Eastman's cash expenditures related to environmental protection and improvement were $300 million, $281 million, and $265 million $244 million,in 2022, 2021, and $274 million in 2020, 2019, and 2018, respectively, and include operating costs associated with environmental protection equipment and facilities, engineering costs, and construction costs. These cash expenditures include environmental capital expenditures of approximately $60 million, $38 million, and $42 million $27 million,in 2022, 2021, and $44 million in 2020, 2019, and 2018, respectively.
Health and Safety
Eastman places a strong emphasis on the health, safety and well-being of its employees. Eastman's commitment to a "zero-incident mindset" takes a holistic approach to people and processes by fostering the right behaviors, values, and culture to ensure that its employees are operating responsibly, accountably, and safely. See "Human Capital". Under the U.S. Occupational Safety and Health Act of 1970, as administered by the Occupational Safety and Health Administration ("OSHA"), some of the Company's operations are subject to workplace standards under OSHA's Process Safety Management program. From time to time, the Company may incur significant capital expenditures to maintain compliance with the requirements of this program.
Available Information - Securities and Exchange Commission ("SEC") Filings
Eastman makes available free of charge, in the "Investors - SEC Information"Investors section of its Internet website (www.eastman.com),at www.eastman.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
For identification and discussion of the most significantmaterial known factors, risks, applicable toand uncertainties that could, in the future, materially adversely affect the Company, and its business, financial condition, or results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.
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ITEM 1B. UNRESOLVED STAFF COMMENTS |
None.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS |
Certain information about Eastman's executive officers is provided below:
Mark J. Costa, age 54,56, is Chair of the Eastman Chemical Company Board of Directors and Chief Executive Officer. Mr. Costa joined the Company in June 2006 as Chief Marketing Officer and leader of corporate strategy and business development; was appointed Executive Vice President, Specialty Plastics and Performance Polymers Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Products and Chief Marketing Officer in May 2009; and became President and a member of the Board of Directors in May 2013. Prior to joining Eastman, Mr. Costa was a senior partner with Monitor Group, a global management consulting firm. He joined Monitor in 1988, and his experience included corporate and business unit strategies, asset portfolio strategies, innovation and marketing, and channel strategies across a wide range of industries. Mr. Costa was appointed Chief Executive Officer in January 2014 and was named Board Chair effective July 2014. Mr. Costa also serves on the Board of Directors of International Flavors & Fragrances Inc.
William T. McLain, Jr., age 48,50, is Senior Vice President and Chief Financial Officer. Mr. McLain joined Eastman in 2000 and has served in high-level finance and accounting roles throughout the organization in the United States, Asia, and Europe. In 2011, Mr. McLain served as Director, Asia Pacific Finance, and in 2013 was appointed to International Controller. In 2014, Mr. McLain was appointed Corporate Controller until 2016 when he became Vice President of Finance. He was appointed to his current position in February 2020. Prior to Eastman, Mr. McLain worked for the public accounting firm PricewaterhouseCoopers LLP. Mr. McLain was appointed to his current position effective February 2020. Effective January 1, 2023, Mr. McLain assumed responsibility for Human Resources.
Stephen G. Crawford, age 58, is Executive Vice President, Manufacturing and Chief Sustainability Officer, with executive responsibility for global manufacturing and engineering and the corporate sustainability strategy. Mr. Crawford joined Eastman in 1984 and held leadership positions of increasing responsibility in both the manufacturing and technology organizations. From 2007 until January 2014 he served as Vice President of Global R&D in the AM and AFP segments. He was appointed Senior Vice President and Chief Technology Officer effective January 2014, and Senior Vice President, Chief Technology and Sustainability Officer effective October 2019. Mr. Crawford was appointed to his current position effective October 2022.
Brad A. Lich, age 53,55, is Executive Vice President and Chief Commercial Officer, with responsibility for the AM and Fibers segments outside-U.S. regional businessas well as leadership and theof marketing, sales, pricing,supply chain, corporate strategy, and procurement organizations.regional leadership. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for the Coatings business. Other positions of increasing responsibility followed, including General Manager of Emerging Markets of the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the former CASPI segment, and in 2012 was appointed Vice President and General Manager of the AFP segment. In January 2014, Mr. Lich was appointed Executive Vice President, with responsibility for the AFP and AM segments and the marketing, sales, and pricing organizations. In March 2016, Mr. Lich assumed executive responsibility for outside-U.S. regional business leadership. Mr. Lich was appointed to his current position effective July 2016.
Lucian Boldea, age 49, is Executive Vice President with responsibility for the AFP and CI segments. Dr. Boldea joined Eastman in 1997 as a chemist. During his career at Eastman, he has held various positions in R&D, licensing, business management, and corporate growth platforms leadership in the AM segment. Between 2012 and 2015 he served as Vice President and General Manager, Specialty Plastics, in the AM segment. In 2015, he was appointed Group Vice President and General Manager of the AFP segment and became Senior Vice President of the AFP segment in July 2016. Dr. Boldea was appointed to his current position effective January 2019.
Mark K. Cox, age 55, is Senior Vice President and Chief Manufacturing, Supply Chain, and Engineering Officer. Mr. Cox joined Eastman in 1986 and has served in a variety of management positions, including commercial, engineering, manufacturing, and technology leadership roles. In August 2008, Mr. Cox was appointed Vice President, Chemicals and Fibers Technology. Beginning in May 2009, Mr. Cox served as Vice President, Chemicals, Fibers, and Performance Polymers Technology. He was appointed Vice President, Worldwide Engineering and Construction in August 2010, appointed Senior Vice President and Chief Manufacturing and Engineering Officer effective January 2014, and to his current position effective March 2016.
Stephen G. Crawford, age 56, is Senior Vice President and Chief Technology and Sustainability Officer, with executive responsibility for innovation and sustainability. Mr. Crawford joined Eastman in 1984 and held leadership positions of increasing responsibility in both the manufacturing and technology organizations. From 2007 until January 2014 he served as Vice President of Global R&D in the AM and AFP segments. He was appointed Senior Vice President and Chief Technology Officer effective January 2014, and to his current position effective October 2019.
Kellye L. Walker, age 54,56, is Executive Vice President and Chief Legal Officer. Ms. Walker joined Eastman in April 2020. Ms. Walker has overall leadership responsibility for Eastman's legal organization, including corporate governance, compliance and litigation management, as well as government affairs, product stewardship and regulatory affairs, global business conduct, global trade, global security, and the Company's global health, safety and environment and security organization. For the five years prior toBefore joining Eastman, Ms. Walker served as executive vice president and chief legal officer of Huntington Ingalls Industries. Prior to that, Ms. Walker's work experience includes serving as general counsel or chief legal officer at American Water Works Company, Diageo North America, and BJ's Wholesale Club. Ms. Walker was appointed to her current position effective April 2020.
Perry Stuckey III,Christopher M. Killian, age 61,53, is Senior Vice President and Chief Human ResourcesTechnology Officer. Mr. StuckeyDr. Killian has responsibility for Eastman's global technology organization. Prior to this position he served as Vice President, Technology for the AFP and CI segments, and Corporate Technology and Vice President of Technology for the AM segment. Dr. Killian joined Eastman in 20111996 as a research chemist. During his career at Eastman, he has held various leadership positions in technology and the business including Director, Tritan Growth Platform early in his career. Dr. Killian was appointed to his current position effective June 2021.
Julie A. McAlindon, age 55, is Senior Vice President, Global Human Resources,Regions and Chief Supply Chain Officer. Ms. McAlindon has responsibility for overseeing supply chain, sourcing and procurement, and regional leadership outside of North America. Ms. McAlindon also leads the transformation of Eastman, building the capabilities and culture required to support Eastman's strategy. Prior to this role, Ms. McAlindon was responsible for Eastman's human resources strategyChief Procurement Officer and services worldwide. Mr. Stuckey'sVice President, Transformation. Ms. McAlindon joined Eastman in 2016. Before joining Eastman, Ms. McAlindon was with Avient Corporation (formerly PolyOne) as senior vice president, designed structures and solutions; and vice president of marketing. Prior to that, Ms. McAlindon's work experience includes a variety of global human resource managementleadership positions with The Dow Chemical Company. Ms. McAlindon was appointed to her current position effective June 2021.
Travis Smith, age 49, is Senior Vice President with responsibility for the AFP segment. Mr. Smith joined the Company in December 1992 as a chemical engineer and has held various positions of increasing responsibility within manufacturing, industrial automation,the chemicals business, corporate innovation, specialty plastics, and bio-technology companies, including Hill-Rom Company, Rockwell Automation,advance materials during his career at Eastman. Mr. Smith assumed the position of Vice President and Monsanto Company.General Manager, Performance Films in July 2012 and for both Performance Films and Advance Interlayers in April 2018. Mr. StuckeySmith was appointed to his current position in January 2013.effective October 2022.
Scott V. King,Michelle R. Stewart, age 52,51, is Vice President, Corporate Controller and Chief Accounting Officer. Since joining Eastman in 1999 as Manager, Corporate Consolidations and External Reporting, Mr. King1995, Ms. Stewart has held variousserved in a number of positions ofwith increasing responsibility in the financial organization. He was first appointed Corporate Controller in August 2007 and has served as Chief Accounting Officer since September 2008. Prior to joining Eastman, Mr. KingMs. Stewart was an audit and business advisory managerauditor with PricewaterhouseCoopers LLP.KPMG Peat Marwick. Ms. Stewart was appointed to her current position effective October 2021.
ITEM 2.PROPERTIES
At December 31, 2020,2022, Eastman owned or operated 4735 manufacturing facilities and had equity interests in threetwo manufacturing joint ventures in a total of 1412 countries. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions; however, none of the principal plants is substantially idle. The Company's plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable and adequate for their use. Unless otherwise indicated, all properties are owned. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Shanghai, China; Rotterdam, the Netherlands; Singapore; and Zug, Switzerland.
The locations and general character of the Company's manufacturing facilities are:
| | | | | | | | | | | | | | |
| Segment using manufacturing location |
Location | Advanced Materials | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | |
USA | | | | |
Alvin, Texas (1) | | x | | | |
Anniston, Alabama | x | | | |
Axton, Virginia | | x | | |
Cartersville, Georgia Axton, Virginia(1)
| x | | | |
Chestertown, Maryland | | | x | |
Columbia, South Carolina (1) | | x | | |
Fieldale, Virginia | | x | | |
Franklin, Virginia (1)
| x | | | |
Jefferson, PennsylvaniaFieldale, Virginia | x | | | |
Kingsport, Tennessee | x | x | x | x |
Lemoyne, Alabama (1)
| x | | | |
Linden, New Jersey | | x | | | |
Longview, Texas | x | x | x | |
Martinsville, Virginia | | x | | |
Monongahela, Pennsylvania | x | | | |
Pace, Florida (2) | | x | | x | |
Sauget, IllinoisSpringfield, Massachusetts | x | | | |
Springfield, MassachusettsSt. Gabriel, Louisiana | | x | | |
St. Gabriel, Louisiana | x | | x | |
Sun Prairie, Wisconsin | | x | | | |
Texas City, Texas | | | x | |
Trenton, Michigan (3)
| | x | | |
Watertown, New York | | | | x |
Europe | | | | |
Antwerp, Belgium (1) | x | x | | |
Ghent, Belgium (4)(3) | x | x | x | |
Kohtla-Järve, Estonia | | x | | x | |
Oulu, Finland (2) | | x | | | |
Dresden, Germany | | x | | | |
Leuna, Germany | | x | | x | |
Marl, Germany (2) | x | | | |
Nienburg, Germany | x | | | |
Middelburg, the NetherlandsAvila, Spain | | x | | | |
LA Batllòria, Spain | | | | x |
Newport, Wales | x | x | | |
(1)Eastman is a guest under an operating agreement with a third party that operates its manufacturing facilities at the site.
(2)Eastman leases from a third party and operates the site.
(3)Expected to close during 2021.
(4)Eastman has more than one manufacturing facility at this location.
| | | | | | | | | | | | | | |
| Segment using manufacturing location |
Location | Advanced Materials | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | |
Asia Pacific | | | | |
Nanjing, China | | x | | x | |
Suzhou, China (1)(2)(3) | x | x | | |
Wuhan, China (4) | | | x | |
Zibo, China (5) | | x | | x | |
Ulsan, Korea (6) | | | | x |
Kuantan, Malaysia (1) | x | x | | |
Jurong Island, Singapore(1)(7)
| x | | x | |
Latin America | | | | |
Itupeva, Brazil (8)
| x | | | |
Mauá, Brazil | | | x | |
Santo Toribio, Mexico | | x | | |
Uruapan, Mexico | x | | | |
(1)Eastman leases from a third party and operates the site.
(2)Eastman has more than one manufacturing facility at this location.
(3)Eastman holds a 60 percent share of Solutia Therminol Co., Ltd. Suzhou in the AFP segment.
(4)Eastman holds a 51 percent share of Eastman Specialties Wuhan Youji Chemical Co., Ltd.
(5)Eastman holds a 51 percent share of Qilu Eastman Specialty Chemical, Ltd.
(6)Eastman holds an 80 percent share of Eastman Fibers Korea Limited.
(7)Expected to close in 2021.
(8)Eastman is a guest under an operating agreement with a third party that operates its manufacturing facilities at the site.
Eastman has 50 percent or less ownership in joint ventures that have manufacturing facilities at the following locations:
| | | | | | | | | | | | | | |
| Segment using manufacturing location |
Location | Advanced Materials | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
| | | | |
Asia Pacific | | | | |
Hefei, China | | | | x |
Nanjing,Shenzhen, China | x | | | |
Shenzhen, China | | x | | |
Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases approximately 240200 stand-alone distribution facilities in approximately 30 countries. The Company also maintains technical service centers around the world.
A summary of properties, classified by type, is included in Note 3,4, "Properties and Accumulated Depreciation", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
ITEM 3.LEGAL PROCEEDINGS
General
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows. Consistent with the requirements of Securities and Exchange Commission Regulation S-K, Item 103, the Company’sCompany's threshold for disclosing any environmental legal proceeding involving a governmental authority (including the Jefferson Hills, Pennsylvania proceedings described below) is potential monetary sanctions that management believes will exceed $1 million.
Jefferson Hills, Pennsylvania Environmental Proceeding
In September 2021, Eastman Chemical Resins, Inc. ("ECRI"), a wholly-owned subsidiary of the Company, and the Company received a proposed Consent Decree from the United States Environmental Protection Agency's Region 3 Office ("EPA") and the Pennsylvania Department of Environmental Protection ("PADEP") alleging that ECRI's Jefferson Hills, Pennsylvania manufacturing operation had violated certain federal and state environmental regulations. Even though the Company sold the Jefferson Hills facility on April 1, 2022 as part of its previously reported sale of the adhesives resins business, it retained responsibility for any civil penalty assessed by EPA and PADEP in this matter. Following receipt of the proposed Consent Decree, ECRI and Company representatives met on multiple occasions with EPA and PADEP representatives and vigorously defended against these allegations. The parties have now reached a tentative settlement of this matter. The ultimate resolution of this proceeding is not expected to have a material impact on the Company's financial condition, results of operations, or cash flows.
Solutia Legacy Torts Claims Litigation
Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia, Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible for the defense and indemnification of Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia has agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly-owned subsidiary of Eastman upon Eastman's acquisition of Solutia in July 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto, which was acquired by Bayer AG in June 2018, as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)Eastman's common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN".
As of December 31, 2020,2022, there were 135,861,854118,796,867 shares of Eastman's common stock issued and outstanding, which shares were held by 12,97411,486 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation.
See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance Under Equity Compensation Plans" in Part III, Item 12 of this Annual Report for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
(c) Not applicable.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
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 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, 2022, a total of 6,743,883 shares have been repurchased under the 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 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 2022, the Company repurchased 10,710,259 shares of common stock for $1,102 million, which included $100 million from the settlement of the 2021 ASR.
For additional information, see Note 15, "Stockholders' Equity", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
| | | | | | | | | | | | | | |
| | | | |
Period | Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Approximate Dollar Value that May Yet Be Purchased Under the Plan or Program |
October 1-31, 2022 | — | | $ | — | | — | | $ | 1.965 | billion |
November 1-30, 2022 | 611,452 | | $ | 82.68 | | 611,452 | | $ | 1.915 | billion |
December 1-31, 2022 | 592,863 | | $ | 84.33 | | 592,863 | | $ | 1.865 | billion |
Total | 1,204,315 | | $ | 83.56 | | 1,204,315 | | |
(1)Average price paid per share reflects the weighted average purchase price paid for shares.
ITEM 6.SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Statements of Earnings Data | Year Ended December 31, |
(Dollars in millions, except per share amounts) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Sales | $ | 8,473 | | | $ | 9,273 | | | $ | 10,151 | | | $ | 9,549 | | | $ | 9,008 | |
Earnings before interest and taxes | 741 | | | 1,120 | | | 1,552 | | | 1,530 | | | 1,389 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net earnings | 489 | | | 762 | | | 1,084 | | | 1,388 | | | 859 | |
Less: Net earnings attributable to noncontrolling interest | 11 | | | 3 | | | 4 | | | 4 | | | 5 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net earnings attributable to Eastman | $ | 478 | | | $ | 759 | | | $ | 1,080 | | | $ | 1,384 | | | $ | 854 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Basic earnings per share attributable to Eastman: | $ | 3.53 | | | $ | 5.52 | | | $ | 7.65 | | | $ | 9.56 | | | $ | 5.80 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Diluted earnings per share attributable to Eastman: | $ | 3.50 | | | $ | 5.48 | | | $ | 7.56 | | | $ | 9.47 | | | $ | 5.75 | |
| | | | | | | | | |
Statements of Financial Position Data | | | | | | | | | |
Current assets | $ | 3,541 | | | $ | 3,321 | | | $ | 3,365 | | | $ | 3,143 | | | $ | 2,866 | |
Net properties | 5,549 | | | 5,571 | | | 5,600 | | | 5,607 | | | 5,276 | |
Goodwill | 4,465 | | | 4,431 | | | 4,467 | | | 4,527 | | | 4,461 | |
Intangible assets, net of accumulated amortization | 1,792 | | | 2,011 | | | 2,185 | | | 2,373 | | | 2,479 | |
Total assets | 16,083 | | | 16,008 | | | 15,995 | | | 15,999 | | | 15,457 | |
Current liabilities | 2,038 | | | 1,789 | | | 1,851 | | | 1,982 | | | 1,795 | |
Long-term borrowings | 5,269 | | | 5,611 | | | 5,925 | | | 6,147 | | | 6,311 | |
Total liabilities | 9,975 | | | 9,976 | | | 10,117 | | | 10,519 | | | 10,849 | |
Total Eastman stockholders' equity | 6,023 | | | 5,958 | | | 5,803 | | | 5,403 | | | 4,532 | |
Dividends declared per share | 2.67 | | | 2.52 | | | 2.30 | | | 2.09 | | | 1.89 | |
| | | | | | | | | |
Statements of Cash Flow Data | | | | | | | | | |
Cash provided by operating activities | $ | 1,455 | | | $ | 1,504 | | | $ | 1,543 | | | $ | 1,657 | | | $ | 1,385 | |
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this 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 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, 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. 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, including some unobservable inputs, 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 20202022 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
In second quarter 2020, the decrease in forecasted revenue and EBIT for the tire additives reporting unit (part of the Additives & Functional Products ("AFP") operating segment) reduced the fair value such that the estimated fair value approximated the carrying value. The decrease in forecasted revenue and EBIT for the tire additives reporting unit was primarily the result of weakened demand in transportation markets impacted by COVID-19 coronavirus global pandemic ("COVID-19") and increased competitive pricing pressure as a result of global capacity increases.
The Company had $4.5 billion of goodwill as of December 31, 2020. As a result of the goodwill impairment testing performed during fourth quarter 2020, fair values were determined to substantially exceed the carrying values for each reporting unit tested with the exception of the tire additives reporting unit (part of the Additives & Functional Products operating segment as described in "Business" in Part I, Item 1 of this Annual Report) whose fair value continues to approximate its carrying value. Two of the most critical assumptions used in the calculation of the fair value of the tire additives reporting unit are the projected long-term growth rate and the WACC. The Company performed a sensitivity analysis assuming a 25 basis point decrease in the projected long-term growth rate or a 25 basis point increase in the WACC, and both scenarios independently yielded approximately a $50 million decrease to the estimated fair value for the tire additives reporting unit. As of December 31, 2020, goodwill allocated to the tire additives reporting unit is $725 million. Additional declines in the market conditions or forecasted revenue and EBIT could result in an impairment of goodwill, especially for the tire additives reporting unit.
Indefinite-lived Intangible Assets
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 $374$359 million in indefinite-lived intangible assets at the time of the annual impairment test.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 2020.
Additional declines2022. Declines in the market conditions or forecasted revenue could result in additional impairment of indefinite-lived intangible assets. For additional information, see Note 1, "Significant Accounting Policies", Note 3, "Properties and Accumulated Depreciation", Note 4, "Goodwill and Other Intangible Assets", and Note 15, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
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 and could result in material impairment charges.
For additional information related to impairment of long-lived assets, see Note 1, "Significant Accounting Policies", Note 4, "Properties and Accumulated Depreciation", Note 5, "Goodwill and Other Intangible Assets", and Note 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 $257$245 million to the maximum of $501 million and from the best estimate or minimum of $260 million to the maximum of $487$457 million at December 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019.2022.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension and other postretirement benefit plans that provide eligible employees with retirement benefits. 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 the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 2.485.58 percent and 1.084.27 percent, respectively, and weighted average expected returns on plan assets of 7.296.62 percent and 4.043.86 percent, respectively, at December 31, 2020.2022. The Company assumed a weighted average discount rate of 2.385.55 percent for its other postretirement benefit plans at December 31, 2020.2022. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The projected benefit obligation as of December 31, 20202022 and 2021 expense for 2023 are affected by year-end 20202022 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.
| | | | | | | | | | | | | | | | | |
Change in Assumption | Impact on
20212023 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Pension Plans | Impact on December 31, 20202022 Projected Benefit Obligation for Pension Plans | Impact on 20212023 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 20202022 Benefit Obligation for Other Postretirement Benefit Plans |
U.S. | Non-U.S. |
25 basis point decrease in discount rate | $-4-1 Million | $+5132 Million | $+5222 Million | $-1 Million | $+1810 Million |
25 basis point increase in discount rate | $+41 Million | $-48-31 Million | $-48-20 Million | $+1 Million | $-17-10 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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. See the calculation of the MTM pension and other post-retirement benefits (gain) loss table below in "NON-GAAP FINANCIAL MEASURES - Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from 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.
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 income taxes could have a material impact on the consolidated results of operations and statements of financial position. As of December 31, 2020 and 2019,2022, valuation allowances of $393$258 million and $453 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 which could result in additional income tax liabilities and income tax 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.
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 - Cash Flows", and "Outlook" 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 considered 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. Management considered these actions and associated costs and incomewhich this relates, management considers this 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 Flow Measure
Eastman regularly evaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as net cash provided by or used in operating activities less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment, and in 2018 net of proceeds from property insurance). Such net capital expenditures are generally funded from available cash and, as such, management believes they should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of available cash. The priorities for cash after funding operations include payment of quarterly dividends, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management believes this metric is useful to investors and securities analysts to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization, and "free cash flow conversion", which management defines as annual free cash flow divided by adjusted net income. Management believes these metrics are useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
Non-GAAP Debt Measure
Eastman from time to time evaluates and discloses to investors and securities and credit analysts the non-GAAP debt measure "net debt", which management defines as total borrowings less cash and cash equivalents. Management believes this metric is useful to investors and securities and credit analysts to provide them with information similar to that used by management in evaluating the Company's overall financial position, liquidity, and leverage and because management believes investors, securities analysts, credit analysts and rating agencies, and lenders often use a similar measure to assess and compare companies' relative financial position and liquidity.
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:
•MTMAsset 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 impairmentsEnvironmental and restructuring charges, including severanceother costs from previously divested or non-operational sites and site closure or shutdown charges,product lines;
•Gains and losses, net of which asset impairments are non-cash transactions impacting profitability;on divested businesses and related transaction costs;
•Adjustments to contingent considerations;
•Accelerated depreciation resulting from the closure of a manufacturing facility as part of ongoing site optimization,optimization; and
•Early debt extinguishment costs resulting from repayment of borrowings.costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following unusual items are excluded by management in its evaluation of certain earnings results in this Annual Report:
•CostsSteam line incident costs, net of and income from insurance for, the coal gasification incident;
•Costs of currency transaction and professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations;proceeds, and
•Estimated net tax benefitDecrease to the provision for income taxes due to adjustment of the amount 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 measures of cash flow, "free cash flow", andmeasure of debt, "net debt", areis also presented in this Annual Report.
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings
| | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Non-core items impacting EBIT: | | | | | |
Mark-to-market pension and other postretirement benefits loss, net | $ | 240 | | | $ | 143 | | | $ | 99 | |
Asset impairments and restructuring charges, net | 227 | | | 126 | | | 45 | |
| | | | | |
| | | | | |
| | | | | |
Accelerated depreciation | 8 | | | — | | | — | |
Unusual items impacting EBIT: | | | | | |
Net coal gasification incident insurance | — | | | — | | | (83) | |
Costs resulting from tax law changes and outside-U.S. entity reorganizations | — | | | — | | | 20 | |
Total non-core and unusual items impacting EBIT | 475 | | | 269 | | | 81 | |
Non-core item impacting earnings before income taxes: | | | | | |
Early debt extinguishment and other related costs | 1 | | | — | | | 7 | |
Total non-core item impacting earnings before income taxes | 1 | | | — | | | 7 | |
Less: Items impacting provision for income taxes: | | | | | |
Tax effect for non-core and unusual items | 115 | | | 47 | | | 16 | |
| | | | | |
Estimated net tax (expense) benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | — | | | (7) | | | (20) | |
| | | | | |
Total items impacting provision for income taxes | 115 | | | 40 | | | (4) | |
Total items impacting net earnings attributable to Eastman | $ | 361 | | | $ | 229 | | | $ | 92 | |
| | | | | | | | | | | | | |
(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
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 loss (gain), net" and that are included in the non-GAAP results.
| | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Other components of post-employment (benefit) cost, net | $ | 119 | | | $ | 60 | | | $ | (21) | |
Service cost | 42 | | | 41 | | | 49 | |
Net periodic benefit (credit) cost | 161 | | | 101 | | | 28 | |
Less: Mark-to-market pension and other postretirement benefits loss, net | 240 | | | 143 | | | 99 | |
Components of post-employment (benefit) cost, net included in non-GAAP earnings measures | $ | (79) | | | $ | (42) | | | $ | (71) | |
| | | | | | | | | | | | | |
(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) | | | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Below is the calculation of the MTM pension and other post-retirement benefits (gain) loss disclosed above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Actual return and percentage of return on assets | $ | 260 | | | 9 | % | | $ | 406 | | | 15 | % | | $ | (82) | | | (3) | % |
Less: expected return on assets | 174 | | | 6 | % | | 165 | | | 6 | % | | 189 | | | 7 | % |
Mark-to-market (loss) gain on assets | 86 | | | | | 241 | | | | | (271) | | | |
Actuarial (loss) gain (1) | (326) | | | | | (384) | | | | | 172 | | | |
Total mark-to-market (loss) gain | $ | (240) | | | | | $ | (143) | | | | | $ | (99) | | | |
Global weighted-average assumed discount rate for year ended December 31: | 2.07 | % | | | | 2.80 | % | | | | 3.82 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 (loss) gain resulted primarily from the change in discount rates from the prior year and changes in other actuarial assumptions.
(2)Curtailment gain in a Non U.S. pension plan was triggered by the sale of the adhesives resins business. The Company retained certain plan participants while the status of the participants changed. The curtailment includes $3 million reduction in the pension benefit obligation and $4 million of prior service credits recognized.
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.
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 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.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "EBIT"Adjusted EBIT Margin", "Adjusted EBITDA", "EBITDA"Adjusted EBITDA Margin", "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 Consolidated 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 Consolidated 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 molecular recycling technologies.personal and 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 $8.5$10.6 billion and $9.3$10.5 billion for 20202022 and 2019,2021, respectively. EBIT was $741 million$1.2 billion and $1.1$1.3 billion in 20202022 and 2019,2021, respectively. Excluding the non-core and unusual items referenced in "Non-GAAP Financial Measures", adjusted EBIT was $1.2$1.3 billion and $1.4$1.6 billion in 20202022 and 2019,2021, 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 volumevolume; higher manufacturing costs resulting from planned and lower selling prices. Sales volume decreased for products serving end-markets negatively impactedunplanned outages; an unfavorable shift in foreign currency exchanges rates; and continued investment in growth. These factors were partially offset by COVID-19, including transportation, building and construction, consumer durables, and textiles end-markets. Lowerhigher selling prices, werenet of higher raw material and energy costs, and distribution costs, as well as lower SG&A costs, primarily due to lower raw material prices. Adjusted EBIT decreased duevariable 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 reduced capacity utilization, lowerthe 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 volume,of the rubber additives business and less favorable product mix, partially offset by the impactadhesive resins business, see Note 2, "Divestitures", to the Company's consolidated financial statements in Part II, Item 8 of cost reduction actions.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.
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
(Dollars in millions, except diluted EPS) | $ | | EPS | | $ | | EPS |
Net earnings attributable to Eastman | $ | 478 | | | $ | 3.50 | | | $ | 759 | | | $ | 5.48 | |
Total non-core and unusual items, net of tax | 361 | | | 2.65 | | | 229 | | | 1.65 | |
Net earnings attributable to Eastman excluding non-core and unusual items | $ | 839 | | | $ | 6.15 | | | $ | 988 | | | $ | 7.13 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 $1.5$975 million and $1.6 billion of cash from operating activities in both 20202022 and 2019. Free cash flow was $1.1 billion in both 2020 and 2019.2021, respectively.
COVID-19 Coronavirus Pandemic Response and Impact
Following the outbreak of COVID-19 in early 2020, in March 2020 the U.S. Centers for Disease Control issued guidelines to mitigate the spread and health consequences of COVID-19. The Company implemented changes to its operations and business practices to follow the guidelines and minimize physical interaction, including using technology to allow employees to work from home when possible and altering production procedures and schedules.
In response to the uncertainties of the impact of COVID-19 (including on overall business and market conditions; Eastman manufacturing sites and distribution, sales, and service facilities closure or reduced availability; and Eastman products market demand weakness and supply chain disruption), management's focus shifted to cash flow, liquidity, and cost management.
As previously reported, as a precautionary measure due to increased financial market volatility resulting from COVID-19, Eastman took certain liquidity actions, including borrowing $400 million under the revolving credit agreement (the "Credit Facility") in first quarter 2020 and $250 million under a new 364-Day Term Loan Credit Agreement (the "Term Loan") in second quarter 2020. Borrowings under the Credit Facility were repaid in second quarter 2020 and borrowings under the Term Loan were repaid in third quarter 2020. The Company reduced net debt by $656 million excluding the impact of foreign currency exchange rates in 2020, and its cash balance as of December 31, 2020 was $564 million. See "Liquidity and Other Financial Information" for additional information.
In 2020, capacity utilization was substantially lower due to lower sales volume and the Company's focus on maximizing cash generation by reducing inventories, reducing EBIT approximately $200 million. Cost reduction actions in response to COVID-19, some of which are expected to be structural, included reduced discretionary spending, deferred asset maintenance turnarounds, and adjusted operations to ensure the health and safety of employees and contractors, totaling approximately $150 million in 2020, with approximately 60 percent in "Cost of sales" and approximately 40 percent in "Selling, general and administrative expenses" and "Research and development expenses" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. See "Results of Operations" and "Summary by Operating Segment" in this MD&A for additional information.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Eastman's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below.
Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Sales | $ | 8,473 | | | $ | 9,273 | | | (9) | % | | $ | 9,273 | | | $ | 10,151 | | | (9) | % |
| | | | | | | | | | | |
Volume / product mix effect | | | | | (5) | % | | | | | | (4) | % |
Price effect | | | | | (4) | % | | | | | | (4) | % |
Exchange rate effect | | | | | — | % | | | | | | (1) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(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)
2020 ComparedContribution to 2019sales revenue of businesses divested which are not in 2022 comparable periods.
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.
2019 Compared to 2018
Gross Profit
Sales revenue decreased as a result of decreases in all operating segments. Further discussion by operating segments is presented in "Summary of Operating Segment" in this MD&A. | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(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) | % | | | | | | |
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Gross profit | $ | 1,975 | | | $ | 2,234 | | | (12) | % | | $ | 2,234 | | | $ | 2,479 | | | (10) | % |
| | | | | | | | | | | |
Net coal gasification incident insurance | — | | | — | | | | | — | | | (18) | | | |
Accelerated depreciation | 8 | | | — | | | | | — | | | — | | | |
| | | | | | | | | | | |
Gross profit excluding non-core and unusual items | $ | 1,983 | | | $ | 2,234 | | | (11) | % | | $ | 2,234 | | | $ | 2,461 | | | (9) | % |
2020 Compared to 2019
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 ongoing site optimization actions.
Excluding thisthese non-core item,and unusual items, gross profit decreased as a result of decreases in all operating segments.segments, except the AFP segment. Further discussion of sales revenue and EBIT changes is presented in "Summary by Operating Segment" in this MD&A.
2019 Compared to 2018
Gross profit included coal gasification incident insurance in excess of costs in 2018. Excluding this unusual item, gross profit decreased due to lower sales volume and an unfavorable shift in foreign currency exchange rates across all operating segments. Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A.
Selling, 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 an operating segment and reported in "Other".
Excluding the non-core item mentioned above, SG&A expenses decreased primarily as a result of lower variable compensation costs partially offset by higher growth initiative costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Selling, general and administrative expenses | $ | 654 | | | $ | 691 | | | (5) | % | | $ | 691 | | | $ | 721 | | | (4) | % |
Costs resulting from tax law changes and outside-U.S. entity reorganizations | — | | | — | | | | | — | | | (7) | | | |
| | | | | | | | | | | |
Selling, general and administrative expenses excluding unusual item | $ | 654 | | | $ | 691 | | | (5) | % | | $ | 691 | | | $ | 714 | | | (3) | % |
2020 Compared to 2019
SG&A expenses decreased primarily due to cost reduction actions.
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.
Research and Development Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Research and development expenses | $ | 226 | | | $ | 234 | | | (3) | % | | $ | 234 | | | $ | 235 | | | — | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
2020 Compared to 2019 | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(Dollars in millions) | 2022 | | 2021 | | Change | | | | | | |
Research and development expenses | $ | 264 | | | $ | 254 | | | 4 | % | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
R&D expenses decreasedincreased primarily due to cost reduction actionshigher spend for growth investment, primarily in the AM and AFP segments including an increased focus on project prioritization.methanolysis and other circular economy initiatives.
2019 Compared to 2018
R&D expenses were relatively unchanged.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
| | | | | | | | | | | | | | | | | |
| For years ended December 31, |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Fixed Asset Impairments | | | | | |
CI & AFP - Singapore (1) | $ | — | | | $ | 27 | | | $ | — | |
Site optimizations | | | | | |
AFP - Tire additives (2) | 5 | | | — | | | — | |
AM - Performance films (3) | 5 | | | — | | | — | |
AFP - Animal nutrition (4) | 3 | | | — | | | — | |
Discontinuation of growth initiatives (5) | 8 | | | — | | | — | |
| 21 | | | 27 | | | — | |
Intangible Asset Impairments | | | | | |
AFP - Tradenames (6) | 123 | | | — | | | — | |
AFP - Customer relationships (7) | 2 | | | — | | | — | |
AFP - Goodwill (8) | — | | | 45 | | | 38 | |
AM - Customer relationships (7) | — | | | — | | | 1 | |
| 125 | | | 45 | | | 39 | |
Severance Charges | | | | | |
Business improvement and cost reduction actions (9) | 47 | | | 45 | | | 6 | |
CI & AFP - Singapore (1) | 6 | | | — | | | — | |
Site optimizations | | | | | |
AM - Advanced interlayers (10) | 5 | | | — | | | — | |
AFP - Tire additives (2) | 3 | | | — | | | — | |
AM - Performance films (3) | 3 | | | — | | | — | |
AFP - Animal nutrition (4) | 1 | | | — | | | — | |
| 65 | | | 45 | | | 6 | |
Other Restructuring Costs | | | | | |
Cost reduction initiatives (9) | 14 | | | 5 | | | — | |
Discontinuation of growth initiatives contract termination fees (5) | 4 | | | — | | | — | |
AFP - Animal nutrition (4) | (2) | | | — | | | — | |
AFP - Discontinued capital project (11) | — | | | 4 | | | — | |
| 16 | | | 9 | | | — | |
| | | | | |
Total | $ | 227 | | | $ | 126 | | | $ | 45 | |
| | | | | | | | | | | | | |
| 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 | | | |
(1)Asset impairment charges of $22 million and $5 million in the CI segment and the AFP segment, respectively, and severance charges of $5 million and $1 million in the CI segment and the AFP segment, respectively, resulting from the previously disclosed plan to discontinue production of certain products at the Singapore manufacturing site. TotalFor detailed information regarding asset impairments and restructuring charges, fornet see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this action are expected to be up to $50 million continuing through 2021.Annual Report.
(2)Fixed asset impairments and severance in the AFP segment from the closure of a tire additives manufacturing facility in Asia Pacific as part of ongoing site optimization.
(3)Fixed asset impairments and severance in the AM segment from the closure of a performance films manufacturing facility in North America as part of ongoing site optimization.
(4)Fixed asset impairments, severance, and other restructuring gains in the AFP segment from the closure of an animal nutrition manufacturing facility in Asia Pacific as part of ongoing site optimization.
(5)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".
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(6)Intangible asset impairment charges in the AFP segment 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 COVID-19 and increased competitive pricing pressure as a result of global capacity increases.
(7)Intangible asset impairment charge for customer relationships.
(8)Goodwill impairment charge in the crop protection reporting unit resulting from the annual impairment test. In first quarter 2020, the crop protection reporting unit combined with the care chemicals reporting unit as a result of business management realignment.
(9)Severance and related costs as part of business improvement and cost reduction initiatives which were reported in "Other".
(10)Severance in the AM segment due to the closure of an advanced interlayers manufacturing facility in North America as part of ongoing site optimization. In addition, accelerated depreciation of $8 million was recognized in "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in 2020 related to the closure of this facility. Management expects total charges of up to $30 million, mostly in "Cost of sales" and in "Asset impairments and restructuring charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings, continuing through 2021 for the closure of this facility.
(11)Additional restructuring charge related to a capital project in the AFP segment that was discontinued in 2016.
Other Components of Post-employment (Benefit) Cost, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Other components of post-employment (benefit) cost, net | $ | 119 | | | $ | 60 | | | 98 | % | | $ | 60 | | | $ | (21) | | | >(100%) |
Mark-to-market pension and other postretirement benefit loss, net | (240) | | | (143) | | | | | (143) | | | (99) | | | |
Other components of post-employment (benefit) cost, net excluding non-core item | $ | (121) | | | $ | (83) | | | 46 | % | | $ | (83) | | | $ | (120) | | | (31) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
(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) | % | | | | | | |
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) | 2020 | | 2019 | | 2018 |
Foreign exchange transaction losses (gains), net | $ | 16 | | | $ | 9 | | | $ | 12 | |
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 | (15) | | | (10) | | | (17) | |
Coal gasification incident property insurance | — | | | — | | | (65) | |
| | | | | |
| | | | | |
Other, net | 7 | | | 4 | | | 4 | |
Other (income) charges, net | $ | 8 | | | $ | 3 | | | $ | (53) | |
| | | | | |
Currency transaction costs resulting from tax law changes and outside-U.S. entity reorganizations | — | | | — | | | (13) | |
Coal gasification incident property insurance | — | | | — | | | 65 | |
| | | | | |
| | | | | |
Other (income) charges, net excluding non-core and unusual items | $ | 8 | | | $ | 3 | | | $ | (1) | |
| | | | | | | | | | | | | |
(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 9,10, "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
Earnings Before Interest and Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
EBIT | $ | 741 | | | $ | 1,120 | | | (34) | % | | $ | 1,120 | | | $ | 1,552 | | | (28) | % |
Mark-to-market pension and other postretirement benefit loss, net | 240 | | | 143 | | | | | 143 | | | 99 | | | |
Net coal gasification incident insurance | — | | | — | | | | | — | | | (83) | | | |
Asset impairments and restructuring charges, net | 227 | | | 126 | | | | | 126 | | | 45 | | | |
Accelerated depreciation | 8 | | | — | | | | | — | | | — | | | |
Costs resulting from tax law changes and outside-U.S. entity reorganizations | — | | | — | | | | | — | | | 20 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
EBIT excluding non-core and unusual items | $ | 1,216 | | | $ | 1,389 | | | (12) | % | | $ | 1,389 | | | $ | 1,633 | | | (15) | % |
Net Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 Compared to 2019 | 2019 Compared to 2018 |
(Dollars in millions) | 2020 | | 2019 | | Change | | 2019 | | 2018 | | Change |
Gross interest expense | $ | 218 | | | $ | 225 | | | | | $ | 225 | | | $ | 242 | | | |
Less: Capitalized interest | 4 | | | 4 | | | | | 4 | | | 4 | | | |
Interest Expense | 214 | | | 221 | | | | | 221 | | | 238 | | | |
Less: Interest income | 4 | | | 3 | | | | | 3 | | | 3 | | | |
Net interest expense | $ | 210 | | | $ | 218 | | | (4) | % | | $ | 218 | | | $ | 235 | | | (7) | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
2020 Compared to 2019 | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(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) | % | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net interest expense decreased in 2022 compared to 2021 primarily as a result of prior year repayment of public debt and lower interest rates.
2019 Compared to 2018
Net interest expense decreased $17 million primarily as a result of U.S. dollar to euro cross-currency swaps, reduced debt balances, and lower interest rates.total borrowings.
Early Debt Extinguishment and Other Related Costs
In third quarter 2020,2022, the Company repaid the 3.6% notes due August 2022, of which $550 million was repaid in second quarter 2022 primarily from the proceeds of a $500 million five-year term loan agreement (the "2027 Term LoanLoan") and $200 million was repaid in third quarter 2022 using available cash. The earlyThere were no debt extinguishment costs associated with the repayment of this debt.
In 2021, the Company amended and restated the $1.50 billion revolving credit agreement (the "Credit Facility"). This resulted in a charge of $1 million for early debt extinguishment costs for unamortized issuance costs.
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 prepayments were $806 million ($800 million total principal and $6 million for the early redemption premiums) and are reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $7 million for early debt extinguishment costs which was primarily attributable to the early redemption premiums and related unamortized costs. The book value of the redeemed debt was $799 million.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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
| $ | | % | | $ | | % | | $ | | % |
Provision for income taxes and effective tax rate | $ | 41 | | | 8 | % | | $ | 140 | | | 16 | % | | $ | 226 | | | 17 | % |
Tax provision for non-core and unusual items(1) | 115 | | | | | 47 | | | | | 16 | | | |
| | | | | | | | | | | |
Estimated net tax (expense) benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | — | | | | | (7) | | | | | (20) | | | |
| | | | | | | | | | | |
Adjusted provision for income taxes and effective tax rate | $ | 156 | | | 15.6 | % | | $ | 180 | | | 15.4 | % | | $ | 222 | | | 16.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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.
The 2020 effective tax rate includes a $27 million decrease to the2022 provision for income taxes asinclude a result$32 million decrease related to the release of a decrease in unrecognized tax positionsstate valuation allowance and a $7$37 million decreaseincrease to reflect the tax implications of the business divestitures, including an increase related to non-deductible losses.
The 2021 provision for income taxes included a $78 million decrease primarily related to adjustments to certainpreviously unrecognized tax positions resulting from finalization of prior years' income tax audits, partially offset by current year tax returns.
The 2019 effective tax rate includes a $7 million increase toincreases. Additionally, the 2021 provision for income taxes resulting from adjustments toincluded impacts of 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 finalizationdivestiture of prior year's income tax returns andrubber additives, including an increase to state income taxes related to additional valuation allowance provided against state income tax credits.
The 2018 effective tax rate includednon-deductible losses partially offset by a $20 million increase todecrease from the provision for income taxes resulting from adjustments to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act, and from outside-U.S. entity reorganizations. These adjustments related to the one-time transition tax on deferred foreign income and changes in valuationrevaluation 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.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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings Attributable to Eastman and Diluted Earnings per Share
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
(Dollars in millions, except per share amounts) | $ | | EPS | | $ | | EPS | | $ | | EPS |
Net earnings and diluted earnings per share attributable to Eastman | $ | 478 | | | $ | 3.50 | | | $ | 759 | | | $ | 5.48 | | | $ | 1,080 | | | $ | 7.56 | |
Non-core items, net of tax: (1) | | | | | | | | | | | |
Mark-to-market pension and other postretirement benefit loss, net | 180 | | | 1.32 | | | 109 | | | 0.79 | | | 75 | | | 0.52 | |
Accelerated depreciation | 6 | | | 0.05 | | | — | | | — | | | — | | | — | |
Asset impairments and restructuring charges, net | 174 | | | 1.28 | | | 113 | | | 0.81 | | | 43 | | | 0.30 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Early debt extinguishment and other related costs | 1 | | | — | | | — | | | — | | | 6 | | | 0.04 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Unusual items, net of tax: (1) | | | | | | | | | | | |
Net coal gasification incident insurance | — | | | — | | | — | | | — | | | (67) | | | (0.47) | |
Estimated net tax expense from tax law changes and tax loss from outside-U.S. entity reorganizations | — | | | — | | | 7 | | | 0.05 | | | 20 | | | 0.14 | |
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 | $ | 839 | | | $ | 6.15 | | | $ | 988 | | | $ | 7.13 | | | $ | 1,172 | | | $ | 8.20 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY BY OPERATING SEGMENT
Eastman's products and operations are managed and reported in four operating segments: 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.Report and the recasted financial information for the AFP segment and "Other" in Part II, Item 5, "Other Information" of the 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) | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Additives & Functional Products Segment |
| | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
| | | | | | Change | | | | | | Change |
(Dollars in millions) | | 2020 | | 2019 | | $ | | % | | 2019 | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | |
Sales | $ | 3,022 | | $ | 3,273 | | $ | (251) | | | (8) | % | $ | 3,273 | | $ | 3,647 | | $ | (374) | | | (10) | % |
| | | | | | | | | | | | | | | | |
Volume / product mix effect | | | | | | (116) | | | (4) | % | | | | | | (177) | | | (5) | % |
Price effect | | | | | | (145) | | | (4) | % | | | | | | (133) | | | (3) | % |
Exchange rate effect | | | | | | 10 | | | — | % | | | | | | (64) | | | (2) | % |
| | | | | | | | | | | | | | | | |
EBIT | $ | 312 | | $ | 496 | | $ | (184) | | | (37) | % | $ | 496 | | $ | 639 | | $ | (143) | | | (22) | % |
Asset impairments and restructuring charges, net |
| 136 | | | 54 | | | 82 | | | | | 54 | | | 38 | | | 16 | | | |
| | | | | | | | | | | | | | | | |
Net coal gasification incident insurance | | — | | | — | | | — | | | | | — | | | (6) | | | 6 | | | |
EBIT excluding non-core and unusual items | | 448 | | | 550 | | | (102) | | | (19) | % | | 550 | | | 671 | | | (121) | | | (18) | % |
2020 Compared to 2019
Sales revenue decreased primarily due to lower selling prices and lower sales volume. Lower selling prices were due to lower raw material prices and competitive activity in animal nutrition, tire additives, and adhesive resins products. The negative impact of COVID-19 on demand resulted in lower sales volume of aviation fluids and coatings and inks additives sold into transportation end-markets resulting in less favorable product mix.
EBIT in 2020 included intangible asset impairment charges of $125 million for tradenames and customer relationships. The impairments were primarily the result of weakened demand in transportation markets impacted by COVID-19 and increased competitive pricing pressure as a result of global capacity increases. 2020 EBIT also included asset impairments and restructuring charges of $10 million for closure of manufacturing facilities in Asia Pacific as part of ongoing site optimization actions and $1 million related to the previously reported plan to discontinue production of certain products at the Singapore manufacturing facility. EBIT in 2019 included a $45 million goodwill impairment of the crop protection business, an asset impairment charge of $5 million resulting from management's approval of a plan to discontinue production of certain products at the Singapore manufacturing site, and a $4 million restructuring charge related to a capital project. Excluding these non-core and unusual items, EBIT decreased primarily due to $133 million of lower sales volume and higher manufacturing costs primarily due to lower capacity utilization and reduction of inventory. These higher costs were offset $41 million by cost reduction actions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 Compared to 2018
Sales revenue decreasedincreased in 2022 compared to 2021 primarily due to higher selling prices partially offset by lower sales volume lower selling prices, and 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 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 primarilypartially offset by favorable product mix due to lower raw material prices, including for care chemicals,increased sales of premium products in the advanced interlayers and increased competitive pressure in markets for tire additives, animal nutrition, and adhesives resins.
specialty plastics product lines.
EBIT in 20192022 and 2021 included a $45 million goodwill impairment of the crop protection business, an asset impairment charge of $5 million resulting from management's approval of a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020, and a $4 million restructuring charge related to a capital project. EBITcharges, net, and in 20182021 included a goodwill impairment charge relatedaccelerated depreciation. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the crop protection business and coal gasification incident insuranceCompany's consolidated financial statements in excessPart II, Item 8 of costs. this Annual Report.
Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling pricesto: $79 million of $133 million, lower sales volume and higher manufacturing costs, primarily due to lower capacity utilization and costs from planned and unplanned outages; $34 million of $101an 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 an unfavorable shift in foreign currency exchange ratesrates. Higher selling prices were due to strong demand across several key end-markets. Cost pass-through contracts represented approximately 45 percent of $22the 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: $49 million higher selling prices, net of higher raw material and energy costs, and higher distribution costs; lower SG&A costs partially offset by lower raw materialhigher R&D costs, totaling $10 million; $14 million unfavorable shift in foreign currency exchange rates; and $9 million of $136 million.higher manufacturing costs.
Growth and Cost Initiatives
In 2020, the AFP segment:
•completed a Dimethylethanolamine ("DMAE") manufacturing capacity expansion in China in response to growing demand for sustainable water treatment under stricter regulation. In addition, the Company decided to significantly increase capacity to produce tertiary amines at its Ghent, Belgium, facility to meet growing demand for hand sanitizers and other household cleaning products;
•advanced growth and innovation of Tetrashield™ , resins that enable low-VOC formulations and eliminate energy-intensive manufacturing steps, by working with key customers and other brands through the value chain;
•completed process improvements of Eastoflex amorphous polyolefin ("APO") polymers manufacturing capacity in Longview, Texas to support product line growth and innovation;
•entered into a global customer supply agreement to meet a growing demand for products in the animal nutrition industry, expanding the Company's gut health solutions offerings; and
•as a result of the ongoing evaluation of strategic alternatives for certain businesses and product lines within the AFP segment, an animal nutrition manufacturing facility and a tire additives manufacturing facility were closed.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Advanced Materials Segment |
| | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
| | | | | | Change | | | | | | Change |
(Dollars in millions) | | 2020 | | 2019 | | $ | | % | | 2019 | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | |
Sales | $ | 2,524 | | $ | 2,688 | | $ | (164) | | | (6) | % | $ | 2,688 | | $ | 2,755 | | $ | (67) | | | (2) | % |
| | | | | | | | | | | | | | | | |
Volume / product mix effect | | | | | | (101) | | | (4) | % | | | | | | (25) | | | (1) | % |
Price effect | | | | | | (67) | | | (2) | % | | | | | | — | | | — | % |
Exchange rate effect | | | | | | 4 | | | — | % | | | | | | (42) | | | (1) | % |
| | | | | | | | | | | | | | | | |
EBIT | $ | 427 | | $ | 517 | | $ | (90) | | | (17) | % | $ | 517 | | $ | 509 | | $ | 8 | | | 2 | % |
| | | | | | | | | | | | | | | | |
Asset impairments and restructuring charges, net |
| 13 | | | 1 | | | 12 | | | | | 1 | | | 1 | | | — | | | |
Accelerated depreciation | | 8 | | | — | | | 8 | | | | | — | | | — | | | — | | | |
Net coal gasification incident insurance | | — | | | — | | | — | | | | | — | | | (9) | | | 9 | | | |
EBIT excluding non-core and unusual items | | 448 | | | 518 | | | (70) | | | (14) | % | | 518 | | | 501 | | | 17 | | | 3 | % |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2020 ComparedInitiatives
In 2022, the AFP segment:
•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 2019optimize 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 lower sales volumehigher selling prices, resulting from higher raw material, energy, and lower selling prices. The negative impact of COVID-19 on demand resulted in lower sales volume of advanced interlayers products sold into transportation end-markets,distribution prices, as well as constrained market conditions. This increase was partially offset by increased sales volume in the fourth quarter for consumer durables and increased sales volume of certain standard copolyester products used in applications for personal care and wellness and consumables end-markets, resulting in a less favorable product mix. Lower selling prices were primarily attributed to lower raw material prices, particularly for paraxylene used in copolyester products.
EBIT in 2020 included severance charges of $5 million and accelerated depreciation charges of $8 million resulting from the closure of an advanced interlayers manufacturing facility, and asset impairments and restructuring charges of $8 million resulting from the closure of a performance films manufacturing facility, both in North America, as part of ongoing site optimization actions. Excluding these non-core items, EBIT decreased primarily due to $128 million of lower sales volume and higher manufacturing costs due to lower capacity utilization and reduction of inventory. These higher costs were offset $53 million by cost reduction actions and lower raw material and energy costs offsetting lower selling prices by $19 million.
2019 Compared to 2018
Sales revenue decreased due to lower sales volume and an unfavorable shift in foreign currency exchange rates. IncreasedThe decrease in sales volume, of premium products, including paint protection films, 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.
global economic uncertainty.
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.
Growth and Cost Initiatives
In 2020, the AM segment:
•commercialized polyester renewal technology with multiple products in various markets including the adoption of Tritan™ Renew in durable goods end-markets;
•commercialized carbon renewal technology with multiple products in various markets including the adoption of Acetate Renew in the premium eyewear end-market;
•continued circular economy advancements (including the January 2021 announced methanolysis advanced plastic-to-plastic molecular recycling manufacturing facility);
•continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
•continued to expand portfolio of differentiated next generation products for both automotive and architectural interlayer films products;
•developed and launched Eastman CORE (trademark and patent pending) digital product data analytics software for accessory sales management and installation of automotive window and paint protection films products; and
•as part of ongoing site optimization, a performance films manufacturing facility and an advanced interlayers manufacturing facility in North America were closed.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Chemical Intermediates Segment |
| | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
| | | | | | Change | | | | | | Change |
(Dollars in millions) | | 2020 | | 2019 | | $ | | % | | 2019 | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | | |
Sales | $ | 2,090 | | $ | 2,443 | | $ | (353) | | | (14) | % | $ | 2,443 | | $ | 2,831 | | $ | (388) | | | (14) | % |
| | | | | | | | | | | | | | | | |
Volume / product mix effect | | | | | | (175) | | | (7) | % | | | | | | (122) | | | (4) | % |
Price effect | | | | | | (180) | | | (7) | % | | | | | | (247) | | | (9) | % |
Exchange rate effect | | | | | | 2 | | | — | % | | | | | | (19) | | | (1) | % |
| | | | | | | | | | | | | | | | |
EBIT | $ | 166 | | $ | 170 | | $ | (4) | | | (2) | % | $ | 170 | | $ | 308 | | $ | (138) | | | (45) | % |
| | | | | | | | | | | | | | | | |
Asset impairments and restructuring charges, net |
| 5 | | | 22 | | | (17) | | | | | 22 | | | — | | | 22 | | | |
Net coal gasification incident insurance | | — | | | — | | | — | | | | | — | | | (30) | | | 30 | | | |
EBIT excluding unusual item | | 171 | | | 192 | | | (21) | | | (11) | % | | 192 | | | 278 | | | (86) | | | (31) | % |
2020 Compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 decreasedincreased in 2022 compared to 2021 primarily due to lowerhigher selling prices across the segment attributeddue to lowerhigher raw material, prices,energy, and lower sales volume in most product lines attributed to the negative impact of COVID-19 on demand and increased competitive pressure.
distribution prices.
EBIT in 20202022 included severance charges and EBIT in 2019 included an asset impairment charge both relatedand restructuring charges, net. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the previously reported plan to discontinue productionCompany's consolidated financial statements in Part II, Item 8 of certain products atthis Annual Report.
Excluding the Singapore manufacturing facility. Excluding these non-core items,item, EBIT decreased due to $66 million of lower sales volume andwas relatively unchanged as higher manufacturing costs due to lower capacity utilization, and lower selling prices, partially offset by lowernet of higher raw material and energy costs, totaling $17 million. Theand higher manufacturingdistribution costs, were offset by $38 million of cost reduction actionshigher manufacturing costs resulting from planned and $18 million of technology licensing earnings in 2020.unplanned outages.
Initiatives
In 2022, the Fibers segment:
•
2019 Compared to 2018
Sales revenue decreased primarily due to lower selling pricesimplemented variable pricing agreements across the segment attributedacetate tow customer base, driving growth and returning adjusted EBIT margins and cash flow generation to lower raw material pricesacceptable performance levels;
•commercialized Naia™ staple fiber for spun yarns for apparel 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 Americahome textiles; and lower intermediates products sales volume attributed to increased competitive activity.
•
EBIT in 2019 includedannounced several high-profile brand adoptions, including a major multinational clothing company; an asset impairment charge resulting from management's approvalAmerican retailer of outdoor clothing; and 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-coresustainable women's clothing and unusual items, EBIT decreased primarily due to lower selling prices more than offsetting lower raw material costs of $63 millionaccessories designer and lower sales volumes of $9 million.
manufacturer.
Growth and Cost Initiatives
To maintain and enhance its status as a low-cost producer and optimize earnings, the CI segment continuously focuses on cost control, operational efficiency, and capacity utilization. This includes focusing on products used internally by other operating segments, thereby supporting growth in specialty product lines throughout the Company, and also external licensing opportunities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 2020, the CI segment announced a strategic project for site optimization and recognized revenue and earnings from licensing of innovative technologies. Under a site optimization project with Gulf Coast Ammonia ("GCA") and Air Products, Inc., GCA leases a portion of Eastman's Texas City, Texas site and will build and own a new world-scale ammonia production plant. In 2018, | | | | | | | | | | | | | | | | | | | |
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 | | | | | | |
On November 1, 2021, the Company and Johnson Matthey announced that Eastman's proprietarycertain 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 for the production of mono ethylene glycol ("MEG") from coal had been selected by Inner Mongolia Jiutai New Material (Jiutai) for its planned 1,000,000 tonnes per annum ethylene glycol facility. The Company recognized revenue and earnings from the MEG technology license in 2020. In addition, production of certain products at the Singapore manufacturing site discontinued as of December 31, 2020 with the site to be shut down in 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fibers Segment |
| | | |
| 2020 Compared to 2019 | | 2019 Compared to 2018 |
(Dollars in millions) | | | | | Change | | | | | | Change |
| 2020 | | 2019 | | $ | | % | | 2019 | | 2018 | | $ | | % |
| | | | | | | | | | | | | | | |
Sales | $ | 837 | | $ | 869 | | $ | (32) | | | (4) | % | $ | 869 | | $ | 918 | | $ | (49) | | | (5) | % |
Volume / product mix effect | | | | | | (18) | | | (2) | % | | | | | | (38) | | | (4) | % |
Price effect | | | | | | (14) | | | (2) | % | | | | | | (7) | | | (1) | % |
Exchange rate effect | | | | | | — | | | — | % | | | | | | (4) | | | — | % |
| | | | | | | | | | | | | | | | |
EBIT | $ | 180 | | $ | 194 | | $ | (14) | | | (7) | % | $ | 194 | | $ | 257 | | $ | (63) | | | (25) | % |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net coal gasification incident insurance | | — | | | — | | | — | | | | | — | | | (38) | | | 38 | | | |
EBIT excluding non-core and unusual items | | 180 | | | 194 | | | (14) | | | (7) | % | | 194 | | | 219 | | | (25) | | | (11) | % |
2020 Compared to 2019
Sales revenue decreased primarily due to lower textile products sales volume attributed to the impact of COVID-19 on demand and lower acetate tow selling prices primarily due to previously negotiated multi-year contracts.
EBIT decreased primarily due to $26 million of lower sales volume and higher manufacturing costs due to lower capacity utilization and reduction of inventory. These higher costs were offset $10 million by cost reduction actions.
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.
Growth and Cost Initiatives
The Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in new markets, optimizing asset productivity, and working with suppliers to reduce costs. For acetate tow, these efforts are assisting customers in the effective use of the Fibers segment's products and customers' product development efforts. For other products, management is applying the Company's innovation-driven growth model to leverageglobal tire additives business of its fibers technology and expertise to focusAFP segment. Additionally, on innovative growth in the textiles and nonwovens markets. Examples of recent product innovation within the Fibers segment include Naia™ yarn for the apparel market developed from Eastman's proprietary cellulose ester technology; and Vestera™ wood pulp-based alternative for the nonwoven industry used in personal hygiene applications.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 2019April 1, 2022, the Company acquired Industrias del Acetato de Celulosa. S.A. ("INACSA")and certain of its subsidiaries completed the sale of its adhesives resins business. The sale included hydrocarbon resins (including Eastman Impera™ tire resins), a cellulosic yarn business in LA Batllòria, Spain as a targeted addition topure 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 Fibers segment's acetate yarn business.
| | | | | | | | | | | | | | | | | | | | | | | |
Other | | | |
| | | | | | | | | |
(Dollars in millions) | | 2020 | | 2019 | | 2018 | | | |
Loss before interest and taxes | | | | | | | | | |
Growth initiatives and businesses not allocated to operating segments | | $ | (95) | | | $ | (102) | | | $ | (114) | | | | |
Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | | (156) | | | (97) | | | (17) | | | | |
Asset impairments and restructuring charges, net | | (73) | | | (49) | | | (6) | | | | |
Other income (charges), net not allocated to operating segments | | (20) | | | (9) | | | (24) | | | | |
Loss before interest and taxes before non-core and unusual items | | $ | (344) | | | $ | (257) | | | $ | (161) | | | | |
Mark-to-market pension and other postretirement benefit plans (gain) loss, net | | 240 | | | 143 | | | 99 | | | | |
Asset impairments and restructuring charges, net | | 73 | | | 49 | | | 6 | | | | |
| | | | | | | | | |
| | | | | | | | | |
Costs resulting from tax law changes and outside-U.S. entity reorganizations | | — | | | — | | | 20 | | | | |
Loss before interest and taxes excluding non-core and unusual items | | (31) | | | (65) | | | (36) | | | | |
AFP 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 AFP segment and "Other" for each quarter from first quarter 2019 through fourth quarter 2021. For more information, see the Current Report on Form 8-K dated April 18, 2022, and Part II, Item 5, "Other Information" of the Quarterly Report on Form 10-Q for first quarter 2022.
Costs 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 results for any of the periods presented and are included in "Other". In 2020,2022, the Company recognized chargescosts, net of $61 million forinsurance proceeds from the steam line incident, environmental and 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, $4 million, for contract termination fees, and $8 million forinitiatives. For more information regarding asset impairments resulting from management's decisionand restructuring charges and debt extinguishment costs see Note 16, "Asset Impairments and Restructuring Charges, Net" and Note 9, "Borrowings", respectively, to discontinue certain growth initiatives for polyester based microfibers, including Avra™ performance fibers. In 2019, the Company recognized chargesCompany's consolidated financial statements in Part II, Item 8 of $49 million for severance and related restructuring costs. In 2018, the Company recognized charges of $6 million for severance.
this Annual Report on Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES BY CUSTOMER LOCATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales Revenue |
| | | |
| | | | | Change | | | | | Change |
(Dollars in millions) | 2020 | | 2019 | | $ | % | | 2019 | | 2018 | | $ | % |
United States and Canada | $ | 3,579 | | | $ | 3,885 | | | $ | (306) | | (8) | % | | $ | 3,885 | | | $ | 4,303 | | | $ | (418) | | (10) | % |
Europe, Middle East, and Africa | 2,299 | | | 2,544 | | | (245) | | (10) | % | | 2,544 | | | 2,756 | | | (212) | | (8) | % |
Asia Pacific | 2,111 | | | 2,278 | | | (167) | | (7) | % | | 2,278 | | | 2,504 | | | (226) | | (9) | % |
Latin America | 484 | | | 566 | | | (82) | | (14) | % | | 566 | | | 588 | | | (22) | | (4) | % |
Total | $ | 8,473 | | | $ | 9,273 | | | $ | (800) | | (9) | % | | $ | 9,273 | | | $ | 10,151 | | | $ | (878) | | (9) | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
2020 Compared to 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 sales 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, decreased primarily due to lowerhigher selling prices inacross all operating segments andpartially offset by lower sales volume infrom the CI and AM segments. These items were partially offset by higher sales volume in the Fibers and AFP segments.
Sales revenue in Europe, Middle East, and Africa decreased primarily due to lower sales volume and lower selling prices in all operating segments. These items were partially offset by favorable foreign currency exchange rates in all operating segments.
Sales revenue in Asia Pacific decreased primarily due to lower selling prices and lower sales volume in all operating segments.
Sales revenue in Latin America decreased primarily due to lower sales volume and lower selling prices in all operating segments.
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.
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 for segment sales revenues by customer location.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND OTHER FINANCIAL INFORMATION
COVID-19 Liquidity Actions
Priorities for uses of available cash for full year 2020 included payment of the quarterly dividend and the reduction of net debt. In first quarter and second quarter 2020, as a precautionary measure due to increased financial market volatility resulting from COVID-19, the Company took certain liquidity actions, including borrowing $400 million under its existing Credit Facility and $250 million under a new Term Loan. Borrowings under the Credit Facility were repaid in second quarter 2020 and borrowings under the Term Loan were repaid in third quarter 2020. As previously reported, in second quarter 2020, the Company amended the covenants of both loan agreements to reflect higher cash balances to enhance liquidity and the expected negative impact on operating results of COVID-19.
Cash Flows
The Company had cash and cash equivalents as follows:
| | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, |
| 2020 | | 2019 | | 2018 |
Cash and cash equivalents | $ | 564 | | | $ | 204 | | | $ | 226 | |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, |
| 2022 | | 2021 | | |
Cash and cash equivalents | $ | 493 | | | $ | 459 | | | |
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) | 2020 | | 2019 | | 2018 |
Net cash provided by (used in): | | | | | |
Operating activities | $ | 1,455 | | | $ | 1,504 | | | $ | 1,543 | |
Investing activities | (394) | | | (480) | | | (463) | |
Financing activities | (704) | | | (1,043) | | | (1,040) | |
Effect of exchange rate changes on cash and cash equivalents | 3 | | | (3) | | | (5) | |
Net change in cash and cash equivalents | 360 | | | (22) | | | 35 | |
Cash and cash equivalents at beginning of period | 204 | | | 226 | | | 191 | |
Cash and cash equivalents at end of period | $ | 564 | | | $ | 204 | | | $ | 226 | |
2020 Compared to 2019 | | | | | | | | | | | | | |
| 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 | | | |
Cash provided by operating activities decreased $49$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), primarilyalso increased, driven by higher inventory due to a decrease in inventories.
Cash used in investing activities decreased $86 million due to lower additions to properties and equipment. Additionally, there were acquisitions in the AFP and Fibers business segments in 2019.
Cash used in financing activities decreased $339 million due to lower share repurchasescontinued inflationary pressures and lower debt repayments.
2019 Compared to 2018
Cash provided by operating activities decreased primarily due to lower net earnings, partially offset by lower net working capital (trade receivables, inventories, and trade payables).sales volume.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash used inprovided by investing activities increased $17 million. Proceeds from coal gasification incident insurance for property damage of $65was $392 million was included in 2018. Excluding this item,2022 compared with cash used in investing activities decreased $48of $29 million in 2021 primarily due to lower capital expenditures partially offset byproceeds from the sale of the adhesives resins business in 2022 greater than proceeds from the sale of the tire additives business in 2021. In addition, 2021 included cash used for acquisitions of businesses in the AFP and FibersAM segments. Lower capital expenditures were due to significant capital projects related to key growth initiatives being completed and put into service during 2018.
Cash used in financing activities was relatively unchanged with increaseddecreased $369 million primarily due to proceeds from borrowings including net debt repayments and dividend paymentsincrease in commercial paper partially offset by lower share repurchases.
| | | | | | | | | | | | | | | | | |
| For years ended December 31, |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Net cash provided by operating activities | $ | 1,455 | | | $ | 1,504 | | | $ | 1,543 | |
Capital expenditures | | | | | |
Additions to properties and equipment | (383) | | | (425) | | | (528) | |
| | | | | |
| | | | | |
Proceeds from property insurance (1) | — | | | — | | | 65 | |
Net capital expenditures | (383) | | | (425) | | | (463) | |
Free cash flow | $ | 1,072 | | | $ | 1,079 | | | $ | 1,080 | |
(1)Cash proceeds from insurance for coal gasification incident property damage.repayment of borrowings.
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.
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. 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 20202022 and 20192021 were $1.5$2.5 billion and $0.9$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 $150$402 million and $169$239 million of these receivables would have been outstanding as of December 31, 20202022 and December 31, 2019,2021, respectively, had they not been sold under these factoring agreements.
Eastman works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working
capital and cash flows. As part of these efforts, in 2019 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. 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 both programs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 |
2021 | | $ | 299 | | | $ | 50 | | | $ | 172 | | | $ | 187 | | | $ | 60 | | | $ | 274 | | | $ | 1,042 | |
2022 | | 744 | | | — | | | 174 | | | 174 | | | 44 | | | 95 | | | 1,231 | |
2023 | | 919 | | | — | | | 157 | | | 137 | | | 31 | | | 91 | | | 1,335 | |
2024 | | 241 | | | — | | | 137 | | | 140 | | | 18 | | | 99 | | | 635 | |
2025 | | 701 | | | — | | | 119 | | | 112 | | | 12 | | | 87 | | | 1,031 | |
2026 and beyond | | 2,664 | | | — | | | 1,291 | | | 2,432 | | | 28 | | | 1,191 | | | 7,606 | |
Total | | $ | 5,568 | | | $ | 50 | | | $ | 2,050 | | | $ | 3,182 | | | $ | 193 | | | $ | 1,837 | | | $ | 12,880 | |
Eastman has debt and other commitments for debt securities, credit facilities, interest payable, purchase obligations, operating leases, and other liabilities. A summary of the Company's debt and other commitment obligations as of December 31, 2022 for each of the next five years and beyond is included in Note 12, "Leases and Other Commitments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
At December 31, 2020,2022, Eastman's borrowings totaled approximately $5.6$5.2 billion with various maturities. In October 2020,second quarter 2022, the Company repaid $550 million of the 3.6% notes due August 2022. In third quarter 2022, the Company repaid the 4.5%remaining $200 million principal of the 3.6% notes due January 2021 ($185 million principal)August 2022 using available cash. In fourth quarter 2019,2021, the Company repaid the 2.7%3.5% notes due January 2020December 2021 ($250300 million principal) using available cash. For information about debt and related interest, see Note 8,9, "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 11,12, "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 estimates, accrued compensation benefits, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2026"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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loan Agreement, Credit Facility, Term Loan, and Commercial Paper Borrowings
In second quarter 2020, the Company borrowed $250 million under a new Term Loan as a precautionary measure due to increased financial market volatility, particularly in the availability and terms of commercial paper, resulting from COVID-19. In third quarter 2020, the Term Loan was repaid using available cash. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company has access to a $1.50 billion Credit Facilityrevolving credit agreement (the "Credit Facility") expiring October 2023.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. Commercial paper borrowings are classified as short-term. At December 31, 2020,2022, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2020,2022, the Company's commercial paper borrowings were $50$326 million with a weighted average interest rate of 0.25 percent. See Note 8, "Borrowings"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 Company's consolidatedsame customary covenants and events of default, including maintenance of certain financial statements in Part II, Item 8ratios, as the Credit Facility, with payment of this Annual Report.customary fees.
The Credit Facility containsand 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 both December 31, 2020 and December 31, 2019. As previously reported, in second quarter 2020 the Company amended the Credit Facility and the Term Loan maximum debt covenants to reflect the higher cash balance to enhance liquidity due to, and the expected negative impact on operating results of, COVID-19 and added a new restrictive covenant prohibiting stock repurchases until June 30, 2021 in the event certain financial ratios are exceeded. See the Current Report on Form 8-K filed May 6, 2020 for additional information on the amendments to the Credit Facility and the Term Loan.2022. The total amount of available borrowings under the Credit Facility was approximately $1.50 billion as of December 31, 2020.2022. 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.
In second quarter 2020, management made the decision not to renew the Company's $250 million accounts receivable securitization agreement, determining other available sources of liquidity sufficient to meet foreseeable cash requirements. See Note 8,9, "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, unaudited) | | 2020 | | | | 2019 |
Total borrowings | | $ | 5,618 | | | | | $ | 5,782 | |
Less: Cash and cash equivalents | | 564 | | | | | 204 | |
Net debt (1) | | $ | 5,054 | | | | | $ | 5,578 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | |
| 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 increase of $132 million in 2020 and a non-cash decrease of $25 million in 2019 resulting from foreign currency exchange rates.rates of $85 million and $113 million in 2022 and 2021, respectively.
In 2020 the Company reduced net debt by $656 million excluding the impact of foreign currency exchange rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Expenditures
Capital expenditures were $383 million, $425$611 million and $528$555 million ($463 million net of proceeds from property damage insurance for 2017 coal gasification incident) in 2020, 2019,2022 and 2018,2021, respectively. Capital expenditures in 20202022 were primarily for the AM segment methanolysis plastic-to-plastic molecular recycling manufacturing facility in Kingsport, Tennessee, and other targeted growth initiatives and site modernization projects.
The Company expects that 20212023 capital spending will be between $500approximately $700 million and $525to $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 globalother targeted growth initiatives and site modernization projects.
The Company had capital expenditures related to environmental protection and improvement of approximately $42 million, $27$60 million and $44$38 million in 2020, 2019,2022 and 2018,2021, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2020,2022, a total of 7,887,2166,743,883 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 $633 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 2020,2022, the Company repurchased a total10,710,259 shares of 1,134,052 sharescommon stock for a total cost$1,102 million, which included $100 million from the settlement of approximately $60 million.the 2021 ASR.
The Board of Directors has declared a cash dividend of $0.69$0.79 per share during the first quarter of 2021,2023, payable on April 5, 202110, 2023 to stockholders of record on March 15, 2021.2023. 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 2021, management expects adjusted EPS to increase between 20 and 30 percent compared with 2020 and free cash flow to be greater than $1 billion. These expectations assume:
•economic activity recovering from the impact of COVID-19;
•cost structure to be similar to 2020 due to structural cost savings from transformation of businesses and operations;
•lower costs of approximately $100 million from improved capacity utilization in 2021 due to aggressive inventory actions in 2020;
•increased sales volume and improved product mix due to innovation-driven growth model and continued recovery in key end-markets, including auto, textiles, and durables;
•timing of price increases in response to higher raw material, energy, and logistics costs and continued competitive pressure in markets for tire additives and adhesives resins products to negatively impact financial results;
•interest expense of approximately $200 million;
•the full-year effective tax rate on adjusted earnings before income tax to be between 15 and 16 percent;
•depreciation and amortization of approximately $570 million; and
•capital expenditures between $500 million and $525 million.
In addition, the Company expects net debt reduction of approximately $300 million.
The Company's 2021 financial results forecasts do not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected full-year 2021 earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts.
See "Risk Factors" below.
RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the material known factors, risks, and uncertainties that could cause actual results to differ materially from those under "Outlook" and 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, representsrepresent 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)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 impacted by the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that impacted the global economy. Similarly, as a company which operates and sells products worldwide, continued uncertainty in the global economy, labor market, and global capital markets resulting(including impacts from inflation, higher interest rates, the current globalcontinuing COVID-19 pandemic and subsequent changes and disruptions in business, political, and economic conditions) have adversely impacted and are expected to continue tomay adversely impact 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 and ability to access the credit and capital markets under attractive rates and terms and negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
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.MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Volatility in costs for strategic raw material and energy commodities or disruption in the supply and transportation of these commodities and in transportation of company products could adversely impact 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. TheseThe cost and availability of these raw materials and energy commodities can be adversely impacted by factors such as business and economic conditions, anomalous severe weather events, natural disasters, the 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 and supply chain infrastructure.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent inflationary pressures affecting the general economy, energy markets, and certain raw materials have increased the Company's operating costs. For example, inflationary pressures in 2022 have resulted in increased costs for energy and feedstocks such as natural gas, paraxylene, vinyl acetate monomer, polyvinyl alcohol, and others. While inflation in these and other inputs has increased operating costs, the Company has undertaken efforts to offset many of these costs through pricing actions, including contract terms and some surcharges, contracts leveraged to multiple market indices, alternative supply arrangements, and hedging strategies, however, these risk mitigation measures do not eliminate all exposure to market fluctuations and may limitfluctuations.
In addition to these inflationary pressures, the Company from fully benefiting from lowerhas experienced certain supply chain challenges impacting its ability to secure certain raw material costsmaterials and conversely, offsettimely distribute products to customers. For example, the impact of higher raw material costs. In addition, the ongoing global COVID-19 pandemic has adversely impacted and is expected to continue to impact, and natural disasters, plant interruptions, supply chain disruptions changes in laws or regulations, war orhave impacted the availability of certain raw materials such as ammonia, methanol, and toluene. To mitigate the effects of these and other outbreak of hostilities or terrorism, and breakdown or degradation of transportation and supply chain infrastructure used fordisruptions, 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 geographic footprint has also helped reduce exposure to localized risks.
Prolonged periods of strategic rawheightened inflation or continued or worsening supply chain disruptions could have a material, adverse impact on the Company's financial performance and energy commodities could adversely impact, both the cost and availabilityresults of these commodities.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 impact its business, financial condition, and results of operations.
More than half of Eastman's sales for 20202022 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 including the unique geographic impacts of the global COVID-19 pandemic. Fluctuations in exchange rates may impact product demand and may adversely impact the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. and foreign countries have imposed and may impose additional taxes or otherwise tax Eastman's foreign income (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), or. 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 impact 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,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 attackscyber-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. As previously reported, manufacturing operations and earnings were previously negatively impacted by the second quarter 2018 third-party supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives.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 growth strategy, acquisitions of large companies and businesses (such as the previous acquisitions or divestitures of Taminco Corporation and Solutia, Inc.)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 possibilitiespossibility 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, primarily in the AFP segment, be impaired resulting in non-cash charges to future earnings;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 existinglegacy 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, 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.or 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 General Information - Compliance With Environmental and Other Government Regulations" in Part I, Item 1 of this Annual Report.
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, 2020,2022, 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 $65$50 million, with an additional $6$4 million exposure for each additional one percentage point adverse change in those foreign currency rates. At December 31, 2019, 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 $74 million, with an additional $7 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 September 2020, the Company 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 €152 million ($180 million) maturing December 2028.
At December 31, 2020,2022, a 10 percent fluctuation in the euro currency rate would have had a $258 million impact on the designated net investment values in the foreign subsidiaries. At December 31, 2019, a 10 percent fluctuation in the euro currency rate would have had a $235$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, 2020 and December 31, 2019,2022, 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 $5$3 million, and $9 million, respectively, with an additional $1 million$300 thousand of exposure at both December 31, 2020 and December 31, 20192022 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 $50 million and $171 million at December 31, 2020 and 2019, respectively. These borrowings represented approximately 1 percent and 3 percent of total outstanding debt and bore weighted average interest rates of 0.25 percent and 2.03 percent at December 31, 2020 and 2019, 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, 2020 and December 31, 2019.
In first, second, and third quarters 2020, Eastman entered into forward-starting interest rate swaps with a notional amount of $25 million in each quarter to mitigate the risk of variability in interest rates for an expected long-term debt issuance by August 2022. These swaps were designated as cash flow hedges and will be settled upon debt issuance. The total outstanding forward starting swaps as of December 31, 2020 was $75 million.
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 December 31, 2020 and December 31 2019,2022, the Company had interest rate swaps outstanding with notional values of $150 million and $75 million, respectively.million. For purposes of calculating the market risks associated with the fair value of interest-rate-sensitive instruments, the Company uses a hypothetical 10 percent increase in interest rates. The corresponding market risk 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, 2020 and December 31, 2019.2022.
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/ William T. McLain, Jr. |
Mark J. Costa | | William T. McLain, Jr. |
Chief Executive Officer | | Senior Vice President and |
| | Chief Financial Officer |
February 22, 202115, 2023 | | February 22, 202115, 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, 20202022 and 2019,2021, 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, 2020,2022, 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, 2020,2022, 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, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202022 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, 2020,2022, 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 it 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 mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates 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 mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Annual Goodwill Impairment Assessment – Tire- Reporting Unit in the Additives Reporting Unit& Functional Products Segment
As described in Note 4Notes 1 and 5 to the consolidated financial statements, the Company's consolidated goodwill balance was $4.5 billion$3,664 million as of December 31, 2020. Goodwill allocated to2022, and the tire additives reporting unit ofgoodwill associated with the Additives & Functional Products segment is $725was $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. As disclosed by management, in second quarter 2020, management concluded that the decrease in forecasted revenue and earnings before interest and taxes (EBIT) for the tire additives reporting unit reduced the fair value such that the estimated fair value approximated the carrying value. The decrease in forecasted revenue and EBIT for the tire additives reporting unit was primarily the result of weakened demand in transportation markets impacted by COVID-19 and increased competitive pricing pressure as a result of global capacity increases. Additionally, management disclosed that as a result of the goodwill impairment testing performed during fourth quarter 2020, fair values were determined to substantially exceed the carrying values for each reporting unit tested with the exception of the tire additives reporting unit whose fair value continues to approximate carrying value. Management usesused an income approach, including some unobservable inputs, and appliesspecifically a discounted cash flow model, in testing the carrying value of goodwill of each reporting unit for impairment. Management's cash flow projections for the tire additives reporting unit includedAs disclosed by management, key assumptions and estimates related toused in the Company's goodwill impairment testing included projections of revenues and EBIT,earnings before interest and taxes (EBIT), the estimated weighted average cost of capital (WACC) and a projected long-term growth rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment offor a reporting unit in the tire additives reporting unitAdditives & Functional Products segment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurementestimate of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management'smanagement’s significant assumptions related to projections of revenues and EBIT, the estimated WACC, and the projected long-term growth rate; and (iii) the audit effort involved the use of professionals with specialized skill and 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’smanagement's process for developing the fair value estimate of the tire additivesa 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 related to projections of revenues and EBIT, the estimated WACC, and the projected long-term growth rate. Evaluating management's assumptions related to the projections of revenues and EBIT and the projected long-termlong- 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 and (ii) the estimated WACC.
Indefinite-lived Intangible Impairment Assessment – Crystex™ and Santoflex™
As described in Note 4 to the consolidated financial statements, the Company's consolidated indefinite-lived intangible assets balance was $374 million asreasonableness of December 31, 2020. The Company 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.
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. In second quarter 2020, outside of the annual impairment testing process, management reviewed the indefinite-lived intangible assets associated with the tire additives reporting unit for impairment. As a result of the review, the Company recognized intangible asset impairments of $123 million in second quarter 2020 in the tire additives reporting unit to reduce the carrying value of the Crystex™ and Santoflex™ tradenames to their estimated fair values. The impairments are primarily the result of weakened demand in transportation markets impacted by COVID-19 and increased competitive pricing pressure as a result of global capacity increases. Management uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets for impairment. The estimated fair value of tradenames is determined based on projections of revenues and an assumed royalty rate savings, discounted by the estimated WACC plus a risk premium.
The principal considerations for our determination that performing procedures relating to the Crystex™ and Santoflex™ tradenames is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the tradenames; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to projections of revenues, the assumed royalty rate savings, and the estimated WACC plus a risk premium; and (iii) the audit effort involved the use of professionals with specialized skill and 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 indefinite-lived intangible impairment assessment, including controls over the valuation of the Company's tradenames. These procedures also included, among others (i) testing management's process for developing the fair value estimate of the Crystex™ and Santoflex™ tradenames, (ii) evaluating the appropriateness of the relief from royalty method, (iii) testing the completeness, accuracy and relevance of underlying data used in the model, and (iv) evaluating the significant assumptions used by management related to projections of revenues, the assumed royalty rate savings, and the estimated WACC plus a risk premium. Evaluating management's assumptions related to the projections of revenues involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the tradenames, (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 the evaluation of the Company's relief from royalty method, the assumed royalty rate savings and the estimated WACC plus a risk premium assumption.
/s/ PricewaterhouseCoopers LLP
Charlotte, NCNorth Carolina
February 22, 202115, 2023
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) | 2020 | | 2019 | | 2018 |
Sales | $ | 8,473 | | | $ | 9,273 | | | $ | 10,151 | |
Cost of sales | 6,498 | | | 7,039 | | | 7,672 | |
Gross profit | 1,975 | | | 2,234 | | | 2,479 | |
Selling, general and administrative expenses | 654 | | | 691 | | | 721 | |
Research and development expenses | 226 | | | 234 | | | 235 | |
Asset impairments and restructuring charges, net | 227 | | | 126 | | | 45 | |
Other components of post-employment (benefit) cost, net | 119 | | | 60 | | | (21) | |
Other (income) charges, net | 8 | | | 3 | | | (53) | |
Earnings before interest and taxes | 741 | | | 1,120 | | | 1,552 | |
Net interest expense | 210 | | | 218 | | | 235 | |
Early debt extinguishment costs | 1 | | | 0 | | | 7 | |
Earnings before income taxes | 530 | | | 902 | | | 1,310 | |
Provision for income taxes | 41 | | | 140 | | | 226 | |
Net earnings | 489 | | | 762 | | | 1,084 | |
Less: Net earnings attributable to noncontrolling interest | 11 | | | 3 | | | 4 | |
Net earnings attributable to Eastman | $ | 478 | | | $ | 759 | | | $ | 1,080 | |
| | | | | |
Basic earnings per share attributable to Eastman | $ | 3.53 | | | $ | 5.52 | | | $ | 7.65 | |
Diluted earnings per share attributable to Eastman | $ | 3.50 | | | $ | 5.48 | | | $ | 7.56 | |
| | | Comprehensive Income | Comprehensive Income | | Comprehensive Income | |
Net earnings including noncontrolling interest | Net earnings including noncontrolling interest | $ | 489 | | | $ | 762 | | | $ | 1,084 | | Net earnings including noncontrolling interest | $ | 796 | | | $ | 867 | | | $ | 489 | |
Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
Change in cumulative translation adjustment | Change in cumulative translation adjustment | (29) | | | 45 | | | (13) | | Change in cumulative translation adjustment | 7 | | | 56 | | | (29) | |
Defined benefit pension and other postretirement benefit plans: | 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 | | | 0 | | | 0 | | Prior service credit arising during the period | — | | | — | | | 9 | |
Amortization of unrecognized prior service credits included in net periodic costs | Amortization of unrecognized prior service credits included in net periodic costs | (28) | | | (29) | | | (30) | | Amortization of unrecognized prior service credits included in net periodic costs | (27) | | | (28) | | | (28) | |
Derivatives and hedging: | Derivatives and hedging: | | Derivatives and hedging: | |
Unrealized gain (loss) during period | Unrealized gain (loss) during period | (34) | | | (20) | | | 22 | | Unrealized gain (loss) during period | 53 | | | 66 | | | (34) | |
Reclassification adjustment for (gains) losses included in net income, net | Reclassification adjustment for (gains) losses included in net income, net | 23 | | | 15 | | | (15) | | Reclassification adjustment for (gains) losses included in net income, net | (56) | | | (3) | | | 23 | |
Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | (59) | | | 11 | | | (36) | | Total other comprehensive income (loss), net of tax | (23) | | | 91 | | | (59) | |
Comprehensive income including noncontrolling interest | Comprehensive income including noncontrolling interest | 430 | | | 773 | | | 1,048 | | Comprehensive income including noncontrolling interest | 773 | | | 958 | | | 430 | |
Less: Comprehensive income attributable to noncontrolling interest | Less: Comprehensive income attributable to noncontrolling interest | 11 | | | 3 | | | 4 | | Less: Comprehensive income attributable to noncontrolling interest | 3 | | | 10 | | | 11 | |
Comprehensive income attributable to Eastman | Comprehensive income attributable to Eastman | $ | 419 | | | $ | 770 | | | $ | 1,044 | | Comprehensive income attributable to Eastman | $ | 770 | | | $ | 948 | | | $ | 419 | |
Retained Earnings | Retained Earnings | | | | | | Retained Earnings | | | | | |
Retained earnings at beginning of period | Retained earnings at beginning of period | $ | 7,965 | | | $ | 7,573 | | | $ | 6,802 | | Retained earnings at beginning of period | $ | 8,557 | | | $ | 8,080 | | | $ | 7,965 | |
Cumulative effect adjustment resulting from adoption of new accounting standards | 0 | | | (20) | | | 16 | | |
| Net earnings attributable to Eastman | Net earnings attributable to Eastman | 478 | | | 759 | | | 1,080 | | Net earnings attributable to Eastman | 793 | | | 857 | | | 478 | |
Cash dividends declared | Cash dividends declared | (363) | | | (347) | | | (325) | | Cash dividends declared | (377) | | | (380) | | | (363) | |
Retained earnings at end of period | Retained earnings at end of period | $ | 8,080 | | | $ | 7,965 | | | $ | 7,573 | | 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) | 2020 | | 2019 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 564 | | | $ | 204 | |
Trade receivables, net of allowance for credit losses | 1,033 | | | 980 | |
Miscellaneous receivables | 482 | | | 395 | |
Inventories | 1,379 | | | 1,662 | |
Other current assets | 83 | | | 80 | |
Total current assets | 3,541 | | | 3,321 | |
Properties | | | |
Properties and equipment at cost | 13,531 | | | 13,081 | |
Less: Accumulated depreciation | 7,982 | | | 7,510 | |
Net properties | 5,549 | | | 5,571 | |
Goodwill | 4,465 | | | 4,431 | |
Intangible assets, net of accumulated amortization | 1,792 | | | 2,011 | |
Other noncurrent assets | 736 | | | 674 | |
Total assets | $ | 16,083 | | | $ | 16,008 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities | | | |
Payables and other current liabilities | $ | 1,689 | | | $ | 1,618 | |
Borrowings due within one year | 349 | | | 171 | |
Total current liabilities | 2,038 | | | 1,789 | |
Long-term borrowings | 5,269 | | | 5,611 | |
Deferred income tax liabilities | 848 | | | 915 | |
Post-employment obligations | 1,143 | | | 1,016 | |
Other long-term liabilities | 677 | | | 645 | |
Total liabilities | 9,975 | | | 9,976 | |
Commitments and contingencies (Note 11) | | | |
Stockholders' equity | | | |
Common stock ($0.01 par value per share – 350,000,000 shares authorized; shares issued – 220,641,506 and 219,638,646 for 2020 and 2019, respectively) | 2 | | | 2 | |
Additional paid-in capital | 2,174 | | | 2,105 | |
Retained earnings | 8,080 | | | 7,965 | |
Accumulated other comprehensive loss | (273) | | | (214) | |
| 9,983 | | | 9,858 | |
Less: Treasury stock at cost (84,830,450 shares for 2020 and 83,696,398 shares for 2019) | 3,960 | | | 3,900 | |
Total Eastman stockholders' equity | 6,023 | | | 5,958 | |
Noncontrolling interest | 85 | | | 74 | |
Total equity | 6,108 | | | 6,032 | |
Total liabilities and stockholders' equity | $ | 16,083 | | | $ | 16,008 | |
| | | |
| | | | | | | | | | | |
| 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) | 2020 | | 2019 | | 2018 |
Operating activities | | | | | |
Net earnings | $ | 489 | | | $ | 762 | | | $ | 1,084 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 574 | | | 611 | | | 604 | |
Mark-to-market pension and other postretirement benefit plans (gain) loss, net | 240 | | | 143 | | | 99 | |
Asset impairment charges | 146 | | | 72 | | | 39 | |
Early debt extinguishment costs | 1 | | | 0 | | | 7 | |
| | | | | |
Gain from sale of assets | 0 | | | 0 | | | (4) | |
Gain from property insurance | 0 | | | 0 | | | (65) | |
Provision for (benefit from) deferred income taxes | (111) | | | 23 | | | (51) | |
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | | | |
(Increase) decrease in trade receivables | (31) | | | 170 | | | 16 | |
(Increase) decrease in inventories | 291 | | | (80) | | | (224) | |
Increase (decrease) in trade payables | (100) | | | (27) | | | 90 | |
Pension and other postretirement contributions (in excess of) less than expenses | (136) | | | (119) | | | (152) | |
Variable compensation (in excess of) less than expenses | 87 | | | 38 | | | 55 | |
Other items, net | 5 | | | (89) | | | 45 | |
Net cash provided by operating activities | 1,455 | | | 1,504 | | | 1,543 | |
Investing activities | | | | | |
Additions to properties and equipment | (383) | | | (425) | | | (528) | |
Proceeds from property insurance | 0 | | | 0 | | | 65 | |
| | | | | |
Proceeds from sale of assets and businesses | 0 | | | 0 | | | 5 | |
Acquisitions, net of cash acquired | (1) | | | (48) | | | (3) | |
| | | | | |
| | | | | |
Other items, net | (10) | | | (7) | | | (2) | |
Net cash used in investing activities | (394) | | | (480) | | | (463) | |
Financing activities | | | | | |
Net increase (decrease) in commercial paper and other borrowings | (121) | | | (70) | | | (146) | |
Proceeds from borrowings | 249 | | | 460 | | | 1,604 | |
Repayment of borrowings | (435) | | | (760) | | | (1,774) | |
Dividends paid to stockholders | (358) | | | (343) | | | (318) | |
Treasury stock purchases | (60) | | | (325) | | | (400) | |
| | | | | |
Other items, net | 21 | | | (5) | | | (6) | |
Net cash used in financing activities | (704) | | | (1,043) | | | (1,040) | |
Effect of exchange rate changes on cash and cash equivalents | 3 | | | (3) | | | (5) | |
Net change in cash and cash equivalents | 360 | | | (22) | | | 35 | |
Cash and cash equivalents at beginning of period | 204 | | | 226 | | | 191 | |
Cash and cash equivalents at end of period | $ | 564 | | | $ | 204 | | | $ | 226 | |
| | | | | | | | | | | | | | | | | |
| 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
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") 2016-13 Financial Instruments2021-05 Leases (Topic 842): Lessors - Credit Losses: Certain Leases with Variable Lease Payments: On January 1, 2020,2022, Eastman adopted this standard,update which is a part of the Financial Accounting Standards Board's ("FASB") post-implementation review of this Topic. The update provides that lessors should classify and related releases, underaccount 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 various required transition methods. The amendments requirelease would have been classified as a financial asset (including trade receivables) to be presented atsales-type lease or a direct financing lease and 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 newlylessor would have otherwise recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.a day-one loss. The adoption of this standard did not result inhave a materialsignificant impact on 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:2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance: On January 1, 2020,2022, Eastman adopted prospectively this standardamendment which requires business entities that isaccount for transactions with a part ofgovernment by applying a grant or contribution model by analogy (for example, a grant model within International Financial Reporting Standards) to provide annual disclosures about government assistance recorded during the Financial Accounting Standards Board's ("FASB") disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary changes applicable to Eastman in this update are the disclosures of fair value levels, assessment thereof, and transfers between those levels.period. The adoption under the various required transition methods did not have a significant impact on the Company's financial statements and related disclosures.
Accounting Standards Issued But Not Adopted as of December 31, 2022
ASU 2018-14 Retirement Benefits - Disclosure Framework - Changes to the Disclosure Requirements2021-08 Business Combinations (Topic 805): Accounting for Defined Benefit Plans:Contract Assets and Contract Liabilities from Contracts with Customers In fourth quarter 2020, Eastman adopted this standard which applied the disclosures changes on a retrospective basis to all periods presented.: The FASB issued this update asin October 2021, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a part of its disclosure framework project to improve the effectiveness of disclosuresbusiness combination in the notes to financial statements. The primary change impacting Eastman is the addition of disclosures related to significant gains and losses resulting from changes in the benefit obligation for the period and weighted-average interest crediting rates for cash balance plans. The adoption of the disclosure changes did not materially impact the Company's related disclosures. Please see Note 10, "Retirement Plans", for these disclosure changes.
ASU 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) andaccordance with Topic 606 (RevenueRevenue from Contracts with Customers):Customers On January 1, 2020, Eastman adopted this standard, retrospectively, as if it had originated the contracts. The update also provides certain practical expedients for acquirers and is applicable to all contract assets and liabilities within the datescope 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 which the acquirer does not have the appropriate data or expertise to analyze the historical periods in which the contract was entered into". This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Adoption is on a prospective basis to business combinations occurring on or after the initial application of Topic 606application. Management does not expect that changes required by the new standard will have a significant impact on January 1, 2017, that provides 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. The adoption of this standard did not impact the Company's financial statements and related disclosures.
ASU 2019-01 Leases - Codification Improvements:2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method On January 1, 2020, Eastman adopted this standard which was applied as of the adoption date and under the same transition methodology of ASU 2016-02 Lease previously adopted on January 1, 2019.: The FASB issued this update in response to stakeholder inquiriesMarch 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 application. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Management does not expect that changes required by the new leasing standard.standard will have a significant impact on the Company's financial statements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures: The adoptionFASB issued this update in March 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 loan refinancings and restructurings for borrowers experiencing financial difficulty. This ASU also amends the guidance on "vintage disclosures" to require disclosure of thisgross write-offs by year of origination. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Management does not expect that changes required by the new standard did notwill have a significant impact on the Company's financial statements and related disclosures.
ASU 2020-04 Reference Rate Reform2022-03 Fair Value Measurement (Topic 848) - Facilitation820): Fair Value Measurement of the Effects of Reference Rate Reform on Financial Reporting:Equity Securities Subject to Contractual Sale Restrictions Eastman adopted this standard when issued and effective on March 12, 2020.: The FASB issued this update to provide optional guidance forin June 2022, which states that when measuring the fair value of an asset or a limited period of time to easeliability, a reporting entity should consider the potential burden in accounting for (or recognizing the effects of) reference rate reform (the global financial markets transition in contracts, hedging relationships, and other transactions away from referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates and toward new reference rates) on financial reporting. As reference reform has not impacted Eastman ascharacteristics of the issuance and effective date,asset or liability, including restrictions on the adoptionsale of this standard did not impact the Company's financial statements and related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Issued But Not Adopted asasset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of December 31, 2020
ASU 2019-12 Income Taxes - Simplifyingaccount for the Accounting for Income Taxes: In December 2019, the FASB issued this update as part of its initiative to reduce complexity in accounting standards which removes certain exceptions and provides simplification to specific tax items.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. Adoption methods vary based on the specific items impacted.with early adoption permitted. 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.
ASU 2020-01 Investments2022-04 Liabilities - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815:Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations In January 2020, the: The FASB issued this update in September 2022, which requires the buyer in a clarification that an entity should consider observable transactions that requiresupplier finance program to disclose qualitative and quantitative information about the application or discontinuanceprogram. Required disclosures include information about the key terms of the equity methodprogram, outstanding confirmed amounts as of accounting for the purposesend of applying the measurement alternativeperiod, a rollforward of such amounts during each annual period, and clarification that certain forward contracts and purchased options to purchase securities that, upon settlement, would be accounted for undera description of where in the equity method of accounting.financial statements outstanding amounts are presented. This standardguidance is effective for fiscal years beginning after December 15, 2020, and2022, including interim periods within those fiscal years. The updateyears, except for the disclosure of rollforward information, which is to be applied prospectively.effective for fiscal years beginning after December 15, 2023, with early adoption permitted. Management does not expect thatis currently evaluating the impact of the changes required by the new standard will materiallyon 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 $18 million and $4$14 million as of December 31, 2020 or December 31, 2019,2022 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 $62$93 million and $65$82 million as of December 31, 20202022 and December 31, 2019,2021, 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".
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension and other postretirement benefits plans that provide eligible employees with retirement benefits. 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.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 "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 Consolidated 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".
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".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of Eastman's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. The recoverability of ourthe 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 ourthe 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 has evaluated these potential issues under the more-likely-than-not standard of the accounting literature. A tax position is recognized if it meets this standard and is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized. Such judgments and estimates may change based on audit settlements, court cases and interpretation of tax laws and regulations. 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 Company recognizes income tax positions that meet the more likely than not threshold. The accrued interest related to unrecognized income tax positions and taxes resulting from the global intangible low-tax income ("GILTI") are recorded as a component of the income tax provision.
For additional information, see Note 7,8, "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 Credit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Eastman maintains allowances for estimated credit losses, which are developed at a market, country, and region level based on risk of collection as well as current and forecasted economic conditions. The Company calculates the allowance based on an assessment of the risk when the accounts receivable is recognized. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for credit losses was $14$15 million and $11$17 million as of December 31, 20202022 and December 31, 2019,2021, 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 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 of 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 of 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.
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.
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, including some unobservable inputs, and appliesspecifically a discounted cash flow model, in testing the carrying value of goodwill forof each reporting unit.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 estimated weighted average cost of capital ("WACC") plus a risk premium.
For additional information, see Note 4,5, "Goodwill and Other Intangible Assets".
Leases
There are two types of leases: financefinancing 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 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 5,6, "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.
The Company's derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and measured at fair value. Hedge accounting will be discontinued prospectively for all hedges that no longer qualify for hedge accounting treatment.
For additional information, see Note 9,10, "Derivative and Non-Derivative Financial Instruments".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 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 20202022 and 20192021 were $1.5$2.5 billion and $0.9$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 sell 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.
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:
| | | | | |
| |
(Dollars in millions) | |
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 | |
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, | | December 31, |
(Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | 2022 | | 2021 |
| | | | | | | | |
Finished goods | Finished goods | $ | 891 | | | $ | 1,114 | | Finished goods | $ | 1,347 | | | $ | 1,007 | |
Work in process | Work in process | 203 | | | 220 | | Work in process | 297 | | | 273 | |
Raw materials and supplies | Raw materials and supplies | 511 | | | 576 | | Raw materials and supplies | 743 | | | 589 | |
Total inventories at FIFO or average cost | Total inventories at FIFO or average cost | 1,605 | | | 1,910 | | Total inventories at FIFO or average cost | 2,387 | | | 1,869 | |
Less: LIFO reserve | Less: LIFO reserve | 226 | | | 248 | | Less: LIFO reserve | 493 | | | 365 | |
Total inventories | Total inventories | $ | 1,379 | | | $ | 1,662 | | Total inventories | $ | 1,894 | | | $ | 1,504 | |
Inventories valued on the LIFO method were approximately 50 percent of total inventories at both December 31, 20202022 and December 31, 2019. In 2020, a $13 million LIFO decrement was recognized due to inventory reduction actions, resulting in an increase to "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings and a decrease to "Inventories" in the Consolidated Statements of Financial Position.2021.
4.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 | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
3.PROPERTIES AND ACCUMULATED DEPRECIATION
| | | | | | | | | | | |
| December 31, |
(Dollars in millions) | 2020 | | 2019 |
Properties | | | |
Land | $ | 163 | | | $ | 158 | |
Buildings | 1,824 | | | 1,450 | |
Machinery and equipment | 11,494 | | | 11,117 | |
Construction in progress | 50 | | | 356 | |
Properties and equipment at cost | $ | 13,531 | | | $ | 13,081 | |
Less: Accumulated depreciation | 7,982 | | | 7,510 | |
Net properties | $ | 5,549 | | | $ | 5,571 | |
Depreciation expense was $384 million, $426 million, and $445 million $450 million,for 2022, 2021, and $437 million for 2020, 2019, and 2018, respectively.
Cumulative construction-period interest of $100$93 million and $98$99 million, reduced by accumulated depreciation of $41$43 million and $38$45 million, is included in net properties at December 31, 20202022 and 2019,2021, respectively.
Eastman capitalized $9 million, $5 million, and $4 million of interest in 2022, 2021, and 2020, 2019, and 2018.respectively.
4.5.GOODWILL AND OTHER INTANGIBLE ASSETS
ChangesBelow is a summary of the change in the carrying amount of goodwill follow:during 2022 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Additives & Functional Products | | Advanced Materials | | Chemical Intermediates | | Other | | Total |
Balance at December 31, 2018 | $ | 2,410 | | | $ | 1,283 | | | $ | 764 | | | $ | 10 | | | $ | 4,467 | |
Acquisitions | 15 | | | 0 | | | 0 | | | 0 | | | 15 | |
Impairments recognized | (45) | | | 0 | | | 0 | | | 0 | | | (45) | |
| | | | | | | | | |
Currency translation adjustments | (3) | | | (1) | | | (2) | | | 0 | | | (6) | |
Balance at December 31, 2019 | 2,377 | | | 1,282 | | | 762 | | | 10 | | | 4,431 | |
| | | | | | | | | |
| | | | | | | | | |
Currency translation adjustments | 20 | | | 10 | | | 4 | | | 0 | | | 34 | |
Balance at December 31, 2020 | $ | 2,397 | | | $ | 1,292 | | | $ | 766 | | | $ | 10 | | | $ | 4,465 | |
(1)Held for sale goodwill was divested in 2022.(2)Measurement period adjustments related to prior year acquisitions.
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 2020 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 WACC, and a projected long-term growth rate. As a result of the annual goodwill impairment testing performed during fourth quarter 2020, fair values were determined to substantially exceed the carrying values for each reporting unit tested with the exception of tire additives (part of the Additives & Functional Products ("AFP") segment).
In fourth quarter 2019, as a result of the annual impairment test of goodwill, the Company recognized goodwill impairments of $45 million in the crop protection reporting unit. The impairment was primarily due to the impact of 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 crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019. In first quarter 2020, the crop protection reporting unit combined with the care chemicals reporting unit as a result of business management realignment.
As of December 31, 2020 and 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, at both December 31, 2022 and 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 | |
Amortization expense of definite-lived intangible assets was $87 million, $108 million, and $128 million for 2022, 2021, and 2020, respectively. Estimated amortization expense for future periods is $83 million in 2023 and 2024, $76 million in 2025 and 2026, and $67 million in 2027.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of intangible assets follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 | | December 31, 2019 |
(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 | $ | 1,589 | | | $ | 571 | | | $ | 1,018 | | | $ | 1,566 | | | $ | 494 | | | $ | 1,072 | |
Technology | 7 | - | 20 | 687 | | | 392 | | | 295 | | | 677 | | | 343 | | | 334 | |
Tradenames | 25 | 44 | | | 2 | | | 42 | | | 0 | | | 0 | | | 0 | |
Other | 18 | - | 37 | 86 | | | 23 | | | 63 | | | 88 | | | 22 | | | 66 | |
| | | | | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | | | |
Tradenames | | | | 364 | | | — | | | 364 | | | 529 | | | — | | | 529 | |
Other | | | | 10 | | | — | | | 10 | | | 10 | | | — | | | 10 | |
Total identified intangible assets | | | | $ | 2,780 | | | $ | 988 | | | $ | 1,792 | | | $ | 2,870 | | | $ | 859 | | | $ | 2,011 | |
In second quarter 2020, outside of the annual impairment testing process, the Company reviewed the indefinite-lived intangible assets associated with the tire additives reporting unit for impairment. As a result of the review, the Company recognized intangible asset impairments of $123 million in second quarter 2020 in the tire additives reporting unit to reduce the carrying value of the Crystex™ and Santoflex™ tradenames to the estimated fair value. The impairments are primarily the result of weakened demand in transportation end markets impacted by the COVID-19 coronavirus global pandemic ("COVID-19") and increased competitive pricing pressure as a result of global capacity increases. Amortization began in third quarter 2020 for the remaining value of the Crystex™ tradename of $42 million. Additional declines in the market conditions or forecasted revenue could result in additional impairment of indefinite-lived intangible assets.
Amortization expense of definite-lived intangible assets was $128 million, $160 million, and $164 million for 2020, 2019, and 2018, respectively. Estimated amortization expense for future periods is $125 million in 2021, $115 million in each year for 2022 through 2024, and $110 million for 2025.
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 and could result in material impairment charges.
5.6.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, 20202022 and 2019,2021, the Company's total investment in these joint ventures was $111 million and $106$96 million, respectively, included in "Other noncurrent assets" in the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.7.PAYABLES AND OTHER CURRENT LIABILITIES
| | | December 31, | | December 31, |
(Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | 2022 | | 2021 |
Trade creditors | Trade creditors | $ | 799 | | | $ | 890 | | Trade creditors | $ | 1,319 | | | $ | 1,228 | |
Accrued payrolls, vacation, and variable-incentive compensation | Accrued payrolls, vacation, and variable-incentive compensation | 228 | | | 176 | | Accrued payrolls, vacation, and variable-incentive compensation | 164 | | | 311 | |
Accrued taxes | Accrued taxes | 178 | | | 89 | | Accrued taxes | 157 | | | 138 | |
Post-employment obligations | Post-employment obligations | 138 | | | 93 | | Post-employment obligations | 103 | | | 70 | |
| Dividends payable to shareholders | 94 | | | 90 | | |
Dividends payable to stockholders | | Dividends payable to stockholders | 94 | | | 101 | |
Other | Other | 252 | | | 280 | | Other | 288 | | | 285 | |
Total payables and other current liabilities | Total payables and other current liabilities | $ | 1,689 | | | $ | 1,618 | | 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.
7.8.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) | 2020 | | 2019 | | 2018 |
Earnings before income taxes | | | | | |
United States | $ | 164 | | | $ | 454 | | | $ | 718 | |
Outside the United States | 366 | | | 448 | | | 592 | |
Total | $ | 530 | | | $ | 902 | | | $ | 1,310 | |
Provision for income taxes | | | | | |
United States Federal | | | | | |
Current | $ | 70 | | | $ | 55 | | | $ | 161 | |
Deferred | (96) | | | 19 | | | (11) | |
Outside the United States | | | | | |
Current | 77 | | | 62 | | | 86 | |
Deferred | (14) | | | (32) | | | (22) | |
State and other | | | | | |
Current | 5 | | | 0 | | | 30 | |
Deferred | (1) | | | 36 | | | (18) | |
Total | $ | 41 | | | $ | 140 | | | $ | 226 | |
| | | | | | | | | | | | | | | | | |
| 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
The following represents the deferred tax (benefit) charge recorded as a component of "Accumulated other comprehensive income (loss)" ("AOCI") in the Consolidated Statements of Financial Position:
| | | | | | | | | | | | | | | | | |
| For years ended December 31, |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Defined benefit pension and other postretirement benefit plans | $ | (7) | | | $ | (10) | | | $ | (10) | |
| | | | | |
Derivatives and hedging | (4) | | | (2) | | | 3 | |
Total | $ | (11) | | | $ | (12) | | | $ | (7) | |
| | | | | | | | | | | | | | | | | |
| 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) | |
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Total income tax expense (benefit) included in the consolidated financial statements was composed of the following:
| | | | | | | | | | | | | | | | | |
| For years ended December 31, |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Earnings before income taxes | $ | 41 | | | $ | 140 | | | $ | 226 | |
| | | | | |
Other comprehensive income | (11) | | | (12) | | | (7) | |
Total | $ | 30 | | | $ | 128 | | | $ | 219 | |
| | | | | | | | | | | | | | | | | |
| 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 | |
Differences between the provision for income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow: | | | | | | | | | | | | | | | | | |
| For years ended December 31, |
(Dollars in millions) | 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) | 2020 | | 2019 | | 2018 |
Amount computed using the statutory rate | $ | 109 | | | $ | 189 | | | $ | 274 | |
State income taxes, net | 2 | | | 36 | | | 6 | |
Foreign rate variance | (49) | | | (68) | | | (52) | |
| | | | | |
Change in reserves for tax contingencies | 4 | | | 36 | | | 21 | |
General business credits | (39) | | | (52) | | | (60) | |
U.S. tax on foreign earnings | 13 | | | (17) | | | 10 | |
Foreign tax credits | 0 | | | 0 | | | (12) | |
Tax law changes and tax loss from outside-U.S. entity reorganizations | 0 | | | 7 | | | 20 | |
Other | 1 | | | 9 | | | 19 | |
Provision for income taxes | $ | 41 | | | $ | 140 | | | $ | 226 | |
| | | | | |
Effective income tax rate | 8 | % | | 16 | % | | 17 | % |
The 2022 provision for income taxes include a $32 million decrease related to the release of a state valuation allowance and a $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 finalization of prior years' income tax audits, partially offset by current year increases. Additionally, the 2021 provision for income taxes includes 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 liabilities.
The 2020 effective tax rateprovision for income taxes includes a $27 million decrease to the provision for income taxes as a result of a decrease in previously unrecognized tax positions and a $7 million decrease to the provision for income taxes related to adjustments to certain prior year tax returns.
The 2019 effective tax rate includes a $7 million increase to the provision for income taxes resulting from adjustments to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"). The 2019 effective tax rate also includes adjustments to the tax provision to reflect finalization of prior year's income tax returns and an increase to state income taxes related to additional valuation allowance provided against state income tax credits.
The 2018 effective tax rate included 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 million increase to the provision for income taxes resulting from adjustments to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act. These adjustments related to the one-time transition tax on deferred foreign income and changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center.
Income tax incentives, in the form of tax holidays, have been granted to the Company in certain jurisdictions to attract investment and encourage industrial development. The expiration of these tax 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 those jurisdictions. No individual tax holiday had a material impact to the Company’sCompany's earnings in 2020, 2019,2022, 2021, or 2018.2020.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
| | | | | | | | | | | |
| December 31, |
(Dollars in millions) | 2020 | | 2019 |
Deferred tax assets | | | |
Post-employment obligations | $ | 280 | | | $ | 247 | |
Net operating loss carryforwards | 619 | | | 606 | |
Tax credit carryforwards | 216 | | | 239 | |
Environmental contingencies | 68 | | | 68 | |
Unrealized derivative loss | 22 | | | 18 | |
Other | 213 | | | 173 | |
Total deferred tax assets | 1,418 | | | 1,351 | |
Less: Valuation allowance | 393 | | | 453 | |
Deferred tax assets less valuation allowance | $ | 1,025 | | | $ | 898 | |
Deferred tax liabilities | | | |
Property, plant, and equipment | $ | (893) | | | $ | (895) | |
Intangible assets | (388) | | | (439) | |
Investments | (305) | | | (235) | |
Other | (175) | | | (178) | |
Total deferred tax liabilities | $ | (1,761) | | | $ | (1,747) | |
Net deferred tax liabilities | $ | (736) | | | $ | (849) | |
As recorded in the Consolidated Statements of Financial Position: | | | |
| | | |
Other noncurrent assets | $ | 112 | | | $ | 66 | |
| | | |
Deferred income tax liabilities | (848) | | | (915) | |
Net deferred tax liabilities | $ | (736) | | | $ | (849) | |
| | | | | | | | | | | |
| 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) | |
All foreign earnings, with the exception of short-term liquid assets on certain foreign subsidiaries, including basis differences, continue to be considered indefinitely reinvested. As of December 31, 2020,2022, unremitted earnings of subsidiaries outside the U.S. totaled approximately $2.7$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 $29 million at December 31, 2020 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2020,2022, foreign net operating loss carryforwards totaled $2.2$2.4 billion. Of this total, $700$900 million will expire in 1 to 20 years and $1.5 billion have no expiration date. A valuation allowance of approximately $217$131 million has been provided against such net operating loss carryforwards.carryforwards and other foreign deferred income tax balances.
At December 31, 2020,2022, there were no federal net operating loss carryforwards of $3 million were available to offset future taxable income, which expire from 2028 to 2030.income. At December 31, 2020,2022, foreign tax credit carryforwards of approximately $56$66 million were available to reduce possible future U.S. income taxes, and which expire from 20212023 to 2030.2032. 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 $24$54 million has been established on a portion of deferred tax assets as of December 31, 2020.2022.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2020,2022, 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) | 2020 | | 2019 |
Miscellaneous receivables | $ | 311 | | | $ | 211 | |
| | | |
Payables and other current liabilities | $ | 147 | | | $ | 36 | |
Other long-term liabilities | 83 | | | 139 | |
Total income taxes payable | $ | 230 | | | $ | 175 | |
| | | | | | | | | | | |
| 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 | |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2020 | | 2019 | | 2018 |
Balance at January 1 | $ | 202 | | | $ | 182 | | | $ | 142 | |
Adjustments based on tax positions related to current year | 14 | | | 25 | | | 9 | |
| | | | | |
Adjustments based on tax positions related to prior years | 63 | | | (3) | | | 35 | |
Lapse of statute of limitations | (22) | | | (2) | | | (4) | |
| | | | | |
Balance at December 31 (1) | $ | 257 | | | $ | 202 | | | $ | 182 | |
| | | | | | | | | | | | | | | | | |
(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)AllApproximately $229 million of the unrecognized tax benefits as of December 31, 2022, 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) | 2020 | | 2019 | | 2018 |
Balance at January 1 | $ | 13 | | | $ | 10 | | | $ | 6 | |
Expense for interest, net of tax | 5 | | | 5 | | | 4 | |
Income for interest, net of tax | (5) | | | (2) | | | 0 | |
Balance at December 31 | $ | 13 | | | $ | 13 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | |
(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 | |
Accrued penalties related to unrecognized tax positions were immaterial as of December 31, 2020, 2019,2022, 2021, and 2018.2020.
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 2012 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 2012.2015. 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 2012.2002.
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 $120$55 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
8.9.BORROWINGS
| | | December 31, | | December 31, |
(Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | 2022 | | 2021 |
Borrowings consisted of: | Borrowings consisted of: | | | | Borrowings consisted of: | | | |
| 4.5% notes due January 2021 | $ | 0 | | | $ | 185 | | |
3.5% notes due December 2021 | 299 | | | 298 | | |
| 3.6% notes due August 2022 | 3.6% notes due August 2022 | 744 | | | 741 | | 3.6% notes due August 2022 | $ | — | | | $ | 747 | |
1.50% notes due May 2023 (1) | 1.50% notes due May 2023 (1) | 919 | | | 840 | | 1.50% notes due May 2023 (1) | 800 | | | 850 | |
7 1/4% debentures due January 2024 | 7 1/4% debentures due January 2024 | 198 | | | 198 | | 7 1/4% debentures due January 2024 | 198 | | | 198 | |
7 5/8% debentures due June 2024 | 7 5/8% debentures due June 2024 | 43 | | | 43 | | 7 5/8% debentures due June 2024 | 43 | | | 43 | |
3.8% notes due March 2025 | 701 | | | 695 | | |
3.80% notes due March 2025 | | 3.80% notes due March 2025 | 693 | | | 698 | |
1.875% notes due November 2026 (1) | 1.875% notes due November 2026 (1) | 609 | | | 556 | | 1.875% notes due November 2026 (1) | 530 | | | 565 | |
7.60% debentures due February 2027 | 7.60% debentures due February 2027 | 195 | | | 195 | | 7.60% debentures due February 2027 | 196 | | | 195 | |
4.5% notes due December 2028 | 4.5% notes due December 2028 | 493 | | | 493 | | 4.5% notes due December 2028 | 495 | | | 494 | |
4.8% notes due September 2042 | 4.8% notes due September 2042 | 493 | | | 493 | | 4.8% notes due September 2042 | 494 | | | 494 | |
4.65% notes due October 2044 | 4.65% notes due October 2044 | 874 | | | 874 | | 4.65% notes due October 2044 | 877 | | | 875 | |
2027 Term loan | | 2027 Term loan | 499 | | | — | |
Commercial paper and short-term borrowings | Commercial paper and short-term borrowings | 50 | | | 171 | | Commercial paper and short-term borrowings | 326 | | | — | |
| Total borrowings | Total borrowings | 5,618 | | | 5,782 | | Total borrowings | 5,151 | | | 5,159 | |
Borrowings due within one year | 349 | | | 171 | | |
Less: Borrowings due within one year | | Less: Borrowings due within one year | 1,126 | | | 747 | |
Long-term borrowings | Long-term borrowings | $ | 5,269 | | | $ | 5,611 | | Long-term borrowings | $ | 4,025 | | | $ | 4,412 | |
(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.
In fourth quarter 2020,2022, the Company repaid the 4.5%3.6% notes due January 2021 ($185August 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 Statement of Cash Flows.
In fourth quarter 2019, the Company repaid the 2.7% notes due January 2020 ($250 million principal) 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 Statements of Cash Flows.
Loan Agreement, Credit Facility, Term Loan, and Commercial Paper Borrowings
In second quarter 2020, the Company borrowed $250 million under a new 364-Day Term Loan Credit Agreement (the "Term Loan") as a precautionary measure due to increased financial market volatility, particularly in the availability and terms of commercial paper, resulting from COVID-19. In third quarter 2020, the Term Loan was repaid using available cash. The early repayment resulted in a charge of $1 million for early debt extinguishment costs which was primarily attributable to related unamortized issuance costs.
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. In first quarter 2020, the Company borrowed a total of $400 million under the Credit Facility. In second quarter 2020, the Company repaid a total of $400 million using available cash. At December 31, 20202022 and December 31, 2019,2021, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2020,2022, the Company's commercial paper borrowings were $50$326 million with a weighted average interest rate of 0.25 percent.4.85%. At December 31, 2019,2021, the Company'sCompany had no outstanding commercial paper borrowings were $170borrowings.
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 2.03 percent.5.55% as of December 31, 2022. Borrowings under the 2027 Term Loan are subject to interest at varying spreads above quoted market rates.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facility containsand 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. In second quarter 2020, the Company amended the Credit Facility and the Term Loan maximum debt covenants to reflect the higher cash balance to enhance liquidity due to, and the expected negative impact on operating results of, COVID-19 and added a new restrictive covenant prohibiting stock repurchases until June 30, 2021 in the event certain financial ratios are exceeded. The Company was in compliance with all applicable covenants at both December 31, 20202022 and December 31, 2019.2021.
The Company did not renew the $250 million accounts receivable securitization agreement (the "A/R Facility") which expired April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, had an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC had first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility were subject to interest rates based on a spread over the lender's borrowing costs and ECFC paid a fee to maintain availability of the A/R Facility. In first quarter 2020, the Company borrowed a total of $350 million, in two tranches, under the A/R Facility and repaid a total of $350 million using available cash. At December 31, 2019, the Company had no borrowings outstanding under the A/R Facility.