 the Company recognized a $4 million restructuring charge related to a capital project in the AFP segment that was discontinued in 2016.
In 2018, asset impairments and restructuring charges, net consisted of restructuring charges of approximately $6 million for severance. As a result of the annual impairment test of goodwill the Company reduced the carrying value of the crop protection reporting unit (part of the AFP segment) to its estimated fair value through recognition of a $38 million goodwill impairment. The impairment was primarily due to an increase in the WACC applied to the impairment analysis and the estimated impact of future regulatory changes. Additionally, the Company recognized an intangible asset impairment of $1 million in the AM segment.
In 2017, asset impairments and restructuring charges, net were $3 million of asset impairments and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China and restructuring charges of approximately $5 million for severance.
Other Components of Post-employment (Benefit) Cost, Net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Other components of post-employment (benefit) cost, net | $ | (101) | | | $ | (412) | | | (75) | % | | | | | | | | Mark-to-market pension and other postretirement benefit gain (loss), net | (19) | | | 267 | | | | | | | | | | | Other components of post-employment (benefit) cost, net excluding non-core item | $ | (120) | | | $ | (145) | | | (17) | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Other components of post-employment (benefit) cost, net | $ | 60 |
| | $ | (21 | ) | | >(100%) |
| | $ | (21 | ) | | $ | (135 | ) | | (84 | )% | | Mark-to-market pension and other postretirement benefit gain (loss), net | (143 | ) | | (99 | ) | | | | (99 | ) | | 21 |
| | | | Other components of post-employment (benefit) cost, net excluding non-core item | $ | (83 | ) | | $ | (120 | ) | | (31 | )% | | $ | (120 | ) | | $ | (114 | ) | | 5 | % |
For more information regarding "Other components of post-employment (benefit) cost, net" see Note 1, "Significant Accounting Policies", and Note 10,11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Other (Income) Charges, Net | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | | | Foreign exchange transaction losses (gains), net | $ | 16 | | | $ | 10 | | | | | (Income) loss from equity investments and other investment (gains) losses, net | (19) | | | (16) | | | | | Other, net | (3) | | | (11) | | | | | Other (income) charges, net | $ | (6) | | | $ | (17) | | | | | Environmental and other costs | (15) | | | — | | | | | Adjustments to contingent considerations | 6 | | | — | | | | | Other (income) charges, net excluding non-core items | $ | (15) | | | $ | (17) | | | |
For more information regarding components of foreign exchange transaction losses, see Note 10, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Earnings Before Interest and Taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | EBIT | $ | 1,159 | | | $ | 1,281 | | | (10) | % | | | | | | | | Mark-to-market pension and other postretirement benefit loss (gain), net | 19 | | | (267) | | | | | | | | | | | Steam line incident costs, net of insurance proceeds | 39 | | | — | | | | | | | | | | | Asset impairments and restructuring charges, net | 52 | | | 47 | | | | | | | | | | | Loss on divested businesses and related transaction costs | 61 | | | 570 | | | | | | | | | | | Accelerated depreciation | — | | | 4 | | | | | | | | | | | Environmental and other costs | 15 | | | — | | | | | | | | | | | Adjustments to contingent considerations | (6) | | | — | | | | | | | | | | | EBIT excluding non-core and unusual items | $ | 1,339 | | | $ | 1,635 | | | (18) | % | | | | | | |
For more information regarding items that impact EBIT, see "Overview", and items described above in "Results of Operations".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other (Income) Charges, Net
| | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | Foreign exchange transaction losses (gains), net (1) | $ | 9 |
| | $ | 12 |
| | $ | 5 |
| | Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | 13 |
| | — |
| | (Income) loss from equity investments and other investment (gains) losses, net | (10 | ) | | (17 | ) | | (12 | ) | | Coal gasification incident property insurance | — |
| | (65 | ) | | — |
| | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | 9 |
| Gain from sale of business (2) | — |
| | — |
| | (3 | ) | | Other, net | 4 |
| | 4 |
| | 5 |
| | Other (income) charges, net | $ | 3 |
| | $ | (53 | ) | | $ | 4 |
| | Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | (13 | ) | | — |
| | Coal gasification incident property insurance | — |
| | 65 |
| | — |
| | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | (9 | ) | Gain from sale of business (2) | — |
| | — |
| | 3 |
| | Other (income) charges, net excluding non-core and unusual items | $ | 3 |
| | $ | (1 | ) | | $ | (2 | ) |
| | (1)
| Net impact of revaluation of foreign entity assets and liabilities and effect of foreign exchange non-qualifying derivatives. |
| | (2)
| Gain from sale of the AFP segment formulated electronic cleaning solution business. |
Earnings Before Interest and Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | EBIT | $ | 1,120 |
| | $ | 1,552 |
| | (28 | )% | | $ | 1,552 |
| | $ | 1,530 |
| | 1 | % | | Mark-to-market pension and other postretirement benefit (gain) loss, net | 143 |
| | 99 |
| | |
| | 99 |
| | (21 | ) | | |
| | Net coal gasification incident (insurance) costs | — |
| | (83 | ) | | | | (83 | ) | | 112 |
| | | | Asset impairments and restructuring charges, net | 126 |
| | 45 |
| | |
| | 45 |
| | 8 |
| | |
| | Costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | 20 |
| | | | 20 |
| | — |
| | | | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | | | — |
| | 9 |
| | | | Gains from sale of businesses | — |
| | — |
| | | | — |
| | (3 | ) | | | | EBIT excluding non-core and unusual items | $ | 1,389 |
| | $ | 1,633 |
| | (15 | )% | | $ | 1,633 |
| | $ | 1,635 |
| | — | % |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | Change | | | | | | | | Gross interest expense | $ | 197 | | | $ | 206 | | | | | | | | | | | Less: Capitalized interest | 9 | | | 5 | | | | | | | | | | | Interest Expense | 188 | | | 201 | | | | | | | | | | | Less: Interest income | 6 | | | 3 | | | | | | | | | | | Net interest expense | $ | 182 | | | $ | 198 | | | (8) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 2019 Compared to 2018 | 2018 Compared to 2017 | | (Dollars in millions) | 2019 | | 2018 | | Change | | 2018 | | 2017 | | Change | | Gross interest expense | $ | 225 |
| | $ | 242 |
| | | | $ | 242 |
| | $ | 251 |
| | | | Less: Capitalized interest | 4 |
| | 4 |
| | | | 4 |
| | 7 |
| | | | Interest Expense | 221 |
| | 238 |
| | | | 238 |
| | 244 |
| | | | Less: Interest income | 3 |
| | 3 |
| | | | 3 |
| | 3 |
| | | | Net interest expense | $ | 218 |
| | $ | 235 |
| | (7 | )% | | $ | 235 |
| | $ | 241 |
|
| (2 | )% |
2019 Compared to 2018
Net interest expense decreased $17 millionin 2022 compared to 2021 primarily as a result of U.S. dollar to euro cross-currency swaps, reduced debt balances, and lower interest rates.total borrowings.
2018 Compared to 2017
Net interest expense decreased $6 million primarily as a result of U.S. dollar to euro cross-currency swaps and reduced debt partly offset by increased interest rates.
Early Debt Extinguishment and Other Related Costs
In fourth quarter 2018,2022, the Company sold 3.5%repaid the 3.6% notes due December 2021August 2022, of which $550 million was repaid in the principal amount of $300 million and 4.5% notes due December 2028 in the principal amount of $500 million. Net proceedssecond quarter 2022 primarily from the notesproceeds of a $500 million five-year term loan agreement (the "2027 Term Loan") and $200 million was repaid in third quarter 2022 using available cash. There were $789 million and were used, togetherno debt extinguishment costs associated with available cash, for the early and full repayment of this debt.
In 2021, the 5.5% notes due November 2019 ($250 million principal)Company amended and restated the partial redemption of the 2.7% notes due January 2020 ($550 million principal)$1.50 billion revolving credit agreement (the "Credit Facility"). Total consideration for these prepayments were $806 million ($800 million total principal and $6 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repaymentThis resulted in a charge of $7$1 million for early debt extinguishment costs which was primarily attributable to the early redemption premiums and related unamortized costs. The book value of the redeemed debt was $799 million.fees.
For additional information regarding the early debt extinguishment costs, see Note 8,9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Provision for (Benefit from) Income Taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | | | $ | | % | | $ | | % | | | | | | Provision for income taxes and effective tax rate | $ | 181 | | | 19 | % | | $ | 215 | | | 20 | % | | | | | Tax provision for non-core and unusual items (1) | (11) | | | | | (16) | | | | | | | | | | | | | | | | | | | | | Adjustments from tax law changes | — | | | | | 15 | | | | | | | | | | | | | | | | | | | | | Adjusted provision for income taxes and effective tax rate | $ | 170 | | | 15 | % | | $ | 214 | | | 15 | % | | | | |
(1)Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | | $ | | % | | $ | | % | | $ | | % | | Provision for (benefit from) income taxes and effective tax rate | $ | 140 |
| | 16 | % | | $ | 226 |
| | 17 | % | | $ | (99 | ) | | (8 | )% | Tax provision for non-core and unusual items(1) | 47 |
| | | | 16 |
| | | | 30 |
| | | | Tax benefit associated with previously impaired site | — |
| | | | — |
| | | | 8 |
| | | | Estimated net tax (expense) benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | (7 | ) | | | | (20 | ) | | | | 339 |
| | | | Adjusted provision for income taxes and effective tax rate | $ | 180 |
| | 15 | % | | $ | 222 |
| | 16% | | $ | 278 |
| | 20 | % |
| | (1)
| Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 2019 effective tax rate includes a $7 million increase to the2022 provision for income taxes resulting from adjustmentsinclude a $32 million decrease related to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act and from outside-U.S. entity reorganizations. The 2019 effective tax rate also includes adjustments to the tax provision to reflect finalizationrelease of prior year's income tax returns and an increase toa state income taxes related to additional valuation allowance provided against state income tax credits.
The 2018 effective tax rate includedand a $20$37 million increase to reflect the tax implications of the business divestitures, including an increase related to non-deductible losses.
The 2021 provision for income taxes resulting from adjustments to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes,included a $78 million decrease primarily the Tax Reform Act, and from outside-U.S. entity reorganizations. These adjustments related to the one-time transitionpreviously unrecognized tax on deferred foreign income and changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
The 2017 effective tax rate included a $339 million net benefitpositions resulting from tax law changes, primarily the Tax Reform Act, and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years' domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years' foreign income tax returns. The 2017 effectiveaudits, partially offset by current year increases. Additionally, the 2021 provision for income taxes included impacts of the divestiture of rubber additives, including an increase related to non-deductible losses partially offset by a decrease from the revaluation of deferred tax rate also includes an $8 million tax benefit due to a tax ruling permitting deductibility of a liquidation loss on a previously impaired site.liabilities.
For more information, see Note 7,8, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Net Earnings Attributable to Eastman and Diluted Earnings per Share
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | (Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | $ | | EPS | | Net earnings and diluted earnings per share attributable to Eastman | $ | 759 |
| | $ | 5.48 |
| | $ | 1,080 |
| | $ | 7.56 |
| | $ | 1,384 |
| | $ | 9.47 |
| Non-core items, net of tax: (1) | | | | | | | | | | | | | Mark-to-market pension and other postretirement benefit (gain) loss, net | 109 |
| | 0.79 |
| | 75 |
| | 0.52 |
| | (14 | ) | | (0.09 | ) | | Asset impairments and restructuring charges (gain), net | 113 |
| | 0.81 |
| | 43 |
| | 0.30 |
| | (3 | ) | | (0.02 | ) | | Early debt extinguishment and other related costs | — |
| | — |
| | 6 |
| | 0.04 |
| | — |
| | — |
| | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | — |
| | — |
| | 5 |
| | 0.03 |
| | Gains from sale of businesses | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (0.01 | ) | Unusual items, net of tax: (1) | | | | | | | | | | | | | Net coal gasification incident (insurance) costs | — |
| | — |
| | (67 | ) | | (0.47 | ) | | 80 |
| | 0.55 |
| | Estimated net tax expense (benefit) from tax law changes and tax loss from outside-U.S. entity reorganizations | 7 |
| | 0.05 |
| | 20 |
| | 0.14 |
| | (339 | ) | | (2.32 | ) | | Costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | — |
| | 15 |
| | 0.11 |
| | — |
| | — |
| | Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 988 |
| | $ | 7.13 |
| | $ | 1,172 |
| | $ | 8.20 |
| | $ | 1,112 |
| | $ | 7.61 |
|
| | (1)
| The provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net Earnings Attributable to Eastman and Diluted Earnings per Share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | | | (Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | | | | | Net earnings and diluted earnings per share attributable to Eastman | $ | 793 | | | $ | 6.35 | | | $ | 857 | | | $ | 6.25 | | | | | | Non-core items, net of tax: (1) | | | | | | | | | | | | | Mark-to-market pension and other postretirement benefit loss (gain), net | 14 | | | 0.12 | | | (202) | | | (1.46) | | | | | | | Accelerated depreciation | — | | | — | | | 3 | | | 0.02 | | | | | | | Asset impairments and restructuring charges, net | 48 | | | 0.39 | | | 39 | | | 0.28 | | | | | | | | | | | | | | | | | | | Environmental and other costs | 11 | | | 0.09 | | | — | | | — | | | | | | | Loss on divested businesses and related transaction costs | 93 | | | 0.74 | | | 530 | | | 3.86 | | | | | | | Early debt extinguishment costs | — | | | — | | | 1 | | | 0.01 | | | | | | | Adjustments to contingent considerations | (4) | | | (0.04) | | | — | | | — | | | | | | | | | | | | | | | | | | Unusual items, net of tax: (1) | | | | | | | | | | | | | Steam line incident costs, net of insurance proceeds | 29 | | | 0.23 | | | — | | | — | | | | | | | Adjustments from tax law changes | — | | | — | | | (15) | | | (0.11) | | | | | | | | | | | | | | | | | | | Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 984 | | | $ | 7.88 | | | $ | 1,213 | | | $ | 8.85 | | | | | |
(1)The provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
SUMMARY BY OPERATING SEGMENT
Eastman's products and operations are managed and reported in four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. For additional financial and product information for each operating segment, see "Business - Business Segments" in Part I, Item 1 of this Annual Report and Note 19,20, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. | | | | | | | | | | | | | | | | | | | | | | | | | | | Additives & Functional Products Segment | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | | | | | | | Change | | | | | | Change | | (Dollars in millions) | | 2019 | | 2018 | | $ | | % | | 2018 | | 2017 | | $ | | % | | | | | | | | | | | | | | | | | | | | Sales | $ | 3,273 |
| $ | 3,647 |
| $ | (374 | ) | | (10 | )% | $ | 3,647 |
| $ | 3,343 |
| $ | 304 |
| | 9 | % | | Volume / product mix effect | | | | | | (177 | ) | | (5 | )% | | | | | | 151 |
| | 4 | % | | Price effect | | | | | | (133 | ) | | (3 | )% | | | | | | 98 |
| | 3 | % | | Exchange rate effect | | | | | | (64 | ) | | (2 | )% | | | | | | 55 |
| | 2 | % | | | | | | | | | | | | | | | | | | | | EBIT | $ | 496 |
| $ | 639 |
| $ | (143 | ) | | (22 | )% | $ | 639 |
| $ | 653 |
| $ | (14 | ) | | (2 | )% | | Asset impairments and restructuring charges, net |
| 54 |
| | 38 |
| | 16 |
| | | | 38 |
| | 3 |
| | 35 |
| | | | Gain from sale of business | | — |
| | — |
| | — |
| | | | — |
| | (3 | ) | | 3 |
| | | | Net coal gasification incident (insurance) costs | | — |
| | (6 | ) | | 6 |
| | | | (6 | ) | | 8 |
| | (14 | ) | | | | EBIT excluding non-core and unusual items | | 550 |
| | 671 |
| | (121 | ) | | (18 | )% | | 671 |
| | 661 |
| | 10 |
| | 2 | % |
2019 Compared to 2018
Sales revenue decreased primarily due to lower sales volume, lower selling prices,Report and an unfavorable shiftthe recasted financial information for the AFP segment and "Other" in foreign currency exchange rates. The lower sales volume was primarily attributed to weaker end-market demand resulting from global trade-related pressures, particularly in transportation markets and other consumer discretionary end markets. Lower selling prices were primarily due to lower raw material prices, including for care chemicals, and increased competitive pressure in markets for tire additives, animal nutrition, and adhesives resins.
EBIT in 2019 included a $45 million goodwill impairmentPart II, Item 5, "Other Information" of the crop protection business, an asset impairment charge of $5 million resulting from management's approval of a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020, and a $4 million restructuring charge related to a capital project. EBIT in 2018 included a goodwill impairment charge related to the crop protection business and coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices of $133 million, lower sales volume of $101 million, and an unfavorable shift in foreign currency exchange rates of $22 million, partially offset by lower raw material costs of $136 million.Quarterly Report on Form 10-Q for first quarter 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Advanced Materials Segment | | | | | | | | | | | | | | | Change | | | | | | | | (Dollars in millions) | | 2022 | | 2021 | | $ | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | $ | 3,207 | | | $ | 3,027 | | | $ | 180 | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Volume / product mix effect | | | | | | (127) | | | (4) | % | | | | | | | | | | Price effect | | | | | | 391 | | | 13 | % | | | | | | | | | | Exchange rate effect | | | | | | (84) | | | (3) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT | | $ | 376 | | | $ | 519 | | | $ | (143) | | | (28) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset impairments and restructuring charges, net | | 19 | | | 9 | | | 10 | | | | | | | | | | | | | Accelerated depreciation | | — | | | 4 | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT excluding non-core items | | 395 | | | 532 | | | (137) | | | (26) | % | | | | | | | | |
2018 Compared to 2017
Sales revenue increased due to higher sales volume, higher selling prices across most product lines, and a favorable shift in foreign currency exchange rates. The higher sales volume was primarily attributed to volume growth in care chemicals, coatings and inks additives, tire additives, and animal nutrition, and products previously reported in the CI segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBITSales revenue increased in 2018 included a goodwill impairment charge related2022 compared to the crop protection business and coal gasification incident insurance in excess of costs. EBIT in 2017 included net costs resulting from the coal gasification incident, asset impairment and restructuring charges, including severance, related to the closure of a facility in China, and a gain from sale of the formulated electronics cleaning solutions business. Excluding these non-core and unusual items, EBIT increased2021 primarily due to higher selling prices partially offset by lower sales volume of $54 million largely offset byand an unfavorable shift in foreign currency exchange rates. Higher selling prices across all product lines were due to higher raw material, energy, and distribution prices. Lower sales volume was due to reduced demand and significant destocking attributed to global economic uncertainty in consumer durables and building and construction end-markets, primarily in fourth quarter 2022, as well as planned and unplanned outages. The lower sales volume was partially offset by favorable product mix due to increased sales of premium products in the advanced interlayers and specialty plastics product lines.
EBIT in 2022 and 2021 included asset impairment and restructuring charges, net, and in 2021 included accelerated depreciation. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Excluding these non-core items, EBIT decreased primarily due to: $79 million of lower sales volume and higher manufacturing costs, more than exceedingprimarily due to lower capacity utilization and costs from planned and unplanned outages; $34 million of an unfavorable shift in foreign exchange rates; and $14 million of higher growth spending. Initiatives In 2022, the AM segment: •achieved key milestones for planned molecular recycling facilities (see "Corporate Overview - Business Strategy - Sustainability and Circular Economy - Circularity" in Part I, Item 1 of this Annual Report); •continued adoption of polyester renewal technology for products including, Tritan™ Renew, Cristal™ Renew, and Cristal™ One Renew across several end-markets, including cosmetic packaging, eyewear and power tools; and •continued to expand portfolio of differentiated post-applied window films and protective films for automotive and architectural applications.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Additives & Functional Products Segment | | | | | | | | | | | | | | | Change | | | | | | | | (Dollars in millions) | | 2022 | | 2021 | | $ | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | $ | 3,165 | | | $ | 2,708 | | | $ | 457 | | | 17 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Volume / product mix effect | | | | | | 71 | | | 3 | % | | | | | | | | | | Price effect | | | | | | 490 | | | 18 | % | | | | | | | | | | Exchange rate effect | | | | | | (104) | | | (4) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT | | $ | 483 | | | $ | 448 | | | $ | 35 | | | 8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset impairments and restructuring charges, net |
| — | | | 4 | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT excluding non-core item | | 483 | | | 452 | | | 31 | | | 7 | % | | | | | | | | |
Sales revenue increased in 2022 compared to 2021 primarily due to higher selling prices and higher sales volume, partially offset by $20 million,an unfavorable shift in foreign currency exchange rates. Higher selling prices were due to strong demand across several key end-markets. Cost pass-through contracts represented approximately 45 percent of the selling price increase in 2022. The increase in sales volume due to growth in care additives and animal nutrition product lines was mostly offset by a decline in building and construction and industrial end-markets primarily attributed to deceleration of demand and customer inventory destocking in fourth quarter 2022 attributed to global economic uncertainty. EBIT in 2021 included asset impairments and restructuring charges, net. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Excluding these non-core items, EBIT increased in 2022 compared to 2021 primarily due to fourth quarter competitive pressure in adhesives resins,to: $49 million higher selling prices, net of higher raw material and energy costs, and higher growth initiativedistribution costs; lower SG&A costs partially offset by higher R&D costs, totaling $10 million; $14 million unfavorable shift in foreign currency exchange rates; and $9 million of approximately $20 million.
Growth Initiatives
In 2019, the AFP segment:
| | • | advanced growth and innovation of Regalite™ UltraPure hydrocarbon resin, a new class of clean tackifying hydrocarbon resins, through a capacity expansion at the Middelburg, Netherlands manufacturing site;
|
| | • | acquired the Marlotherm™ heat transfer assets in Marl, Germany and the related formulations, intellectual property, and customer contracts, as a targeted addition to the specialty fluids business;
|
| | • | advanced growth of Impera™ resins through capacity expansions for the production of performance resins for tires at both the Middelburg, Netherlands, and Jefferson, Pennsylvania, manufacturing sites to serve demand from tire manufacturers around the world for product solutions that enable improved safety, efficiency, and performance;
|
| | • | continued to enhance our ability to serve the global customer base in low volatile organic compound ("VOC") coatings and other markets by completing the final phase of a ketones capacity expansion at the Kingsport, Tennessee manufacturing site in fourth quarter 2019; and
|
| | • | responded to growing demand for purified water and sustainable waste water treatment across the globe with world scale production units for Dimethylaminoethanol ("DMAE"/"DMEA") in Europe (Belgium) and North America (Louisiana) and decided to expand capacity in China to respond to stricter regulation and rapidly growing demand in Asia (DMAE is used as a key component into flocculants that are critical for municipal and industrial water treatments).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | Advanced Materials Segment | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | | | | | | | Change | | | | | | Change | | (Dollars in millions) | | 2019 | | 2018 | | $ | | % | | 2018 | | 2017 | | $ | | % | | | | | | | | | | | | | | | | | | | | Sales | $ | 2,688 |
| $ | 2,755 |
| $ | (67 | ) | | (2 | )% | $ | 2,755 |
| $ | 2,572 |
| $ | 183 |
| | 7 | % | | Volume / product mix effect | | | | | | (25 | ) | | (1 | )% | | | | | | 130 |
| | 5 | % | | Price effect | | | | | | — |
| | — | % | | | | | | 22 |
| | 1 | % | | Exchange rate effect | | | | | | (42 | ) | | (1 | )% | | | | | | 31 |
| | 1 | % | | | | | | | | | | | | | | | | | | | | EBIT | $ | 517 |
| $ | 509 |
| $ | 8 |
| | 2 | % | $ | 509 |
| $ | 483 |
| $ | 26 |
| | 5 | % | | Asset impairments and restructuring charges, net |
| 1 |
| | 1 |
| | — |
| | | | 1 |
| | — |
| | 1 |
| | | | Net coal gasification incident (insurance) costs | | — |
| | (9 | ) | | 9 |
| | | | (9 | ) | | 11 |
| | (20 | ) | | | | EBIT excluding non-core and unusual items | | 518 |
| | 501 |
| | 17 |
| | 3 | % | | 501 |
| | 494 |
| | 7 |
| | 1 | % |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 Compared to 2018
•expanded capacity and capabilities of Eastapure™ electronic solvents for use in manufacturing of semiconductor chips and other electronic applications with extremely low organic and inorganic impurities; •realized additional production capacity across its Global Alkylamines assets through optimization projects; and •continued global launch of Fluid Genius™, a patent-pending product that equips end-users with predictive insights to optimize heat transfer fluid performance by leveraging artificial intelligence technology with Eastman expertise to monitor and maximize the life cycle of heat transfer fluids for a myriad of system applications.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Chemical Intermediates Segment | | | | | | | | | | | | | | | Change | | | | | | | | (Dollars in millions) | | 2022 | | 2021 | | $ | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | $ | 3,026 | | | $ | 2,849 | | | $ | 177 | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Volume / product mix effect | | | | | | (238) | | | (8) | % | | | | | | | | | | Price effect | | | | | | 462 | | | 16 | % | | | | | | | | | | Exchange rate effect | | | | | | (47) | | | (2) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT | | $ | 409 | | | $ | 445 | | | $ | (36) | | | (8) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset impairments and restructuring charges, net |
| 3 | | | 16 | | | (13) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT excluding non-core item | | 412 | | | 461 | | | (49) | | | (11) | % | | | | | | | | |
Sales revenue decreasedincreased in 2022 compared to 2021 primarily due to higher selling prices, resulting from higher raw material, energy, and distribution prices, as well as constrained market conditions. This increase was partially offset by lower sales volume and an unfavorable shift in foreign currency exchange rates. IncreasedThe decrease in sales volume, of premium products, including paint protection film, Tritan™ copolyester, and Saflex™ acoustic and architectural interlayers,primarily in plasticizers, which was more thanpartially offset by decreased sales volumedemand growth in the agriculture end-market for functional amines, was broadened in fourth quarter 2022 due to slowing demand in the building and construction and industrial end-markets, primarily attributed to deceleration of standard copolyesterdemand and interlayers productscustomer inventory destocking related to underlying market declines in transportation and consumer durable end markets.
EBIT in 20192022 and 2021 included aasset impairment and restructuring charge for severance costs. EBITcharges, net. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in 2018 included coal gasification incident insurance in excessPart II, Item 8 of costs and a charge for an impairment of an indefinite-lived intangible asset. this Annual Report. Excluding these non-core and unusual items, EBIT increaseddecreased in 2022 compared to 2021 primarily due to $121 million lower sales volume and higher manufacturing costs partially offset by $60 million higher selling prices, net of higher raw material and energy costs, of $49and higher distribution costs, and $31 million mostly offset by anlower SG&A costs. In addition, there was a $14 million unfavorable shift in foreign currency exchange rates of $23 million and lower sales volume of $16 million. The impact of lower sales volume was mostly offset by increased sales of certain premium products.rates.
2018 Compared to 2017
Sales revenue increased primarily due to higher sales volume and improved product mix across the segment, including for premium products such as performance films, Saflex™ head-up displays, and Tritan™ copolyester. While 2018 had higher sales volume compared with 2017, fourth quarter 2018 had lower specialty plastics sales volume compared to fourth quarter 2017 attributed to customer inventory destocking related to uncertainty caused by the U.S. - China trade dispute.
EBIT in 2018 included coal gasification incident insurance in excess of costs and a charge for an impairment of an indefinite-lived intangible asset. EBIT in 2017 included net costs resulting from the coal gasification incident. Excluding these non-core and unusual items, EBIT increased primarily due to higher sales volume and improved product mix of premium products of $94 million, partially offset by higher raw material (particularly for paraxylene in the second half of the year), energy, and distribution costs of $67 million and higher growth initiative costs of approximately $25 million.
Growth Initiatives
In 2019, the AM segment:
| | • | continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
|
strengthened growth in automotive paint protection films in North America and China through an improved sales channel, marketing, and commercial execution strategies and capabilities;
finalized development and announced the launch of Eastman CORE (trademark and patent pending) next generation analytics-based software platform for automotive window and paint protection film products, enabling more efficient application and overall business management for dealers; and
developed and enhanced Eastman's sustainability capabilities and commercial opportunities, including strategic collaborations with third parties to secure a consistent source of recyclable copolyester feedstock and to innovate new sustainable specialty plastic solutions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | Chemical Intermediates Segment | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | | | | | | | Change | | | | | | Change | | (Dollars in millions) | | 2019 | | 2018 | | $ | | % | | 2018 | | 2017 | | $ | | % | | | | | | | | | | | | | | | | | | | | Sales | $ | 2,443 |
| $ | 2,831 |
| $ | (388 | ) | | (14 | )% | $ | 2,831 |
| $ | 2,728 |
| $ | 103 |
| | 4 | % | | Volume / product mix effect | | | | | | (122 | ) | | (4 | )% | | | | | | (142 | ) | | (5 | )% | | Price effect | | | | | | (247 | ) | | (9 | )% | | | | | | 229 |
| | 8 | % | | Exchange rate effect | | | | | | (19 | ) | | (1 | )% | | | | | | 16 |
| | 1 | % | | | | | | | | | | | | | | | | | | | | EBIT | $ | 170 |
| $ | 308 |
| $ | (138 | ) | | (45 | )% | $ | 308 |
| $ | 255 |
| $ | 53 |
| | 21 | % | | Asset impairments and restructuring charges, net |
| 22 |
| | — |
| | 22 |
| | | | — |
| | — |
| | — |
| | | | Net coal gasification incident (insurance) costs | | — |
| | (30 | ) | | 30 |
| | | | (30 | ) | | 44 |
| | (74 | ) | | | | EBIT excluding unusual item | | 192 |
| | 278 |
| | (86 | ) | | (31 | )% | | 278 |
| | 299 |
| | (21 | ) | | (7 | )% |
2019 Compared to 2018
Sales revenue decreased primarily due to lower selling prices across the segment attributed to lower raw material prices and increased competitive activity. Sales revenue was also negatively impacted by lower functional amines products sales volume attributed to weaker demand in agricultural end-markets resulting from wet weather in North America and lower intermediates products sales volume attributed to increased competitive activity.
EBIT in 2019 included an asset impairment charge resulting from management's approval of a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020. EBIT in 2018 included coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices more than offsetting lower raw material costs of $63 million and lower sales volumes of $9 million.
2018 Compared to 2017
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fibers Segment | | | | | | | | | | (Dollars in millions) | | | | | Change | | | | | | | | 2022 | | 2021 | | $ | | % | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | $ | 1,022 | | | $ | 900 | | | $ | 122 | | | 14 | % | | | | | | | | | | Volume / product mix effect | | | | | | (10) | | | (1) | % | | | | | | | | | | Price effect | | | | | | 139 | | | 15 | % | | | | | | | | | | Exchange rate effect | | | | | | (7) | | | — | % | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT | | $ | 131 | | | $ | 142 | | | $ | (11) | | | (8) | % | | | | | | | | | | Asset impairments and restructuring charges, net | | 9 | | | — | | | 9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | EBIT excluding non-core item | | 140 | | | 142 | | | (2) | | | (1) | % | | | | | | | | |
Sales revenue increased in 2022 compared to 2021 primarily due to higher selling prices across most product lines, particularly for acetyl derivatives attributed to favorable market conditions and for olefin derivativesthe segment due to higher raw material and energy costs. Higher selling prices were partially offset by lower sales volume primarily attributable to lower merchant ethylene sales, products previously reported in the CI segment being reported in the AFP segment in 2018, and supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities. Lower merchant ethylene sales are primarily due to the decision to reduce operating rates of the olefins cracking units at the Longview, Texas manufacturing facility due to spot ethylene prices. Lower sales volume was partially offset by higher functional amines products sales attributed to strengthened agriculture and energy markets.
EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased due to lower sales volume of $62 million, and higher planned manufacturing shutdown costs of $21 million. The decrease was partially offset by higher selling prices exceeding higher raw material, energy, and distribution prices.
EBIT in 2022 included asset impairment and restructuring charges, net. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Excluding the non-core item, EBIT was relatively unchanged as higher selling prices, net of higher raw material and energy costs, and higher distribution costs, were offset by higher manufacturing costs resulting from planned and unplanned outages. Initiatives In 2022, the Fibers segment: •implemented variable pricing agreements across the acetate tow customer base, driving growth and returning adjusted EBIT margins and cash flow generation to acceptable performance levels; •commercialized Naia™ staple fiber for spun yarns for apparel and home textiles; and •announced several high-profile brand adoptions, including a major multinational clothing company; an American retailer of $61 million.outdoor clothing; and a sustainable women's clothing and accessories designer and manufacturer.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | Other | | | | | | | | | | | | | | | (Dollars in millions) | | 2022 | | 2021 | | | | | | | Sales | | $ | 160 | | | $ | 992 | | | | | | | | | | | | | | | | | | Loss before interest and taxes | | | | | | | | | | | Growth initiatives and businesses not allocated to operating segments | | $ | (196) | | | $ | (49) | | | | | | | | Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | | 70 | | | 375 | | | | | | | | Asset impairments and restructuring charges, net | | (21) | | | (18) | | | | | | | | Net gain (loss) on divested businesses and related transaction costs | | (61) | | | (570) | | | | | | | | Steam line incident costs, net of insurance proceeds | | (39) | | | — | | | | | | | | Other income (charges), net not allocated to operating segments | | 7 | | | (11) | | | | | | | | Loss before interest and taxes | | $ | (240) | | | $ | (273) | | | | | | | | | | | | | | | | | | Asset impairments and restructuring charges, net | | 21 | | | 18 | | | | | | | | Loss on divested businesses and related transaction costs | | 61 | | | 570 | | | | | | | | Steam line incident costs, net of insurance proceeds | | 39 | | | — | | | | | | | | Environmental and other costs | | 15 | | | — | | | | | | | | | | | | | | | | | | Mark-to-market pension and other postretirement benefits (gain) loss, net | | 19 | | | (267) | | | | | | | | Adjustments to contingent considerations | | (6) | | | — | | | | | | | | Earnings (loss) before interest and taxes excluding non-core and unusual items | | (91) | | | 48 | | | | | | |
Cost and Growth Initiatives
To maintain and enhance its status as a low-cost producer and optimize earnings, the CI segment continuously focuses on cost control, operational efficiency, and capacity utilization. This includes focusing on products used internally by other operating segments, thereby supporting growth in specialty product lines throughoutOn November 1, 2021, the Company and also external licensing opportunities.
In 2018,certain of its subsidiaries completed the sale of its rubber additives (including Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology of the global tire additives business of its AFP segment. Additionally, on April 1, 2022, the Company and certain of its subsidiaries completed modifications to the olefin cracking units atsale of its adhesives resins business. The sale included hydrocarbon resins (including Eastman Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines, all of which were also previously part of the Longview, Texas manufacturing site. These modifications allowedAFP segment.
Beginning January 1, 2022, sales revenue and EBIT of the divested businesses are included in "Other". To maintain comparability of segment financial statement information, the Company has recast the segment financial information for the introduction of refinery-grade propylene ("RGP") intoAFP segment and "Other" for each quarter from first quarter 2019 through fourth quarter 2021. For more information, see the feedstock mix while also reducing the amount of other purchased feedstocks. This feedstock shift resulted in a significant decrease in ethylene productionCurrent Report on Form 8-K dated April 18, 2022, and excess ethylene sales in 2019, while maintaining historical levels of propylene production. The RGP project provided the flexibility to significantly reduce the Company's participation in the merchant ethylene market, while retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fibers Segment | | | | | | | | 2019 Compared to 2018 | | 2018 Compared to 2017 | | (Dollars in millions) | | | | | Change | | | | | | Change | | | 2019 | | 2018 | | $ | | % | | 2018 | | 2017 | | $ | | % | | | | | | | | | | | | | | | | | | | Sales | $ | 869 |
| $ | 918 |
| $ | (49 | ) | | (5 | )% | $ | 918 |
| $ | 852 |
| $ | 66 |
| | 8 | % | | Volume / product mix effect | | | | | | (38 | ) | | (4 | )% | | | | | | 95 |
| | 11 | % | | Price effect | | | | | | (7 | ) | | (1 | )% | | | | | | (30 | ) | | (3 | )% | | Exchange rate effect | | | | | | (4 | ) | | — | % | | | | | | 1 |
| | — | % | | | | | | | | | | | | | | | | | | | | EBIT | $ | 194 |
| $ | 257 |
| $ | (63 | ) | | (25 | )% | $ | 257 |
| $ | 181 |
| $ | 76 |
| | 42 | % | | Net coal gasification incident (insurance) costs | | — |
| | (38 | ) | | 38 |
| |
|
| | (38 | ) | | 49 |
| | (87 | ) | |
|
| | EBIT excluding non-core and unusual items | | 194 |
| | 219 |
| | (25 | ) | | (11 | )% | | 219 |
| | 230 |
| | (11 | ) | | (5 | )% |
2019 Compared to 2018
Sales revenue decreased primarily due to lower acetate tow sales volume attributed to weakened market demand resulting from general market decline and customer buying patterns.
EBIT included coal gasification incident insurance in excess of costs in 2018. Excluding this unusual item, EBIT decreased primarily due to lower acetate tow sales volume of $24 million.
2018 Compared to 2017
Sales revenue increased primarily due to sales of nonwovens products previously reported in "Other" of $57 million and higher sales volume, particularly for textiles products. The higher sales revenue was partially offset by lower selling prices, particularly for acetate tow. Lower acetate tow selling prices were primarily attributed to lower industry capacity utilization.
EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased primarily due to the net impact of $7 million of lower selling prices, particularly for acetate tow attributed to lower capacity utilization, and higher raw material and energy costs, partially offset by volume growth of textiles products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost and Growth Initiatives
In 2019 the Company acquired Industrias del Acetato de Celulosa. S.A. ("INACSA"), a cellulosic yarn business in LA Batllòria, Spain as a targeted addition to the Fibers segment's acetate yarn business.
The Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in new markets, optimizing asset productivity, and working with suppliers to reduce costs. For acetate tow, these efforts are assisting customers in the effective usePart II, Item 5, "Other Information" of the segment's products and customers' product development efforts. Beyond acetate tow, management is applying the innovation-driven growth model to leverage its fibers technology and expertise to focusQuarterly Report on innovative growth in the textiles and nonwovens markets. Examples of recent product innovation within the Fibers segment include NaiaForm 10-Q™ yarn for the apparel market developed from Eastman's proprietary cellulose ester technology; Avra™ performance fibers for the apparel, home furnishings and industrial fabrics markets developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™ wood pulp-based alternative for the nonwoven industry used in personal hygiene applications.first quarter 2022.
Other
| | | | | | | | | | | | | | | (Dollars in millions) | | 2019 | | 2018 | | 2017 | | | | | | | | | | Sales | | $ | — |
| | $ | — |
| | $ | 54 |
| | | | | | | | | | Loss before interest and taxes | | | | | | | | Growth initiatives and businesses not allocated to operating segments | | $ | (102 | ) | | $ | (114 | ) | | $ | (114 | ) | | Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | | (97 | ) | | (17 | ) | | 93 |
| Asset impairments and restructuring charges, net
| | (49 | ) | | (6 | ) | | (5 | ) | | Other income (charges), net not allocated to operating segments | | (9 | ) | | (24 | ) | | (16 | ) | | Loss before interest and taxes before non-core and unusual items | | $ | (257 | ) | | $ | (161 | ) | | $ | (42 | ) | | Mark-to-market pension and other postretirement benefit plans (gain) loss, net | | 143 |
| | 99 |
| | (21 | ) | Asset impairments and restructuring charges, net
| | 49 |
| | 6 |
| | 5 |
| | Cost of disposition of claims against discontinued Solutia operations | | — |
| | — |
| | 9 |
| | Costs resulting from tax law changes and outside-U.S. entity reorganizations | | — |
| | 20 |
| | — |
| | Loss before interest and taxes excluding non-core and unusual items | | (65 | ) | | (36 | ) | | (49 | ) |
Sales revenue and costsCosts related to growth initiatives, including circular economy, R&D costs, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in operating segment operating results for any of the periods presented and are included in "Other". See "Eastman ChemicalIn 2022, the Company General Information - Researchrecognized costs, net of insurance proceeds from the steam line incident, environmental and Development"other costs from previously divested or non-operational sites, and adjustments to contingent considerations. In 2022 and 2021, the Company recognized severance and related costs as part of business improvement and cost reduction initiatives. For more information regarding asset impairments and restructuring charges and debt extinguishment costs see Note 16, "Asset Impairments and Restructuring Charges, Net" and Note 9, "Borrowings", respectively, to the Company's consolidated financial statements in Part I,II, Item 18 of this Annual Report.Report on Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES BY CUSTOMER LOCATION | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales Revenue | | | | | | | | | | Change | | | | | | | (Dollars in millions) | 2022 | | 2021 | | $ | % | | | | | | | | | United States and Canada | $ | 4,738 | | | $ | 4,578 | | | $ | 160 | | 3 | % | | | | | | | | | Europe, Middle East, and Africa | 2,783 | | | 2,735 | | | 48 | | 2 | % | | | | | | | | | Asia Pacific | 2,443 | | | 2,549 | | | (106) | | (4) | % | | | | | | | | | Latin America | 616 | | | 614 | | | 2 | | — | % | | | | | | | | | Total | $ | 10,580 | | | $ | 10,476 | | | $ | 104 | | 1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales revenue increased 1 percent due to increases in 2017sales revenue across all regions, except Asia Pacific. Higher sales revenue was primarily due to higher selling prices (up 14 percent) partially offset by lower sales volume (down 11 percent, including the impact from divested businesses) and an unfavorable shift in foreign currency exchange rates (down 2 percent). The most significant increase in sales revenue occurred in the United States and Canada, primarily due to higher selling prices across all operating segments partially offset by lower sales volume from the nonwovens products. Beginning first quarter 2018, sales revenue and innovation costs from the nonwovens and textiles innovation products previously reported in "Other" are reported in the Fibers segment due to accelerating commercial progress of growth initiatives. divested businesses. See Note 19,20, "Segment and Regional Sales 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
SALES BY CUSTOMER LOCATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales Revenue | | | | | | | Change | | | | | Change | | (Dollars in millions) | 2019 | | 2018 | | $ | % | | 2018 | | 2017 | | $ | % | | United States and Canada | $ | 3,885 |
| | $ | 4,303 |
| | $ | (418 | ) | (10 | )% | | $ | 4,303 |
| | $ | 4,189 |
| | $ | 114 |
| 3 | % | | Europe, Middle East, and Africa | 2,544 |
| | 2,756 |
| | (212 | ) | (8 | )% | | 2,756 |
| | 2,539 |
| | 217 |
| 9 | % | | Asia Pacific | 2,278 |
| | 2,504 |
| | (226 | ) | (9 | )% | | 2,504 |
| | 2,306 |
| | 198 |
| 9 | % | | Latin America | 566 |
| | 588 |
| | (22 | ) | (4 | )% | | 588 |
| | 515 |
| | 73 |
| 14 | % | | Total | $ | 9,273 |
| | $ | 10,151 |
| | $ | (878 | ) | (9 | )% | | $ | 10,151 |
| | $ | 9,549 |
| | $ | 602 |
| 6 | % |
2019 Compared to 2018
Sales revenue in United States and Canada decreased primarily due to lower selling prices and lower sales volume in all operating segments, particularly in the CI and AFP segments.
Sales revenue in Europe, Middle East, and Africa decreased primarily due to unfavorable foreign currency exchange rates in all operating segments, lower AFP segment selling prices, and lower AFP and CI segments sales volume. These items were partially offset by higher sales volume in the AM segment.
Sales revenue in Asia Pacific decreased primarily due to lower sales volume in all operating segments, particularly in the AFP and AM segments, and lower CI and AFP segments selling prices.
Sales revenue in Latin America decreased primarily due to lower selling prices, particularly in the CI segment.
2018 Compared to 2017
Sales revenue in United States and Canada increased primarily due to higher CI, AFP, and AM segments selling prices and higher AFP and AM segments sales volume. The increase was partially offset by lower CI segment sales volume, primarily resulting from lower merchant ethylene sales.
Sales revenue in Europe, Middle East, and Africa increased primarily due to a favorable shift in foreign currency exchange rates across the segments, higher CI, AM, and Fibers segments sales volume, and higher AFP and CI segments selling prices. These items were partially offset by lower AFP segment sales volume.
Sales revenue in Asia Pacific increased primarily due to higher AFP and AM segments sales volume and higher CI and AFP segments selling prices partially offset by lower Fibers segment selling prices.
Sales revenue in Latin America increased primarily due to higher AM, AFP, and CI segments sales volume and higher CI segment selling prices.
See Note 19, "Segment and Regional Sales Information", in Part II, Item 8 of this Annual Report for segment sales revenues by customer location.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND OTHER FINANCIAL INFORMATION
Cash Flows
The Company had cash and cash equivalents as follows: | | | | | | | | | | | | | | | (Dollars in millions) | December 31, | | | 2022 | | 2021 | | | | Cash and cash equivalents | $ | 493 | | | $ | 459 | | | |
| | | | | | | | | | | | | | (Dollars in millions) | December 31, | | | 2019 | | 2018 | | 2017 | | Cash and cash equivalents | $ | 204 |
| | $ | 226 |
| | $ | 191 |
|
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. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility.
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | | | Net cash provided by (used in): | | | | | | | Operating activities | $ | 975 | | | $ | 1,619 | | | | | Investing activities | 392 | | | (29) | | | | | Financing activities | (1,321) | | | (1,690) | | | | | Effect of exchange rate changes on cash and cash equivalents | (12) | | | (5) | | | | | Net change in cash and cash equivalents | 34 | | | (105) | | | | | Cash and cash equivalents at beginning of period | 459 | | | 564 | | | | | Cash and cash equivalents at end of period | $ | 493 | | | $ | 459 | | | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Net cash provided by (used in): | | | | | | | Operating activities | $ | 1,504 |
| | $ | 1,543 |
| | $ | 1,657 |
| | Investing activities | (480 | ) | | (463 | ) | | (643 | ) | | Financing activities | (1,043 | ) | | (1,040 | ) | | (1,006 | ) | | Effect of exchange rate changes on cash and cash equivalents | (3 | ) | | (5 | ) | | 2 |
| | Net change in cash and cash equivalents | (22 | ) | | 35 |
| | 10 |
| | Cash and cash equivalents at beginning of period | 226 |
| | 191 |
| | 181 |
| | Cash and cash equivalents at end of period | $ | 204 |
| | $ | 226 |
| | $ | 191 |
|
2019 Compared to 2018
Cash provided by operating activities decreased primarily$644 million due to lower net earnings partially offset by loweradjusted for both loss on divested businesses and mark-to-market pension and other postretirement benefit plans (gain) loss, net, as well as higher variable compensation payout. The use of cash in working capital (trade receivables, inventories, and trade payables).
Cash used in investing activitiesalso increased, $17 million. Twelve months 2018 included $65 million proceeds from coal gasification incident insurance for property damage. Excluding this item, cash used in investing activities decreased $48 milliondriven by higher inventory due to continued inflationary pressures and lower capital expenditures partially offset by acquisitions of businesses in the AFP and Fibers segments. Lower capital expenditures were due to significant capital projects related to key growth initiatives being completed and put into service during 2018.sales volume.
Cash used in financing activities was relatively unchanged with increased net debt repayments and dividend payments offset by lower share repurchases.
2018 Compared to 2017
Cash provided by operating activities decreased primarily due to increased inventory resulting from reduced demand and higher cost raw materials inventory in fourth quarter 2018.
Cash used in investing activities decreased primarily due to decreased capital expenditures as significant capital projects related to key growth initiatives were completed and put into service during 2018. See "Capital Expenditures" below.
Cash used in financing activities increased primarily due to increased share repurchases and dividend payments partially offset by reduced net debt repayments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Net cash provided by operating activities | $ | 1,504 |
| | $ | 1,543 |
| | $ | 1,657 |
| | Capital expenditures | | | | | | | Additions to properties and equipment | (425 | ) | | (528 | ) | | (649 | ) | Proceeds from property insurance (1) | — |
| | 65 |
| | — |
| | Net capital expenditures | (425 | ) | | (463 | ) | | (649 | ) | | Free cash flow | $ | 1,079 |
| | $ | 1,080 |
| | $ | 1,008 |
|
| | (1)
| Cash proceeds from insurance for coal gasification incident property damage. |
Working Capital Management and Off Balance Sheet Arrangements
Eastman applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable a full range of capital allocation options in support of the Company's strategy. Eastman expects to continue utilizing the programs described below to support freeoperating cash flow consistent with ourthe Company's past practices.
Eastman works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, in 2019, theThe Company introduced a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a participating financial institution. A downgrade in Eastman's credit rating or changes in the financial markets could limit the financial institution's willingness to commit funds to, and participate in, the program. Management does not believe such risk would have a material impact on the Company's working capital or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for additional information regarding the program.
In 2019, the Company expandedhas an off balance sheet, uncommitted accounts receivable factoring agreementsprogram under which entire invoices may be sold, without recourse, to third-party financial institutions. Available capacity under these agreements, which the Company uses as a routine source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. The total amount of receivables sold in 20192022 and 20182021 were $857 million$2.5 billion and $219 million,$1.2 billion, respectively. Based on the original terms of receivables sold for certain agreements and actual outstanding balance of receivables under service agreements, the Company estimates that $169$402 million and $76$239 million of these receivables would have been outstanding as of December 31, 20192022 and December 31, 2018,2021, respectively, had they not been sold under these factoring agreements.
Revolving Credit FacilitiesEastman works with suppliers to optimize payment terms and Commercial Paper Borrowingsconditions on accounts payable to enhance timing of working
capital and cash flows. The Company has accessa voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At December 31, 2019, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2019, commercial paper borrowings were $170 million with a weighted average interest rate of 2.03 percent.participating financial institution. See Note 8, "Borrowings"1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2019, the Company had no borrowings under the A/R Facility. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Credit Facility and A/R Facility contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all covenants at both December 31, 2019 and December 31, 2018. The amount of available borrowings under the A/R and Credit Facilities was approximately $1.75 billion as of December 31, 2019. ForReport for additional information see Section 5.03 of the Credit Facility at Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.regarding both programs.
Debt and Other Commitments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Payments Due for | | Period | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities | | Total | | 2020 | | $ | — |
| | $ | 171 |
| | $ | 173 |
| | $ | 181 |
| | $ | 62 |
| | $ | 241 |
| | $ | 828 |
| | 2021 | | 483 |
| | — |
| | 186 |
| | 156 |
| | 49 |
| | 81 |
| | 955 |
| | 2022 | | 741 |
| | — |
| | 175 |
| | 102 |
| | 38 |
| | 87 |
| | 1,143 |
| | 2023 | | 840 |
| | — |
| | 156 |
| | 91 |
| | 25 |
| | 87 |
| | 1,199 |
| | 2024 | | 240 |
| | — |
| | 137 |
| | 100 |
| | 14 |
| | 89 |
| | 580 |
| | 2025 and beyond | | 3,307 |
| | — |
| | 1,414 |
| | 1,967 |
| | 30 |
| | 1,106 |
| | 7,824 |
| | Total | | $ | 5,611 |
| | $ | 171 |
| | $ | 2,241 |
| | $ | 2,597 |
| | $ | 218 |
| | $ | 1,691 |
| | $ | 12,529 |
|
At December 31, 2019, Eastman's borrowings totaled approximately $5.8 billion with various maturities. In fourth quarter 2019, the Company repaid the 2.7% notes due January 2020 ($250 million principal) using available cash. In fourth quarter 2018 the Company refinanced certain outstanding public debt with proceeds of the sale of new debt securities, which extended the weighted average maturity of outstanding debt while retaining adequate levels of pre-payableEastman has debt and near-term maturities.
Estimated future payments of debt securities assumes the repayment of principal upon stated maturity, and actual amounts and the timing of such payments may differ materially due to repayment or other changes in the terms of such debt prior to maturity. For information oncommitments for debt securities, credit facilities, interest payable, purchase obligations, operating leases, and other and interest payable, see Note 8, "Borrowings", toliabilities. A summary of the Company's consolidated financial statementsdebt and other commitment obligations as of December 31, 2022 for each of the next five years and beyond is included in Part II, Item 8 of this Annual Report.
For information about purchase obligations and operating leases, see Note 11,12, "Leases and Other Commitments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
At December 31, 2022, Eastman's borrowings totaled approximately $5.2 billion with various maturities. In second quarter 2022, the Company repaid $550 million of the 3.6% notes due August 2022. In third quarter 2022, the Company repaid the remaining $200 million principal of the 3.6% notes due August 2022 using available cash. In fourth quarter 2021, the Company repaid the 3.5% notes due December 2021 ($300 million principal) using available cash. For information about debt and related interest, see Note 9, "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, "Leases and Other Commitments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, accrued compensation benefits, environmental loss contingency reserves, accrued compensation benefits,estimates, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2025"2028 and beyond" line item.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The amount and timing of pension and other postretirement benefit payments included in other liabilities is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company's U.S. defined benefit pension plans are not currently under any benefit restrictions. See Note 10,11, "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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The resolution of uncertainties related to environmental matters included in other liabilities may have a material adverse effect on the Company's consolidated results of operations in the period recognized, however, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See "Environmental Costs" in Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for the Company's accounting policy for environmental costs, and see Note 12,13, "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.
Credit Facility, Term Loan, and Commercial Paper Borrowings
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring December 2026. 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 includes sustainability-linked pricing terms, provides available liquidity for general corporate purposes, and supports commercial paper borrowings. At December 31, 2022, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2022, the Company's commercial paper borrowings were $326 million with a weighted average interest rate of 4.85%.
In 2022, the Company borrowed $500 million under a five-year term loan agreement (the "2027 Term Loan") and used the proceeds from the 2027 Term Loan to pay down $500 million of the 3.6% notes due August 2022. The 2027 Term Loan had a variable interest rate of 5.55% as of December 31, 2022.
In January 2023, the Company borrowed $300 million under a delayed draw two-year term loan (the "2024 Term Loan"), which was executed in fourth quarter 2022. Borrowings under the 2024 Term Loan are subject to interest at varying spreads above quoted market rates. The 2024 Term Loan contains the same customary covenants and events of default, including maintenance of certain financial ratios, as the Credit Facility, with payment of customary fees.
The Credit Facility and 2027 Term Loan contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all applicable covenants at December 31, 2022. The total amount of available borrowings under the Credit Facility was $1.50 billion as of December 31, 2022. For additional information regarding financial covenants under the Credit Facility, see Section 5.03 of the Credit Facility at Exhibit 10.01 to the Company's Current Report on Form 8-K dated April 30, 2020.
See Note 9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Net Debt | | | | | | | | | | | | | | | December 31, | | | | December 31, | | (Dollars in millions) | 2022 | | | | 2021 | | Total borrowings | $ | 5,151 | | | | | $ | 5,159 | | | Less: Cash and cash equivalents | 493 | | | | | 459 | | Net debt (1) | $ | 4,658 | | | | | $ | 4,700 | | | | | | | |
(1)Includes a non-cash decrease from foreign currency exchange rates of $85 million and $113 million in 2022 and 2021, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Expenditures
Capital expenditures were $425$611 million $528 million ($463 million net of proceeds from property damage insurance for 2017 coal gasification incident), and $649$555 million in 2019, 2018,2022 and 2017,2021, respectively. Capital expenditures in 20192022 were primarily for targeted growth initiativesthe AM segment methanolysis plastic-to-plastic molecular recycling manufacturing facility in Kingsport, Tennessee, and site modernization projects at the Longview, Texas; Kingsport, Tennessee; and Jefferson, Pennsylvania manufacturing sites.
The Company expects that 2020 capital spending will be between $450 million and $475 million, primarily forother targeted growth initiatives and site modernization projects.
The Company expects that 2023 capital spending will be approximately $700 million to $800 million, primarily for targeted growth initiatives, including the AM segment methanolysis plastic-to-plastic molecular recycling manufacturing facility and the Tritan™ capacity expansion, both in Kingsport, Tennessee, and other targeted growth initiatives and site modernization projects.
The Company had capital expenditures related to environmental protection and improvement of approximately $27 million, $44$60 million and $38 million in 2019, 2018,2022 and 2017,2021, 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.
Dividends and Stock Repurchases and Dividends
In February 2014, the Company's Board of Directors authorized the repurchase of up to $1 billion of the Company's outstanding common stock. The Company completed the $1 billion repurchase authorization in May 2018, acquiring a total of 12,215,950 shares. In February 2018, the Company's Board of Directors authorized the repurchase of up to an additional $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company.Company and its stockholders (the "2018 authorization"). The Company completed the 2018 authorization in May 2022, acquiring a total of 19,915,370 shares. In December 2021, the Company's Board of Directors authorized the additional repurchase of up to $2.5 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders (the "2021 authorization"). As of December 31, 2019,2022, a total of 6,753,1646,743,883 shares have been repurchased under the February 20182021 authorization for $635 million. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
In fourth quarter 2021, the Company entered into an accelerated share repurchase program ("2021 ASR") to purchase $500 million of the Company's common stock under the 2018 authorization. In exchange for upfront payment totaling $500 million, the financial institutions committed to deliver shares during the 2021 ASR's purchase period, which was settled in first quarter 2022. The total number of shares ultimately delivered was determined at the end of the applicable purchase period based on the volume-weighted average price of the Company's stock during the term of the 2021 ASR, less a discount. Approximately 80 percent of the expected shares repurchased under the 2021 ASR were delivered in fourth quarter 2021 and the remaining shares were delivered in first quarter 2022.
In second quarter 2022, the Company entered into an accelerated share repurchase program ("2022 ASR") to purchase $500 million of the Company's common stock under the Board approved authorizations. In exchange for upfront payment totaling $500 million, the financial institutions committed to deliver shares during the 2022 ASR's purchase period, which was settled in third quarter 2022. The total amountnumber of $573 million. shares ultimately delivered was determined at the end of the applicable purchase period based on the volume-weighted average price of the Company's stock during the term of the 2022 ASR, less a discount. During 2019,2022, the Company repurchased a total10,710,259 shares of 4,282,409 sharescommon stock for a total cost$1,102 million, which included $100 million from the settlement of approximately $325 million.the 2021 ASR.
The Board of Directors has declared a cash dividend of $0.66$0.79 per share during the first quarter of 2020,2023, payable on April 3, 202010, 2023 to stockholders of record on March 16, 2020.15, 2023. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
INFLATION
In recent years, general economic2022, the Company experienced rapid, broad-based inflation has not had aacross its portfolio, including higher raw material adverse impact on Eastman'sand energy costs and higher distribution costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy prices and costs to continue and the Company will continue to pursue pricing and hedging strategies and ongoing cost control initiatives to offset the effects. For additional information, see "Risk Factors" and "Summary by Operating Segments" in this MD&A, and Note 9,10, "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 1, "Significant Accounting Policies", to Eastman'sthe 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
OUTLOOK
In 2020, management expects adjusted EPS to be between $7.20 to $7.60 and free cash flow to be between $1.0 billion to $1.1 billion. These expectations assume:
earnings to benefit from higher sales volume due to increased new business revenue, less market and customer inventory destocking, and stable growth in some end-markets, actions to reduce operating costs by $20 million to $40 million, and lower pension and depreciation costs;
earnings to be negatively impacted by lower product margins in the CI segment and adhesive resins, tire additives, and animal nutrition products in the AFP segment, higher variable compensation costs, and a stronger U.S. dollar;
interest expense of approximately $215 million;
the full-year effective tax rate on reported earnings before income tax to be similar to 2019;
depreciation and amortization of approximately $560 million;
capital expenditures between $450 million and $475 million;
debt reduction greater than $400 million; and
continued share repurchases.
The Company's 2020 financial results forecasts do not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected full-year 2020 earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts. These forecasts also do not include the possible impact on business and financial results of the recent coronavirus outbreak, including negative impact on overall business and market conditions; Eastman manufacturing sites and distribution, sales, and service facilities closure or reduced availability, including for employee health and safety; and Eastman products market demand weakness and supply chain disruption.
See "Risk Factors" below.
RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the most significantmaterial known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward-Looking Statements". The risks described below should be carefully considered, some of which have manifested and any of which may occur in the future, in addition to the other information contained in this Annual Report before making an investment decision with respect to any of the Company's securities. The following risk factors are not necessarily presented in the order of importance. In addition, 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. This and other related disclosures made by the Company in this Annual Report, and elsewhere from time to time, represent 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, in Company press releases, or in other public Company presentations) on related subjects.
Risks Related to Global Economy and Industry Conditions
Continued uncertain conditions in the global economy, labor market, and the financial markets could negatively impact the Company.
The Company's business and operating results were affectedimpacted by the impact of the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affectedimpacted the global economy. ContinuedSimilarly, as a company which operates and sells products worldwide, uncertainty in the global economy, labor market, and global capital markets (including impacts from inflation, higher interest rates, the continuing COVID-19 pandemic and subsequent changes and disruptions in business, political, and economic conditions) have impacted and may adversely affect Eastman'simpact demand for and the costs of certain Eastman products and accordingly results of operations, and may adversely impact the Company's financial condition and cash flows. In addition, the Company'sflows and ability to access the credit and capital markets under attractive rates and terms could be constrained, which mayand negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
Both domestic and international markets experienced significant inflationary pressures in 2022 and inflation rates in the U.S., as well as in other countries in which the Company operates, are currently expected to continue at elevated levels for the near-term. In addition, the Federal Reserve in the U.S. and other central banks in various countries have raised, and may again raise, interest rates in response to concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. Interest rate increases or other government actions taken to reduce inflation could also result in recessionary pressures in many parts of the world.
Volatility in costs for strategic raw material and energy commodities or disruption in the supply and transportation of these commodities and in transportation of company products could adversely affectimpact the Company's financial results.
Eastman is reliant on certain strategic raw material and energy commodities for its operations and utilizes certain risk management tools including hedging, as appropriate, to mitigate market fluctuations in raw material and energy costs. These risk mitigation measures do not eliminate all exposure to market fluctuationsThe cost and may limit the Company from fully benefiting from loweravailability of these raw material costsmaterials and conversely, offset the impact of higher raw material costs. In addition,energy commodities can be adversely impacted by factors such as business and economic conditions, anomalous severe weather events, natural disasters, pandemic illness (including the recent coronavirus outbreak),global COVID-19 pandemic, plant interruptions, supply chain and transportation disruptions (related to the global COVID-19 pandemic and otherwise), changes in laws or regulations, levels of unemployment and inflation, currency exchange rates, higher interest rates, war or other outbreak of hostilities or terrorism (such as the ongoing Russia/Ukraine conflict), 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.supply chain infrastructure.
Loss or financial weakness of any of the Company's largest customers could adversely affect the Company's financial results.
Although Eastman has an extensive customer base, loss of, or material financial weakness of, certain of the Company's largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced. No assurances can be made that the Company would be able to regain or replace any lost customers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to these inflationary pressures, the Company has experienced certain supply chain challenges impacting its ability to secure certain raw materials and timely distribute products to customers. For example, the global supply chain disruptions have impacted the availability of certain raw materials such as ammonia, methanol, and toluene. To mitigate the effects of these and other supply chain disruptions, the Company has implemented multifaceted sourcing, warehousing, and delivery strategies to focus on building resilient and redundant supply positions, and minimizing disruptions to customers by using alternate shipping methods to expedite delivery times. The Company's business is subjectgeographic footprint has also helped reduce exposure to operating risks common to chemical manufacturing businesses, including cyber security risks, anylocalized risks.
Prolonged periods of which could disrupt manufacturing operationsheightened inflation or related infrastructure and adversely affect results of operations.
As a global specialty chemicals manufacturing company, Eastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, dischargescontinued 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 infrastructureworsening supply chain disruptions could have a material, adverse effect on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness (including the recent coronavirus outbreak), changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber attacks and breaches of its computer information systems, although none of these have had a material adverse effect on the Company's operations. While the Company remains committed to managing cyber related risk, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. Unplanned disruptions of manufacturing operations or related infrastructure could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's financial performance and results of operations. As previously reported, manufacturing operations and earnings have been negatively impacted by the fourth quarter 2017 operational incident in the Kingsport manufacturing facility coal gasification operations area and the second quarter 2018 third-party supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by available and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed or current investments and projects.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's substantial global operations subject it to risks of doing business in other countries, including U.S. and non-U.S. trade relations, which could adversely affectimpact its business, financial condition, and results of operations.
More than half of Eastman's sales for 20192022 were to customers outside of North America. The Company expects sales from international markets to continue to represent a significant portion of its sales. Also, a significant portion of the Company's manufacturing capacity is located outside 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.jurisdictions including the unique geographic impacts of the global COVID-19 pandemic. Fluctuations in exchange rates may affectimpact product demand and may adversely affectimpact the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. orand foreign countries have imposed and may impose additional taxes or otherwise tax Eastman's foreign income or(see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Income Taxes" in Part II, Item 7 of this Annual Report). For example, the Organization for Economic Development has proposed the introduction of a global minimum tax. While details around the timing and impact of a global minimum tax are uncertain, if enacted, the Company may experience an increase in tax obligations in jurisdictions it conducts business.
The U.S. and foreign countries may also adopt or increase restrictions on foreign trade or investment, including currency exchange controls, tariffs or other taxes, or limitations on imports or exports (including recent and proposed changes in U.S. trade policy and resulting retaliatory actions by other countries, including China, which have recently reduced and which may increasingly reduce demand for and increase costs of impacted products or result in U.S.-based trade counterparties limiting trade with U.S.-based companies or non-U.S. customers limiting their purchases from U.S.-based companies). 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 U.S. 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 (including the U.K. departure from the European Union, also known as "Brexit") 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 and mitigate 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 effectimpact on Eastman's business, financial condition, or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Risks Related to the Company's Business and Strategy
The Company's business is subject to operating risks common to chemical and specialty materials manufacturing businesses, including cybersecurity risks, any of which could disrupt manufacturing operations or related infrastructure and adversely impact results of operations.
As a global specialty materials company, Eastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation and supply chain interruptions, remediation, chemical spills, and discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse impact on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as supply chain disruption, computer or equipment malfunction at third-party service providers, natural disasters, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber-attacks, or breakdown or degradation of transportation and supply chain infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber-attacks and breaches of its computer information systems, although none of these have had a material adverse impact on the Company's operations and financial results. While the Company remains committed to managing cyber related risk, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material impact on operations (see "Business - Eastman Chemical Company General Information - Information Security" in Part I, Item 1 of this Annual Report). Unplanned disruptions of manufacturing operations or related infrastructure could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's results of operations.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives, such as Eastman's sustainable innovation initiatives which aim to develop a more "circular economy." These and other growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by availability and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will receive necessary governmental or regulatory approvals, or result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively impact the returns from any proposed or current investments and projects.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Significant acquisitions or divestitures could 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 and divestitures have been and continue to be a part of Eastman's strategy, acquisitions of large companies and acquisitions or divestitures of businesses 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 possibility that the actual and projected future financial performance of the acquired or remaining business may be significantly worse than expected and that, in the case of an acquired business and as reported in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Impairment of Long-Lived Assets - Goodwill" in Part II, Item 7 of this Annual Report, the carrying values of goodwill, indefinite-lived intangible assets, and certain assets from acquisitions may, as has been the case for certain acquired assets, be impaired resulting in non-cash charges to future earnings and, in the case of a divested business, the divestiture could reduce Eastman's revenue and, potentially, margins and increase its costs and liabilities in the form of transition costs and retained liabilities from the operations divested, including environmental liabilities; 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 integration of the new business or specific assets or product lines or separation of the divested business or specific assets or product lines resulting in a loss of focus on the successful operation of the Company's legacy businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business or specific assets or product lines into Eastman or separate any divested business or specific assets or product lines from Eastman, or that the integration or separation efforts will not achieve the expected benefits.
Risks Related to Regulatory Changes and Compliance
Legislative, regulatory, or voluntary actions, including associated with physical impacts of climate change, could increase the Company's future health, safety, and environmental compliance costs.
Eastman, and its facilities, and its businesses are subject to complex health, safety, and environmental laws, regulations, and related voluntary actions, both in the U.S. and internationally, which require and will continue to require significant expenditures to remain in compliance with such laws, regulations, and voluntary actions. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. For example, any amount accrued for environmental matters reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number of and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and actions, and testing requirements could result in higher costs. Specifically, while the Company's sustainability and "circular economy" innovation initiatives are sources of competitive strength (see "Business - Corporate Overview - Business Strategy - Circular Economy and Sustainability" in Part I, Item 1 of this Annual Report), future changes in legislation and regulation and related voluntary actions associated with physical impacts of climate change may increase the likelihood that the Company's manufacturing facilities will in the future be impacted by carbon requirements, regulation of greenhouse gas emissions, and energy policy, and may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct and indirect compliance costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions expose theor other costs or consequences including decreased demand for products related to carbon-based energy sources or increased demand for goods that result in lower emissions than competing products and reputational risk resulting from operations with greenhouse gas emissions. See "Business - Eastman Chemical Company to risksGeneral Information - Compliance With Environmental 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 and businesses (such as the previous acquisitions of Taminco Corporation and Solutia, Inc.) 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 actual and projected future financial performance of the acquired business may be significantly worse than expected and that, as reported in "Critical Accounting Estimates - Impairment of Long-Lived Assets - Goodwill"Other Government Regulations" in Part II,I, Item 71 of this Annual Report, the carrying values of certain assets from acquisitions may be impaired resulting in charges to future earnings; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the new business resulting in a loss of focus on the successful operation of the Company's existing businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business into Eastman or that the integration efforts will not achieve the expected benefits.Report.
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.53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| | 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. To mitigate foreign currency risk, 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, the Company, from time to time, enters into non-derivative and 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, 2019,2022, 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 $74$50 million, with an additional $7$4 million exposure for each additional one percentage point adverse change in those foreign currency rates. At December 31, 2018, 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 $28 million, with an additional $3 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 January 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €150 million ($180 million) maturing January 2021 and €266 million ($320 million) maturing August 2022.
In October 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €165 million ($190 million) maturing January 2024, €104 million ($120 million) maturing March 2025, and €165 million ($190 million) maturing February 2027.
At December 31, 2019,2022, a 10 percent fluctuation in the euro currency rate would have had a $235 million impact on the designated net investment values in the foreign subsidiaries. At December 31, 2018, a 10 percent fluctuation in the euro currency rate would have had a $240$196 million impact on the designated net investment values in the foreign subsidiaries. As a result of the designation of the euro-denominated borrowings and designated cross-currency interest rate swaps as hedges of the net investments, foreign currency translation gains and losses on the borrowings and designated cross-currency interest rate swaps 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 in Part II, Item 8 of this Annual Report. Therefore, 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 or the foreign currency change in the designated cross-currency interest rate swaps.
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 enters into derivative transactions, from time to time, to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period. At December 31, 2019 and December 31, 2018,2022, 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 $9$3 million, and $25 million, respectively, with an additional $1 million and $3 million$300 thousand of exposure at December 31, 2019 and December 31, 2018, respectively,2022 for each one percentage point move in closing price thereafter.
Interest Rate Risk
Eastman is exposed to interest rate risk 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 regular operational and financing strategies. The Company had $825 million variable interest rate borrowings (including credit facilityterm loan borrowings and commercial paper borrowings) of $171 million and $293 million at December 31, 2019 and 2018, respectively. These borrowings represented approximately 3 percent and 5 percent of total outstanding debt and bore weighted average interest rates of 2.03 percent and 2.53 percent at December 31, 2019 and 2018, respectively. A hypothetical 10 percent increase in the average interest rate applicable to these borrowings would have no material impact on the annualized interest expense as of December 31, 2019 and change annualized interest expense by approximately $1 million as of December 31, 2018.2022.
Eastman may enter into interest rate swaps, collars, or similar instruments with the objective of reducing interest rate volatility relating to the Company's borrowing costs. As of both December 31, 2019 and 2018,2022, the Company had an interest rate swapswaps outstanding with a notional valuevalues of $75 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 of the interest rate swap hedging the interest rate risk on the 3.8% bonds maturing March 2025 and the interest rate swap hedging the variability in interest rates for long-term debt issuances was $1$5 million as of both December 31, 2019 and December 31, 2018.2022.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | | 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"). 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. PricewaterhouseCoopers LLP and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with PricewaterhouseCoopers LLP and Eastman's Director of 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. EspelandWilliam T. McLain, Jr. | | Mark J. Costa | | Curtis E. EspelandWilliam T. McLain, Jr. | | Chief Executive Officer | | ExecutiveSenior Vice President and | | | Chief Financial Officer | February 26, 202015, 2023 | | February 26, 202015, 2023 |
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 and its subsidiaries (the "Company") as of December 31, 20192022 and 2018,2021, and the related consolidated statements of earnings, comprehensive income and retained earnings, and of cash flows for each of the three years in the period ended December 31, 2019,2022, 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, 2019,2022, 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in 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, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company'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 Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our 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 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 consolidated financial 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial 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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Annual Goodwill Impairment Assessment - Crop Protection Reporting Unit
As described in Note 4Notes 1 and 5 to the consolidated financial statements, the Company's consolidated goodwill balance was $4.4 billion$3,664 million as of December 31, 2019.The Company2022, and the goodwill associated with the Additives & Functional Products segment was $1,601 million. Management conducts testing of goodwill for impairment annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company usesManagement used an income approach, and appliesspecifically a discounted cash flow model, in testing the carrying value of goodwill forof each reporting unit. Keyunit for impairment. As disclosed by management, key assumptions and estimates used in the Company's goodwill impairment testing included projections of revenues and earnings before interest and income taxes ("EBIT") determined using the Company's annual multi-year strategic plan,(EBIT), the estimated weighted average cost of capital ("WACC"),(WACC) and a projected long-term growth rate. As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products ("AFP") operating segment). The Company recognized a goodwill impairment of $45 million in the crop protection reporting unit. The impairment was primarily due to the impact of recent regulatory changes in the European Union on current period and forecasted revenue and EBIT and a decrease in the long-term growth rate. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment offor a reporting unit in the crop protection reporting unitAdditives & Functional Products segment is a critical audit matter are there was(i) the significant judgment by management when developing the fair value measurementestimate of the reporting unit. This in turn led tounit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating the audit evidence supporting management'smanagement’s significant assumptions includingrelated to projections of revenuerevenues and EBIT, determined using the Company's annual multi-year strategic plan, the estimated WACC, and the projected long-term growth rate. In addition,rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's goodwill impairment assessment, including controls over the valuation of a reporting unit in the Company's reporting units.Additives & Functional Products segment. These procedures also included, among others (i) testing management's process for developing the fair value estimate of the crop protectiona reporting unit in the Additives & Functional Products segment, (ii) evaluating the appropriateness of the discounted cash flow model, (iii) testing the completeness and accuracy and relevance of the underlying data used in the model, and (iv) evaluating the significant assumptions used by management includingrelated to projections of revenuerevenues and EBIT, determined using the Company's annual multi-year strategic plan, the estimated WACC, and the projected long-term growth rate. Evaluating management's assumptions related the impactto projections of recent regulatory changes in the European Union on current period and forecasted revenuerevenues and EBIT and the long-termprojected long- term growth rate involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external industry reports, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the evaluationappropriateness of the Company's discounted cash flow model includingand (ii) the evaluationreasonableness of the WACC.estimated WACC significant assumption.
/s/ PricewaterhouseCoopers LLP Cincinnati, OHCharlotte, North Carolina
February 15, 2023 February 26, 2020
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) | 2022 | | 2021 | | 2020 | | Sales | $ | 10,580 | | | $ | 10,476 | | | $ | 8,473 | | | Cost of sales | 8,443 | | | 7,976 | | | 6,498 | | | Gross profit | 2,137 | | | 2,500 | | | 1,975 | | | Selling, general and administrative expenses | 726 | | | 795 | | | 654 | | | Research and development expenses | 264 | | | 254 | | | 226 | | | Asset impairments and restructuring charges, net | 52 | | | 47 | | | 227 | | | Other components of post-employment (benefit) cost, net | (101) | | | (412) | | | 119 | | | Other (income) charges, net | (6) | | | (17) | | | 8 | | | Loss on divested businesses | 43 | | | 552 | | | — | | | Earnings before interest and taxes | 1,159 | | | 1,281 | | | 741 | | | Net interest expense | 182 | | | 198 | | | 210 | | | Early debt extinguishment costs | — | | | 1 | | | 1 | | | Earnings before income taxes | 977 | | | 1,082 | | | 530 | | | Provision for income taxes | 181 | | | 215 | | | 41 | | | Net earnings | 796 | | | 867 | | | 489 | | | Less: Net earnings attributable to noncontrolling interest | 3 | | | 10 | | | 11 | | | Net earnings attributable to Eastman | $ | 793 | | | $ | 857 | | | $ | 478 | | | | | | | | | Basic earnings per share attributable to Eastman | $ | 6.42 | | | $ | 6.35 | | | $ | 3.53 | | | Diluted earnings per share attributable to Eastman | $ | 6.35 | | | $ | 6.25 | | | $ | 3.50 | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions, except per share amounts) | 2019 | | 2018 | | 2017 | | Sales | $ | 9,273 |
| | $ | 10,151 |
| | $ | 9,549 |
| | Cost of sales | 7,039 |
| | 7,672 |
| | 7,186 |
| | Gross profit | 2,234 |
| | 2,479 |
| | 2,363 |
| | Selling, general and administrative expenses | 691 |
| | 721 |
| | 729 |
| | Research and development expenses | 234 |
| | 235 |
| | 227 |
| Asset impairments and restructuring charges, net
| 126 |
| | 45 |
| | 8 |
| | Other components of post-employment (benefit) cost, net | 60 |
| | (21 | ) | | (135 | ) | | Other (income) charges, net | 3 |
| | (53 | ) | | 4 |
| | Earnings before interest and taxes | 1,120 |
| | 1,552 |
| | 1,530 |
| | Net interest expense | 218 |
| | 235 |
| | 241 |
| | Early debt extinguishment and other related costs | — |
| | 7 |
| | — |
| | Earnings before income taxes | 902 |
| | 1,310 |
| | 1,289 |
| | Provision for (benefit from) income taxes | 140 |
| | 226 |
| | (99 | ) | | Net earnings | 762 |
| | 1,084 |
| | 1,388 |
| | Less: Net earnings attributable to noncontrolling interest | 3 |
| | 4 |
| | 4 |
| | Net earnings attributable to Eastman | $ | 759 |
| | $ | 1,080 |
| | $ | 1,384 |
| | | |
| | |
| | |
| | Basic earnings per share attributable to Eastman | $ | 5.52 |
| | $ | 7.65 |
| | $ | 9.56 |
| | Diluted earnings per share attributable to Eastman | $ | 5.48 |
| | $ | 7.56 |
| | $ | 9.47 |
|
| | | | Comprehensive Income | | | | | | Comprehensive Income | | | Net earnings including noncontrolling interest | $ | 762 |
| | $ | 1,084 |
| | $ | 1,388 |
| Net earnings including noncontrolling interest | $ | 796 | | | $ | 867 | | | $ | 489 | | | Other comprehensive income (loss), net of tax: | | | | | | Other comprehensive income (loss), net of tax: | | | Change in cumulative translation adjustment | 45 |
| | (13 | ) | | 85 |
| Change in cumulative translation adjustment | 7 | | | 56 | | | (29) | | | Defined benefit pension and other postretirement benefit plans: | | | | | | Defined benefit pension and other postretirement benefit plans: | | | Prior service credit arising during the period | | Prior service credit arising during the period | — | | | — | | | 9 | | | Amortization of unrecognized prior service credits included in net periodic costs | (29 | ) | | (30 | ) | | (27 | ) | Amortization of unrecognized prior service credits included in net periodic costs | (27) | | | (28) | | | (28) | | | Derivatives and hedging: | | | | | | Derivatives and hedging: | | | Unrealized gain (loss) during period | (20 | ) | | 22 |
| | 7 |
| Unrealized gain (loss) during period | 53 | | | 66 | | | (34) | | | Reclassification adjustment for (gains) losses included in net income, net | 15 |
| | (15 | ) | | 7 |
| Reclassification adjustment for (gains) losses included in net income, net | (56) | | | (3) | | | 23 | | | Total other comprehensive income (loss), net of tax | 11 |
| | (36 | ) | | 72 |
| Total other comprehensive income (loss), net of tax | (23) | | | 91 | | | (59) | | | Comprehensive income including noncontrolling interest | 773 |
| | 1,048 |
| | 1,460 |
| Comprehensive income including noncontrolling interest | 773 | | | 958 | | | 430 | | | Less: Comprehensive income attributable to noncontrolling interest | 3 |
| | 4 |
| | 4 |
| Less: Comprehensive income attributable to noncontrolling interest | 3 | | | 10 | | | 11 | | | Comprehensive income attributable to Eastman | $ | 770 |
| | $ | 1,044 |
| | $ | 1,456 |
| Comprehensive income attributable to Eastman | $ | 770 | | | $ | 948 | | | $ | 419 | | | Retained Earnings | | | | | | Retained Earnings | | | | | | | Retained earnings at beginning of period | $ | 7,573 |
| | $ | 6,802 |
| | $ | 5,721 |
| Retained earnings at beginning of period | $ | 8,557 | | | $ | 8,080 | | | $ | 7,965 | | | Cumulative effect adjustment resulting from adoption of new accounting standards | (20 | ) | | 16 |
| | — |
| | | | Net earnings attributable to Eastman | 759 |
| | 1,080 |
| | 1,384 |
| Net earnings attributable to Eastman | 793 | | | 857 | | | 478 | | | Cash dividends declared | (347 | ) | | (325 | ) | | (303 | ) | Cash dividends declared | (377) | | | (380) | | | (363) | | | Retained earnings at end of period | $ | 7,965 |
| | $ | 7,573 |
| | $ | 6,802 |
| Retained earnings at end of period | $ | 8,973 | | | $ | 8,557 | | | $ | 8,080 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION | | | | | | | | | | | December 31, | | December 31, | | (Dollars in millions, except per share amounts) | 2019 | | 2018 | | Assets | | | | | Current assets | | | | | Cash and cash equivalents | $ | 204 |
| | $ | 226 |
| | Trade receivables, net of allowance for doubtful accounts | 980 |
| | 1,154 |
| | Miscellaneous receivables | 395 |
| | 329 |
| | Inventories | 1,662 |
| | 1,583 |
| | Other current assets | 80 |
| | 73 |
| | Total current assets | 3,321 |
| | 3,365 |
| | Properties | | | | | Properties and equipment at cost | 12,904 |
| | 12,731 |
| | Less: Accumulated depreciation | 7,333 |
| | 7,131 |
| | Net properties | 5,571 |
| | 5,600 |
| | Goodwill | 4,431 |
| | 4,467 |
| | Intangible assets, net of accumulated amortization | 2,011 |
| | 2,185 |
| | Other noncurrent assets | 674 |
| | 378 |
| | Total assets | $ | 16,008 |
| | $ | 15,995 |
| | Liabilities and Stockholders' Equity | | | | | Current liabilities | | | | | Payables and other current liabilities | $ | 1,618 |
| | $ | 1,608 |
| | Borrowings due within one year | 171 |
| | 243 |
| | Total current liabilities | 1,789 |
| | 1,851 |
| | Long-term borrowings | 5,611 |
| | 5,925 |
| | Deferred income tax liabilities | 915 |
| | 884 |
| | Post-employment obligations | 1,016 |
| | 925 |
| | Other long-term liabilities | 645 |
| | 532 |
| | Total liabilities | 9,976 |
| | 10,117 |
| | Commitments and contingencies (Note 11) | | | | | Stockholders' equity | | | | | Common stock ($0.01 par value per share – 350,000,000 shares authorized; shares issued – 219,638,646 and 219,140,523 for 2019 and 2018, respectively) | 2 |
| | 2 |
| | Additional paid-in capital | 2,105 |
| | 2,048 |
| | Retained earnings | 7,965 |
| | 7,573 |
| | Accumulated other comprehensive loss | (214 | ) | | (245 | ) | | | 9,858 |
| | 9,378 |
| | Less: Treasury stock at cost (83,696,398 shares for 2019 and 79,413,989 shares for 2018) | 3,900 |
| | 3,575 |
| | Total Eastman stockholders' equity | 5,958 |
| | 5,803 |
| | Noncontrolling interest | 74 |
| | 75 |
| | Total equity | 6,032 |
| | 5,878 |
| | Total liabilities and stockholders' equity | $ | 16,008 |
| | $ | 15,995 |
|
| | | | | | | | | | | | | December 31, | | December 31, | | (Dollars in millions, except per share amounts) | 2022 | | 2021 | | Assets | | | | | Current assets | | | | | Cash and cash equivalents | $ | 493 | | | $ | 459 | | | Trade receivables, net of allowance for credit losses | 957 | | | 1,091 | | | Miscellaneous receivables | 320 | | | 489 | | | Inventories | 1,894 | | | 1,504 | | | Other current assets | 114 | | | 96 | | | Assets held for sale | — | | | 1,007 | | | Total current assets | 3,778 | | | 4,646 | | | Properties | | | | | Properties and equipment at cost | 12,942 | | | 12,680 | | | Less: Accumulated depreciation | 7,782 | | | 7,684 | | | Net properties | 5,160 | | | 4,996 | | | Goodwill | 3,664 | | | 3,641 | | | Intangible assets, net of accumulated amortization | 1,210 | | | 1,362 | | | Other noncurrent assets | 855 | | | 874 | | | Total assets | $ | 14,667 | | | $ | 15,519 | | | Liabilities and Stockholders' Equity | | | | | Current liabilities | | | | | Payables and other current liabilities | $ | 2,125 | | | $ | 2,133 | | | Borrowings due within one year | 1,126 | | | 747 | | | Liabilities held for sale | — | | | 91 | | | Total current liabilities | 3,251 | | | 2,971 | | | Long-term borrowings | 4,025 | | | 4,412 | | | Deferred income tax liabilities | 671 | | | 810 | | | Post-employment obligations | 628 | | | 811 | | | Other long-term liabilities | 856 | | | 727 | | | Total liabilities | 9,431 | | | 9,731 | | | Commitments and contingencies (Note 12) | | | | | Stockholders' equity | | | | | Common stock ($0.01 par value per share – 350,000,000 shares authorized; shares issued – 222,348,557 and 221,809,309 for 2022 and 2021, respectively) | 2 | | | 2 | | | Additional paid-in capital | 2,315 | | | 2,187 | | | Retained earnings | 8,973 | | | 8,557 | | | Accumulated other comprehensive loss | (205) | | | (182) | | | 11,085 | | | 10,564 | | | Less: Treasury stock at cost (103,602,488 and 92,892,229 shares for 2022 and 2021, respectively) | 5,932 | | | 4,860 | | | Total Eastman stockholders' equity | 5,153 | | | 5,704 | | | Noncontrolling interest | 83 | | | 84 | | | Total equity | 5,236 | | | 5,788 | | | Total liabilities and stockholders' equity | $ | 14,667 | | | $ | 15,519 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 |
| 2018 |
| 2017 | | Operating activities | | | | | | | Net earnings | $ | 762 |
| | $ | 1,084 |
| | $ | 1,388 |
| | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | Depreciation and amortization | 611 |
| | 604 |
| | 587 |
| | Mark-to-market pension and other postretirement benefit plans (gain) loss, net | 143 |
| | 99 |
| | (21 | ) | | Asset impairment charges | 72 |
| | 39 |
| | 1 |
| | Early debt extinguishment and other related costs | — |
| | 7 |
| | — |
| | Gains from sale of assets and businesses | — |
| | (4 | ) | | (3 | ) | | Gain from property insurance | — |
| | (65 | ) | | — |
| | Provision for (benefit from) deferred income taxes | 23 |
| | (51 | ) | | (394 | ) | | Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | | | (Increase) decrease in trade receivables | 170 |
| | 16 |
| | (53 | ) | | (Increase) decrease in inventories | (80 | ) | | (224 | ) | | (71 | ) | | Increase (decrease) in trade payables | (27 | ) | | 90 |
| | 123 |
| | Pension and other postretirement contributions (in excess of) less than expenses | (119 | ) | | (152 | ) | | (115 | ) | | Variable compensation (in excess of) less than expenses | 38 |
| | 55 |
| | 71 |
| | Other items, net | (89 | ) | | 45 |
| | 144 |
| | Net cash provided by operating activities | 1,504 |
|
| 1,543 |
|
| 1,657 |
| | Investing activities | | | | | | | Additions to properties and equipment | (425 | ) | | (528 | ) | | (649 | ) | | Proceeds from property insurance | — |
| | 65 |
| | — |
| | Proceeds from sale of assets and businesses | — |
| | 5 |
| | 14 |
| | Acquisitions, net of cash acquired | (48 | ) | | (3 | ) | | (4 | ) | | Other items, net | (7 | ) | | (2 | ) | | (4 | ) | | Net cash used in investing activities | (480 | ) |
| (463 | ) |
| (643 | ) | | Financing activities | | | | | | | Net increase (decrease) in commercial paper and other borrowings | (70 | ) | | (146 | ) | | (19 | ) | | Proceeds from borrowings | 460 |
| | 1,604 |
| | 675 |
| | Repayment of borrowings | (760 | ) | | (1,774 | ) | | (1,025 | ) | | Dividends paid to stockholders | (343 | ) | | (318 | ) | | (296 | ) | | Treasury stock purchases | (325 | ) | | (400 | ) | | (350 | ) | | Other items, net | (5 | ) | | (6 | ) | | 9 |
| | Net cash used in financing activities | (1,043 | ) |
| (1,040 | ) |
| (1,006 | ) | | Effect of exchange rate changes on cash and cash equivalents | (3 | ) |
| (5 | ) |
| 2 |
| | Net change in cash and cash equivalents | (22 | ) | | 35 |
| | 10 |
| | Cash and cash equivalents at beginning of period | 226 |
| | 191 |
| | 181 |
| | Cash and cash equivalents at end of period | $ | 204 |
|
| $ | 226 |
|
| $ | 191 |
|
| | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Operating activities | | | | | | | Net earnings | $ | 796 | | | $ | 867 | | | $ | 489 | | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | Depreciation and amortization | 477 | | | 538 | | | 574 | | | Mark-to-market pension and other postretirement benefit plans (gain) loss, net | 19 | | | (267) | | | 240 | | | Asset impairment charges | — | | | 16 | | | 146 | | | Early debt extinguishment costs | — | | | 1 | | | 1 | | | Loss on sale of assets | 15 | | | — | | | — | | | | | | | | | Loss on divested businesses | 43 | | | 552 | | | — | | | Provision for (benefit from) deferred income taxes | (136) | | | (38) | | | (111) | | | Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | | | (Increase) decrease in trade receivables | 93 | | | (281) | | | (31) | | | (Increase) decrease in inventories | (430) | | | (389) | | | 291 | | | Increase (decrease) in trade payables | 60 | | | 554 | | | (100) | | | Pension and other postretirement contributions (in excess of) less than expenses | (149) | | | (185) | | | (136) | | | Variable compensation payments (in excess of) less than expenses | (103) | | | 162 | | | 87 | | | Other items, net | 290 | | | 89 | | | 5 | | | Net cash provided by operating activities | 975 | | | 1,619 | | | 1,455 | | | Investing activities | | | | | | | Additions to properties and equipment | (611) | | | (555) | | | (383) | | | | | | | | | | | | | | | Proceeds from sale of businesses | 998 | | | 667 | | | — | | | Acquisitions, net of cash acquired | (1) | | | (114) | | | (1) | | | | | | | | | Additions to capitalized software | (13) | | | (23) | | | (13) | | | Other items, net | 19 | | | (4) | | | 3 | | | Net cash provided by (used in) investing activities | 392 | | | (29) | | | (394) | | | Financing activities | | | | | | | Net increase (decrease) in commercial paper and other borrowings | 326 | | | (50) | | | (121) | | | Proceeds from borrowings | 500 | | | — | | | 249 | | | Repayment of borrowings | (750) | | | (300) | | | (435) | | | Dividends paid to stockholders | (381) | | | (375) | | | (358) | | | Treasury stock purchases | (1,002) | | | (1,000) | | | (60) | | | | | | | | | Other items, net | (14) | | | 35 | | | 21 | | | Net cash used in financing activities | (1,321) | | | (1,690) | | | (704) | | | Effect of exchange rate changes on cash and cash equivalents | (12) | | | (5) | | | 3 | | | Net change in cash and cash equivalents | 34 | | | (105) | | | 360 | | | Cash and cash equivalents at beginning of period | 459 | | | 564 | | | 204 | | | Cash and cash equivalents at end of period | $ | 493 | | | $ | 459 | | | $ | 564 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES | | 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.presentation, including sales revenue, earnings before interest and taxes ("EBIT"), assets, depreciation and amortization expense, and capital expenditures related to the divested rubber additives product lines and related assets and technology and the adhesives resins business. See Note 20, "Segment and Regional Sales Information", for more information.
Recently Adopted Accounting Standards
Accounting Standards Update ("ASU") 2016-02 Leases: 2021-05 Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments: On January 1, 2019,2022, Eastman adopted this standard, and related releases, under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impactupdate which is a part of the new standardFinancial Accounting Standards Board's ("FASB") post-implementation review of this Topic. The update provides that lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both: the lease would have been classified as a sales-type lease or a direct financing lease and the lessor would have otherwise recognized a day-one loss. The adoption did not result in an impact to retained earnings. Upon adoption, operating right-to-use assets and lease liabilities were $219 million. The new standard establishes two types of leases: finance and operating. Both finance and operating leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Consolidated Statement of Financial Position. For further information, see Note 11, "Leases and Other Commitments".
ASU 2018-02 Income Statement - Reporting Comprehensive Income: On January 1, 2019, Eastman adopted this standard in the current period resulting in the reclassification of $20 million of stranded tax expense from accumulated other comprehensive income (loss) ("AOCI") to retained earnings as a result of the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI.
ASU 2018-15 Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: On January 1, 2019, Eastman adopted this standard prospectively which did not result in a materialsignificant impact on the Company's financial statements and related disclosures.
ASU 2018-16 Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes:2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance: On January 1, 2019,2022, Eastman adopted prospectively this standard prospectivelyamendment which requires business entities that account for qualifying newtransactions with a government by applying a grant or redesignated hedging relationships. Management doescontribution model by analogy (for example, a grant model within International Financial Reporting Standards) to provide annual disclosures about government assistance recorded during the period. The adoption did not expect the adoption of this standard will materiallyhave a significant impact on the Company's financial statements and related disclosures.
Accounting Standards Issued But Not Adopted as of December 31, 20192022
ASU 2016-13 Financial Instruments - Credit Losses: 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with CustomersIn June 2016, the Financial Accounting Standards Board ("FASB") issued this standard relating to credit losses and subsequent related releases.: The amendments require a financial asset (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 standard is effective for annual reporting periods beginning after December 15, 2019. The new standard application is mixed among the various elements that include modified retrospective and prospective transition methods. Management does not expect that changes in its accounting required by the new standard will materially impact the Company's financial statements and related disclosures.
ASU 2018-13 Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued this update in October 2021, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 Revenue from Contracts with Customers, as a part of its disclosure framework project to improveif it had originated the effectiveness of disclosures in the notes to financial statements.contracts. The primary changesupdate also provides certain practical expedients for acquirers and is applicable to Eastmanall contract assets and liabilities within the scope of Topic 606. The expedients are as follows: "provides relief for contracts that have been previously modified before the acquisition date" and "relief for situations in this update arewhich the disclosures of fair value levels, assessment thereof, and transfers between those levels.acquirer does not have the appropriate data or expertise to analyze the historical periods in which the contract was entered into". This standardguidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. Certain disclosure amendments are2022, including interim periods within those years. Adoption is on a prospective basis to be applied prospectively for onlybusiness combinations occurring on or after the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented.initial application. Management does not expect that changes required by the new standard will materiallyhave a significant impact on the Company's financial statements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU 2018-14 Retirement Benefits - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans:2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method In August 2018, the: The FASB issued this update as a partin March 2022. This ASU clarifies the guidance in Accounting Standards Codification ("ASC") 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets. This ASU amends the guidance in ASU 2017-12 (released on August 28, 2017) that, among other things, established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the "portfolio layer" method and addresses feedback from stakeholders regarding its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary change impacting Eastman is the addition of disclosures related to significant gains and losses related to changes in the benefit obligation for the period and weighted-average interest crediting rates for cash balance plans.application. This standardguidance is effective for fiscal years endingbeginning after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all2022, including interim periods presented.within those years. Management does not expect that changes required by the new standard will materially impact the Company's related disclosures.
ASU 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers): In November 2018, the FASB issued clarification in regards to which contracts are accounted for under Topic 808 and Topic 606 as well as alignment of guidance between the two pronouncements. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Upon adoption, this update is to be applied retrospectively to the date of initial application of Topic 606. Management is currently evaluating thehave a significant impact on the Company's financial statements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS ASU 2019-01 Leases - Codification Improvements: 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage DisclosuresIn March 2019, the: The FASB issued this update in responseMarch 2022. This ASU updates the requirements for accounting for credit losses under ASC 326, eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40, and enhances creditors' disclosure requirements related to stakeholder inquiries regardingloan refinancings and restructurings for borrowers experiencing financial difficulty. This ASU also amends the new leasing standard.guidance on "vintage disclosures" to require disclosure of gross write-offs by year of origination. This standardguidance is effective for fiscal years beginning after December 15, 2019, and2022, including interim periods within those fiscal years. Upon adoption, this update is to be applied as ofManagement does not expect that changes required by the adoption date and under the same transition methodology of ASU 2016-02 Leases. Management is currently evaluating thenew standard will have a significant impact on the Company's financial statements and related disclosures.
ASU 2019-12 Income Taxes - Simplifying the Accounting for Income Taxes2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions: In December 2019, theThe FASB issued this update as partin June 2022, which states that when measuring the fair value of its initiativean asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to reduce complexity in accounting standards which removes certain exceptions and provides simplification to specific tax items.that determination is the unit of account for the asset or liability being measured at fair value. This standardguidance is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, beginning after December 15, 2020. Earlywith early adoption is permitted, including adoption in any interim period for which financial statementspermitted. Management does not expect that changes required by the new standard will have not yet been issued. Adoption methods vary based on the specific items impacted. Management is currently evaluating thea significant impact on the Company's financial statements and related disclosures.
ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations: The FASB issued this update in September 2022, which requires the buyer in a supplier finance program to disclose qualitative and quantitative information about the program. Required disclosures include information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. Management is currently evaluating the impact of the changes required by the new standard on the Company's financial statements and related disclosures.
ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848: The FASB issued this update in December 2022, which extends the temporary optional relief in accounting for the impact of reference rate reform under Topic 848 from December 31, 2022 to December 31, 2024. The amendments apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. This update was effective immediately upon issuance, with no impact on the Company's financial statements and related disclosures.
Revenue Recognition
On January 1, 2018, Eastman adopted ASU 2014-09 Revenue Recognition (ASC 606) under the modified retrospective method, such that revenue for all periods prior to January 1, 2018 continue to be reported under the previous standard, which resulted in an increase to retained earnings of $53 million after tax for products shipped but not delivered as of December 31, 2017.
Eastman recognizes revenue when performance obligations of the sale are satisfied. Eastman sells to customers through master sales agreements or standalone purchase orders. The majority of the Company's terms of sale have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when control has been transferred to the customer, generally at the time of shipment of products.
Eastman accounts for shipping and handling as activities to fulfill the promise to transfer the good and does not allocate revenue to those activities. All related shipping and handling costs are recognized at the time of shipment. Amounts collected for sales or other similar taxes are presented net of the related tax expense rather than presenting them as additional revenue. The incremental cost of obtaining a sales contract is recognized as a selling expense when incurred given the potential amortization period for such an asset is one year or less. The possible existence of a significant financing component within a sales contract is ignored when the time between cash collection and performance is less than one year. Finally, the Company does not disclose any unfulfilled obligations as customer purchase order commitments have an original expected duration of one year or less and no consideration from customers is excluded from the transaction price.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS The timing of Eastman's customer billings does not always match the timing of revenue recognition. When the Company is entitled to bill a customer in advance of the recognition of revenue, a contract liability is recognized. When the Company is not entitled to bill a customer until a period after the related recognition of revenue, a contract asset is recognized. Contract assets represent the Company's right to consideration for the exchange of goods under a contract but which are not yet billable to a customer for consignment inventory or pursuant to certain shipping terms. Contract liabilities were not material as of December 31, 2019 or December 31, 2018. Contract assets were $65$18 million and $62$14 million as of December 31, 20192022 and 2021, respectively, and are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Consolidated Statements of Financial Position. Contract assets were $93 million and $82 million as of December 31, 2018,2022 and 2021, respectively, and are included as a component of "Miscellaneous receivables" in the Consolidated Statements of Financial Position.
For additional information, see Note 19,20, "Segment and Regional Sales Information". NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension and other postretirement benefits 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 10,11, "Retirement Plans".
Environmental Costs
Eastman recognizes environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum undiscounted amount. This undiscounted amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs.
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged to earnings over the estimated useful life of the assets. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted.impacted in the period the estimate is changed. 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 and charged to "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
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 preventthe possibility of future contamination. The cost of operating and maintaining environmental control facilities is charged to expense"Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings, as incurred.
For additional information see Note 12,13, "Environmental Matters and Asset Retirement Obligations".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Share-Based Compensation
Eastman recognizes compensation expense in "Selling, general and administrative expense" in the financial statementsConsolidated Statements of Earnings, Comprehensive Income and Retained Earnings 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 17,18, "Share-Based Compensation Plans and Awards".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 15,16, "Asset Impairments and Restructuring Charges, Net".
Income Taxes
The provision for (benefit from) 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 provision for (benefit from) 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. The recoverability of the Company's deferred tax assets are evaluated each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize the Company's net deferred tax assets. 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 calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and management judgment. Eastman's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company recognizes incomehas evaluated these potential issues under the more-likely-than-not standard of the accounting literature. A tax positionsposition is recognized if it meets this standard and is measured at the largest amount of benefit that meet the more likelyhas a greater than not threshold50 percent likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. The Company accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet. The accrued interest related to unrecognized income tax positions and taxes resulting from the global intangible low-tax income are recorded as a component of the income tax provision.
In conjunction with its evaluation of the provisions of the Tax Reform Act, in 2018, the Company made an accounting policy election to account for taxes resulting from the global intangible low-tax income ("GILTI") as a component of the provision for income taxes.For additional information, see Note 8, "Income Taxes".
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, and readily marketable securities with original maturities of three months or less.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 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 AccountsCredit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Eastman maintains allowances for doubtful accounts for estimated credit losses, resulting from the inabilitywhich are developed at a market, country, and region level based on risk of its customers to make required payments.collection as well as current and forecasted economic conditions. The Company calculates the allowance based on an assessment of the risk inwhen the accounts receivable portfolio.is recognized. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accountscredit losses was $11$15 million at bothand $17 million as of December 31, 20192022 and 2018.2021, respectively. The Company does not enter into receivables of a long-term nature, also known as financing receivables, in the normal course of business.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories measured by the last-in, first-out ("LIFO") method are valued at the lower of cost or market and inventories measured by the first-in, first-out ("FIFO") method are valued at the lower of cost or net realizable value. Eastman determines the cost of most raw materials, work in process, and finished goods inventories in the United States and Switzerland by the LIFO method. The cost of all other inventories is determined by the average cost method, which approximates the FIFO method. The Company writes-down its inventories equal to the difference between the carrying value of inventory and the estimated market value or net realizable value based upon assumptions about future demand and market conditions.
For additional information, see Note 3, "Inventories".
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.in "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained 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.
For additional information, see Note 4, "Properties and Accumulated Depreciation". 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"Cost of sales.sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
For additional information, see Note 4, "Properties and Accumulated Depreciation".
Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset. Amortization expense is reported in cost"Cost of sales.sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
For additional information, see Note 4,5, "Goodwill and Other Intangible Assets".
NOTES TO THE AUDITED 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 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 properties and equipment and the review of definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value
Goodwill
Goodwill is the price that would be received to sell an asset determined as the residual of the purchase price over the fair value of identified assets and liabilities acquired in an orderly transaction between market participants.
Goodwill
a business combination. Eastman conducts testing of goodwill for impairment 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.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reporting unit's goodwill An impairment is considered to be impairedrecognized when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach, and appliesspecifically a discounted cash flow model, in testing the carrying value of goodwill forof each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and earnings before interest and taxes ("EBIT") determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC") and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.unit for impairment.
Indefinite-lived Intangible Assets
Eastman conducts testing of indefinite-lived intangible assets annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACCestimated weighted average cost of capital ("WACC") plus a risk premium.
For additional information, see Note 4,5, "Goodwill and Other Intangible Assets".
Leases
As noted above, On January 1, 2019, Eastman adopted ASU 2016-02 Leases. ForThere are two types of leases: financing and operating. Both types of leases have associated right-to-use assets and lease liabilities that are valued at the net present value of the lease payments and recognized on the Consolidated Statements of Financial Position. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used. The Company elected the accounting policy not to apply the recognition and elections,measurement requirements to short-term leases with a term of 12 months or less and do not include a bargain purchase option. Residual guarantee payments that become probable and estimable are recognized as rent expense over the remaining life of the applicable lease.
For lease accounting policies, see Note 11,12, "Leases and Other Commitments".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 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. The Company includes its share of earnings and losses of such investments in "Net earnings attributable to Eastman" and "Comprehensive income attributable to Eastman" located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and in "Total equity" located in the Consolidated Statements of Financial Position.
Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. Underunder the equity method of accounting, theseaccounting. These investments are included in "Other noncurrent assets" in the Consolidated Statements of Financial Position. The Company includes its share of earnings and losses of such investments in "Other (income) charges, net" located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
For additional information, see Note 6, "Equity Investments".
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 ongoing basis.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 derivative or non-derivative instruments designated as net investment hedges, the net change in the hedge instrument and item being hedged is reported as a component of "Cumulative translation adjustment" ("CTA") within AOCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Any hedge components excluded from the assessment of effectiveness are recognized in earnings, the initial value of the excluded component, using a systematic and rational method over the life of the hedging instrument. 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 9,10, "Derivative and Non-Derivative Financial Instruments".
Litigation and Contingent Liabilities
From time to time, 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.
Working Capital Management and Off Balance Sheet Arrangements
The Company has an off balance sheet, uncommitted accounts receivable factoring program under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals fair value with no gain or loss recognized, and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a routine source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amount of receivables sold in 2022 and 2021 were $2.5 billion and $1.2 billion, respectively.
The Company works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, in 2019, theThe Company introducedhas a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a participating financial institution. Eastman's responsibility is limited to making payments on the terms originally negotiated with suppliers, regardless of whether the suppliers sellssell their receivables to the financial institution. The range of payment terms Eastman negotiates with suppliers are consistent, regardless of whether a supplier participates in the program. All of Eastman's accounts payable and associated payments are reported consistently in the Company's Consolidated Statements of Financial Position and Consolidated Statements of Cash Flows regardless of whether they are associated with a vendor who participates in the program.
In 2019, the Company expanded off balance sheet, uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amount of receivables sold in 2019 and 2018 were $857 million and $219 million, respectively, representing less than full capacity due to implementation of new agreements across periods.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 2.DIVESTITURES
Rubber Additives Divestiture
On November 1, 2021, the Company and certain of its subsidiaries completed the sale of its rubber additives (including Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology of the global tire additives business ("rubber additives") of its Additives & Functional Products ("AFP") segment. The sale did not include the Eastman Impera™ and other performance resins product lines of the tire additives business. The Company provided certain business transition and post-closing services to the buyer on agreed terms, which were completed in 2022. The business was not reported as a discontinued operation because the sale did not have a major effect on the Company's operations and financial results. The total estimated consideration, after estimates of contingent consideration and post-closing adjustments and ongoing agreements through October 2027, was $640 million. The additional amount of consideration of up to $75 million is to be paid based on performance of divested rubber additives through December 2023. The divestiture resulted in a $594 million loss (including cumulative translation adjustment liquidation of $23 million and certain costs to sell of $7 million), of which $42 million was recorded in 2022.
The major classes of divested assets and liabilities were as follows:
| | | | | | | | 2.(Dollars in millions) | INVENTORIES | | Assets divested | | | Trade receivables, net of allowance for doubtful accounts | $ | 107 | | | Inventories | 94 | | | Other assets | 26 | | | Properties, net of accumulated depreciation | 298 | | | Goodwill | 398 | | | Intangible assets, net of accumulated amortization | 381 | | | Assets divested | 1,304 | | | Liabilities divested | | | Payables and other liabilities | 48 | | | Post-employment obligations | 34 | | | Other liabilities | 18 | | | Liabilities divested | 100 | | | Disposal group, net | $ | 1,204 | |
| | | | | | | | | | | December 31, | | (Dollars in millions) | 2019 | | 2018 | | | | | | | Finished goods | $ | 1,114 |
| | $ | 1,143 |
| | Work in process | 220 |
| | 262 |
| | Raw materials and supplies | 576 |
| | 515 |
| | Total inventories at FIFO or average cost | 1,910 |
| | 1,920 |
| | Less: LIFO reserve | 248 |
| | 337 |
| | Total inventories | $ | 1,662 |
| | $ | 1,583 |
|
Separately, the Company recognized $5 million and $15 million of transaction costs for the divested business in 2022 and 2021, respectively. Transaction costs are expensed as incurred and are included in "Selling, general and administrative expenses" ("SG&A") in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Adhesives Resins Divestiture
On April 1, 2022, the Company and certain of its subsidiaries completed the sale of its adhesives resins business, which included hydrocarbon resins (including Eastman Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines ("adhesives resins"), of its AFP segment. The Company provided certain business transition and post-closing services to the buyer on agreed terms, which were completed in 2022. The business was not reported as a discontinued operation because the sale did not have a major effect on the Company's operations and financial results. Included in the adhesives resins divestiture was the 50 percent interest in a joint venture that has a manufacturing facility in Nanjing, China, which produces Eastotac™ hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants.
The total estimated consideration, after estimates of post-closing adjustments, was $957 million. The divestiture resulted in a $1 million loss (including cumulative translation adjustment liquidation of $10 million and certain costs to sell of $13 million).
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The major classes of divested assets and liabilities as of the date of the divestiture were as follows:
| | | | | | | | | (Dollars in millions) | | | Assets divested | | | Trade receivables, net of allowance for doubtful accounts | $ | 129 | | | Inventories | 163 | | | Other assets | 21 | | | Properties, net of accumulated depreciation | 303 | | | Goodwill | 399 | | | Intangible assets, net of accumulated amortization | 14 | | | Assets divested | 1,029 | | | Liabilities divested | | | Payables and other liabilities | 83 | | | Deferred tax liability | 7 | | | Other liabilities | 4 | | | Liabilities divested | 94 | | | Disposal group, net | $ | 935 | |
The Company recognized $13 million and $3 million of transaction costs for the divested business in 2022 and 2021, respectively. Transaction costs are expensed as incurred and are included in SG&A in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
3.INVENTORIES | | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | | | | | | Finished goods | $ | 1,347 | | | $ | 1,007 | | | Work in process | 297 | | | 273 | | | Raw materials and supplies | 743 | | | 589 | | | Total inventories at FIFO or average cost | 2,387 | | | 1,869 | | | Less: LIFO reserve | 493 | | | 365 | | | Total inventories | $ | 1,894 | | | $ | 1,504 | |
Inventories valued on the LIFO method were approximately 50 percent and 55 percent of total inventories at both December 31, 20192022 and December 31, 2018, respectively.2021.
| | 3. | PROPERTIES AND ACCUMULATED DEPRECIATION |
| | | | | | | | | | | December 31, | | (Dollars in millions) | 2019 | | 2018 | | Properties | | | | | Land | $ | 158 |
| | $ | 158 |
| | Buildings | 1,430 |
| | 1,385 |
| | Machinery and equipment | 10,960 |
| | 10,801 |
| | Construction in progress | 356 |
| | 387 |
| | Properties and equipment at cost | $ | 12,904 |
| | $ | 12,731 |
| | Less: Accumulated depreciation | 7,333 |
| | 7,131 |
| | Net properties | $ | 5,571 |
| | $ | 5,600 |
|
Depreciation expense was $450 million, $437 million, and $420 million for 2019, 2018, and 4.2017, respectively.PROPERTIES AND ACCUMULATED DEPRECIATION
| | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | | Properties | | | | | Land | $ | 140 | | | $ | 150 | | | Buildings | 1,394 | | | 1,458 | | | Machinery and equipment | 10,543 | | | 10,449 | | | Construction in progress | 865 | | | 623 | | | Properties and equipment at cost | $ | 12,942 | | | $ | 12,680 | | | Less: Accumulated depreciation | 7,782 | | | 7,684 | | | Net properties | $ | 5,160 | | | $ | 4,996 | |
Cumulative construction-period interest of $98 million and $115 million, reduced by accumulated depreciation of $38 million and $54 million, is included in net properties at December 31, 2019 and 2018, respectively.
Eastman capitalized $4 million of interest in 2019, $4 million of interest in 2018, and $8 million of interest in 2017.
| | 4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill follow:
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Additives & Functional Products | | Advanced Materials | | Chemical Intermediates | | Other | | Total | | Balance at December 31, 2017 | $ | 2,459 |
| | $ | 1,289 |
|
| $ | 769 |
|
| $ | 10 |
|
| $ | 4,527 |
| | Impairments recognized | (38 | ) | | — |
| | — |
| | — |
| | (38 | ) | | Currency translation adjustments | (11 | ) | | (6 | ) | | (5 | ) | | — |
| | (22 | ) | | Balance at December 31, 2018 | 2,410 |
| | 1,283 |
| | 764 |
| | 10 |
| | 4,467 |
| | Acquisitions | 15 |
| | — |
| | — |
| | — |
| | 15 |
| | Impairments recognized | (45 | ) | | — |
| | — |
| | — |
| | (45 | ) | | Currency translation adjustments | (3 | ) | | (1 | ) | | (2 | ) | | — |
| | (6 | ) | | Balance at December 31, 2019 | $ | 2,377 |
| | $ | 1,282 |
| | $ | 762 |
| | $ | 10 |
| | $ | 4,431 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $384 million, $426 million, and $445 million for 2022, 2021, and 2020, respectively.
Cumulative construction-period interest of $93 million and $99 million, reduced by accumulated depreciation of $43 million and $45 million, is included in net properties at December 31, 2022 and 2021, respectively.
Eastman conducts testingcapitalized $9 million, $5 million, and $4 million of goodwill annuallyinterest in the fourth quarter or more frequently when events2022, 2021, and circumstances indicate an impairment may have occurred. A reporting unit's goodwill2020, respectively.
5.GOODWILL AND OTHER INTANGIBLE ASSETS
Below is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach and applies a discounted cash flow model in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated WACC, and a projected long-term growth rate. As a resultsummary of the change in goodwill impairment testing performed during fourth quarter 2019, fair values were determined2022 and 2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Advanced Materials | | Additives & Functional Products | | Chemical Intermediates | | Other | | Total | | Balance at December 31, 2020 | $ | 1,292 | | | $ | 2,397 | | | $ | 766 | | | $ | 10 | | | $ | 4,465 | | | Divestiture | — | | | (398) | | | — | | | — | | | (398) | | Held for sale (1) | — | | | (399) | | | — | | | — | | | (399) | | | Currency translation adjustments | (6) | | | (15) | | | (6) | | | — | | | (27) | | | Balance at December 31, 2021 | 1,286 | | | 1,585 | | | 760 | | | 10 | | | 3,641 | | Acquisitions (2) | 15 | | | 30 | | | — | | | — | | | 45 | | | Currency translation adjustments | (5) | | | (14) | | | (3) | | | — | | | (22) | | | Balance at December 31, 2022 | $ | 1,296 | | | $ | 1,601 | | | $ | 757 | | | $ | 10 | | | $ | 3,664 | |
(1)Held for sale goodwill was divested in 2022. (2)Measurement period adjustments related to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products ("AFP") segment).prior year acquisitions.
In fourth quarter 2019 and 2018, as a result of the annual impairment test of goodwill, the Company recognized goodwill impairments of $45 million and $38 million, respectively, in the crop protection reporting unit. The impairment in 2019 was primarily due to the impact of recent regulatory changes in the European Union on current period and forecasted revenue and EBIT and a decrease in the long-term growth rate for the reporting unit assumed in the goodwill impairment model. The impairment in 2018 was primarily due to the WACC applied to the impairment analysis and the estimated impact of future regulatory changes. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
As of December 31, 2019, the reported balance of goodwill included accumulated impairment losses of $106 million, $12 million, and $14 million in the AFP segment, Chemical Intermediates ("CI") segment, and other segments, respectively.
As ofrespectively, at both December 31, 2018, the reported balance of goodwill included accumulated impairment losses of $61 million, $12 million,2022 and $14 million in the AFP segment, CI segment, and other segments, respectively.2021.
The carrying amounts of intangible assets follow: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2022 | | December 31, 2021 | | (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 | $ | 1,134 | | | $ | 535 | | | $ | 599 | | | $ | 1,144 | | | $ | 479 | | | $ | 665 | | | Technology | 7 | - | 20 | 505 | | | 331 | | | 174 | | | 581 | | | 304 | | | 277 | | | Other | 16 | - | 37 | 110 | | | 32 | | | 78 | | | 87 | | | 26 | | | 61 | | | | | | | | | | | | | | | | | | Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | Tradenames | | | | 349 | | | — | | | 349 | | | 349 | | | — | | | 349 | | | Other | | | | 10 | | | — | | | 10 | | | 10 | | | — | | | 10 | | | Total identified intangible assets | | | | $ | 2,108 | | | $ | 898 | | | $ | 1,210 | | | $ | 2,171 | | | $ | 809 | | | $ | 1,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | (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 | $ | 1,566 |
| | $ | 494 |
| | $ | 1,072 |
| | $ | 1,567 |
| | $ | 419 |
| | $ | 1,148 |
| | Technology | 7 | - | 20 | 677 |
| | 343 |
| | 334 |
| | 680 |
| | 294 |
| | 386 |
| | Contracts | | 5 |
| — |
| | — |
| | — |
| | 180 |
| | 147 |
| | 33 |
| | Other | 5 | - | 37 | 88 |
| | 22 |
| | 66 |
| | 102 |
| | 23 |
| | 79 |
| | | | | | | | | | | | | | | | | | Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | Tradenames | | | | 529 |
| | — |
| | 529 |
| | 529 |
| | — |
| | 529 |
| | Other | | | | 10 |
| | — |
| | 10 |
| | 10 |
| | — |
| | 10 |
| | Total identified intangible assets | | | | $ | 2,870 |
| | $ | 859 |
| | $ | 2,011 |
| | $ | 3,068 |
| | $ | 883 |
| | $ | 2,185 |
|
Amortization expense of definite-lived intangible assets was $160$87 million, $164$108 million, and $164$128 million for 2019, 2018,2022, 2021, and 2017,2020, respectively. Estimated amortization expense for future periods is $130$83 million in 2020, $1252023 and 2024, $76 million in 2021,2025 and $1152026, and $67 million each year for 2022 through 2024.in 2027.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 6.EQUITY INVESTMENTS
Eastman owns a 50 percent or less interest in joint ventures which are accounted for under the equity method. These include a 45 percent interest in a joint venture with China National Tobacco Corporation that manufactures acetate tow in Hefei, China. The Company owns 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,As of December 31, 2022 and sealants. These also2021, these 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. As of December 31, 2022, these joint ventures also include a 40 percent interest in a joint venture that is building a manufacturing facility in Kingsport, Tennessee. The Kingsport facility will produce acetylated wood. As of December 31, 2021, Eastman owned a 50 percent interest in a joint venture that had a manufacturing facility in Nanjing, China. The Nanjing facility produces EastotacTM hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and sealants, which was sold in 2022 as part of the divestiture of the adhesives resins business. For additional information, see Note 2, "Divestitures". At December 31, 20192022 and 2018,2021, the Company's total investment in these joint ventures was $106$111 million and $100$96 million, respectively, included in "Other noncurrent assets" in the Consolidated Statements of Financial Position.
| | 6. | PAYABLES AND OTHER CURRENT LIABILITIES |
7.PAYABLES AND OTHER CURRENT LIABILITIES | | | | December 31, | | December 31, | | (Dollars in millions) | 2019 | | 2018 | (Dollars in millions) | 2022 | | 2021 | | Trade creditors | $ | 890 |
| | $ | 914 |
| Trade creditors | $ | 1,319 | | | $ | 1,228 | | | Accrued payrolls, vacation, and variable-incentive compensation | 176 |
| | 197 |
| Accrued payrolls, vacation, and variable-incentive compensation | 164 | | | 311 | | | Accrued taxes | 89 |
| | 94 |
| Accrued taxes | 157 | | | 138 | | | Post-employment obligations | 93 |
| | 80 |
| Post-employment obligations | 103 | | | 70 | | | Dividends payable to shareholders | 90 |
| | 87 |
| | | | Dividends payable to stockholders | | Dividends payable to stockholders | 94 | | | 101 | | | Other | 280 |
| | 236 |
| Other | 288 | | | 285 | | | Total payables and other current liabilities | $ | 1,618 |
| | $ | 1,608 |
| Total payables and other current liabilities | $ | 2,125 | | | $ | 2,133 | |
The "Other" above consists primarily of accruals for the current portion of factoring, operating lease liabilities, interest payable, the current portion of derivative hedging liabilities, the current portion of environmental liabilities, and miscellaneous accruals.
8.INCOME TAXES
Components of earnings before income taxes and the provision for U.S. and other income taxes from operations follow: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Earnings before income taxes | | | | | | | United States | $ | 205 | | | $ | 645 | | | $ | 164 | | | Outside the United States | 772 | | | 437 | | | 366 | | | Total | $ | 977 | | | $ | 1,082 | | | $ | 530 | | | Provision for income taxes | | | | | | | United States Federal | | | | | | | Current | $ | 179 | | | $ | 114 | | | $ | 70 | | | Deferred | (76) | | | 18 | | | (96) | | | Outside the United States | | | | | | | Current | 105 | | | 115 | | | 77 | | | Deferred | (10) | | | (42) | | | (14) | | | State and other | | | | | | | Current | 33 | | | 24 | | | 5 | | | Deferred | (50) | | | (14) | | | (1) | | | Total | $ | 181 | | | $ | 215 | | | $ | 41 | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of earnings before income taxes and the provision for (benefit from) U.S. and other income taxes from operations follow:
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Earnings before income taxes | | | | | | | United States | $ | 454 |
| | $ | 718 |
| | $ | 654 |
| | Outside the United States | 448 |
| | 592 |
| | 635 |
| | Total | $ | 902 |
| | $ | 1,310 |
| | $ | 1,289 |
| | Provision for (benefit from) income taxes | |
| | |
| | |
| | United States Federal | |
| | |
| | |
| Current (1) | $ | 55 |
| | $ | 161 |
| | $ | 220 |
| Deferred (2) | 19 |
| | (11 | ) | | (383 | ) | | Outside the United States | | | | | | | Current | 62 |
| | 86 |
| | 62 |
| | Deferred | (32 | ) | | (22 | ) | | 2 |
| | State and other | | | | | | | Current | — |
| | 30 |
| | 13 |
| | Deferred | 36 |
| | (18 | ) | | (13 | ) | | Total | $ | 140 |
| | $ | 226 |
| | $ | (99 | ) |
| | (1)
| A one-time transition tax of $71 million on deferred foreign income tax is included for 2017. |
| | (2)
| Includes a one-time benefit of $517 million primarily due to the remeasurement 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 for 2017. |
The following represents the deferred tax (benefit) charge recorded as a component of AOCI"Accumulated other comprehensive income (loss)" ("AOCI") in the Consolidated Statements of Financial Position: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Defined benefit pension and other postretirement benefit plans | $ | (7) | | | $ | (10) | | | $ | (7) | | | | | | | | | Derivatives and hedging | (1) | | | 21 | | | (4) | | | Total | $ | (8) | | | $ | 11 | | | $ | (11) | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Defined benefit pension and other postretirement benefit plans | $ | (10 | ) | | $ | (10 | ) | | $ | (16 | ) | | Derivatives and hedging | (2 | ) | | 3 |
| | 8 |
| | Total | $ | (12 | ) | | $ | (7 | ) | | $ | (8 | ) |
Total income tax expense (benefit) included in the consolidated financial statements was composed of the following: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Earnings before income taxes | $ | 181 | | | $ | 215 | | | $ | 41 | | | | | | | | | Other comprehensive income | (8) | | | 11 | | | (11) | | | Total | $ | 173 | | | $ | 226 | | | $ | 30 | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Earnings before income taxes | $ | 140 |
| | $ | 226 |
| | $ | (99 | ) | | Other comprehensive income | (12 | ) | | (7 | ) | | (8 | ) | | Total | $ | 128 |
| | $ | 219 |
| | $ | (107 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences between the provision for (benefit from) income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Amount computed using the statutory rate | $ | 205 | | | $ | 225 | | | $ | 109 | | | State income taxes, net | (27) | | | (4) | | | 2 | | | Foreign rate variance | (16) | | | (28) | | | (49) | | | Change in reserves for tax contingencies | 27 | | | (39) | | | 4 | | | General business credits | (44) | | | (21) | | | (39) | | | U.S. tax on foreign earnings, net of credits | (17) | | | 2 | | | 13 | | | Divestitures | 37 | | | 89 | | | — | | | Tax law changes and tax loss from outside-U.S. entity reorganizations | — | | | (15) | | | — | | | Other | 16 | | | 6 | | | 1 | | | Provision for income taxes | $ | 181 | | | $ | 215 | | | $ | 41 | | | | | | | | | Effective income tax rate | 19 | % | | 20 | % | | 8 | % |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Amount computed using the statutory rate | $ | 189 |
| | $ | 274 |
| | $ | 450 |
| | State income taxes, net | 36 |
| | 6 |
| | (4 | ) | | Foreign rate variance | (68 | ) | | (52 | ) | | (150 | ) | | Domestic manufacturing deduction | — |
| | — |
| | (18 | ) | | Change in reserves for tax contingencies | 36 |
| | 21 |
| | 20 |
| | General business credits | (52 | ) | | (60 | ) | | (65 | ) | | U.S. tax on foreign earnings | (17 | ) | | 10 |
| | 29 |
| | Foreign tax credits | — |
| | (12 | ) | | (26 | ) | Tax law changes and tax loss from outside-U.S. entity reorganizations (1) | 7 |
| | 20 |
| | (339 | ) | | Other | 9 |
| | 19 |
| | 4 |
| | Provision for (benefit from) income taxes | $ | 140 |
| | $ | 226 |
| | $ | (99 | ) | | | | | | | | | Effective income tax rate | 16 | % | | 17 | % | | (8 | )% |
| | (1)
| Includes a one-time net benefit primarily due to the remeasurement 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 in 2017 and a net incremental adjustment to those amounts under the Tax Reform Act in 2018 and 2019. |
The 2019 effective tax rate includes a $7 million increase to the2022 provision for income taxes resulting from adjustmentsinclude a $32 million decrease related to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act. The 2019 effective tax rate also includes adjustments to the tax provision to reflect finalizationrelease of prior year's income tax returns and an increase toa state income taxes related to additional valuation allowance provided against state income tax credits.
The 2018 effective tax rate included the impact of the U.S. corporate tax rate reduction resulting from the Tax Reform Act and the repeal of the domestic manufacturing deduction. The 2018 effective tax rate also included a $20$37 million increase to reflect the tax implications of the business divestitures, including an increase related to non-deductible losses.
The 2021 provision for income taxes includes a $78 million decrease primarily related to previously unrecognized tax positions resulting from adjustments tofinalization of prior years' income tax audits, partially offset by current year increases. Additionally, the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily2021 provision for income taxes includes impacts of the Tax Reform Act. These adjustmentsdivestiture of rubber additives, including an increase related to the one-time transition tax on deferred foreign income and changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
The 2017 effective tax rate includednon-deductible losses partially offset by a $339 million net tax benefit, primarily resultingdecrease 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 benefit from the one-time revaluation of deferred tax liabilities, partially offset byliabilities.
The 2020 provision for income taxes includes a one-time transition$27 million decrease as a result of a decrease in previously unrecognized tax on deferred foreign income and changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The 2017 effective tax rate also included a $20 million benefit due to amendments to prior years' domestic income tax returns,positions and a $30$7 million benefit reflecting the finalization of prior years' foreign income tax returns. The 2017 effective tax rate also included an $8 million tax benefit due to a tax ruling permitting deductibility of a liquidation loss on a previously impaired site.
The U.S. Department of Treasury has issued a number of proposed regulationsdecrease related to implementationadjustments to certain prior year tax returns.
Income tax incentives, in the form of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformityholidays, have been granted to the current federal tax code. FinalizationCompany in certain jurisdictions to attract investment and encourage industrial development. The expiration of these regulationstax holidays varies by country. The tax holidays are conditional on the Company meeting certain requirements, including employment and investment thresholds; determination of compliance with these conditions may be subject to challenge by tax authorities in future periods may result in changes in the period of enactmentthose jurisdictions. No individual tax holiday had a material impact to the amounts currently reportedCompany's earnings in the Consolidated Statements of Financial Position.2022, 2021, or 2020.
As of December 31, 2019 and 2018, a non-current income tax payable of approximately $6 million and $56 million, respectively, attributable to the transition tax is reflected in "Other long-term liabilities" of the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with its evaluation of the provisions of the Tax Reform Act, in 2018, the Company made an accounting policy election to account for taxes resulting from GILTI as a component of the provision for income taxes.
The significant components of deferred tax assets and liabilities follow: | | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | | Deferred tax assets | | | | | Post-employment obligations | $ | 150 | | | $ | 176 | | | Net operating loss carryforwards | 645 | | | 637 | | | Tax credit carryforwards | 236 | | | 212 | | | Environmental contingencies | 64 | | | 67 | | | Capitalized research and development expenses | 139 | | | — | | | Other | 239 | | | 224 | | | Total deferred tax assets | 1,473 | | | 1,316 | | | Less: Valuation allowance | 258 | | | 339 | | | Deferred tax assets less valuation allowance | $ | 1,215 | | | $ | 977 | | | Deferred tax liabilities | | | | | Property, plant, and equipment | $ | (849) | | | $ | (843) | | | Intangible assets | (272) | | | (288) | | | Investments | (441) | | | (369) | | | Other | (201) | | | (171) | | | Total deferred tax liabilities | $ | (1,763) | | | $ | (1,671) | | | Net deferred tax liabilities | $ | (548) | | | $ | (694) | | | As recorded in the Consolidated Statements of Financial Position: | | | | | | | | | Other noncurrent assets | $ | 123 | | | $ | 116 | | | | | | | Deferred income tax liabilities | (671) | | | (810) | | | Net deferred tax liabilities | $ | (548) | | | $ | (694) | |
| | | | | | | | | | | December 31, | | (Dollars in millions) | 2019 | | 2018 (1) | | Deferred tax assets | | | | | Post-employment obligations | $ | 247 |
| | $ | 230 |
| | Net operating loss carryforwards | 606 |
| | 634 |
| | Tax credit carryforwards | 239 |
| | 239 |
| | Environmental reserves | 68 |
| | 70 |
| | Unrealized derivative loss | 18 |
| | 18 |
| | Other | 173 |
| | 94 |
| | Total deferred tax assets | 1,351 |
| | 1,285 |
| | Less: Valuation allowance | 453 |
| | 487 |
| | Deferred tax assets less valuation allowance | $ | 898 |
| | $ | 798 |
| | Deferred tax liabilities | |
| | |
| | Property, plant, and equipment | $ | (895 | ) | | $ | (856 | ) | | Intangible assets | (439 | ) | | (473 | ) | | Investments | (235 | ) | | (179 | ) | | Other | (178 | ) | | (131 | ) | | Total deferred tax liabilities | $ | (1,747 | ) | | $ | (1,639 | ) | | Net deferred tax liabilities | $ | (849 | ) | | $ | (841 | ) | | As recorded in the Consolidated Statements of Financial Position: | |
| | |
| | Other noncurrent assets | $ | 66 |
| | $ | 43 |
| | Deferred income tax liabilities | (915 | ) | | (884 | ) | | Net deferred tax liabilities | $ | (849 | ) | | $ | (841 | ) |
| | (1)
| Revised from Note 7, "Income Taxes", to the Company's 2018 Annual Report on Form 10-K, which reported net operating loss carryforwards as $708 million, valuation allowance as $466 million, and investments as $(274) million. |
Beginning January 1, 2019,All foreign earnings, with the Company did not assert indefinite reinvestment onexception of short-term liquid assets ofon certain foreign subsidiaries. All other foreign earnings,subsidiaries, including basis differences, continue to be considered indefinitely reinvested. As of December 31, 20192022, unremitted earnings of subsidiaries outside the U.S. totaled approximately $2.5$3.0 billion of which a substantial portion has already been subject to U.S. tax. The Company has not determined the deferred tax liability associated with these unremitted earnings and basis differences, as such determination is not practicable.
For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the U.S. 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 U.S., 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 U.S. statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $24 million at December 31, 2019 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2019,2022, foreign net operating loss carryforwards totaled $2.1$2.4 billion. Of this total, $23$900 million will expire in 1 to 20 years and $2.1$1.5 billion have no expiration date. A valuation allowance of approximately $262$131 million has been provided against such net operating loss carryforwards.carryforwards and other foreign deferred income tax balances.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019,2022, there were no federal net operating loss carryforwards of $8 million were available to offset future taxable income, which expire from 2028 to 2030.income. At December 31, 2019,2022, foreign tax credit carryforwards of approximately $75$66 million were available to reduce possible future U.S. income taxes, and which expire from 20202023 to 2028.2032. As a result of the 2017 Tax Cuts and Jobs Act ("Tax Reform Act,Act"), the Company may no longer be able to utilize certain U.S. foreign tax credit carryforwards. A valuation allowance of $45$54 million has been established on a portion of deferred tax assets as of December 31, 20192022. .
At December 31, 2019,2022, a partial valuation allowance of $72$28 million has been provided against state tax credits that the Company may not be able to utilize.
A partial valuation allowance of $47$42 million has been established for the Solutia, Inc. ("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.
The Tax Reform Act eliminated the option to deduct research and development ("R&D") expenses in the period incurred and requires R&D expenses to be capitalized and amortized beginning in 2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position: | | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | | Miscellaneous receivables | $ | 35 | | | $ | 173 | | | | | | | Payables and other current liabilities | $ | 95 | | | $ | 68 | | | Other long-term liabilities | 174 | | | 130 | | | Total income taxes payable | $ | 269 | | | $ | 198 | |
| | | | | | | | | | | December 31, | | (Dollars in millions) | 2019 | | 2018 | | Miscellaneous receivables | $ | 211 |
| | $ | 135 |
| | | | | | | Payables and other current liabilities | $ | 36 |
| | $ | 43 |
| | Other long-term liabilities | 139 |
| | 162 |
| | Total income taxes payable | $ | 175 |
| | $ | 205 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Balance at January 1 | $ | 200 | | | $ | 257 | | | $ | 202 | | | Adjustments based on tax positions related to current year | 11 | | | 6 | | | 14 | | | | | | | | | Adjustments based on tax positions related to prior years | 24 | | | 2 | | | 63 | | | Lapse of statute of limitations | — | | | (45) | | | (22) | | | Settlements | — | | | (20) | | | — | | Balance at December 31 (1) | $ | 235 | | | $ | 200 | | | $ | 257 | |
(1)Approximately $229 million of the unrecognized tax benefits as of December 31, 2022, would, if recognized, impact the Company's effective tax rate. | | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Balance at January 1 | $ | 182 |
| | $ | 142 |
| | $ | 114 |
| | Adjustments based on tax positions related to current year | 22 |
| | 44 |
| | 29 |
| | Lapse of statute of limitations | (2 | ) | | (4 | ) | | (1 | ) | Balance at December 31 (1) | $ | 202 |
| | $ | 182 |
| | $ | 142 |
|
| | (1)
| All of the unrecognized tax benefits would, if recognized, impact the Company's effective tax rate. |
A reconciliation of the beginning and ending amounts of accrued interest related to unrecognized tax positions is as follows: | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Balance at January 1 | $ | 13 | | | $ | 13 | | | $ | 13 | | | Expense for interest, net of tax | 9 | | | 9 | | | 5 | | | Income for interest, net of tax | — | | | (9) | | | (5) | | | Balance at December 31 | $ | 22 | | | $ | 13 | | | $ | 13 | |
| | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Balance at January 1 | $ | 10 |
| | $ | 6 |
| | $ | 4 |
| | Expense for interest, net of tax | 5 |
| | 4 |
| | 3 |
| | Income for interest, net of tax | (2 | ) | | — |
| | (1 | ) | | Balance at December 31 | $ | 13 |
| | $ | 10 |
| | $ | 6 |
|
Accrued penalties related to unrecognized tax positions were immaterial as of December 31, 2019, 2018,2022, 2021, and 2017.2020.
Eastman files federal income tax returns in the U.S. and income tax returns in various state and foreign jurisdictions. The Company is no longer subject to U.S. Federalfederal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Solutia legal entities.2017. With few exceptions, Eastman is no longer subject to foreign, state, and local income tax examinations by tax authorities for years before 2011.2015. 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 2011.2002.
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 $28$55 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | December 31, | | December 31, | | (Dollars in millions) | 2019 | | 2018 | (Dollars in millions) | 2022 | | 2021 | | Borrowings consisted of: | | | | Borrowings consisted of: | | | | | 2.7% notes due January 2020 | $ | — |
| | $ | 250 |
| | | 4.5% notes due January 2021 | 185 |
| | 185 |
| | | 3.5% notes due December 2021 | 298 |
| | 297 |
| | | | 3.6% notes due August 2022 | 741 |
| | 739 |
| 3.6% notes due August 2022 | $ | — | | | $ | 747 | | 1.50% notes due May 2023 (1) | 840 |
| | 855 |
| 1.50% notes due May 2023 (1) | 800 | | | 850 | | | 7 1/4% debentures due January 2024 | 198 |
| | 197 |
| 7 1/4% debentures due January 2024 | 198 | | | 198 | | | 7 5/8% debentures due June 2024 | 43 |
| | 43 |
| 7 5/8% debentures due June 2024 | 43 | | | 43 | | | 3.8% notes due March 2025 | 695 |
| | 691 |
| | | 3.80% notes due March 2025 | | 3.80% notes due March 2025 | 693 | | | 698 | | 1.875% notes due November 2026 (1) | 556 |
| | 566 |
| 1.875% notes due November 2026 (1) | 530 | | | 565 | | | 7.60% debentures due February 2027 | 195 |
| | 195 |
| 7.60% debentures due February 2027 | 196 | | | 195 | | | 4.5% notes due December 2028 | 493 |
| | 492 |
| 4.5% notes due December 2028 | 495 | | | 494 | | | 4.8% notes due September 2042 | 493 |
| | 493 |
| 4.8% notes due September 2042 | 494 | | | 494 | | | 4.65% notes due October 2044 | 874 |
| | 872 |
| 4.65% notes due October 2044 | 877 | | | 875 | | | 2027 Term loan | | 2027 Term loan | 499 | | | — | | | Commercial paper and short-term borrowings | 171 |
| | 243 |
| Commercial paper and short-term borrowings | 326 | | | — | | | Credit facilities borrowings | — |
| | 50 |
| | | | Total borrowings | 5,782 |
| | 6,168 |
| Total borrowings | 5,151 | | | 5,159 | | | Borrowings due within one year | 171 |
| | 243 |
| | | Less: Borrowings due within one year | | Less: Borrowings due within one year | 1,126 | | | 747 | | | Long-term borrowings | $ | 5,611 |
| | $ | 5,925 |
| Long-term borrowings | $ | 4,025 | | | $ | 4,412 | |
| | (1)(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.
| 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. |
In fourth quarter 2019,2022, the Company repaid the 2.7%3.6% notes due January 2020 ($250August 2022, of which $550 million principal)was repaid in second quarter 2022 primarily from proceeds from the 2027 Term Loan discussed below and $200 million was repaid in third quarter 2022 using available cash. There were no material debt extinguishment costs associated with the early repayment of this debt. The total consideration for this redemption is reported under financing activities on the Consolidated StatementsStatement of Cash Flows.
In fourth quarter 2018, the Company sold 3.5% notes due December 2021 in the principal amount of $300 million and 4.5% notes due December 2028 in the principal amount of $500 million. Net proceeds from the notes were $789 million and were used, together with available cash, for the early and full repayment of the 5.5% notes due November 2019 ($250 million principal) and the partial redemption of the 2.7% notes due January 2020 ($550 million principal). Total consideration for these redemptions was $806 million ($800 million total principal and $6 million for the early redemption premiums) and is reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $7 million for early debt extinguishment costs which were primarily attributable to the early redemption premiums and related unamortized costs. The book value of the redeemed debt was $799 million.
Revolving Credit FacilitiesFacility, Term Loan, and Commercial Paper Borrowings
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023.that was amended and restated in December 2021. The amendments include the addition of sustainability-linked pricing terms and extending the maturity to December 2026, and resulted in a charge of $1 million for early debt extinguishment costs which was attributable to unamortized fees. 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, 20192022 and 2018,2021, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2019,2022, the Company's commercial paper borrowings were $170$326 million with a weighted average interest rate of 2.03 percent.4.85%. At December 31, 2018,2021, the Company'sCompany had no outstanding commercial paper borrowings were $130borrowings.
In 2022, the Company borrowed $500 million withunder a weighted averagefive-year term loan agreement (the "2027 Term Loan"). The 2027 Term Loan had a variable interest rate of 2.91 percent.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary5.55% as 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.December 31, 2022. Borrowings under the A/R Facility2027 Term Loan 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, 2019, the Company had 0 borrowings under the A/R Facility. At December 31, 2018, the Company's borrowings under the A/R Facility were $50 million with an interest rate of 3.39 percent.at varying spreads above quoted market rates.
Through September 2019, the Company had access to borrowings of up to €150 million ($163 million) under a receivables facility based on the discounted value of selected customer accounts receivable. These arrangements included receivables in the United States, Belgium, and Finland, and were subject to various eligibility requirements. Borrowings under this facility were subject to interest at an agreed spread above LIBOR and EURIBOR plus administration and insurance fees and were classified as short-term. In October 2019, this receivables facility was terminated and the balance was repaid using available A/R Facility borrowings. At December 31, 2018, the Company's amount of outstanding borrowings under this facility were $112 million with a weighted average interest rate of 1.70 percent.
The Credit Facility and A/R Facility2027 Term Loan contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all applicable covenants at both December 31, 20192022 and December 31, 2018.2021.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Borrowings
Eastman has classified its total borrowings at December 31, 20192022 and 20182021 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 quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other borrowings primarily under the commercial paper and receivables facilitythe 2027 Term Loan equals the carrying value and is classified as Level 2. At December 31, 20192022 and 2018,2021, the fair value of total borrowings was $6.275 billion$4,888 million and $6.216 billion,$5,737 million, respectively. The Company had no borrowings classified as Level 1 or Level 3 as of December 31, 20192022 and 2021. 2018.
NOTES TO THE AUDITED CONSOLIDATEDIn January 2023, the Company borrowed $300 million under a delayed draw two-year term loan (the "2024 Term Loan"), which was executed in fourth quarter 2022. Borrowings under the 2024 Term Loan are subject to interest at varying spreads above quoted market rates. The 2024 Term Loan contains the same customary covenants and events of default, including maintenance of certain financial ratios, as the Credit Facility, with payment of customary fees.
10.DERIVATIVE AND NON-DERIVATIVE FINANCIAL STATEMENTS INSTRUMENTS
| | 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 change in the hedge instrument 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. Cash flows from cash flow hedges are classified as operating activities in the Consolidated Statements of Cash Flows.
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). Additionally, the Company, from time to time, enters into forward exchange contract cash flow hedges to hedge certain firm commitments denominated in foreign currencies.
In fourth quarter 2022, the Company de-designated and monetized certain forward cash flow hedges. The resulting unrealized gain of $27 million was recorded in AOCI and will be recognized in earnings in 2023 through 2025 as the underlying forecasted transactions impact earnings.
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,benzene, ethane, ethylene, natural gas, paraxylene, ethylene, and benzene.propane. 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. 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.
In 2022, the Company settled the notional amount of $75 million associated with the 2022 forward starting interest rate swap, resulting in a cash gain of $13 million which is included as part of operating activities in the Consolidated Statements of Cash Flows. The recognized gain from cash flow hedges of $1 million is included within "Net interest expense" on the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and the unrecognized gain of $12 million from cash flow hedges is included in AOCI on the Consolidated Statements of Financial Position.
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 recognizedreported as "Long-term borrowings" on the balance sheetConsolidated Statements of Financial Position 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 fair value 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 recognized in earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from fair value hedges are classified as operating activities in the Consolidated Statements of Cash Flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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"Cumulative Translation Adjustment" ("CTA") within AOCI located in the Consolidated Statements of Financial Position. Cash flows from the CTA component are classified as operating activities in the Consolidated Statements of Cash Flows. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. In the event of a complete or substantially complete liquidation of the net investment, cash flows from net investment hedges are classified as investing activities in the Consolidated Statements of Cash Flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities", "Other noncurrent assets", "Payables and other current liabilities", or "Other noncurrentcurrent assets" within the Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Consolidated Statements of Cash Flows.
In January 2018, Eastman entered into2022, the Company terminated fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of theThe notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €150 million ($180 million) maturing January 2021 andamount terminated was €266 million ($320 million) maturingwhich was scheduled to mature in August 2022.
In October 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment The termination resulted in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve$40 million gain recognized in CTA. The related cash flows were classified as investing activities in the exchangeConsolidated Statements of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €165 million ($190 million) maturing January 2024, €104 million ($120 million) maturing March 2025, and €165 million ($190 million) maturing February 2027.Cash Flows.
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 atDecember 31, 20192022 and 20182021 associated with Eastman's hedging programs. | | | | | | | | | | | | | | | | Notional Outstanding | December 31, 2022 | | December 31, 2021 | | | | | | | Derivatives designated as cash flow hedges: | | | | | Foreign Exchange Forward and Option Contracts (in millions) | | | | | EUR/USD (in EUR) | €573 | | €429 | | | | | | | | | | | | | | | | | Commodity Forward and Collar Contracts | | | | | Feedstock (in million barrels) | — | | | 1 | | | Energy (in million british thermal units) | 3 | | | 13 | | | Interest rate swaps for the future issuance of debt (in millions) | — | | $75 | | | | | | Derivatives designated as fair value hedges: | | | | | Fixed-for-floating interest rate swaps (in millions) | $75 | | $75 | | | | | | Derivatives designated as net investment hedges: | | | | | Cross-currency interest rate swaps (in millions) | | | | | EUR/USD (in EUR) | €587 | | €853 | | | | | | Non-derivatives designated as net investment hedges: | | | | | Foreign Currency Net Investment Hedges (in millions) | | | | | EUR/USD (in EUR) | €1,247 | | €1,246 |
| | | | | | | | | Notional Outstanding | December 31, 2019 | | December 31, 2018 | | | | | | | | Derivatives designated as cash flow hedges: | | | | | Foreign Exchange Forward and Option Contracts (in millions) | | | | | | EUR/USD (in EUR) | €630 | | €263 | | Commodity Forward and Collar Contracts | | | | | | Feedstock (in million barrels) | 1 |
| | 5 |
| | | Energy (in million british thermal units) | 27 |
| | 40 |
| | | | | | | Derivatives designated as fair value hedges: | | | | | Fixed-for-floating interest rate swaps (in millions) | $75 | | $75 | | | | | | | Derivatives designated as net investment hedges: | | | | | Cross-currency interest rate swaps (in millions) | | | | | | EUR/USD (in EUR) | €851 | | €851 | | | | | | | Non-derivatives designated as net investment hedges: | | | | | Foreign Currency Net Investment Hedges (in millions) | | | | | | EUR/USD (in EUR) | €1,243 | | €1,241 |
Fair Value Measurements
For additional information on fair value measurement, see Note 1, "Significant Accounting Policies".
All 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 counterpartycounterparties to validate the accuracy of its standard pricing models. The Company had no derivatives classified as Level 1 or Level 3 as of December 31, 2022 or December 31, 2021. 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 to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not realize a credit loss during the years ended December 31, 20192022 or 2021. 2018.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS All the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option 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 a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company does not have any cash collateral due under such agreements.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected to presentpresents derivative contracts on a gross basis within the Consolidated Statements of Financial Position. The following table presents 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, 20192022 and 2018.2021. | | | | | | | | | | | | | | | | | | | | | | 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, 2022
Level 2 | | December 31, 2021
Level 2 | | Derivatives designated as cash flow hedges: | | | | | | | | Commodity contracts | | Other current assets | | $ | 3 | | | $ | 16 | | | Commodity contracts | | Other noncurrent assets | | — | | | 2 | | | Foreign exchange contracts | | Other current assets | | — | | | 12 | | | Foreign exchange contracts | | Other noncurrent assets | | — | | | 6 | | | Forward starting interest rate swap contracts | | Other current assets | | — | | | 5 | | | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | Fixed-for-floating interest rate swap | | Other current assets | | 1 | | | 1 | | | Fixed-for-floating interest rate swap | | Other noncurrent assets | | — | | | 1 | | | | | | | | | | Derivatives designated as net investment hedges: | | | | | | | | Cross-currency interest rate swaps | | Other current assets | | — | | | 20 | | | Cross-currency interest rate swaps | | Other noncurrent assets | | 72 | | | 35 | | | Total Derivative Assets | | | | $ | 76 | | | $ | 98 | | | | | | | | | | Derivatives designated as cash flow hedges: | | | | | | | | Commodity contracts | | Payables and other current liabilities | | $ | 3 | | | $ | 1 | | | Commodity contracts | | Other long-term liabilities | | — | | | 1 | | | Foreign exchange contracts | | Payables and other current liabilities | | 8 | | | 1 | | | Foreign exchange contracts | | Other long-term liabilities | | 4 | | | — | | | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | Fixed-for-floating interest rate swap | | Long-term borrowings | | 5 | | | — | | | | | | | | | | Derivatives designated as net investment hedges: | | | | | | | | Cross-currency interest rate swaps | | Other long-term liabilities | | — | | | 5 | | | Total Derivative Liabilities | | | | $ | 20 | | | $ | 8 | | | Total Net Derivative Assets (Liabilities) | | | | $ | 56 | | | $ | 90 | |
| | | | | | | | | | | | | 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, 2019 Level 2 | | December 31, 2018 Level 2 | | Derivatives designated as cash flow hedges: | | | | | | | | Commodity contracts | | Other current assets | | $ | — |
| | $ | 4 |
| | Foreign exchange contracts | | Other current assets | | 13 |
| | 15 |
| | Foreign exchange contracts | | Other noncurrent assets | | 2 |
| | 4 |
| | | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | Fixed-for-floating interest rate swap | | Other current assets | | 1 |
| | 1 |
| | | | | | | | | | Derivatives designated as net investment hedges: | | | | | | | | Cross-currency interest rate swaps | | Other noncurrent assets | | 68 |
| | 26 |
| | Total Derivative Assets | | | | $ | 84 |
| | $ | 50 |
| | | | | | | | | | Derivatives designated as cash flow hedges: | | | | | | | | Commodity contracts | | Payables and other current liabilities | | $ | 26 |
| | $ | 24 |
| | Commodity contracts | | Other long-term liabilities | | 2 |
| | 5 |
| | Foreign exchange contracts | | Payables and other current liabilities | | 1 |
| | — |
| | Foreign exchange contracts | | Other long-term liabilities | | 2 |
| | — |
| | | | | | | | | | Derivatives designated as fair value hedges: | | | | | | | | Fixed-for-floating interest rate swap | | Long-term borrowings | | 1 |
| | 4 |
| | Total Derivative Liabilities | | | | $ | 32 |
| | $ | 33 |
| | Total Net Derivative Assets (Liabilities) | | | | $ | 52 |
| | $ | 17 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges noted in the table above, the Company had a carrying value of $1.3 billion and $1.4 billion associated with non-derivative instruments designated as foreign currency net investment hedges as of both December 31, 20192022 and 2018.2021, 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
As of December 31, 20192022 and 2018,2021, the following amounts were included within the Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability | | Line item in the Consolidated Statements of Financial Position in which the hedged item is included | | December 31, 2022 | | December 31, 2021 | | December 31, 2022 | | December 31, 2021 | | Borrowings due within one year | | $ | — | | | $ | 697 | | | $ | — | | | $ | (2) | | | Long-term borrowings | | 79 | | | 76 | | | 5 | | | 1 | |
| | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Carrying amount of the hedged liabilities | | Cumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability | | Line item in the Consolidated Statements of Financial Position in which the hedged item is included | | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 | Long-term borrowings (1) | | $ | 763 |
| | $ | 759 |
| | $ | (7 | ) | | $ | (12 | ) |
| | (1)
| At both December 31, 2019 and 2018, the cumulative amount of fair value hedging loss adjustment remaining for hedged liabilities for which hedge accounting has been discontinued was $7 million. |
The following table presents the effect of the Company's hedging instruments on Other comprehensive income (loss), net of tax ("OCI") and financial performance for the twelve months ended December 31, 20192022, 2021, and 2018:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Change in amount of after tax gain/(loss) recognized in OCI on Derivatives | | Pre-tax amount of gain/(loss) reclassified from AOCI into income | | | December 31, | | December 31, | | Hedging Relationships | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | | | | | | | | | Commodity contracts | | $ | (11) | | | $ | 15 | | | $ | 17 | | | $ | 36 | | | $ | 20 | | | $ | (31) | | | Foreign exchange contracts | | (2) | | | 39 | | | (36) | | | 45 | | | (7) | | | 9 | | | Forward starting interest rate and treasury lock swap contracts | | 10 | | | 9 | | | 8 | | | (6) | | | (9) | | | (9) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | | | | | Net investment hedges | | 85 | | | 116 | | | (130) | | | — | | | — | | | — | | | Derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | | | | | Cross-currency interest rate swaps | | 63 | | | 74 | | | (88) | | | — | | | — | | | — | | | Cross-currency interest rate swaps excluded component | | (1) | | | (12) | | | 10 | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Change in amount of after tax gain/(loss) recognized in OCI on Derivatives | | Pre-tax amount of gain/(loss) reclassified from AOCI into income | | | | December 31, | | December 31, | | Hedging Relationships | | 2019 | | 2018 | | 2019 | | 2018 | | Derivatives in cash flow hedging relationships: | | | | | | | | | | Commodity contracts | | $ | (2 | ) | | $ | — |
| | $ | (40 | ) | | $ | (3 | ) | | Foreign exchange contracts | | (5 | ) | | 3 |
| | 26 |
| | 29 |
| | Forward starting interest rate and treasury lock swap contracts | | 4 |
| | 4 |
| | (6 | ) | | (5 | ) | | Non-derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | Net investment hedges | | 26 |
| | 67 |
| | — |
| | — |
| | Derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | Cross-currency interest rate swaps | | 19 |
| | 26 |
| | — |
| | — |
| | Cross-currency interest rate swaps excluded component | | 23 |
| | — |
| | — |
| | — |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for 20192022, 2021, and 2018.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Location and Amount of Gain or (Loss) Recognized in Earnings on Fair Value and Cash Flow Hedging Relationships | | Twelve Months | | 2022 | | 2021 | | 2020 | | (Dollars in millions) | Sales | | Cost of Sales | | Net interest expense | | Sales | | Cost of Sales | | Net interest expense | | Sales | | Cost of Sales | | Net interest expense | | Total amounts of income and expense line items presented in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized | | | | | | | | | | | | | | | | | | | | $ | 10,580 | | | $ | 8,443 | | | $ | 182 | | | $ | 10,476 | | | $ | 7,976 | | | $ | 198 | | | $ | 8,473 | | | $ | 6,498 | | | $ | 210 | | | | | | | | | | | | | | | | | | | | | The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | | | | | | Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | | | | | | | | Interest contracts (fixed-for-floating interest rate swaps): | | | | | | | | | | | | | | | | | | | Hedged items | | | | | 2 | | | | | | | 2 | | | | | | | 1 | | | Derivatives designated as hedging instruments | | | | | (2) | | | | | | | (2) | | | | | | | (1) | | | Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | Interest contracts (forward starting interest rate and treasury lock swap contracts): | | | | | | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | | | | | (6) | | | | | | | (9) | | | | | | | (9) | | | Commodity Contracts: | | | | | | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | | | 36 | | | | | | | 20 | | | | | | | (31) | | | | | Foreign Exchange Contracts: | | | | | | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | 45 | | | | | | | (7) | | | | | | | 9 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Location and Amount of Gain or (Loss) Recognized in Earnings on Fair Value and Cash Flow Hedging Relationships | | | | Twelve Months | | | | 2019 | | 2018 | | (Dollars in millions) | | Sales | | Cost of Sales | | Net interest expense | | Sales | | Cost of Sales | | Net interest expense | | Total amounts of income and expense line items presented in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized | | $ | 9,273 |
| | $ | 7,039 |
| | $ | 218 |
| | $ | 10,151 |
| | $ | 7,672 |
| | $ | 235 |
| | | | | | | | | | | | | | | | The effects of fair value and cash flow hedging: | | | | | | | | | | | | | | Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | | | Interest contracts (fixed-for-floating interest rate swaps): | | | | | | | | | | | | | | Hedged items | | | | | | 1 |
| | | | | | — |
| | Derivatives designated as hedging instruments | | | | | | (1 | ) | | | | | | — |
| | Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | | | Interest contracts (forward starting interest rate and treasury lock swap contracts): | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | | | | | | (6 | ) | | | | | | (5 | ) | | Commodity Contracts: | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | | | | (40 | ) | | | | | | (3 | ) | | | | Foreign Exchange Contracts: | | | | | | | | | | | | | | Amount reclassified from AOCI into earnings | | 26 |
| | | | | | 29 |
| | | | |
The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in the line item "Other (income) charges, net" of the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The Company recognized a net loss of $2$11 million in 2022, no gain or loss in 2021, and a net loss of $13$1 million during 2019 and 2018, respectively,in 2020 on these derivatives.
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 lossesgains of $50$134 million at December 31, 20192022 and losses of $112$7 million at December 31, 2018. Losses2021. Gains in AOCI decreased in 20192022 compared to 2018losses in 2021 are primarily as a result of a decreasean increase in foreign currency exchange rates, particularly the euro. If realized, approximately $24$10 million in pre-tax lossesgains will be reclassified into earnings during the next 12 months.months, including foreign exchange contracts prospectively dedesignated and monetized in fourth quarter 2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 11.RETIREMENT PLANS
As described below, Eastman offers various postretirement benefits to its employees.
Defined Contribution Plans
Eastman 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"), under Section 401(a) of the Internal Revenue Code. Eastman made a contribution in February 20202023 to the EIP/ESOP for substantially all U.S. employees equal to 5 percent of their eligible compensation for the 20192022 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 2,076,203; 2,119,614;1,871,624; 1,909,362; and 2,130,1761,997,587 shares as of December 31, 2019, 2018,2022, 2021, and 2017,2020, 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 ("EPS").
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 $68$81 million, $73 million, and $67 million for 2022, 2021, and $64 million for 2019, 2018, and 2017,2020, 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.
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 providesprovided a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will endended on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health 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.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary balance sheet of the change in plan assets during 20192022 and 2018,2021, the funded status of the plans and amounts recognized in the Consolidated Statements of Financial Position.
Summary of Changes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | 2022 | | 2021 | | 2022 | | 2021 | | (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | Change in projected benefit obligation: | | | | | | | | | | | | | Benefit obligation, beginning of year | $ | 1,892 | | | $ | 948 | | | $ | 2,050 | | | $ | 1,089 | | | $ | 665 | | | $ | 745 | | | Service cost | 25 | | | 11 | | | 26 | | | 19 | | | — | | | — | | | Interest cost | 45 | | | 14 | | | 37 | | | 12 | | | 14 | | | 12 | | | Actuarial gain | (328) | | | (264) | | | (49) | | | (68) | | | (127) | | | (40) | | | Curtailment gain | — | | | (3) | | | — | | | — | | | — | | | — | | | Settlement | (9) | | | — | | | (6) | | | — | | | — | | | — | | | Divestitures | — | | | — | | | — | | | (32) | | | — | | | (2) | | | | | | | | | | | | | | | Plan participants' contributions | — | | | 1 | | | — | | | 1 | | | 2 | | | 9 | | | Effect of currency exchange | — | | | (77) | | | — | | | (43) | | | — | | | — | | | Federal subsidy on benefits paid | — | | | — | | | — | | | — | | | — | | | 1 | | | Benefits paid | (154) | | | (28) | | | (166) | | | (30) | | | (45) | | | (60) | | | Benefit obligation, end of year | $ | 1,471 | | | $ | 602 | | | $ | 1,892 | | | $ | 948 | | | $ | 509 | | | $ | 665 | | | Change in plan assets: | | | | | | | | | | | | | Fair value of plan assets, beginning of year | $ | 1,877 | | | $ | 924 | | | $ | 1,798 | | | $ | 938 | | | $ | 134 | | | $ | 144 | | | Actual return on plan assets | (312) | | | (250) | | | 247 | | | 31 | | | (31) | | | 7 | | | Effect of currency exchange | — | | | (76) | | | — | | | (39) | | | — | | | — | | | Company contributions | 3 | | | 18 | | | 4 | | | 23 | | | 35 | | | 40 | | | Reserve for third party contributions | — | | | — | | | — | | | — | | | 11 | | | (7) | | | Plan participants' contributions | — | | | 1 | | | — | | | 1 | | | 2 | | | 9 | | | Benefits paid | (154) | | | (28) | | | (166) | | | (30) | | | (45) | | | (60) | | | Federal subsidy on benefits paid | — | | | — | | | — | | | — | | | — | | | 1 | | | Settlements | (9) | | | — | | | (6) | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets, end of year | $ | 1,405 | | | $ | 589 | | | $ | 1,877 | | | $ | 924 | | | $ | 106 | | | $ | 134 | | | Funded status at end of year | $ | (66) | | | $ | (13) | | | $ | (15) | | | $ | (24) | | | $ | (403) | | | $ | (531) | | | Amounts recognized in the Consolidated Statements of Financial Position consist of: | | | | | | | | | | | | | Other noncurrent assets | $ | — | | | $ | 23 | | | $ | 41 | | | $ | 42 | | | $ | 53 | | | $ | 62 | | | Current liabilities | (13) | | | — | | | (3) | | | — | | | (38) | | | (38) | | | Post-employment obligations | (53) | | | (36) | | | (53) | | | (66) | | | (418) | | | (555) | | | Net amount recognized, end of year | $ | (66) | | | $ | (13) | | | $ | (15) | | | $ | (24) | | | $ | (403) | | | $ | (531) | | | Accumulated benefit obligation | $ | 1,417 | | | $ | 578 | | | $ | 1,803 | | | $ | 910 | | | | | | | Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | | | | | | | Prior service (credit) cost | $ | — | | | $ | (6) | | | $ | 1 | | | $ | (10) | | | $ | (37) | | | $ | (68) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | | 2019 | | 2018 | | 2019 | | 2018 | | (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | Change in projected benefit obligation: | | | | | | | | | | | | | Benefit obligation, beginning of year | $ | 1,959 |
| | $ | 840 |
| | $ | 2,154 |
| | $ | 893 |
| | $ | 672 |
| | $ | 738 |
| | Service cost | 27 |
| | 14 |
| | 35 |
| | 14 |
| | — |
| | — |
| | Interest cost | 76 |
| | 20 |
| | 67 |
| | 20 |
| | 25 |
| | 22 |
| | Actuarial (gain) loss | 200 |
| | 113 |
| | (119 | ) | | (20 | ) | | 71 |
| | (33 | ) | | Plan participants' contributions | — |
| | 1 |
| | — |
| | 1 |
| | 10 |
| | 11 |
| | Effect of currency exchange | — |
| | 11 |
| | — |
| | (45 | ) | | 1 |
| | (1 | ) | | Benefits paid | (195 | ) | | (27 | ) | | (178 | ) | | (23 | ) | | (63 | ) | | (65 | ) | | Benefit obligation, end of year | $ | 2,067 |
| | $ | 972 |
| | $ | 1,959 |
| | $ | 840 |
| | $ | 716 |
| | $ | 672 |
| | Change in plan assets: | | | | | | | | | | | | | Fair value of plan assets, beginning of year | $ | 1,820 |
| | $ | 713 |
| | $ | 2,054 |
| | $ | 773 |
| | $ | 135 |
| | $ | 148 |
| | Actual return on plan assets | 289 |
| | 102 |
| | (61 | ) | | (19 | ) | | 27 |
| | (6 | ) | | Effect of currency exchange | — |
| | 9 |
| | — |
| | (39 | ) | | — |
| | — |
| | Company contributions | 5 |
| | 22 |
| | 5 |
| | 20 |
| | 42 |
| | 43 |
| | Reserve for third party contributions | — |
| | — |
| | — |
| | — |
| | (12 | ) | | 4 |
| | Plan participants' contributions | — |
| | 1 |
| | — |
| | 1 |
| | 10 |
| | 11 |
| | Benefits paid | (195 | ) | | (27 | ) | | (178 | ) | | (23 | ) | | (63 | ) | | (65 | ) | | Fair value of plan assets, end of year | $ | 1,919 |
| | $ | 820 |
| | $ | 1,820 |
| | $ | 713 |
| | $ | 139 |
| | $ | 135 |
| | Funded status at end of year | $ | (148 | ) | | $ | (152 | ) | | $ | (139 | ) | | $ | (127 | ) | | $ | (577 | ) | | $ | (537 | ) | | Amounts recognized in the Consolidated Statements of Financial Position consist of: | | | | | | | | | | | | | Other noncurrent assets | $ | 13 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 50 |
| | $ | 41 |
| | Current liabilities | (3 | ) | | (1 | ) | | (4 | ) | | (1 | ) | | (47 | ) | | (45 | ) | | Post-employment obligations | (158 | ) | | (151 | ) | | (137 | ) | | (126 | ) | | (580 | ) | | (533 | ) | | Net amount recognized, end of year | $ | (148 | ) | | $ | (152 | ) | | $ | (139 | ) | | $ | (127 | ) | | $ | (577 | ) | | $ | (537 | ) | | Accumulated benefit obligation | $ | 2,005 |
| | $ | 919 |
| | $ | 1,900 |
| | $ | 796 |
| | | | | | Amounts recognized in accumulated other comprehensive income consist of: | | | | | | | | | | | | | Prior service (credit) cost | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | (143 | ) | | $ | (182 | ) |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Information for pension plans with projected benefit obligations in excess of plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | Projected benefit obligation | $ | 1,471 | | | $ | 176 | | | $ | 175 | | | $ | 288 | | | Fair value of plan assets | 1,405 | | | 140 | | | 119 | | | 222 | |
| | | | | | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | Projected benefit obligation | $ | 1,673 |
| | $ | 972 |
| | $ | 1,726 |
| | $ | 840 |
| | Fair value of plan assets | 1,512 |
| | 820 |
| | 1,585 |
| | 713 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information for pension plans with accumulated benefit obligations in excess of plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | | | | | Accumulated benefit obligation | $ | 245 | | | $ | 141 | | | $ | 161 | | | $ | 272 | | | Fair value of plan assets | 188 | | | 116 | | | 119 | | | 222 | |
| | | | | | | | | | | | | | | | | | (Dollars in millions) | 2019 | | 2018 | | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | Projected benefit obligation | $ | 1,673 |
| | $ | 651 |
| | $ | 1,726 |
| | $ | 568 |
| | Accumulated benefit obligation | 1,611 |
| | 625 |
| | 1,667 |
| | 547 |
| | Fair value of plan assets | 1,512 |
| | 513 |
| | 1,585 |
| | 448 |
|
Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | | | Components of net periodic benefit (credit) cost: | | | | | | | | | | | | | | | | | | | Service cost | $ | 25 | | | $ | 11 | | | $ | 26 | | | $ | 19 | | | $ | 25 | | | $ | 17 | | | $ | — | | | $ | — | | | $ | — | | | Interest cost | 45 | | | 14 | | | 37 | | | 12 | | | 57 | | | 15 | | | 14 | | | 12 | | | 19 | | | Expected return on plan assets | (128) | | | (31) | | | (126) | | | (37) | | | (135) | | | (34) | | | (4) | | | (5) | | | (5) | | | | | | | | | | | | | | | | | | | | | Amortization of: | | | | | | | | | | | | | | | | | | | Prior service (credit) cost | 1 | | | — | | | — | | | (1) | | | 1 | | | (1) | | | (31) | | | (37) | | | (38) | | Mark-to-market pension and other postretirement benefits loss (gain), net (1) | 112 | | | 10 | | | (170) | | | (62) | | | 163 | | | 28 | | | (103) | | | (35) | | | 49 | | | Net periodic benefit (credit) cost | $ | 55 | | | $ | 4 | | | $ | (233) | | | $ | (69) | | | $ | 111 | | | $ | 25 | | | $ | (124) | | | $ | (65) | | | $ | 25 | | | Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | | | | | | | | Curtailment gain | $ | — | | | $ | (4) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | Current year prior service credit (cost) | — | | | — | | | — | | | — | | | — | | | 12 | | | — | | | — | | | — | | | Amortization of: | | | | | | | | | | | | | | | | | | | Prior service (credit) cost | 1 | | | — | | | — | | | (1) | | | 1 | | | (1) | | | (31) | | | (37) | | | (38) | | | Total | $ | 1 | | | $ | (4) | | | $ | — | | | $ | (1) | | | $ | 1 | | | $ | 11 | | | $ | (31) | | | $ | (37) | | | $ | (38) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | (Dollars in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | | | | | | | Components of net periodic benefit (credit) cost: | | | | | | | | | | | | | | | | | | | Service cost | $ | 27 |
| | $ | 14 |
| | $ | 35 |
| | $ | 14 |
| | $ | 37 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| | Interest cost | 76 |
| | 20 |
| | 67 |
| | 20 |
| | 66 |
| | 20 |
| | 25 |
| | 22 |
| | 23 |
| | Expected return on plan assets | (128 | ) | | (32 | ) | | (147 | ) | | (37 | ) | | (140 | ) | | (35 | ) | | (5 | ) | | (5 | ) | | (5 | ) | | Amortization of: | | | | | | | | | | | | | | | | | | | Prior service (credit) cost | — |
| | — |
| | (1 | ) | | 1 |
| | (4 | ) | | 1 |
| | (39 | ) | | (40 | ) | | (40 | ) | | Mark-to-market pension and other postretirement benefits (gain) loss, net | 39 |
| | 43 |
| | 89 |
| | 36 |
| | (37 | ) | | (7 | ) | | 61 |
| | (26 | ) | | 23 |
| | Net periodic benefit (credit) cost | $ | 14 |
| | $ | 45 |
| | $ | 43 |
| | $ | 34 |
| | $ | (78 | ) | | $ | (8 | ) | | $ | 42 |
| | $ | (49 | ) | | $ | 4 |
| | Other changes in plan assets and benefit obligations recognized in other comprehensive income: | | | | | | | | | | | | | | | | | | | Amortization of: | | | | | | | | | | | | | | | | | | | Prior service (credit) cost | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | (4 | ) | | $ | 1 |
| | $ | (39 | ) | | $ | (40 | ) | | $ | (40 | ) | | Total | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 1 |
| | $ | (4 | ) | | $ | 1 |
| | $ | (39 | ) | | $ | (40 | ) | | $ | (40 | ) |
The estimated
Subsequent to the adhesives resins divestiture, the Company retained pension liabilities of certain plan participants while the status of the participants changed in a Non-U.S. pension plan which triggered a curtailment and an interim mark-to-market ("MTM") remeasurement of the impacted Non-U.S. pension plan's assets and liabilities. A curtailment gain of $7 million, including $3 million reduction in the pension benefit obligation and $4 million of prior service credit for the other postretirement benefit plans that will be amortized from AOCI into net periodic costcredits recognized immediately,and a MTM gain of $3 million were recognized in 2020 is $38 million.2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Settlements are triggered in a plan when distributions exceed the sum of service cost and interest cost of the respective plan. Lump sum payments from a U.S. pension plan resulted in a plan settlement in second quarter 2022. The settlement was not material. However, the settlement triggered an interim remeasurement of the impacted U.S. pension plan's assets and liabilities and, as such, the Company recognized a MTM loss of $7 million in 2022.
Plan Assumptions
The assumptions used to develop the projected benefit obligation for Eastman'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 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | Weighted-average assumptions used to determine benefit obligations for years ended December 31: | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | | Discount rate | 5.58 | % | 4.27 | % | | 2.88 | % | 1.57 | % | | 2.48 | % | 1.08 | % | | 5.55 | % | | 2.83 | % | | 2.38 | % | | Interest crediting rate | 5.48 | % | N/A | | 5.50 | % | N/A | | 5.50 | % | N/A | | N/A | | N/A | | N/A | | Rate of compensation increase | 3.00 | % | 3.04 | % | | 3.00 | % | 3.00 | % | | 2.75 | % | 2.94 | % | | N/A | | N/A | | N/A | | Health care cost trend | | | | | | | | | | | | | | | | Initial | | | | | | | | | | 6.00 | % | | 6.00 | % | | 6.25 | % | | Decreasing to ultimate trend of | | | | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | in year | | | | | | | | | | 2030 | | 2026 | | 2026 | | | | | | | | | | | | | | | | | Weighted-average assumptions used to determine net periodic cost for years ended December 31: | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | | Discount rate | 2.88 | % | 1.57 | % | | 2.48 | % | 1.08 | % | | 3.25 | % | 1.56 | % | | 2.83 | % | | 2.39 | % | | 3.21 | % | | Discount rate for service cost | 2.95 | % | 1.31 | % | | 2.57 | % | 1.08 | % | | 3.31 | % | 1.56 | % | | N/A | | 1.90 | % | | 2.92 | % | | Discount rate for interest cost | 2.46 | % | 1.57 | % | | 1.79 | % | 1.08 | % | | 2.83 | % | 1.56 | % | | 2.35 | % | | 1.74 | % | | 2.80 | % | | Expected return on assets | 7.07 | % | 3.81 | % | | 7.29 | % | 4.04 | % | | 7.37 | % | 4.26 | % | | 3.50 | % | | 3.75 | % | | 3.75 | % | | Rate of compensation increase | 3.00 | % | 3.00 | % | | 2.75 | % | 2.94 | % | | 3.25 | % | 2.94 | % | | N/A | | N/A | | 3.25 | % | | Interest crediting rate | 5.50 | % | N/A | | 5.50 | % | N/A | | 5.52 | % | N/A | | N/A | | N/A | | N/A | | Health care cost trend | | | | | | | | | | | | | | | | Initial | | | | | | | | | | 6.00 | % | | 6.25 | % | | 6.50 | % | | Decreasing to ultimate trend of | | | | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | in year | | | | | | | | | | 2026 | | 2026 | | 2026 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | Weighted-average assumptions used to determine benefit obligations for years ended December 31: | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | | Discount rate | 3.25 | % | 1.56 | % | | 4.29 | % | 2.35 | % | | 3.57 | % | 2.25 | % | | 3.21 | % | | 4.26 | % | | 3.54 | % | | Rate of compensation increase | 3.25 | % | 2.94 | % | | 3.25 | % | 2.94 | % | | 3.25 | % | 2.95 | % | | 3.25 | % | | 3.25 | % | | 3.25 | % | | Health care cost trend | | | | | | | | | | | | | | | | Initial | | | | | | | | | | 6.50 | % | | 6.50 | % | | 6.75 | % | | Decreasing to ultimate trend of | | | | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | in year | | | | | | | | | | 2026 |
| | 2025 |
| | 2025 |
| | | | | | | | | | | | | | | | | | Weighted-average assumptions used to determine net periodic cost for years ended December 31: | U.S. | Non-U.S. | | U.S. | Non-U.S. | | U.S. | Non-U.S. | | | | | | | | Discount rate | 4.29 | % | 2.35 | % | | 3.57 | % | 2.25 | % | | 3.89 | % | 2.33 | % | | 4.26 | % | | 3.54 | % | | 3.91 | % | | Discount rate for service cost | 4.32 | % | 2.35 | % | | 3.64 | % | 2.25 | % | | 3.89 | % | 2.33 | % | | 4.05 | % | | 3.28 | % | | 4.31 | % | | Discount rate for interest cost | 3.96 | % | 2.35 | % | | 3.18 | % | 2.25 | % | | 3.24 | % | 2.33 | % | | 3.93 | % | | 3.14 | % | | 3.28 | % | | Expected return on assets | 7.43 | % | 4.49 | % | | 7.48 | % | 4.83 | % | | 7.49 | % | 5.02 | % | | 3.75 | % | | 3.75 | % | | 3.75 | % | | Rate of compensation increase | 3.25 | % | 2.94 | % | | 3.25 | % | 2.95 | % | | 3.25 | % | 2.94 | % | | 3.25 | % | | 3.25 | % | | 3.25 | % | | Health care cost trend | | | | | | | | | | | | | | | | Initial | | | | | | | | | | 6.50 | % | | 6.75 | % | | 7.00 | % | | Decreasing to ultimate trend of | | | | | | | | | | 5.00 | % | | 5.00 | % | | 5.00 | % | | in year | | | | | | | | | | 2025 |
| | 2025 |
| | 2021 |
|
The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows.
A 6.50 percent rate of increase in per capita cost of covered health care benefits is assumed for 2020. The rate is assumed to decrease gradually to 5 percent in 2026 and remain at that level thereafter. A one percent increase or decrease in health care cost trend would have had 0 material impact on the 2019 service and interest costs or the 2019 benefit obligation, because the Company's contributions for benefits are fixed.
In 2017, the Company performed a five year experience study on assumptions for the U.S. plans, including a review of the mortality tables. As a result of the study, the Company has updated the mortality assumptions used to a modified RP-2017 table with a modified MP-2017 improvement scale and no collar adjustment.
The fair value of plan assets for the U.S. pension plans at December 31, 20192022 and 20182021 was $1.9$1.4 billion and $1.8$1.9 billion, respectively, while the fair value of plan assets at December 31, 20192022 and 20182021 for non-U.S. pension plans was $820$589 million and $713$924 million, respectively. At December 31, 20192022 and 2018,2021, the expected weighted-average long-term rate of return on U.S. pension plan assets was 7.376.62 percent and 7.437.07 percent, respectively. The expected weighted-average long-term rate of return on non-U.S. pension plans assets was 4.263.86 percent and 4.493.81 percent at December 31, 20192022 and 2018,2021, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
The following tables reflect the fair value of the defined benefit pension plans assets. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2022 | | Description | Total Fair Value | | 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. | Cash and Cash Equivalents (1) | $ | 27 | | | $ | 46 | | | $ | 27 | | | $ | 46 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Public Equity - United States (2) | 4 | | | — | | | 4 | | | — | | | — | | | — | | | — | | | — | | Other Investments (3) | — | | | 45 | | | — | | | — | | | — | | | — | | | — | | | 45 | | | Total Assets at Fair Value | $ | 31 | | | $ | 91 | | | $ | 31 | | | $ | 46 | | | $ | — | | | $ | — | | | $ | — | | | $ | 45 | | Investments Measured at Net Asset Value (4) | 1,374 | | | 498 | | | | | | | | | | | | | | | Total Assets | $ | 1,405 | | | $ | 589 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2021 | | Description | Total Fair Value | | 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. | Cash and Cash Equivalents (1) | $ | 45 | | | $ | 37 | | | $ | 45 | | | $ | 37 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Public Equity - United States (2) | 3 | | | — | | | 3 | | | — | | | — | | | — | | | — | | | — | | Other Investments (3) | — | | | 59 | | | — | | | — | | | — | | | — | | | — | | | 59 | | | Total Assets at Fair Value | $ | 48 | | | $ | 96 | | | $ | 48 | | | $ | 37 | | | $ | — | | | $ | — | | | $ | — | | | $ | 59 | | Investments Measured at Net Asset Value (4) | 1,829 | | | 828 | | | | | | | | | | | | | | | Total Assets | $ | 1,877 | | | $ | 924 | | | | | | | | | | | | | |
(1)Cash and Cash Equivalents: Funds generally invested in actively managed collective trust funds or interest bearing accounts. (2)Public Equity - United States: Common stock equity securities which are primarily valued using a market approach based on the quoted market prices. (3)Other Investments: Primarily consist of insurance contracts which are generally valued using a crediting rate that approximates market returns and investments 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, public equity, and public real asset 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2019 | | Description | Total Fair Value | | 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. | Cash & Cash Equivalents (1) | $ | 35 |
| | $ | 72 |
| | $ | 35 |
| | $ | 72 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Public Equity - United States (2) | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other Investments (3) | — |
| | 57 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 57 |
| | Total Assets at Fair Value | $ | 36 |
| | $ | 129 |
| | $ | 36 |
| | $ | 72 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 57 |
| Investments Measured at Net Asset Value (4) | 1,883 |
| | 691 |
| | | | | | | | | | | | | | Total Assets | $ | 1,919 |
| | $ | 820 |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | | | Fair Value Measurements at December 31, 2018 | | Description | Total Fair Value | | 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. | Cash & Cash Equivalents (1) | $ | 16 |
| | $ | 53 |
| | $ | 16 |
| | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Public Equity - United States (2) | 2 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| Other Investments (3) | — |
| | 51 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
| | Total Assets at Fair Value | $ | 18 |
| | $ | 104 |
| | $ | 18 |
| | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51 |
| Investments Measured at Net Asset Value (4) | 1,802 |
| | 609 |
| | | | | | | | | | | | | | Total Assets | $ | 1,820 |
| | $ | 713 |
| | | | | | | | | | | | |
| | (1)
| Cash & Cash Equivalents: Funds generally invested in actively managed collective trust funds or interest bearing accounts. |
| | (2)
| Public Equity - United States: Common stock equity securities which are primarily valued using a market approach based on the quoted market prices. |
| | (3)
| Other Investments: Primarily consist of insurance contracts which are generally valued using a crediting rate that approximates market returns and investments 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. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the fair value of the postretirement benefit plan 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, 2022 | | Description | Total Fair Value | | 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 and Cash Equivalents (1) | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | | Debt (2): | | | | | | | | | Fixed Income (U.S.) | 62 | | | — | | | 62 | | | — | | | Fixed Income (Non-U.S.) | 21 | | | — | | | 21 | | | — | | | | | | | | | | | Total | $ | 88 | | | $ | 5 | | | $ | 83 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Fair Value Measurements at
December 31, 2021 | | Description | Total Fair Value | | 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 and Cash Equivalents (1) | $ | — | | | $ | — | | | $ | — | | | $ | — | | Debt (2): | | | | | | | | | Fixed Income (U.S.) | 79 | | | — | | | 79 | | | — | | | Fixed Income (Non-U.S.) | 29 | | | — | | | 29 | | | — | | | | | | | | | | | Total | $ | 108 | | | $ | — | | | $ | 108 | | | $ | — | |
| | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Fair Value Measurements at December 31, 2019 | | Description | Total Fair Value | | 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: | | | | | | | | Debt (1): | | | | | | | | | Fixed Income (U.S.) | $ | 85 |
| | $ | — |
| | $ | 85 |
| | $ | — |
| | Fixed Income (Non-U.S.) | 26 |
| | — |
| | 26 |
| | — |
| | Total | $ | 111 |
| | $ | — |
| | $ | 111 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Fair Value Measurements at
December 31, 2018 | | Description | Total Fair Value | | 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 (2) | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| Debt (1): | | | | | | | | | Fixed Income (U.S.) | 78 |
| | — |
| | 78 |
| | — |
| | Fixed Income (Non-U.S.) | 26 |
| | — |
| | 26 |
| | — |
| | Total | $ | 107 |
| | $ | 3 |
| | $ | 104 |
| | $ | — |
|
| | (1)
| 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 spreads. |
| | (2)
| Cash & Cash Equivalents: Funds generally invested in actively managed collective trust funds or interest bearing accounts. |
The Company valued assets with unobservable inputs (Level 3), primarily insurance contracts, using a crediting rate that approximates market returns and investments 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) | | | | Other Investments(1) | | (Dollars in millions) | | Non-U.S. Pension Plans | | Balance at December 31, 2017 | | $ | 51 |
| | Unrealized gains | | — |
| | Balance at December 31, 2018 | | 51 |
| | Unrealized gains | | 5 |
| | Purchases, issuances, sales, and settlements | | 1 |
| | Balance at December 31, 2019 | | $ | 57 |
|
| | | | | | | | | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | Other Investments(1) | Primarily consists of insurance contracts.(Dollars in millions) | | Non-U.S. Pension Plans | | Balance at December 31, 2020 | | $ | 68 | | | | | | Unrealized losses | | (9) | | | | | | Balance at December 31, 2021 | | 59 | | | | | | Unrealized losses | | (14) | | | | | | Balance at December 31, 2022 | | $ | 45 | |
(1)Primarily consists of insurance contracts.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the target allocation for the Company's U.S. and non-U.S. pension and postretirement benefit plans assets for 20202023 and the asset allocation at December 31, 20192022 and 2018,2021, by asset category. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Pension Plans | | Non-U.S. Pension Plans | | Postretirement Benefit Plan | | 2023 Target Allocation | Plan Assets at
December 31, 2022 | Plan Assets at
December 31, 2021 | | 2023 Target Allocation | Plan Assets at
December 31, 2022 | Plan Assets at
December 31, 2021 | | 2023 Target Allocation | Plan Assets at
December 31, 2022 | Plan Assets at
December 31, 2021 | | Asset category | | | | | | | | | | | | | Equity securities | 39% | 36% | 38% | | 21% | 20% | 22% | | —% | —% | —% | | Debt securities | 38% | 39% | 43% | | 60% | 62% | 59% | | 100% | 100% | 100% | | Real estate | 8% | 7% | 3% | | 4% | 4% | 4% | | —% | —% | —% | Other investments (1) | 15% | 18% | 16% | | 15% | 14% | 15% | | —% | —% | —% | | Total | 100% | 100% | 100% | | 100% | 100% | 100% | | 100% | 100% | 100% |
(1)U.S. primarily consists of private equity and natural resource and energy related limited partnership investments and public real assets. Non-U.S. primarily consists of annuity contracts and alternative investments. | | | | | | | | | | | | | | | U.S. Pension Plans | | Non-U.S. Pension Plans | | Postretirement Benefit Plan | | | 2020 Target Allocation | Plan Assets at
December 31, 2019 | Plan Assets at
December 31, 2018 | | 2020 Target Allocation | Plan Assets at
December 31, 2019 | Plan Assets at
December 31, 2018 | | 2020 Target Allocation | Plan Assets at
December 31, 2019 | Plan Assets at
December 31, 2018 | | Asset category | | | | | | | | | | | | | Equity securities | 44% | 50% | 43% | | 24% | 21% | 19% | | —% | —% | —% | | Debt securities | 39% | 37% | 44% | | 57% | 53% | 54% | | 100% | 100% | 100% | | Real estate | 2% | 2% | 2% | | 5% | 8% | 8% | | —% | —% | —% | Other investments (1) | 15% | 11% | 11% | | 14% | 18% | 19% | | —% | —% | —% | | Total | 100% | 100% | 100% | | 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. |
Investment 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 investments 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 that includes senior management.
Eastman's investment strategy for its VEBA trust is to invest in intermediate-term, well diversified, high quality investment instruments, with a primary objective of capital preservation.
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 made 0no contributions to its U.S. defined benefit pension plans in 20192022 or 2018.2021. For 20202023 calendar year, 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.
Benefit payments are made using a combination of plan assets and cash payments. Most of the Company's pension plans have plan assets that predominately cover pension benefit obligations. The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows: | | | | | | | | | | | | | | | | | | | Pension Plans | | Postretirement
Benefit Plans | | (Dollars in millions) | U.S. | | Non-U.S. | | | | 2023 | $ | 230 | | | $ | 28 | | | $ | 47 | | | 2024 | 123 | | | 26 | | | 47 | | | 2025 | 122 | | | 28 | | | 47 | | | 2026 | 121 | | | 31 | | | 46 | | | 2027 | 126 | | | 35 | | | 45 | | | 2028-2032 | 604 | | | 187 | | | 208 | |
| | | | | | | | | | | | | | | Pension Plans | | Postretirement Benefit Plans | | (Dollars in millions) | U.S. | | Non-U.S. | | | | 2020 | $ | 197 |
| | $ | 31 |
| | $ | 57 |
| | 2021 | 161 |
| | 30 |
| | 57 |
| | 2022 | 156 |
| | 31 |
| | 53 |
| | 2023 | 151 |
| | 34 |
| | 47 |
| | 2024 | 151 |
| | 38 |
| | 47 |
| | 2025-2029 | 686 |
| | 210 |
| | 223 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 12.LEASES AND OTHER COMMITMENTS
| | 11. | LEASES AND OTHER COMMITMENTS |
Leases
On January 1, 2019, Eastman adopted ASU 2016-02 Leases and related releases under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard. The new standard establishesThere are two types of leases: financefinancing and operating. Both types of leases have associated right-to-use assets and lease liabilities that have beenare valued at the net present value of the lease payments and recognized on the Consolidated Statements of Financial Position which did not result in an impact to retained earnings.Position. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used.
Upon adoption, the Company elected the practical expedient package wherein: expired or existing contracts were not reassessed as to whether these contracts are or contained a lease; expired or existing contracts were not reassessed for operating or financing classification; and initial direct costs for existing leases were not reassessed. The Company also elected the practical expedient not to assess whether existing or expired land easements that were not previously accounted for under the prior standard are or contain a lease. Lastly, the Company elected the accounting policy not to apply the recognition and measurement requirements to short-term leases with a term of 12 months or less thatand do not include a bargain purchase option.
The Company has operating leases, as a lessee, with customary terms that do not include: significant variable lease payments; significant reasonably certain extensions or options required to be included in the lease term; restrictions; or other covenants for real property, rolling stock, and machinery and equipment. Real property leases primarily consist of office space and rolling stock leases primarily for railcars and fleet vehicles. At December 31, 2019, operating2022 and 2021, right-to-use assets of $197for operating leases totaled $211 million and $216 million, respectively, are included as a part of "Other noncurrent assets" inon the Consolidated Statements of Financial PositionPosition. At both December 31, 2022 and includes $82021, the operating right-to-use assets include $3 million of assets previously classified as lease intangibles.intangibles and $6 million and $5 million of prepaid lease assets, respectively. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" inon the Consolidated Statements of Financial Position.
As of December 31, 2019, maturities2022, financing leases were not material to the Company's financial statements.
As of December 31, 2022, reconciliation of lease payments and operating lease liabilities is provided below: | | | | | | | | | | (Dollars in millions) | | Operating lease liabilities | | 2023 | | $ | 58 | | | 2024 | | 46 | | | 2025 | | 37 | | | 2026 | | 26 | | | 2027 | | 17 | | | 2028 and beyond | | 38 | | | Total lease payments | 222 | | | Less: amounts of lease payments representing interest | | 20 | | | Present value of future lease payments | 202 | | | Less: current obligations under leases | | 52 | | | Long-term lease obligations | | $ | 150 | |
| | | | | | | (Dollars in millions) | | Operating lease liabilities | | 2020 | | $ | 62 |
| | 2021 | | 49 |
| | 2022 | | 38 |
| | 2023 | | 25 |
| | 2024 | | 14 |
| | 2025 and beyond | | 30 |
| | Total lease payments | | 218 |
| | Less: amounts of lease payments representing interest | | 22 |
| | Present value of future lease payments | | 196 |
| | Less: current obligations under leases | | 55 |
| | Long-term lease obligations | | $ | 141 |
|
There have been no material changes to the future minimum lease payments asNOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018 as accounted for under the previous2021, reconciliation of lease standard.payments and operating lease liabilities is provided below: | | | | | | | | | | (Dollars in millions) | | Operating lease liabilities | | 2022 | | $ | 55 | | | 2023 | | 44 | | | 2024 | | 31 | | | 2025 | | 24 | | | 2026 | | 18 | | | 2027 and beyond | | 53 | | | Total lease payments | | 225 | | | Less: amounts of lease payments representing interest | | 18 | | | Present value of future lease payments | | 207 | | | Less: current obligations under leases | | 50 | | | Long-term lease obligations | | $ | 157 | |
The Company has operating leases, primarily leases for railcars, with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease that will expire beginning in firstthird quarter 2020.2023. Residual guarantee payments that become probable and estimable are recognized as 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.
Lease costs during the period and other information is provided below: | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Lease costs: | | | | | | | Operating lease costs | $ | 67 | | $ | 71 | | $ | 73 | | Short-term lease costs | 45 | | 40 | | 37 | | Sublease income | (13) | | (4) | | (4) | | Total | $ | 99 | | $ | 107 | | $ | 106 |
| | | | | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | | Other operating lease information: | | | | | Cash paid for amounts included in the measurement of lease liabilities | $ | 67 | | $ | 69 | | Right-to-use assets obtained in exchange for new lease liabilities | $ | 69 | | $ | 110 | | | | | | | Weighted-average remaining lease term, in years | 6 | | 6 | | Weighted-average discount rate | 3.2 | % | | 2.7 | % |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Lease costs during the period and other information is provided below:
| | | | | | | | | For year ended | | (Dollars in millions) | December 31, 2019 | | Lease costs: | | | | Operating lease costs | $ | 70 |
| | | Short-term lease costs | 40 |
| | | Sublease income | (2 | ) | | | Total | $ | 108 |
| | | | | | Other operating lease information: | | | | Cash paid for amounts included in the measurement of lease liabilities | $ | 72 |
| | | Right-to-use assets obtained in exchange for new lease liabilities | 54 |
| | | | | | | Weighted-average remaining lease term, in years | 5 |
| | | Weighted-average discount rate | 4.0 | % |
Debt and Other Commitments
Eastman'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 | | 2023 | | $ | 800 | | | $ | 326 | | | $ | 180 | | | $ | 166 | | | $ | 58 | | | $ | 207 | | | $ | 1,737 | | | 2024 | | 241 | | | — | | | 162 | | | 170 | | | 46 | | | 80 | | | 699 | | | 2025 | | 693 | | | — | | | 143 | | | 140 | | | 37 | | | 88 | | | 1,101 | | | 2026 | | 530 | | | — | | | 131 | | | 118 | | | 26 | | | 86 | | | 891 | | | 2027 | | 196 | | | 499 | | | 97 | | | 112 | | | 17 | | | 102 | | | 1,023 | | | 2028 and beyond | | 1,866 | | | — | | | 1,091 | | | 2,366 | | | 38 | | | 912 | | | 6,273 | | | Total | | $ | 4,326 | | | $ | 825 | | | $ | 1,804 | | | $ | 3,072 | | | $ | 222 | | | $ | 1,475 | | | $ | 11,724 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | Payments Due for | | Period | | Debt Securities | | Credit Facilities and Other | | Interest Payable | | Purchase Obligations | | Operating Leases | | Other Liabilities | | Total | | 2020 | | $ | — |
| | $ | 171 |
| | $ | 173 |
| | $ | 181 |
| | $ | 62 |
| | $ | 241 |
| | $ | 828 |
| | 2021 | | 483 |
| | — |
| | 186 |
| | 156 |
| | 49 |
| | 81 |
| | 955 |
| | 2022 | | 741 |
| | — |
| | 175 |
| | 102 |
| | 38 |
| | 87 |
| | 1,143 |
| | 2023 | | 840 |
| | — |
| | 156 |
| | 91 |
| | 25 |
| | 87 |
| | 1,199 |
| | 2024 | | 240 |
| | — |
| | 137 |
| | 100 |
| | 14 |
| | 89 |
| | 580 |
| | 2025 and beyond | | 3,307 |
| | — |
| | 1,414 |
| | 1,967 |
| | 30 |
| | 1,106 |
| | 7,824 |
| | Total | | $ | 5,611 |
| | $ | 171 |
| | $ | 2,241 |
| | $ | 2,597 |
| | $ | 218 |
| | $ | 1,691 |
| | $ | 12,529 |
|
Estimated future payments of debt securities assumes the repayment of principal upon stated maturity, and actual amounts and the timing of such payments may differ materially due to repayment or other changes in the terms of such debt prior to maturity.
Eastman had various purchase obligations at December 31, 20192022 totaling approximately $2.6$3.1 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, accrued compensation benefits, environmental loss contingency reserves, accrued compensation benefits,estimates, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2025"2028 and beyond" line item.
The amount and timing of pension and other postretirement benefit payments included in other liabilities is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company's U.S. defined benefit pension plans are not currently under any benefit restrictions. See Note 11, "Retirement Plans", 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 the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See "Environmental Costs" in Note 1, "Significant Accounting Policies", and see Note 13, "Environmental Matters and Asset Retirement Obligations", for more information regarding outstanding environmental matters and asset retirement obligations.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 to intellectual property, environmental matters, third-party debt, 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 remaining terms up to 3015 years with maximum potential future payments of approximately $35$160 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote. Eastman utilizes letters of credit to support commitments made in the ordinary course of business. The Company does not expect that any claims against or draws on these instruments would have a material adverse effect on the Company.
| | 12. | ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS |
13.ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS
Certain Eastman manufacturing facilities generate hazardous and nonhazardous wastes, of which 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 certain cleanup costs. In addition, the Company will 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". The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of operationsfinancial statements and related disclosures in the period recognized. However, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future liquidity oroverall financial condition. The Company's total reserve for environmental loss contingencies was $287 millionstatements and $296 million at December 31, 2019 and December 31, 2018, respectively.related disclosures.
Environmental Remediation and Environmental Asset Retirement Obligations
The Company's totalnet environmental reserve that management believes to be probable and reasonably estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Other noncurrent assets", "Payables and other current liabilities", and "Other long-term liabilities" inon the Consolidated Statements of Financial Position as follows: | | | | | | | | | | | | | (Dollars in millions) | December 31, | | 2022 | | 2021 | | Environmental contingencies, current | $ | 10 | | | $ | 20 | | | Environmental contingencies, long-term | 264 | | | 261 | | | Total | $ | 274 | | | $ | 281 | |
| | | | | | | | | | (Dollars in millions) | December 31, | | | 2019 | | 2018 | | Environmental contingent liabilities, current | $ | 20 |
| | $ | 25 |
| | Environmental contingent liabilities, long-term | 267 |
| | 271 |
| | Total | $ | 287 |
| | $ | 296 |
|
Environmental Remediation
Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $260$245 million to the maximum of $487$457 million and from the best estimate or minimum of $271$253 million to the maximum of $508$473 million at December 31, 20192022 and December 31, 2018,2021, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at both December 31, 2019 and 2022. December 31, 2018.
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, $99$117 million had been paid for costs at the Shared Sites as of December 31, 2019.2022. As of December 31, 2019,2022, an additional $197$200 million has been recognized for estimated future remediation costs at the Shared Sites, over a period of approximately 30 years.
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 withinrecognized in "Cost of sales" inand "Other (income) charges, net" on the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Changes in the reserves for environmental remediation liabilities for twelve months ended 2019during full year 2022 and full year 2021 are summarized below: | | | | | | | (Dollars in millions) | Environmental Remediation Liabilities | | Balance at December 31, 2020 | $ | 257 | | | Changes in estimates recognized in earnings and other | 9 | | | Cash reductions | (13) | | | Balance at December 31, 2021 | 253 | | | | | Changes in estimates recognized in earnings and other | 6 | | | Cash reductions | (14) | | | Balance at December 31, 2022 | $ | 245 | |
| | | | | | (Dollars in millions) | Environmental Remediation Liabilities | | Balance at December 31, 2017 | $ | 280 |
| | Changes in estimates recognized in earnings and other | 7 |
| | Cash reductions | (16 | ) | | Balance at December 31, 2018 | 271 |
| | Changes in estimates recognized in earnings and other | 4 |
| | Cash reductions | (15 | ) | | Balance at December 31, 2019 | $ | 260 |
|
Environmental Asset 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. Eastman 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 recognized to date for these environmental asset retirement obligation costs was $27$29 million and $25$28 million at December 31, 20192022 and December 31, 2018,2021, respectively.
Other
Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate the possibility of future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred. Eastman's cash expenditures related to environmental protection and improvement were $244$300 million, $274$281 million, and $257$265 million in 2019, 2018,2022, 2021, and 2017,2020, 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 $27$60 million, $44$38 million, and $38$42 million in 2019, 2018,2022, 2021, and 2017,2020, 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 atin Pace, Florida and Oulu, Finland. These recognized non-environmental asset retirement obligations were $48 million and $46$51 million at both December 31, 20192022 and December 31, 2018, respectively,2021, and are included as part ofin "Other long-term liabilities" inon the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 14.LEGAL MATTERS
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. 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,position, results of operations, or cash flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 15.STOCKHOLDERS' EQUITY
A reconciliation of the changes in stockholders' equity for 2019, 2018,2022, 2021, and 20172020 is provided below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 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, 2016 | $ | 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 |
| Cumulative Effect of Adoption of New Accounting Standards (3) | — |
| | — |
| | 16 |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
| | Net Earnings | — |
| | — |
| | 1,080 |
| | — |
| | — |
| | 1,080 |
| | 4 |
| | 1,084 |
| Cash Dividends (1) | — |
| | — |
| | (325 | ) | | — |
| | — |
| | (325 | ) | | — |
| | (325 | ) | | Other Comprehensive (Loss) | — |
| | — |
| | — |
| | (36 | ) | | — |
| | (36 | ) | | — |
| | (36 | ) | Share-Based Compensation Expense (2) | — |
| | 64 |
| | — |
| | — |
| | — |
| | 64 |
| | — |
| | 64 |
| | Stock Option Exercises | — |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
| Other (4) | — |
| | (17 | ) | | — |
| | — |
| | — |
| | (17 | ) | | (1 | ) | | (18 | ) | | Share Repurchase | — |
| | — |
| | — |
| | — |
| | (400 | ) | | (400 | ) | | — |
| | (400 | ) | | Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) | | Balance at December 31, 2018 | $ | 2 |
| | $ | 2,048 |
| | $ | 7,573 |
|
| $ | (245 | ) |
| $ | (3,575 | ) |
| $ | 5,803 |
|
| $ | 75 |
|
| $ | 5,878 |
| Cumulative Effect of Adoption of New Accounting Standards (5) | — |
| | — |
| | (20 | ) | | 20 |
| | — |
| | — |
| | — |
| | — |
| | Net Earnings | — |
| | — |
| | 759 |
| | — |
| | — |
| | 759 |
| | 3 |
| | 762 |
| Cash Dividends (1) | — |
| | — |
| | (347 | ) | | — |
| | — |
| | (347 | ) | | — |
| | (347 | ) | | Other Comprehensive Income | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
| Share-Based Compensation Expense (2) | — |
| | 59 |
| | — |
| | — |
| | — |
| | 59 |
| | — |
| | 59 |
| | Stock Option Exercises | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | 9 |
| Other (4) | — |
| | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) | | — |
| | (11 | ) | | Share Repurchase | — |
| | — |
| | — |
| | — |
| | (325 | ) | | (325 | ) | | — |
| | (325 | ) | | Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) | | Balance at December 31, 2019 | $ | 2 |
| | $ | 2,105 |
|
| $ | 7,965 |
|
| $ | (214 | ) |
| $ | (3,900 | ) |
| $ | 5,958 |
|
| $ | 74 |
|
| $ | 6,032 |
|
| | (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)
| On January 1, 2018, the Company adopted new accounting standards for revenue recognition and derivatives and hedging, which resulted in increases to beginning retained earnings of $53 million and $2 million, respectively. The Company also adopted a new accounting standard for income taxes, which resulted in a decrease to beginning retained earnings of $39 million. |
| | (4)
| Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards. |
| | (5)
| On January 1, 2019, the Company adopted a new accounting standard for reporting comprehensive income, which resulted in a reclassification of stranded tax effects from the Tax Reform Act from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | 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, 2019 | $ | 2 | | | $ | 2,105 | | | $ | 7,965 | | | $ | (214) | | | $ | (3,900) | | | $ | 5,958 | | | $ | 74 | | | $ | 6,032 | | | | | | | | | | | | | | | | | | | Net Earnings | — | | | — | | | 478 | | | — | | | — | | | 478 | | | 11 | | | 489 | | Cash Dividends (1) | — | | | — | | | (363) | | | — | | | — | | | (363) | | | — | | | (363) | | | Other Comprehensive (Loss) | — | | | — | | | — | | | (59) | | | — | | | (59) | | | — | | | (59) | | Share-Based Compensation Expense (2) | — | | | 44 | | | — | | | — | | | — | | | 44 | | | — | | | 44 | | | Stock Option Exercises | — | | | 36 | | | — | | | — | | | — | | | 36 | | | — | | | 36 | | | | | | | | | | | | | | | | | | Other (3) | — | | | (11) | | | — | | | — | | | — | | | (11) | | | 2 | | | (9) | | | Share Repurchase | — | | | — | | | — | | | — | | | (60) | | | (60) | | | — | | | (60) | | | Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | | | Balance at December 31, 2020 | $ | 2 | | | $ | 2,174 | | | $ | 8,080 | | | $ | (273) | | | $ | (3,960) | | | $ | 6,023 | | | $ | 85 | | | $ | 6,108 | | | | | | | | | | | | | | | | | | | Net Earnings | — | | | — | | | 857 | | | — | | | — | | | 857 | | | 10 | | | 867 | | Cash Dividends (1) | — | | | — | | | (380) | | | — | | | — | | | (380) | | | — | | | (380) | | | Other Comprehensive Income | — | | | — | | | — | | | 91 | | | — | | | 91 | | | — | | | 91 | | Share-Based Compensation Expense (2) | — | | | 70 | | | — | | | — | | | — | | | 70 | | | — | | | 70 | | | Stock Option Exercises | — | | | 62 | | | — | | | — | | | — | | | 62 | | | — | | | 62 | | | | | | | | | | | | | | | | | | Other (3) | — | | | (19) | | | — | | | — | | | — | | | (19) | | | 3 | | | (16) | | Share Repurchase (4) | — | | | (100) | | | — | | | — | | | (900) | | | (1,000) | | | — | | | (1,000) | | | Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (14) | | | (14) | | | Balance at December 31, 2021 | $ | 2 | | | $ | 2,187 | | | $ | 8,557 | | | $ | (182) | | | $ | (4,860) | | | $ | 5,704 | | | $ | 84 | | | $ | 5,788 | | | | | | | | | | | | | | | | | | | Net Earnings | — | | | — | | | 793 | | | — | | | — | | | 793 | | | 3 | | | 796 | | Cash Dividends (1) | — | | | — | | | (377) | | | — | | | — | | | (377) | | | — | | | (377) | | | Other Comprehensive Income | — | | | — | | | — | | | (23) | | | — | | | (23) | | | — | | | (23) | | Share-Based Compensation Expense (2) | — | | | 69 | | | — | | | — | | | — | | | 69 | | | — | | | 69 | | | Stock Option Exercises | — | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 | | | | | | | | | | | | | | | | | | Other (3) | — | | | (20) | | | — | | | — | | | — | | | (20) | | | (4) | | | (24) | | Share Repurchase (5) | — | | | 70 | | | — | | | — | | | (1,072) | | | (1,002) | | | — | | | (1,002) | | | | | | | | | | | | | | | | | | | Balance at December 31, 2022 | $ | 2 | | | $ | 2,315 | | | $ | 8,973 | | | $ | (205) | | | $ | (5,932) | | | $ | 5,153 | | | $ | 83 | | | $ | 5,236 | |
(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)Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards. (4)Additional paid-capital in 2021 included payment for repurchase of shares under the 2021 ASR which had not yet been delivered. (5)Additional paid-in capital in 2022 included the final settlement of the 2021 ASR and the favorable settlement of the second quarter 2022 accelerated share repurchase program (the "2022 ASR").
Eastman 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 $2.52$3.07 in 2019, $2.302022, $2.83 in 2018,2021, and $2.09$2.67 in 2020. 2017.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
TheIn 1997 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 aplans. A warrant to purchase up to 6 million shares of par value common stock of the Company for par value.was contributed to the trust. 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 EPS because the conditions upon which the warrant becomes exercisable have not been met.
The additions to paid-in capital in 2019, 2018, and 2017 are primarily for compensation expense of equity awards and employee stock option exercises.
In February 2014, the Company's Board of Directors authorized repurchase of up to $1 billion of the Company's outstanding common stock. The Company completed the $1 billion repurchase authorization in May 2018, acquiring a total of 12,215,950 shares. NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In February 2018, the Company's Board of Directors authorized the repurchase of up to $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company.Company and its stockholders (the "2018 authorization"). The Company completed the 2018 authorization in May 2022, acquiring a total of 19,915,370 shares. In December 2021, the Company's Board of Directors authorized the additional repurchase of up to $2.5 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders (the "2021 authorization"). As of December 31, 2019,2022, a total of 6,753,1646,743,883 shares have been repurchased under thisthe 2021 authorization for $635 million. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
In fourth quarter 2021, the Company entered into an accelerated share repurchase program ("2021 ASR") to purchase $500 million of the Company's common stock under the 2018 authorization. In exchange for upfront payment totaling $500 million, the financial institutions committed to deliver shares during the 2021 ASR's purchase period, which was settled in first quarter 2022. The total number of shares ultimately delivered was determined at the end of the applicable purchase period based on the volume-weighted average price of the Company's stock during the term of the 2021 ASR, less a discount. Approximately 80 percent of the expected shares repurchased under the 2021 ASR were delivered in fourth quarter 2021 and the remaining shares were delivered in first quarter 2022.
In second quarter 2022, the Company entered into an accelerated share repurchase program ("2022 ASR") to purchase $500 million of the Company's common stock under the Board approved authorizations. In exchange for upfront payment totaling $500 million, the financial institutions committed to deliver shares during the 2022 ASR's purchase period, which was settled in third quarter 2022. The total number of $573 million. shares ultimately delivered was determined at the end of the applicable purchase period based on the volume-weighted average price of the Company's stock during the term of the 2022 ASR, less a discount. Approximately 80 percent of the expected shares repurchased under the 2022 ASR were delivered in second quarter 2022 and the remaining shares were delivered in third quarter 2022.
During 2019,2022, the Company repurchased 4,282,40910,710,259 shares of common stock for a cost$1,102 million, which included $100 million from the settlement of approximately $325 million.the 2021 ASR. During 2018,2021 and 2020, the Company repurchased 3,959,878 shares of common stock of 8,061,779 and 1,134,052, respectively, for a cost of approximately $400 million. During 2017, the Company repurchased 4,184,637 shares of common stock for a cost of approximately $350 million.$900 million and $60 million, respectively.
The Company's charitable foundation held 50,798 issued and outstanding shares of the Company's common stock at December 31, 2019, 2018,2022, 2021, and 20172020 which are included in treasury stock in the Consolidated Statements of Financial Position and excluded from calculations of diluted EPS.
The following table sets forth the computation of basic and diluted EPS: | | | | | | | | | | | | | | | For years ended December 31, | | (In millions, except per share amounts) | 2019 | | 2018 | | 2017 | | Numerator | | | | | | | Net earnings attributable to Eastman | $ | 759 |
| | $ | 1,080 |
| | $ | 1,384 |
| | | | | | | | | Denominator | | | | | | | Weighted average shares used for basic EPS | 137.4 |
| | 141.2 |
| | 144.8 |
| | Dilutive effect of stock options and other award plans | 1.1 |
| | 1.7 |
| | 1.3 |
| | Weighted average shares used for diluted EPS | 138.5 |
| | 142.9 |
| | 146.1 |
| | | | | | | | EPS (1) | | | | | | | Basic | $ | 5.52 |
| | $ | 7.65 |
| | $ | 9.56 |
| | Diluted | $ | 5.48 |
| | $ | 7.56 |
| | $ | 9.47 |
|
| | (1)
| EPS is calculated using whole dollars and shares. |
| | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (In millions, except per share amounts) | 2022 | | 2021 | | 2020 | | Numerator | | | | | | | Net earnings attributable to Eastman | $ | 793 | | | $ | 857 | | | $ | 478 | | | | | | | | | Denominator | | | | | | | Weighted average shares used for basic EPS | 123.5 | | | 134.9 | | | 135.5 | | | Dilutive effect of stock options and other award plans | 1.4 | | | 2.2 | | | 1.0 | | | Weighted average shares used for diluted EPS | 124.9 | | | 137.1 | | | 136.5 | | | | | | | | EPS (1) | | | | | | | Basic | $ | 6.42 | | | $ | 6.35 | | | $ | 3.53 | | | Diluted | $ | 6.35 | | | $ | 6.25 | | | $ | 3.50 | |
(1) EPS is calculated using whole dollars and shares. Shares underlying stock options excluded from the 2019, 2018,2022, 2021, and 20172020 calculations of diluted EPS were 2,183,875, 619,706,1,398,110, 150,781, and 204,978,2,424,826, respectively, because the grant price of these options was greater than the average market price of the Company's common stock and the effect of including them in the calculation of diluted EPS would have been antidilutive.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS Shares of common stock issued, including shares held in treasury, are presented below: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | 2022 | | 2021 | | 2020 | | | | | | | | Balance at beginning of year | 221,809,309 | | | 220,641,506 | | | 219,638,646 | | | Issued for employee compensation and benefit plans | 539,248 | | | 1,167,803 | | | 1,002,860 | | | | | | | | | Balance at end of year | 222,348,557 | | | 221,809,309 | | | 220,641,506 | |
| | | | | | | | | | | | For years ended December 31, | | | 2019 | | 2018 | | 2017 | | | | | | | | | Balance at beginning of year | 219,140,523 |
| | 218,369,992 |
| | 217,707,600 |
| | Issued for employee compensation and benefit plans | 498,123 |
| | 770,531 |
| | 662,392 |
| | Balance at end of year | 219,638,646 |
| | 219,140,523 |
| | 218,369,992 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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) | | Balance at December 31, 2020 | $ | (293) | | | $ | 87 | | | $ | (66) | | | $ | (1) | | | $ | (273) | | | Period change | 56 | | | (28) | | | 63 | | | — | | | 91 | | | Balance at December 31, 2021 | (237) | | | 59 | | | (3) | | | (1) | | | (182) | | | Period change | 7 | | | (27) | | | (3) | | | — | | | (23) | | | Balance at December 31, 2022 | $ | (230) | | | $ | 32 | | | $ | (6) | | | $ | (1) | | | $ | (205) | |
| | | | | | | | | | | | | | | | | | | | | (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) | | Balance at December 31, 2017 | $ | (296 | ) | | $ | 136 |
| | $ | (48 | ) | | $ | (1 | ) | | $ | (209 | ) | | Period change | (13 | ) | | (30 | ) | | 7 |
| | — |
| | (36 | ) | | Balance at December 31, 2018 | (309 | ) | | 106 |
| | (41 | ) | | (1 | ) | | (245 | ) | Period change (1) | 45 |
| | — |
| | (14 | ) | | — |
| | 31 |
| | Balance at December 31, 2019 | $ | (264 | ) | | $ | 106 |
| | $ | (55 | ) | | $ | (1 | ) | | $ | (214 | ) |
| | (1)
| Benefit plans unrecognized prior service credits includes $29 million reclassification of stranded tax expense from AOCI to retained earnings and unrealized gains (losses) on derivative instruments includes $9 million reclassification of stranded tax benefit from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information. |
Amounts of other comprehensive income (loss) are presented net of applicable taxes. Eastman 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 recognized on the cumulative translation adjustment of other subsidiaries outside the United States, as the 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, | | 2022 | | 2021 | | 2020 | | (Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Change in cumulative translation adjustment | $ | 7 | | | $ | 7 | | | $ | 56 | | | $ | 56 | | | $ | (29) | | | $ | (29) | | | Defined benefit pension and other postretirement benefit plans: | | | | | | | | | | | | | Prior service credit arising during the period | — | | | — | | | — | | | — | | | 12 | | | 9 | | | Amortization of unrecognized prior service credits included in net periodic costs | (34) | | | (27) | | | (38) | | | (28) | | | (38) | | | (28) | | | | | | | | | | | | | | | Derivatives and hedging: | | | | | | | | | | | | | Unrealized gain (loss) during period | 71 | | | 53 | | | 88 | | | 66 | | | (46) | | | (34) | | | Reclassification adjustment for (gains) losses included in net income, net | (75) | | | (56) | | | (4) | | | (3) | | | 31 | | | 23 | | | | | | | | | | | | | | | Total other comprehensive income (loss) | $ | (31) | | | $ | (23) | | | $ | 102 | | | $ | 91 | | | $ | (70) | | | $ | (59) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | | 2019 | | 2018 | | 2017 | | (Dollars in millions) | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Before Tax | | Net of Tax | | Change in cumulative translation adjustment | $ | 45 |
| | $ | 45 |
| | $ | (13 | ) | | $ | (13 | ) | | $ | 85 |
| | $ | 85 |
| | Defined benefit pension and other postretirement benefit plans: | | | | | | | |
| | | | | | Amortization of unrecognized prior service credits included in net periodic costs | (39 | ) | | (29 | ) | | (40 | ) | | (30 | ) | | (43 | ) | | (27 | ) | | Derivatives and hedging: | | | | | | | |
| | | | | | Unrealized gain (loss) during period | (27 | ) | | (20 | ) | | 30 |
| | 22 |
| | 11 |
| | 7 |
| | Reclassification adjustment for (gains) losses included in net income, net | 20 |
| | 15 |
| | (20 | ) | | (15 | ) | | 11 |
| | 7 |
| | Total other comprehensive income (loss) | $ | (1 | ) | | $ | 11 |
| | $ | (43 | ) | | $ | (36 | ) | | $ | 64 |
| | $ | 72 |
|
For additional information regarding the impact of reclassifications into earnings, refer to Note 9,10, "Derivative and Non-Derivative Financial Instruments", and Note 10,11, "Retirement Plans".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | 15. | ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET |
Components of asset impairments and restructuring charges, net, are presented below: | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Tangible Asset Impairments | | | | | | CI & AFP - Singapore (1) | $ | — | | | $ | 3 | | | $ | — | | | Site optimizations | | | | | | Other - Tire additives (2) | — | | | 12 | | | 5 | | AM - Advanced interlayers (3) | — | | | 1 | | | — | | AM - Performance films (4) | — | | | — | | | 5 | | AFP - Animal nutrition (5) | — | | | — | | | 3 | | Discontinuation of growth initiatives (6) | — | | | — | | | 8 | | | — | | | 16 | | | 21 | | | Loss (Gain) on Sale of Previously Impaired Assets | | | | | | | Site optimizations | | | | | | AM - Advanced interlayers (3) | 16 | | | — | | | — | | Other - Tire additives (2) | (1) | | | — | | | — | | AFP - Animal nutrition (5) | — | | | (1) | | | — | | | 15 | | | (1) | | | — | | | Intangible Asset Impairments | | | | | | Other - Tradenames (7) | — | | | — | | | 123 | | AFP - Customer relationships (8) | — | | | — | | | 2 | | | | | | | | | | | | | | | — | | | — | | | 125 | | | Severance Charges | | | | | | Cost reduction and business improvement actions (9) | 22 | | | 1 | | | 47 | | CI & AFP - Singapore (1) | — | | | — | | | 6 | | | Site optimizations | | | | | | Other - Tire additives (2) | — | | | — | | | 3 | | AM - Advanced interlayers (3) | — | | | 1 | | | 5 | | AM - Performance films (4) | 1 | | | — | | | 3 | | AFP - Animal nutrition (5) | — | | | — | | | 1 | | Fibers - Acetate Yarn (10) | 7 | | | — | | | — | | | 30 | | | 2 | | | 65 | | | Other Restructuring Costs | | | | | | Cost reduction and business improvement actions (9) | — | | | — | | | 14 | | Discontinuation of growth initiatives contract termination fees (6) | — | | | — | | | 4 | | CI & AFP - Singapore (1) | 3 | | | 17 | | | — | | | Site optimizations | | | | | | Other - Tire additives (2) | — | | | 6 | | | — | | AM - Advanced interlayers (3) | 2 | | | 5 | | | — | | AM - Performance films (4) | — | | | 2 | | | — | | AFP - Animal nutrition (5) | — | | | — | | | (2) | | Fibers - Acetate Yarn (10) | 2 | | | — | | | — | | | 7 | | | 30 | | | 16 | | | | | | | | | Total | $ | 52 | | | $ | 47 | | | $ | 227 | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Asset impairments | $ | 27 |
| | $ | — |
| | $ | 1 |
| | Intangible asset and goodwill impairments | 45 |
| | 39 |
| | — |
| | Severance charges | 45 |
| | 6 |
| | 6 |
| | Site closure and restructuring charges | 9 |
| | — |
| | 1 |
| | Total | $ | 126 |
| | $ | 45 |
| | $ | 8 |
|
In December 2019, management approved a plan to discontinue production(1)Site closure costs of certain products at$3 million in 2022 in the CI segment, asset impairment charges in 2021 of $2 million and $1 million in the CI segment and the AFP segment, respectively, and severance charges in 2020 of $5 million and $1 million in the CI segment and the AFP segment, respectively, and site closure costs, including contract termination fees, in 2021 of $14 million and $3 million in the CI segment and the AFP segment, respectively, resulting from closure of the Singapore manufacturing site.
(2)Asset impairment charges of $8 million in 2021 for assets associated with divested rubber additives. Gain on sale of previously impaired assets in 2022, asset impairment charges of $4 million, and site closure costs in 2021, from the previously reported closure of a tire additives manufacturing facility in Asia Pacific as part of site optimization. Fixed asset impairment charges and severance charges in 2020 from the closure of a tire additives manufacturing facility in Asia Pacific as part of site optimization. (3)Asset impairment charges, loss on transfer of previously impaired assets to a third party, severance charges, and site closure costs in the Advanced Materials ("AM") segment due to the closure of an advanced interlayers manufacturing facility in North America as part of site optimization. In addition, accelerated depreciation of $4 million and $8 million was recognized in "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in 2021 and 2020, respectively, related to the closure of this facility. (4)Severance charges in 2022 for the closure of a performance films research and development facility, fixed asset impairments, severance charges, and site closure costs in 2021 and 2020 from the closure of a performance films manufacturing facility in North America as part of site optimization. (5)Fixed asset impairments, severance charges, and other restructuring gains in 2020 in from the closure of an animal nutrition manufacturing facility in Asia Pacific as part of site optimization, and in 2021 a gain from the sale of the previously impaired assets. (6)Fixed asset impairments and contract termination fees resulting from management's decision to discontinue growth initiatives for polyester based microfibers, including Avra™ performance fibers, the financial results of which were not allocated to an operating segment and reported in "Other". (7)Intangible asset impairment charges in the now divested tire additives business to reduce the carrying values of the Crystex™ and Santoflex™ tradenames to the estimated fair values. The estimated fair values were determined using an income approach, specifically, the relief from royalty method, including some unobservable inputs. The impairments are primarily the result of weakened demand in transportation markets impacted by the endCOVID-19 and increased competitive pricing pressure as a result of 2020 resulting in anglobal capacity increases. (8)Intangible asset impairment charge of $27 million impacting the AFPfor customer relationships. (9)Severance charges in 2022 and CI segments. As a result of the annual impairment test of goodwill, the Company recognized a $45 million goodwill impairmentseverance charges and related costs in the crop protection reporting unit (part of the AFP segment). Additionally, in 2019,2020 as part of business improvement and cost reduction initiatives the Company recognized restructuringwhich was reported in "Other". (10)Severance charges of $45 million for severance and $5 million for related costs. Also included was an additional $4 million restructuring chargesite closure costs related to a capital project in the AFP segment that was discontinued in 2016.
2018
In 2018 asset impairments and restructuring charges, net consisted of restructuring charges of approximately $6 million for severance. As a result of the annual impairment test of goodwill, the Company recognized a $38 million goodwill impairment in the crop protection reporting unit (part of the AFP segment). Additionally, the Company recognized an intangible asset impairment of $1 million in the Advanced Materials ("AM") segment.
2017
In 2017 asset impairments and restructuring charges, net were $3 million of asset impairment and restructuring charges, including severance, in the AFP segment related to the closure of aan acetate yarn manufacturing facility in China and restructuring charges of approximately $5 million for severance.Europe.
Reconciliations of the beginning and ending restructuring liability amounts are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Balance at
January 1,
2022 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash
Reductions | | Balance at
December 31,
2022 | | | | | | | | | | | | Severance costs | $ | 12 | | | $ | 31 | | | $ | — | | | $ | (9) | | | $ | 34 | | | Site closure & restructuring costs | 5 | | | 21 | | | 1 | | | (26) | | | 1 | | | Total | $ | 17 | | | $ | 52 | | | $ | 1 | | | $ | (35) | | | $ | 35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Balance at
January 1,
2021 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash
Reductions | | Balance at
December 31,
2021 | | Non-cash charges | $ | — | | | $ | 16 | | | $ | (16) | | | $ | — | | | $ | — | | | Severance costs | 65 | | | 2 | | | (1) | | | (54) | | | 12 | | | Site closure & restructuring costs | 14 | | | 29 | | | (9) | | | (29) | | | 5 | | | Total | $ | 79 | | | $ | 47 | | | $ | (26) | | | $ | (83) | | | $ | 17 | |
| | | (Dollars in millions) | Balance at January 1, 2019 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash Reductions | | Balance at December 31, 2019 | (Dollars in millions) | Balance at
January 1,
2020 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash
Reductions | | Balance at
December 31,
2020 | | Non-cash charges | $ | — |
| | $ | 72 |
| | $ | (72 | ) | | $ | — |
| | $ | — |
| Non-cash charges | $ | — | | | $ | 145 | | | $ | (145) | | | $ | — | | | $ | — | | | Severance costs | 6 |
| | 45 |
| | — |
| | (34 | ) | | 17 |
| Severance costs | 17 | | | 65 | | | 1 | | | (18) | | | 65 | | | Site closure & restructuring costs | 8 |
| | 9 |
| | 1 |
| | (7 | ) | | 11 |
| Site closure & restructuring costs | 11 | | | 17 | | | — | | | (14) | | | 14 | | | Total | $ | 14 |
| | $ | 126 |
| | $ | (71 | ) | | $ | (41 | ) | | $ | 28 |
| Total | $ | 28 | | | $ | 227 | | | $ | (144) | | | $ | (32) | | | $ | 79 | |
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Balance at
January 1,
2018 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash
Reductions | | Balance at
December 31,
2018 | | Non-cash charges | $ | — |
| | $ | 39 |
| | $ | (39 | ) | | $ | — |
| | $ | — |
| | Severance costs | 19 |
| | 6 |
| | 1 |
| | (20 | ) | | 6 |
| | Site closure & restructuring costs | 10 |
| | — |
| | — |
| | (2 | ) | | 8 |
| | Total | $ | 29 |
| | $ | 45 |
| | $ | (38 | ) | | $ | (22 | ) | | $ | 14 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | Balance at
January 1,
2017 | | Provision/ Adjustments | | Non-cash Reductions/ Additions | | Cash
Reductions | | Balance at
December 31,
2017 | | Non-cash charges | $ | — |
| | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | Severance costs | 42 |
| | 6 |
| | — |
| | (29 | ) | | 19 |
| | Site closure & restructuring costs | 13 |
| | 1 |
| | 1 |
| | (5 | ) | | 10 |
| | Total | $ | 55 |
| | $ | 8 |
| | $ | — |
| | $ | (34 | ) | | $ | 29 |
|
Substantially all costs remaining for severance are expected to be applied to the reserves within one year.
| | 16. | OTHER (INCOME) CHARGES, NET |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | Foreign exchange transaction losses (gains), net (1) | $ | 9 |
| | $ | 12 |
| | $ | 5 |
| | Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations | — |
| | 13 |
| | — |
| | (Income) loss from equity investments and other investment (gains) losses, net | (10 | ) | | (17 | ) | | (12 | ) | | Coal gasification incident property insurance | — |
| | (65 | ) | | — |
| | Cost of disposition of claims against discontinued Solutia operations | — |
| | — |
| | 9 |
| Gain from sale of business (2) | — |
| | — |
| | (3 | ) | | Other, net | 4 |
| | 4 |
| | 5 |
| | Other (income) charges, net | $ | 3 |
| | $ | (53 | ) | | $ | 4 |
|
| | (1)
| Net impact of revaluation of foreign entity assets and liabilities and effects of foreign exchange non-qualifying derivatives. |
| | (2)
| Gain resulting from the sale of the formulated electronic cleaning solution business in the AFP segment in 2017. |
| | 17. | SHARE-BASED COMPENSATION PLANS AND AWARDS |
2017
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS 17.OTHER (INCOME) CHARGES, NET | | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | Foreign exchange transaction losses (gains), net (1) | $ | 16 | | | $ | 10 | | | $ | 16 | | | (Income) loss from equity investments and other investment (gains) losses, net | (19) | | | (16) | | | (15) | | Other, net (2) | (3) | | | (11) | | | 7 | | | Other (income) charges, net | $ | (6) | | | $ | (17) | | | $ | 8 | |
(1)Net impact of revaluation of foreign entity assets and liabilities and effects of foreign exchange non-qualifying derivatives. (2)Includes environmental and other costs from previously divested or non-operational sites and product lines and adjustments to contingent considerations. 18.SHARE-BASED COMPENSATION PLANS AND AWARDS
2021 Omnibus Stock Compensation Plan
Eastman's 20172021 Omnibus Stock Compensation Plan ("20172021 Omnibus Plan") was approved by stockholders at the May 4, 20176, 2021 Annual Meeting of Stockholders and shall remain in effect until its fifth anniversary. The 20172021 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 20172021 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 20172021 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 20172021 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. NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Director Stock Compensation Subplan
Eastman's 20182021 Director Stock Compensation Subplan ("Directors' Subplan"), a component of the 20172021 Omnibus Plan, remains in effect until terminated by the Board of Directors or the earlier termination of the 20172021 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 20172021 Omnibus Plan. The Directors' Subplan does not constitute a separate source of shares for grantgrants of equity awards and all shares awarded are part of the 10 million shares authorized under the 20172021 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.
It has been the Company's practice to issue new shares rather than treasury shares for equity awards for compensation plans, including the 20172021 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 2019, 2018,2022, 2021, and 2017,2020, total share-based compensation expense (before tax) of approximately $59$69 million, $64$70 million,, and $52$44 million,, respectively, was recognized in "Selling, general and administrative expense" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards of which approximately $9$11 million, $9 million, and $8$7 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. Approximately $3$7 million for both 2019 and 2018 and2022, $2 million for 20172021, and $1 million for 2020 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 by the Compensation and Management Development Committee of the Board of Directors under the 20172021 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.
The weighted average assumptions used in the determination of fair value for stock options awarded in 2019, 2018,2022, 2021, and 20172020 are provided in the table below: | | | | | | | | | | | | | | | | | | | | | | Assumptions | | 2022 | | 2021 | | 2020 | | Expected volatility rate | | 28.98% | | 28.99% | | 21.56% | | Expected dividend yield | | 2.57% | | 3.58% | | 3.30% | | Average risk-free interest rate | | 2.35% | | 0.95% | | 0.94% | | Expected term years | | 6.4 | | 6.0 | | 5.9 |
| | | | | | | | | Assumptions | | 2019 | | 2018 | | 2017 | | Expected volatility rate | | 19.80% | | 19.03% | | 20.45% | | Expected dividend yield | | 2.51% | | 2.48% | | 2.64% | | Average risk-free interest rate | | 2.44% | | 2.61% | | 1.91% | | Expected term years | | 5.7 | | 5.1 | | 5.0 |
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.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 2019, 2018,2022, 2021, and 20172020 is presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Outstanding at beginning of year | 3,168,500 | | | $ | 84 | | | 3,526,600 | | | $ | 79 | | | 3,479,300 | | | $ | 80 | | | Granted | 443,100 | | | 113 | | | 449,700 | | | 109 | | | 622,000 | | | 62 | | | Exercised | (122,700) | | | 74 | | | (807,200) | | | 77 | | | (568,800) | | | 64 | | | Cancelled, forfeited, or expired | (9,700) | | | 87 | | | (600) | | | 74 | | | (5,900) | | | 82 | | | Outstanding at end of year | 3,479,200 | | | $ | 88 | | | 3,168,500 | | | $ | 84 | | | 3,526,600 | | | $ | 79 | | | Options exercisable at year-end | 2,534,400 | | | | | 2,047,500 | | | | | 2,192,300 | | | | | Available for grant at end of year | 8,355,640 | | | | | 9,866,480 | | | | | 4,046,748 | | | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Options | | Weighted-Average Exercise Price | | Outstanding at beginning of year | 2,905,600 |
| | $ | 79 |
| | 2,614,100 |
| | $ | 70 |
| | 2,363,700 |
| | $ | 61 |
| | Granted | 786,000 |
| | 81 |
| | 619,700 |
| | 104 |
| | 745,800 |
| | 80 |
| | Exercised | (135,700 | ) | | 67 |
| | (323,000 | ) | | 55 |
| | (489,300 | ) | | 44 |
| | Cancelled, forfeited, or expired | (76,600 | ) | | 88 |
| | (5,200 | ) | | 78 |
| | (6,100 | ) | | 74 |
| | Outstanding at end of year | 3,479,300 |
| | $ | 80 |
| | 2,905,600 |
| | $ | 79 |
| | 2,614,100 |
| | $ | 70 |
| | Options exercisable at year-end | 2,077,600 |
| | | | 1,606,800 |
| | | | 1,335,500 |
| | | | Available for grant at end of year | 6,085,857 |
| | | | 8,174,614 |
| | | | 9,943,033 |
| | |
The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable at December 31, 2019:2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | Range of Exercise Prices | | Number Outstanding at
December 31, 2022 | | Weighted-Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable at
December 31, 2022 | | Weighted-Average Exercise Price | | $61-$75 | | 1,037,200 | | 5.2 | | $ | 65 | | | 831,800 | | $ | 66 | | | $76-$90 | | 1,099,700 | | 5.3 | | 82 | | | 1,018,600 | | 82 | | | $91-$105 | | 535,800 | | 5.2 | | 104 | | | 535,800 | | 104 | | | $106-$121 | | 806,500 | | 8.6 | | 114 | | | 148,200 | | 109 | | | | | 3,479,200 | | 6.0 | | $ | 88 | | | 2,534,400 | | $ | 83 | |
| | | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable | | Range of Exercise Prices | | Number Outstanding at December 31, 2019 | | Weighted-Average Remaining Contractual Life (Years) | | Weighted-Average Exercise Price | | Number Exercisable at December 31, 2019 | | Weighted-Average Exercise Price | | $38-$50 | | 176,700 | | 1.5 | | $ | 39 |
| | 176,700 | | $ | 39 |
| | $51-$73 | | 720,500 | | 5.9 | | 67 |
| | 625,100 | | 66 |
| | $74-$89 | | 1,985,100 | | 7.1 | | 81 |
| | 1,076,800 | | 79 |
| | $90-$104 | | 597,000 | | 8.2 | | 104 |
| | 199,000 | — |
| 104 |
| | | | 3,479,300 | | 6.8 | | $ | 80 |
| | 2,077,600 | | $ | 74 |
|
The range of exercise prices of options outstanding at December 31, 20192022 is approximately $38$61 to $104$121 per share. The aggregate intrinsic value of total options outstanding and total options exercisable at December 31, 20192022 is $18$17 million and $17$13 million, respectively. Intrinsic value is the amount by which the closing market price of the stock at December 31, 20192022 exceeds the exercise price of the option grants.
The weighted average remaining contractual life of all exercisable options at December 31, 20192022 is 5.55.1 years.
The weighted average fair value of options granted during 2019, 2018,2022, 2021, and 20172020 was $13.12, $15.90,$26.80, $19.81, and $11.79,$7.92, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018,2022, 2021, and 2017,2020, was $2$6 million, $15$31 million, and $19$14 million, respectively. Cash proceeds received by the Company from option exercises totaled $9$10 million and thewith a related tax benefit was de minimisof $1 million, respectively, for 2019. Cash proceeds received by the Company from option exercises and the2022, $62 million with a related tax benefit totaled $18 million and $3 million, respectively, for 2018 and $22 million andof $5 million, respectively, for 2017.2021, and $36 million with a related tax benefit of $2 million, respectively, for 2020. The total fair value of shares vested during the years ended December 31, 2019, 2018,2022, 2021, and 20172020 was $8 million, $7$8 million, and $6$9 million, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the changes in the Company's nonvested options during the year ended December 31, 20192022 is presented below: | | | | | | | | | | | | | | | | Nonvested Options | | Number of Options | | Weighted-Average Grant Date Fair Value | | Nonvested at January 1, 2022 | | 1,121,000 | | | $13.88 | | Granted | | 443,100 | | | $26.80 | | Vested | | (611,900) | | | $12.99 | | Cancelled, forfeited, or expired | | (7,400) | | | $14.90 | | Nonvested options at December 31, 2022 | | 944,800 | | | $20.50 |
| | | | | | | | Nonvested Options | | Number of Options | | Weighted-Average Grant Date Fair Value | | Nonvested at January 1, 2019 | | 1,298,800 |
| | $13.63 | | Granted | | 786,000 |
| | $13.12 | | Vested | | (608,200 | ) | | $12.89 | | Cancelled, forfeited, or expired | | (74,900 | ) | | $13.43 | | Nonvested options at December 31, 2019 | | 1,401,700 |
| | $13.68 |
For nonvested options at December 31, 2019,2022, approximately $53 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, Eastman 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 2019-2021, 2018-2020,2022-2024, 2021-2023, and 2017-20192020-2022 periods were 412288 thousand, 310311 thousand, and 357423 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 2019, 2018,2022, 2021, and 20172020 were 189 thousand, 160 thousand, 166 thousand, and 172227 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, 2019, 2018,2022, 2021, and 20172020 was approximately $50$58 million, $55$60 million, and $44$37 million, respectively. The unrecognized compensation expense before tax for these same type awards at December 31, 20192022 was approximately $55$73 million and will be recognized primarily over a period of two years.
| | 18. | SUPPLEMENTAL CASH FLOW INFORMATION |
19.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, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Current assets | $ | 22 | | | $ | (57) | | | $ | (1) | | | Other assets | 12 | | | (32) | | | (14) | | | Current liabilities | 180 | | | 109 | | | 5 | | | Long-term liabilities and equity | 76 | | | 69 | | | 15 | | | Total | $ | 290 | | | $ | 89 | | | $ | 5 | |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Current assets | $ | (5 | ) | | $ | (47 | ) | | $ | 13 |
| | Other assets | 15 |
| | 43 |
| | 29 |
| | Current liabilities | (82 | ) | | (38 | ) | | 59 |
| | Long-term liabilities and equity | (17 | ) | | 87 |
| | 43 |
| | Total | $ | (89 | ) | | $ | 45 |
| | $ | 144 |
|
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, equity investment dividends, prepaid insurance, miscellaneous deferrals, value-added taxes, and other miscellaneous accruals.
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, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | | | | | | | Interest, net of amounts capitalized | $ | 179 | | | $ | 170 | | | $ | 191 | | | Income taxes, net of refunds | 78 | | | 122 | | | 179 | | | Non-cash investing activities: | | | | | | | Outstanding trade payables related to capital expenditures | 64 | | | 22 | | | 20 | | | | | | | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cash paid for interest and income taxes is as follows:
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | | | | | | | | Interest, net of amounts capitalized | $ | 235 |
| | $ | 239 |
| | $ | 263 |
| | Income taxes | 217 |
| | 202 |
| | 97 |
| | Non-cash investing and financing activities: | | | | | | | Outstanding trade payables related to capital expenditures | 22 |
| | 18 |
| | 27 |
| | (Gain) loss from equity investments | (10 | ) | | (17 | ) | | (14 | ) |
| | 19. | SEGMENT AND REGIONAL SALES INFORMATION |
The Company'sEastman's products and operations are managed and reported in 4four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. The economic factors that impact the nature, amount, timing, and uncertainty of revenue and cash flows vary among the Company's business operating segments and the geographical regions in which they operate.
To maintain comparability of segment financial statement information, the Company has moved the divested businesses from the AFP segment to "Other" and recast the segment financial information for sales revenue, EBIT, assets, depreciation and amortization expense, and capital expenditures related to the divested rubber additives product lines and related assets and technology and the divested adhesives resins business.
Advanced Materials Segment
In the AM segment, the Company produces and markets polymers, films, and plastics with differentiated performance properties for value-added end-uses in transportation; durables and electronics; building and construction; medical and pharma; and consumables end-markets.
The advanced interlayers product line includes polyvinyl butyral sheet and specialty polyvinyl butyral intermediates. The performance films product line primarily consists of window films and protective films products for aftermarket applied films. The specialty plastics product line consists of two primary products: copolyesters and cellulosic biopolymers.
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Product Lines | 2022 | 2021 | 2020 | | Advanced Interlayers | 29% | 29% | 29% | | Performance Films | 20% | 20% | 20% | | Specialty Plastics | 51% | 51% | 51% | | Total | 100% | 100% | 100% |
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2022 | 2021 | 2020 | | United States and Canada | 33% | 30% | 34% | | Asia Pacific | 35% | 38% | 33% | | Europe, Middle East, and Africa | 26% | 27% | 27% | | Latin America | 6% | 5% | 6% | | Total | 100% | 100% | 100% |
Additives & Functional Products Segment
In the AFP segment, the Company manufactures chemicalsmaterials for products in the transportation, consumables,transportation; personal care and wellness; food, feed, and agriculture; building and construction, animal nutrition, crop protection, energy, personalconstruction; water treatment and home care,energy; consumables; and other markets.durables and electronics end-markets.
The products manufactured by the Company manufactures in the coatingsanimal nutrition business consist of organic acid-based solutions product lines. The care additives business consists of amine derivative-based building blocks for the production of flocculants, intermediates for surfactants, fumigants, fungicides, and inksplant growth regulator products. The coatings additives product line can be broadly classified as polymers and additives and solvents and include specialty coalescents, specialty solvents, paint additives, and specialty polymers. The adhesives resins product line consists of hydrocarbon and rosin resins. The tire additives product line includes insoluble sulfur rubber additives, antidegradant rubber additives, and performance resins. The care chemicals business consists of amine derivative-based building blocks for the production of flocculants and intermediates for surfactants. In the specialty fluids product line, the Company produces heat transfer and aviation fluids products. The animal nutrition business consists of organic acid-based solutions product lines. The crop protection business consists of metam-based soil fumigants, thiram and ziram-based fungicides, and plant growth regulator products.
| | | | | | | Percentage of Total Segment Sales | | Product Lines | 2019 | 2018 | 2017 | | Coatings and Inks Additives | 24% | 23% | 23% | | Adhesives Resins | 15% | 16% | 18% | | Tire Additives | 16% | 17% | 17% | | Care Chemicals | 18% | 17% | 17% | | Specialty Fluids | 14% | 13% | 13% | | Animal Nutrition and Crop Protection | 13% | 14% | 12% | | Total | 100% | 100% | 100% |
| | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2019 | 2018 | 2017 | | United States and Canada | 37% | 36% | 35% | | Asia Pacific | 24% | 24% | 23% | | Europe, Middle East, and Africa | 33% | 34% | 36% | | Latin America | 6% | 6% | 6% | | Total | 100% | 100% | 100% |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Product Lines | 2022 | 2021 | 2020 | | Animal Nutrition | 14% | 12% | 12% | | Care Additives | 34% | 32% | 34% | | Coatings Additives | 34% | 38% | 36% | | Specialty Fluids | 18% | 18% | 18% | | Total | 100% | 100% | 100% |
Advanced Materials Segment
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2022 | 2021 | 2020 | | United States and Canada | 39% | 38% | 38% | | Asia Pacific | 24% | 27% | 26% | | Europe, Middle East, and Africa | 31% | 29% | 30% | | Latin America | 6% | 6% | 6% | | Total | 100% | 100% | 100% |
In the AM segment, the Company produces and markets 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.
The specialty plastics product line consists of two primary products: copolyesters and cellulose esters. The advanced interlayers product line includes polyvinyl butyral sheet and specialty polyvinyl butyral intermediates. The performance films product line primarily consists of window film and protective film products for aftermarket applied films.
| | | | | | | Percentage of Total Segment Sales | | Product Lines | 2019 | 2018 | 2017 | | Specialty Plastics | 49% | 49% | 51% | | Advanced Interlayers | 32% | 33% | 33% | | Performance Films | 19% | 18% | 16% | | Total | 100% | 100% | 100% |
| | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2019 | 2018 | 2017 | | United States and Canada | 34% | 35% | 36% | | Asia Pacific | 32% | 33% | 33% | | Europe, Middle East, and Africa | 28% | 27% | 26% | | Latin America | 6% | 5% | 5% | | Total | 100% | 100% | 100% |
Chemical Intermediates Segment
The CI segmentEastman leverages large scale and vertical integration from the cellulosecellulosic biopolymers and acetyl, olefins, and alkylamines streams to support the Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond the Company's internal specialty needs into marketsend-markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals.
The functional amines product lines include methylamines and salts, and higher amines and solvents. In the intermediates product line, the Company produces olefin derivatives, acetyl derivatives, ethylene, and commodity solvents. The plasticizers product line consists of a unique set of primary non-phthalate and phthalate plasticizers and a range of niche non-phthalate plasticizers. The functional amines product lines include methylamines and salts, and higher amines and solvents. | | | | | | | | | | | | | Percentage of Total Segment Sales | | Product Lines | 2022 | 2021 | 2020 | | Functional Amines | 24% | 21% | 23% | | Intermediates | 56% | 57% | 57% | | Plasticizers | 20% | 22% | 20% | | Total | 100% | 100% | 100% |
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2022 | 2021 | 2020 | | United States and Canada | 70% | 70% | 65% | | Asia Pacific | 7% | 8% | 13% | | Europe, Middle East, and Africa | 17% | 16% | 16% | | Latin America | 6% | 6% | 6% | | Total | 100% | 100% | 100% |
| | | | | | | Percentage of Total Segment Sales | | Product Lines | 2019 | 2018 | 2017 | | Intermediates | 59% | 60% | 64% | | Plasticizers | 21% | 20% | 19% | | Functional Amines | 20% | 20% | 17% | | Total | 100% | 100% | 100% |
| | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2019 | 2018 | 2017 | | United States and Canada | 64% | 64% | 68% | | Asia Pacific | 14% | 15% | 14% | | Europe, Middle East, and Africa | 15% | 15% | 12% | | Latin America | 7% | 6% | 6% | | Total | 100% | 100% | 100% |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fibers Segment
In the Fibers segment, Eastman manufactures and sells cellulose acetate tow and triacetin plasticizers for use in filtration media, primarily cigarette filters. The acetyl chemicals product line consists of triacetin,filters; cellulosic staple fibers and filament yarn for use in apparel, home furnishings, and industrial fabrics; nonwoven media for use in filtration and friction applications, used primarily in transportation, industrial, and agricultural end-markets; and 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. The nonwovens product line consists primarily of the nonwovens innovation products previously reported in "Other". | | | | | | | Percentage of Total Segment Sales | | Product Lines | 2019 | 2018 | 2017 | | Acetate Tow | 68% | 69% | 77% | | Acetyl Chemical Products | 15% | 15% | 15% | | Acetate Yarn | 12% | 10% | 8% | | Nonwovens | 5% | 6% | —% | | Total | 100% | 100% | 100% |
| | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2019 | 2018 | 2017 | | United States and Canada | 25% | 26% | 22% | | Asia Pacific | 32% | 33% | 37% | | Europe, Middle East, and Africa | 39% | 37% | 37% | | Latin America | 4% | 4% | 4% | | Total | 100% | 100% | 100% |
Other
Sales revenue in the table below for "Other" in 2017 is primarily sales from the nonwovens innovation products. Beginning first quarter 2018, sales revenue and innovation costs from the nonwovens and textiles innovation products previously reported in "Other" are reported in the Fibers segment due to accelerating commercial progress of growth initiatives.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Product Lines | 2022 | 2021 | 2020 | | Acetate Tow | 64% | 64% | 70% | | Acetate Yarn | 14% | 14% | 9% | | Acetyl Chemical Products | 16% | 16% | 16% | | Nonwovens | 6% | 6% | 5% | | Total | 100% | 100% | 100% |
| | | | | | | | | | | | | Percentage of Total Segment Sales | | Sales by Customer Location | 2022 | 2021 | 2020 | | United States and Canada | 25% | 25% | 26% | | Asia Pacific | 35% | 35% | 32% | | Europe, Middle East, and Africa | 37% | 37% | 39% | | Latin America | 3% | 3% | 3% | | Total | 100% | 100% | 100% |
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Sales by Segment | | | | | | | Additives & Functional Products | $ | 3,273 |
| | $ | 3,647 |
| | $ | 3,343 |
| | Advanced Materials | 2,688 |
| | 2,755 |
| | 2,572 |
| | Chemical Intermediates | 2,443 |
| | 2,831 |
| | 2,728 |
| | Fibers | 869 |
| | 918 |
| | 852 |
| | Total Sales by Operating Segment | 9,273 |
| | 10,151 |
| | 9,495 |
| | Other | — |
| | — |
| | 54 |
| | Total Sales | $ | 9,273 |
| | $ | 10,151 |
| | $ | 9,549 |
|
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Earnings Before Interest and Taxes by Segment | | | | | | | Additives & Functional Products | $ | 496 |
| | $ | 639 |
| | $ | 653 |
| | Advanced Materials | 517 |
| | 509 |
| | 483 |
| | Chemical Intermediates | 170 |
| | 308 |
| | 255 |
| | Fibers | 194 |
| | 257 |
| | 181 |
| | Total EBIT by Operating Segment | 1,377 |
| | 1,713 |
| | 1,572 |
| | Other | | | | | | | Growth initiatives and businesses not allocated to operating segments | (102 | ) | | (114 | ) | | (114 | ) | | Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | (97 | ) | | (17 | ) | | 93 |
| | Asset impairments and restructuring charges, net | (49 | ) | | (6 | ) | | (5 | ) | | Other income (charges), net not allocated to operating segments | (9 | ) | | (24 | ) | | (16 | ) | | Total EBIT | $ | 1,120 |
| | $ | 1,552 |
| | $ | 1,530 |
|
| | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Sales by Segment | | | | | | | Advanced Materials | $ | 3,207 | | | $ | 3,027 | | | $ | 2,524 | | | Additives & Functional Products | 3,165 | | | 2,708 | | | 2,095 | | | Chemical Intermediates | 3,026 | | | 2,849 | | | 2,090 | | | Fibers | 1,022 | | | 900 | | | 837 | | | Total Sales by Operating Segment | 10,420 | | | 9,484 | | | 7,546 | | Other (1) | 160 | | | 992 | | | 927 | | | Total Sales | $ | 10,580 | | | $ | 10,476 | | | $ | 8,473 | |
| | | | | | | | | | | December 31, | | (Dollars in millions) | 2019 | | 2018 | Assets by Segment (1) | | | | | Additives & Functional Products | $ | 6,387 |
| | $ | 6,545 |
| | Advanced Materials | 4,415 |
| | 4,456 |
| | Chemical Intermediates | 2,775 |
| | 2,934 |
| | Fibers | 1,014 |
| | 978 |
| | Total Assets by Operating Segment | 14,591 |
| | 14,913 |
| | Corporate Assets | 1,417 |
| | 1,082 |
| | Total Assets | $ | 16,008 |
| | $ | 15,995 |
|
| | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Earnings (Loss) Before Interest and Taxes by Segment | | | | | | | Advanced Materials | $ | 376 | | | $ | 519 | | | $ | 427 | | | Additives & Functional Products | 483 | | | 448 | | | 382 | | | Chemical Intermediates | 409 | | | 445 | | | 166 | | | Fibers | 131 | | | 142 | | | 180 | | | Total EBIT by Operating Segment | 1,399 | | | 1,554 | | | 1,155 | | Other (1) | | | | | | | Growth initiatives and businesses not allocated to operating segments | (196) | | | (49) | | | (32) | | | Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | 70 | | | 375 | | | (156) | | | Asset impairments and restructuring charges, net | (21) | | | (18) | | | (206) | | | Net gain (loss) on divested businesses and related transaction costs | (61) | | | (570) | | | — | | | Steam line incident costs, net of insurance proceeds | (39) | | | — | | | — | | | Other income (charges), net not allocated to operating segments | 7 | | | (11) | | | (20) | | | Total EBIT | $ | 1,159 | | | $ | 1,281 | | | $ | 741 | |
(1)"Other" includes EBIT of $6 million in2022 and loss before interest and taxes of $502 million and $70 million in 2021 and 2020, respectively, from the divested rubber additives and adhesives resins businesses.
| | (1)
| The chief operating decision maker holds operating segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangible assets. |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | December 31, | | (Dollars in millions) | 2022 | | 2021 | Assets by Segment (1) | | | | | Advanced Materials | $ | 4,967 | | | $ | 4,661 | | | Additives & Functional Products | 4,127 | | | 4,188 | | | Chemical Intermediates | 2,695 | | | 2,703 | | | Fibers | 1,046 | | | 972 | | | Total Assets by Operating Segment | 12,835 | | | 12,524 | | | Corporate Assets | 1,832 | | | 2,995 | | | Total Assets | $ | 14,667 | | | $ | 15,519 | |
(1)Segment assets include accounts receivable, inventory, fixed assets, goodwill, and intangible assets. As disclosed in Note 1, "Significant Accounting Policies", December 31, 2021 Assets by Segment have been recast from Note 20, "Segment and Regional Sales Information", to the Company's 2021 Annual Report on Form 10-K. Prior to the recast, December 31, 2021 assets reported for the AFP segment were revised from $4,643 million to $5,195 million, and assets reported for Corporate and Other Assets were revised from $2,540 million to $1,988 million. Total assets were not impacted by the misclassification.
| | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Depreciation and Amortization Expense by Segment | | | | | | | Advanced Materials | $ | 163 | | | $ | 177 | | | $ | 187 | | | Additives & Functional Products | 134 | | | 132 | | | 125 | | | Chemical Intermediates | 112 | | | 111 | | | 108 | | | Fibers | 61 | | | 60 | | | 56 | | | Total Depreciation and Amortization Expense by Operating Segment | 470 | | | 480 | | | 476 | | Other (1) | 7 | | | 58 | | | 98 | | | Total Depreciation and Amortization Expense | $ | 477 | | | $ | 538 | | | $ | 574 | |
(1)"Other" includes depreciation and amortization expense from the divested rubber additives and adhesives resins businesses. | | | | | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2022 | | 2021 | | 2020 | | Capital Expenditures by Segment | | | | | | | Advanced Materials | $ | 341 | | | $ | 280 | | | $ | 140 | | | Additives & Functional Products | 98 | | | 97 | | | 79 | | | Chemical Intermediates | 98 | | | 124 | | | 84 | | | Fibers | 43 | | | 33 | | | 31 | | | Total Capital Expenditures by Operating Segment | 580 | | | 534 | | | 334 | | Other (1) | 31 | | | 21 | | | 49 | | | Total Capital Expenditures | $ | 611 | | | $ | 555 | | | $ | 383 | |
(1)"Other" includes capital expenditures from the divested rubber additives and adhesives resins businesses.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Depreciation and Amortization Expense by Segment | | | | | | | Additives & Functional Products | $ | 218 |
| | $ | 219 |
| | $ | 213 |
| | Advanced Materials | 172 |
| | 169 |
| | 164 |
| | Chemical Intermediates | 150 |
| | 151 |
| | 148 |
| | Fibers | 64 |
| | 64 |
| | 58 |
| | Total Depreciation and Amortization Expense by Operating Segment | 604 |
| | 603 |
| | 583 |
| | Other | 7 |
| | 1 |
| | 4 |
| | Total Depreciation and Amortization Expense | $ | 611 |
| | $ | 604 |
| | $ | 587 |
|
| | | | | | | | | | | | | | | For years ended December 31, | | (Dollars in millions) | 2019 | | 2018 | | 2017 | | Capital Expenditures by Segment | | | | | | | Additives & Functional Products | $ | 152 |
| | $ | 150 |
| | $ | 229 |
| | Advanced Materials | 130 |
| | 187 |
| | 248 |
| | Chemical Intermediates | 98 |
| | 137 |
| | 116 |
| | Fibers | 42 |
| | 50 |
| | 52 |
| | Total Capital Expenditures by Operating Segment | 422 |
| | 524 |
| | 645 |
| | Other | 3 |
| | 4 |
| | 4 |
| | Total Capital Expenditures | $ | 425 |
| | $ | 528 |
| | $ | 649 |
|
Sales are attributed to geographic areas based on customer location and long-lived assets are attributed to geographic areas based on asset location. | | | | | | | | | | | | | | | | | | | (Dollars in millions) | For years ended December 31, | | Geographic Information | 2022 | | 2021 | | 2020 | | Sales | | | | | | | United States | $ | 4,738 | | | $ | 4,397 | | | $ | 3,437 | | | All foreign countries | 5,842 | | | 6,079 | | | 5,036 | | | Total | $ | 10,580 | | | $ | 10,476 | | | $ | 8,473 | | | | | | | | | | | | | | | December 31, | | 2022 | | 2021 | | 2020 | | Net properties | | | | | | | United States | $ | 4,180 | | | $ | 3,847 | | | $ | 4,106 | | | All foreign countries | 980 | | | 1,149 | | | 1,443 | | | Total | $ | 5,160 | | | $ | 4,996 | | | $ | 5,549 | |
| | | | | | | | | | | | | | (Dollars in millions) | For years ended December 31, | | Geographic Information | 2019 | | 2018 | | 2017 | | Sales | | | | | | | United States | $ | 3,720 |
| | $ | 4,118 |
| | $ | 3,999 |
| | All foreign countries | 5,553 |
| | 6,033 |
| | 5,550 |
| | Total | $ | 9,273 |
| | $ | 10,151 |
| | $ | 9,549 |
| | | | | | | | | | | | | | | | | December 31, | | | 2019 | | 2018 | | 2017 | | Net properties | | | | | | | United States | $ | 4,178 |
| | $ | 4,228 |
| | $ | 4,203 |
| | All foreign countries | 1,393 |
| | 1,372 |
| | 1,404 |
| | Total | $ | 5,571 |
| | $ | 5,600 |
| | $ | 5,607 |
|
Valuation and Qualifying Accounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | Balance at January 1,
2022 | | Charges (Credits) to Cost and Expense | | Other Accounts | |
Deductions | | Balance at December 31, 2022 | | Reserve for: | | | | | | | | | | | Credit losses | $ | 17 | | | $ | (2) | | | $ | — | | | $ | — | | | $ | 15 | | | LIFO inventory | 365 | | | 128 | | | — | | | — | | | 493 | | | Non-environmental asset retirement obligations | 51 | | | 2 | | | (1) | | | 1 | | | 51 | | | Environmental contingencies | 281 | | | 7 | | | — | | | 14 | | | 274 | | | Deferred tax valuation allowance | 339 | | | (79) | | | (2) | | | — | | | 258 | | | | $ | 1,053 | | | $ | 56 | | | $ | (3) | | | $ | 15 | | | $ | 1,091 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | Balance at January 1,
2021 | | Charges (Credits) to Cost and Expense | | Other Accounts (1) | | Deductions (2) | | Balance at December 31, 2021 | | Reserve for: | | | | | | | | | | | Credit losses | $ | 14 | | | $ | 4 | | | $ | (1) | | | $ | — | | | $ | 17 | | | LIFO inventory | 226 | | | 159 | | | (30) | | | (10) | | | 365 | | | Non-environmental asset retirement obligations | 51 | | | 2 | | | (1) | | | 1 | | | 51 | | | Environmental contingencies | 285 | | | 11 | | | — | | | 15 | | | 281 | | | Deferred tax valuation allowance | 393 | | | (55) | | | 1 | | | — | | | 339 | | | | $ | 969 | | | $ | 121 | | | $ | (31) | | | $ | 6 | | | $ | 1,053 | |
(1)Other accounts in the reserve for LIFO inventory was due to assets held for sale classification resulting from the Company entering into a definitive agreement to sell the adhesives resins business. (2)Deductions in the reserve for LIFO inventory was the result of the divestiture of rubber additives. For additional information, see Note 2, "Divestitures".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | 20. | QUARTERLY SALES AND EARNINGS DATA – UNAUDITED |
| | | | | | | | | | | | | | | | | | (Dollars in millions, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | 2019 | | | | | | | | | Sales | $ | 2,380 |
| | $ | 2,363 |
| | $ | 2,325 |
| | $ | 2,205 |
| | Gross profit | 574 |
| | 589 |
| | 574 |
| | 497 |
| Asset impairments and restructuring charges, net
| 32 |
| | 18 |
| | 2 |
| | 74 |
| | Net earnings attributable to Eastman | 209 |
| | 258 |
| | 266 |
| | 26 |
| Net earnings per share attributable to Eastman(1) | |
| | |
| | |
| | |
| | Basic | $ | 1.50 |
| | $ | 1.87 |
| | $ | 1.95 |
| | $ | 0.19 |
| | Diluted | $ | 1.49 |
| | $ | 1.85 |
| | $ | 1.93 |
| | $ | 0.19 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | Balance at January 1,
2020 | | Charges (Credits) to Cost and Expense | | Other Accounts | |
Deductions | | Balance at December 31, 2020 | | Reserve for: | | | | | | | | | | | Credit losses | $ | 11 | | | $ | 4 | | | $ | — | | | $ | 1 | | | $ | 14 | | | LIFO inventory | 248 | | | (22) | | | — | | | — | | | 226 | | | Non-environmental asset retirement obligations | 48 | | | 2 | | | 1 | | | — | | | 51 | | | Environmental contingencies | 287 | | | 8 | | | — | | | 10 | | | 285 | | | Deferred tax valuation allowance | 453 | | | (61) | | | 1 | | | — | | | 393 | | | | $ | 1,047 | | | $ | (69) | | | $ | 2 | | | $ | 11 | | | $ | 969 | |
(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 | | 2018 | | | | | | | | | Sales | $ | 2,607 |
| | $ | 2,621 |
| | $ | 2,547 |
| | $ | 2,376 |
| | Gross profit | 581 |
| | 704 |
| | 728 |
| | 466 |
| Asset impairments and restructuring charges, net
| 2 |
| | 4 |
| | — |
| | 39 |
| | Net earnings attributable to Eastman | 290 |
| | 344 |
| | 412 |
| | 34 |
| Net earnings per share attributable to Eastman(1) | | | | | | | | | Basic | $ | 2.03 |
| | $ | 2.42 |
| | $ | 2.93 |
| | $ | 0.25 |
| | Diluted | $ | 2.00 |
| | $ | 2.39 |
| | $ | 2.89 |
| | $ | 0.24 |
|
| | | Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount. |
Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | Balance at January 1, 2019 | | Charges (Credits) to Cost and Expense | | Other Accounts | | Deductions | | Balance at December 31, 2019 | | Reserve for: | |
| | |
| | |
| | |
| | |
| | Doubtful accounts and returns | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | LIFO inventory | 337 |
| | (89 | ) | | — |
| | — |
| | 248 |
| | Non-environmental asset retirement obligations | 46 |
| | 2 |
| | — |
| | — |
| | 48 |
| | Environmental contingencies | 296 |
| | 7 |
| | — |
| | 16 |
| | 287 |
| | Deferred tax valuation allowance | 487 |
| | (20 | ) | | (14 | ) | | — |
| | 453 |
| | | $ | 1,177 |
| | $ | (100 | ) | | $ | (14 | ) | | $ | 16 |
| | $ | 1,047 |
|
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | Balance at January 1,
2018 | | Charges (Credits) to Cost and Expense | | Other Accounts | |
Deductions | | Balance at December 31, 2018 | | Reserve for: | |
| | |
| | |
| | |
| | |
| | Doubtful accounts and returns | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 11 |
| | LIFO inventory | 288 |
| | 44 |
| | 5 |
| | — |
| | 337 |
| | Non-environmental asset retirement obligations | 49 |
| | (2 | ) | | — |
| | 1 |
| | 46 |
| | Environmental contingencies | 304 |
| | 9 |
| | — |
| | 17 |
| | 296 |
| Deferred tax valuation allowance (1) | 410 |
| | 81 |
| | (4 | ) | | — |
| | 487 |
| | | $ | 1,063 |
| | $ | 132 |
| | $ | 1 |
| | $ | 19 |
| | $ | 1,177 |
|
| | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | Additions | | | | | | | 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 | $ | 10 |
| | $ | 3 |
| | $ | — |
| | $ | 1 |
| | $ | 12 |
| | LIFO inventory | 264 |
| | 24 |
| | — |
| | — |
| | 288 |
| | Non-environmental asset retirement obligations | 46 |
| | 2 |
| | 1 |
| | — |
| | 49 |
| | Environmental contingencies | 321 |
| | 8 |
| | 4 |
| | 29 |
| | 304 |
| | Deferred tax valuation allowance | 278 |
| | 126 |
| | 6 |
| | — |
| | 410 |
| | | $ | 919 |
| | $ | 163 |
|
| $ | 11 |
|
| $ | 30 |
|
| $ | 1,063 |
|
| | (1)
| Revised from Note 21, "Reserve Rollforwards", to the Company's 2018 Annual Report on Form 10-K, which reported deferred tax valuation allowance as $466 million. |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
| | ITEM 9.
| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. | | ITEM 9A. CONTROLS AND PROCEDURES
| CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Eastman 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, 2019,2022, 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, 20192022 based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2019.2022.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20192022 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, 20192022 that has materially affected, or is reasonably likely to materially effect, the Company's internal control over financial reporting.
| | ITEM 9B. OTHER INFORMATION
| OTHER INFORMATION |
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
| | ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The material under the heading "Proposals"Summary of Items to be Voted Onon at the Annual Meeting--Item 1--Election of Directors" to (but not including), under the subheading "The Board of Directors and Corporate Governance"Directors-Director Nominees", 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)heading "Corporate Governance", each as included and to be filed in the definitive Proxy Statement for the 20202023 Annual Meeting of Stockholders (the "2020"2023 Proxy Statement"), is incorporated by reference herein in response to this Item. Certain information concerning executive officers of Eastman is set forth under the heading "Information About our Executive Officers" in Part I of this Annual Report on Form 10-K (this "Annual Report").
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"Summary of Items to be Voted Onon at the Annual Meeting--Item 1--Election of Directors--BoardDirectors", under the subheadings "Corporate Governance--Board Committees--Compensation and Management Development Committee--CompensationCommittee", "Corporate Governance--Committee Reports" (except for the Audit Committee Report"Report material), under the subheadingand "Director Compensation", and under the heading "Executive"Item 2--Advisory Approval of Executive Compensation", each as included and to be filed in the 20202023 Proxy Statement, is incorporated by reference herein in response to this Item.
| | ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The material under the headingsheading "Information about Stock Ownership", under the subheadings "Stock Ownership of Directors and Executive Officers--Common Stock" and "Principal Stockholders", each as included and to be filed in the 20202023 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 20072012 Omnibus Long-TermStock Compensation Plan, the 20122017 Omnibus Stock Compensation Plan, and the 20172021 Omnibus Stock Compensation Plan. Although stock and stock-based awards are still outstanding under the 20072012 Omnibus Long-TermStock Compensation Plan and the 20122017 Omnibus Stock Compensation Plan, no shares are available under these plans for future awards. All future share-based awards are made from the 20172021 Omnibus Stock Compensation Plan and the 2018Amended 2021 Director Stock Compensation Subplan, a component of the 20172021 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, 20192022 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) | | | Equity compensation plans approved by stockholders | | 3,479,200 | | (1) | $ | 88 | | | 8,355,640 | | (2) | | Equity compensation plans not approved by stockholders | | — | | | — | | | — | | | | TOTAL | | 3,479,200 | | | $ | 88 | | | 8,355,640 | | |
(1)Represents shares of common stock issuable upon exercise of outstanding options granted under Eastman Chemical Company's 2012 Omnibus Stock Compensation Plan, the 2017 Omnibus Stock Compensation Plan, and the 2021 Omnibus Stock Compensation Plan. (2)Shares of common stock available for future awards under the Company's 2021 Omnibus Stock Compensation Plan, including the Amended 2021 Director Stock Compensation Subplan, a component of the 2021 Omnibus Stock Compensation Plan.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | | | | | | | | | | | | | | 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) | | | Equity compensation plans approved by stockholders | | 3,479,300 |
| (1) | $ | 80 |
| | 6,085,857 |
| (2) | | Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
| | | TOTAL | | 3,479,300 |
| | $ | 80 |
| | 6,085,857 |
| |
| | (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 2012 Omnibus Stock Compensation Plan, and the 2017 Omnibus Stock Compensation Plan. |
| | (2)
| Shares of common stock available for future awards under the Company's 2017 Omnibus Stock Compensation Plan, including the 2018 Director Stock Compensation Subplan, a component of the 2017 Omnibus Stock Compensation Plan. |
| | ITEM 13.
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The material under the heading "Proposals"Summary of Items to be Voted Onon at the Annual Meeting--Item 1--Election of Directors", subheadings "Director"The Board of Directors--Director Independence" and "Transactions"Corporate Governance--Board Practices, Processes, and Policies--Transactions with Directors, Executive Officers, and Related Persons", each as included and to be filed in the 20202023 Proxy Statement, is incorporated by reference herein in response to this Item.
| | ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
| 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 3 - Ratification"Summary of Items to be Voted on at the Annual Meeting--Item 3--Ratification of Appointment of Independent Registered Public Accounting Firm" as included and to be filed in the 20202023 Proxy Statement is incorporated by reference herein in response to this Item.
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | | | | | | | | | | | | | | | | Page | | (a) | 1. | Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2. | | | | (b) | | |
ITEM 16.FORM 10-K SUMMARY
None.
| | | | | | | | | ITEM 15.Exhibit Number
| EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | | | | | | | | Page | | (a) | 1. | Consolidated Financial Statements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2. | | | | (b) | | |
| EXHIBIT INDEX | ITEM 16. | FORM 10-K SUMMARY |
None.
| Description | | | | Exhibit Number3.01 | | EXHIBIT INDEX | | Description | | | | 3.01 | | | | | | | 3.02 | | | | | | 4.01 | | | | | | 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)2 to the Company's Current Report on Form 8-K dated January 10, 1994) | | | | 4.03 | | | | | | 4.044.01 | | 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) | | | | 4.054.02 | | 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) | | | | 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) | | | | 4.074.03 | | | | | | 4.084.04 | | | | | | 4.094.05 | | | | | | 4.10 | | | | | | 4.11 | | | | | | 4.124.06 | | | | | | 4.134.07 | | | | | | 4.144.08 | | | | | | 4.154.09 | | | | | | 4.164.10 | | | | | | 4.17 | | | | | | 4.18* | | | | | |
| | | | Exhibit Number4.11 | | EXHIBIT INDEX | | Description | 10.01 | | Amended and Restated $250,000,000 Accounts Receivable Securitization Agreement dated July 9, 2008 (amended August 31, 2016, April 2, 2018, and June 27, 2019) between the Company and The BankDescription of Tokyo-Mitsubishi UFJ, Ltd., as agentSecurities (incorporated herein by reference to Exhibit 10.014.18 to the Company's QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended June 30, 2015, Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended MarchDecember 31, 20182019), and Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019) | | | | 10.0210.01 | | Second Amended and Restated Five-Year Credit Agreement dated as of October 25, 2018December 3, 2021 among Eastman Chemical Company, the initial lenders named herein, and Citibank, N.A., as administrative agent, Citibank, N.A. and Mizuho Bank, LTD., as Co-Sustainability Structuring Agents, and Citibank, N.A., BOFA Securities, Inc., JPMorgan Chase Bank, N.A., and Merrill Lynch, Pierce, Fenner & Smith Incorporate,Mizuho Bank, LTD., as joint lead arrangers (incorporated (incorporated herein by referencereference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018) | | | | 10.03 | | Amended and Restated Non-Recourse Account Receivable Purchase Agreement dated December 21, 2012 (amended March 28, 2013, July 30, 2013, March 22, 2016, December 16, 2016 and December 28, 2017) 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, Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 20162021), and Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017) | | | | 10.0410.02 | | Amended and Restated Non-Recourse Accounts Receivable PurchaseTerm Loan Agreement dated October 31, 2012 (amended March 28, 2013, May 23, 2013, July 30, 2013, December 10, 2013, January 7, 2014, March 22, 2016, December 16, 2016, and December 28, 2017) between BNP Paribas Fortis Factor N.V. and Taminco B.V.B.A. (initial agreement incorporatedas of April 14, 2022 (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, Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended DecemberMarch 31, 20162022), and Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017) | | | | 10.0510.03* | | | | | | | 10.04* | | Non-Recourse Accounts Receivable Purchase agreementAgreement dated April 25, 2014 (amended May 13, 2014, November 21, 2014, March 22, 2016, December 16, 2016,October 1, 2019 and Decemberamendment dated September 28, 2017)2022 between BNP ParisbasParibas Fortis Factor N.V. and Taminco Finland Oy (incorporated herein by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016US LLC, Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016, and Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017) | | | | 10.0610.05* | | | | | | | 10.06 | | | | | | | 10.07 | | | | | | | 10.08 | | | | | |
| | | | | | | | | 10.09Exhibit Number | | EXHIBIT INDEX | | Description | | 10.09 | | | | | | | 10.10 | | | | | | | 10.11 | | | | | | | 10.12 | | | | | | | 10.13 | | | | | |
| | | | Exhibit Number10.14 | | EXHIBIT INDEX | | Description | 10.14 | | | | | | | 10.15 | | | | | | | 10.16 | | | | | | 10.17 | | | | | | 10.1810.17 | | | | | | 10.1910.18 | | | | | | 10.2010.19* | | | | | | 10.21*10.20 | | | | | | 10.22 | | | | | | 10.2310.21* | | | | | | 10.24 | | | | | | 10.2510.22 | | | | | | 10.2610.23 | | | | | | 10.2710.24 | | | | | |
| | | | | | | | | 2018Exhibit Number | | EXHIBIT INDEX | | Description | | 10.25 | | | | | | 10.2810.26 | | | | | | 10.2910.27 | | | | | |
| | | | | 10.28 | | | | EXHIBIT INDEX10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022) ** | | Description | | 10.3010.29 | | | | | | 10.3110.30 * | | | | | | | 21.01* | | | | | | | 23.01* | | | | | | | 31.01* | | | | | | | 31.02* | | | | | | | 32.01* | | | | | | | 32.02* | | | | | | | 99.01* | | | | | | | 99.02* | | | | | | | 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | | | | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | | | | 101.CAL* | | Inline XBRL Taxonomy Calculation Linkbase Document | | | | | 101.DEF* | | Inline XBRL Definition Linkbase Document | | | | | 101.LAB* | | Inline XBRL Taxonomy Label Linkbase Document | | | | | 101.PRE* | | Inline XBRL Presentation Linkbase Document | | | | | 104 | | Cover Page Interactive Data File (formatted as Inlineinline XBRL and contained in Exhibit 101) |
| | | | | | | * | 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: | February 26, 202015, 2023 | |
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: | | | | | | | | | | SIGNATURE | | TITLE | | DATE | | | | | | PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR: | | | | | | | | | | | /s/ Mark J. Costa | | Chief Executive Officer and | | February 26, 202015, 2023 | | Mark J. Costa | | Director | | | | | | | | | | | | | PRINCIPAL FINANCIAL OFFICER: | | | | | | | | | | /s/ Curtis E. Espeland | | Executive Vice President and | | February 26, 2020 | Curtis E. Espeland | | Chief Financial Officer | | | | | | | | | | | | | PRINCIPAL ACCOUNTING OFFICER: | | | | | | | | | | /s/ Scott V. King | | Vice President, Corporate Controller | | February 26, 2020 | Scott V. King | | and Chief Accounting Officer | | |
| | | | | | SIGNATURE | | TITLE | | DATE | | PRINCIPAL FINANCIAL OFFICER: | | | | | | | | | | | /s/ William T. McLain, Jr. | | Senior Vice President and | | February 15, 2023 | | William T. McLain, Jr. | | Chief Financial Officer | | | | | | | | | | | | | | PRINCIPAL ACCOUNTING OFFICER: | | | | | | | | | | | /s/ Michelle R. Stewart | | Vice President, Corporate Controller | | February 15, 2023 | | Michelle R. Stewart | | 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 | | February 26, 202015, 2023 | | Humberto P. Alfonso | | | | | | | | | | | /s/ Brett D. Begemann | | Director | | February 26, 202015, 2023 | | Brett D. Begemann | | | | | | | | | | /s/ Michael P. ConnorsEric L. Butler | | Director | | February 26, 202015, 2023 | Michael P. ConnorsEric L. Butler | | | | | | | | | | /s/ Robert M. HernandezEdward L. Doheny II | | Director | | February 26, 202015, 2023 | Robert M. HernandezEdward L. Doheny II | | | | | | | | | | | /s/ Julie F. Holder | | Director | | February 26, 202015, 2023 | | Julie F. Holder | | | | | | | | | | | /s/ Renée J. Hornbaker | | Director | | February 26, 202015, 2023 | | Renée J. Hornbaker | | | | | | | | | | /s/ Lewis M. Kling | | Director | | February 26, 2020 | Lewis M. Kling | | | | | | | | | | | /s/ Kim A. Mink | | Director | | February 26, 202015, 2023 | | Kim A. Mink | | | | | | | | | | | /s/ James J. O'Brien | | Director | | February 26, 202015, 2023 | | James J. O'Brien | | | | | | | | | | | /s/ David W. Raisbeck | | Director | | February 26, 202015, 2023 | | David W. Raisbeck | | | | | | | | | | * Edward L. Doheny II and/s/ Charles K. Stevens III were appointed to the Board of Directors in | | Director | | February 2020.15, 2023 | | Charles K. Stevens III | | | | | | | | | |
|
