Company: EASTMAN CHEMICAL CO
CIK: 915389
SIC: 2821
Filing Date: 2020-02-26 00:00:00

ITEM 1 - BUSINESS
ITEM 1. BUSINESS
CORPORATE OVERVIEW
Eastman Chemical Company ("Eastman" or the "Company") is a global advanced materials and specialty additives company that produces a broad range of products found in items people use every day. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company's photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 50 manufacturing facilities and equity interests in three manufacturing joint ventures in 15 countries that supply products to customers throughout the world. See Item 2. "Properties" of this Annual Report on Form 10-K (this "Annual Report"). The Company's headquarters and largest manufacturing facility are located in Kingsport, Tennessee. With a robust portfolio of specialty businesses, Eastman works with customers to deliver innovative products and solutions while maintaining a commitment to safety and sustainability. Eastman's businesses are managed and reported in four operating segments: Additives & Functional Products, Advanced Materials, Chemical Intermediates, and Fibers. See "Business Segments".
In the first years as a stand-alone company, Eastman was diversified between commodity and more specialty chemical businesses. Beginning in 2004, the Company refocused its strategy and changed its businesses and portfolio of products, first by the divestiture and discontinuance of under-performing assets and commodity businesses and initiatives (including divestiture in 2004 of resins, inks, and monomers product lines, divestiture in 2006 of the polyethylene business, and divestiture from 2007 to 2010 of the polyethylene terephthalate assets and business). The Company then pursued growth through the development and acquisition of more specialty businesses and product lines by inorganic acquisition and integration (including the acquisition of Solutia, Inc., a global leader in performance materials and specialty chemicals, in 2012, and Taminco Corporation, a global specialty chemical company, in 2014) and organic development and commercialization of new and enhanced technologies and products.
Eastman currently uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value 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, nonwovens and textiles, animal nutrition, and chemical and plastics recycling technologies. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends. Management believes that these elements of the Company's innovation-driven growth model, combined with disciplined portfolio management and balanced capital deployment, will result in consistent, sustainable earnings growth and strong cash flow.
In 2019, the Company reported sales revenue of $9.3 billion, earnings before interest and taxes ("EBIT") of $1.1 billion, and net earnings of $0.8 billion. Diluted earnings per share were $5.48. Net cash provided by operating activities was $1.5 billion. Excluding non-core and unusual items, adjusted EBIT was $1.4 billion and adjusted diluted earnings per share were $7.13. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report for reconciliation of financial measures under accounting principles generally accepted in the United States ("GAAP") to non-GAAP financial measures, description of excluded items, and related information. For Company sales revenue by end-market, see Exhibit 99.01 "2019 Company and Segment Sales Revenue by End-Use Market" of this Annual Report. Approximately 60 percent of 2019 sales revenue was generated from outside the United States and Canada region. For additional information regarding sales by customer location and by segment, see Note 19, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary by Operating Segment", "Sales by Customer Location", and "Risk Factors" in Part II, Item 7 of this Annual Report.
BUSINESS STRATEGY
Eastman's objective is to be an outperforming specialty chemical company with consistent, sustainable earnings growth and strong cash flow. Integral to the Company's strategy for growth is leveraging its heritage expertise and innovation within its cellulose and acetyl, olefins, polyester, and alkylamine chemistries. For each of these "streams", the Company has developed and acquired a combination of assets and technologies that combine scale and integration across multiple manufacturing units and sites as a competitive advantage. Management uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development, and relentlessly engaging the market. The Company sells differentiated products into diverse markets and geographic regions and engages the market by working directly with customers and downstream users to meet their needs in existing and new niche markets. Management believes that this innovation-driven growth model will result in consistent financial results by leveraging the Company's proven technology capabilities to improve product mix, increasing emphasis on specialty businesses, and sustaining and expanding leadership in attractive niche markets. A consistent increase in earnings is expected to result from both organic growth initiatives and strategic inorganic initiatives.
Innovation
Management is pursuing specific opportunities to leverage Eastman's innovation-driven growth model for continued near-term and long-term greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. Recently developed, introduced, or commercialized innovation products, applications, and technologies include the following:
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Plastic waste feedstock procurement and commercial-scale operations of proprietary innovative chemical recycling carbon renewal technology which breaks down waste plastics into molecular building blocks (carbon monoxide and hydrogen) for feedstocks of acetyl manufacturing stream products.
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Introduction of advanced circular recycling methanolysis technology to depolymerize waste plastics to re-create specialty monomers for use in manufacture of specialty copolyester products sold into a wide array of end markets.
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Eastman CORE (trademark and patent pending), a differentiated analytics-based software platform that provides Eastman's high performance paint protection film and window film product customers and end-users with access to digital service to improve customer experience and accelerate category development.
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Saflex™ E series, an enhanced acoustic interlayer product, is formulated to dampen sound, particularly in the high frequency range, and provides improved performance compared to traditional acoustic interlayers.
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Tetrashield™ performance polyester resins based on proprietary monomer technology with improved performance and sustainability features for automotive coatings, industrial, and food packaging end-users.
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Impera™ tire additives performance resins that enable tire manufacturers to improve the safety and handling of tires, balance tire performance and fuel economy needs, and achieve superior levels of tack for tire construction.
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Naia™, a yarn product for the apparel market developed from Eastman's proprietary cellulose ester technology.
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Regalite™ UltraPure Platform, a new class of tackifying hydrocarbon adhesives resins with enhanced features addressing hygiene end-use product consumer odor, volatile organic compounds and trace chemicals concerns.
Sustainability
Central to Eastman's innovation-driven growth model is our dedication to enhance the quality of life in a material way with a sustainability strategy to create more value than the resources used by innovating to deliver consumer choices that will sustain and protect our world. Management approaches sustainability as a source of competitive strength by focusing its innovation strategy on opportunities where disruptive macro trends align with the Company's differentiated technology platforms and applications development capabilities to develop innovative products, applications, and technologies that enable customers' development and sales of sustainable products. Eastman's sustainability-related growth initiatives include targeted products utilizing technology that enhance end-use product durability, material usage, recyclability, and health and safety impact characteristics to reduce unnecessary waste, pollution, and greenhouse gas emissions associated with climate change.
The Company's long history of technical expertise in chemical processes and polymer science position it to provide innovative solutions to some of the world's most complex problems, contributing to development of a more "circular economy" - an economic system in which resource input and waste generation, emissions, and energy usage are reduced by slowing, closing, and narrowing energy and material loops through long-lasting design, maintenance, repair, reuse, remanufacturing, refurbishing, recycling, and upcycling. The Company's sustainable innovation initiatives include mechanical recycling, biodegradation, gasification, and chemical recycling and strategic collaborations with end-user markets. In 2019, the Company announced its use of its unique platform of solutions to address the challenges of plastic waste in the environment with circular chemical and plastics recycling, carbon renewal, and methanolysis technologies. Eastman's scale and integration provides a unique opportunity to accelerate the use of these advanced circular recycling technologies and make a meaningful positive impact on the environment.
Examples of Eastman sustainable solutions within identified disruptive macro trends include:
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health and wellness: Tritan™ copolyester, Tetrashield™ performance polyester resins, and Vestera™ cellulosic fiber;
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natural resource efficiency: Saflex™ Q series advanced acoustic interlayers, Impera™ high performance resins for tires, and Treva™ proprietary engineering bioplastic;
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emerging middle class: Saflex™ and head-up display ("HUD") acoustic interlayers, Regalite™ hydrocarbon resins, Naia™ cellulosic yarn, and Avra™ performance fibers;
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feeding a growing population: Eastman organic acids, Enhanz™ feed additive, and Banguard™ crop protection; and
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circular economy: carbon renewal and methanolysis chemical and plastics recycling technologies.
The Company leverages core competencies in polyesters, cellulose esters, thermoplastic processing, textile capability, and in-house application expertise for use in a wide range of applications to provide sustainable solutions to markets which are in search of new and improved products.
FINANCIAL STRATEGY
In its management of the Company's businesses and growth initiatives, management is committed to maintaining a strong financial position with appropriate financial flexibility and liquidity. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility. The Company employs a disciplined and balanced approach to capital allocation and deployment of cash. The priorities for uses of available cash include payment of the quarterly dividend, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management expects that the combination of continued strong cash flow generation, a strong balance sheet, and sufficient liquidity will continue to provide flexibility to pursue growth initiatives.
BUSINESS SEGMENTS
The Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. This organizational structure is based on the management of the strategies, operating models, and sales channels that the various businesses employ and supports the Company's continued transformation towards a more specialty portfolio of products. For segment sales revenue and earnings and segment product lines revenues, see Note 19, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary by Operating Segment" in Part II, Item 7 of this Annual Report. For identification of manufacturing facilities by segment, see Item 2, "Properties" of this Annual Report.
ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT
Overview
In the AFP segment, the Company manufactures chemicals for products in the transportation, consumables, building and construction, animal nutrition, crop protection, energy, personal and home care, and other markets. Key technology platforms in this segment are cellulose esters, polyester polymers, insoluble sulfur, hydrocarbon resins, alkylamine derivatives, and propylene derivatives.
The AFP segment's sales growth is typically above annual industrial production growth due to innovation and enhanced commercial execution with sales to a robust set of end-markets. The segment is focused on producing high-value additives that provide critical functionality but which comprise a small percentage of total customer product cost. The segment principally competes on the differentiated performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. A critical element of the AFP segment's success is its close formulation collaboration with customers through advantaged application development capability.
Principal Products
See Exhibit 99.01 for AFP segment revenue by end-use market.
Strategy
Management applies Eastman's innovation-driven growth model in the AFP segment by leveraging proprietary technologies for the continued development of innovative product offerings and focusing growth efforts on further expanding end-markets such as transportation, building and construction, consumables, industrial applications, animal nutrition, care chemicals, crop protection, and energy. Management believes that the ability to leverage the AFP segment's research, differentiated application development, and production capabilities across multiple markets uniquely positions it to meet evolving needs to improve the quality and performance of its customers' products. For example, tire performance labeling regulations in various parts of the world and competitive pressure favoring performance over cost are causing tire manufacturers to simultaneously improve conflicting tire attributes. Eastman's tire additives technology helps tire manufacturers overcome common compromises often observed between wet grip and rolling resistance. The Company is also developing new technologies such as polyester resins for coatings, sustainable solvents, and hydrocarbon resins for tires to address identified customer and end-user desired features.
Eastman's global manufacturing presence is a key element of the AFP segment's growth strategy. For example, the segment expects to capitalize on industrial growth in Asia from its manufacturing capacity expansion in Kuantan, Malaysia and cellulose ester products sourced from the Company's low-cost cellulose and acetyl manufacturing stream in North America.
In 2019, the AFP segment:
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advanced growth and innovation of Regalite™ UltraPure hydrocarbon resin, a new class of clean tackifying hydrocarbon resins, through a capacity expansion at the Middelburg, Netherlands manufacturing site;
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acquired the Marlotherm™ heat transfer assets in Marl, Germany and the related formulations, intellectual property, and customer contracts, as a targeted addition to the specialty fluids business;
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advanced growth of Impera™ resins through capacity expansions for the production of performance resins for tires at both the Middelburg, Netherlands, and Jefferson, Pennsylvania, manufacturing sites to serve demand from tire manufacturers around the world for product solutions that enable improved safety, efficiency, and performance;
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continued to enhance our ability to serve the global customer base in low volatile organic compound ("VOC") coatings and other markets by completing the final phase of a ketones capacity expansion at the Kingsport, Tennessee manufacturing site in fourth quarter 2019; and
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responded to growing demand for purified water and sustainable waste water treatment across the globe with world scale production units for Dimethylaminoethanol ("DMAE"/"DMEA") in Europe (Belgium) and North America (Louisiana) and decided to expand capacity in China to respond to stricter regulation and rapidly growing demand in Asia (DMAE is used as a key component into flocculants that are critical for municipal and industrial water treatments).
The AFP segment is pursuing specific opportunities to leverage Eastman's innovation-driven growth model to create greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. Examples of recent product innovation within the AFP segment include Tetrashield™ performance polyester resins based on proprietary monomer technology, Impera™ high performance resins for tires, Regalite™ UltraPure Platform addressing consumer concerns associated with odor, volatile organic compounds and trace chemicals in the hygiene industry, Aerafin™ polymer developed from proprietary olefin technology, and care chemicals alkylamine derivatives including state-of-the-art water treatment solutions.
In response to market and business conditions, management is evaluating strategic alternatives for certain businesses and product lines within the AFP segment, including certain adhesives resins, tire additives, and animal nutrition products constituting approximately one-third of segment revenue. Options being considered include restructuring and cost management actions, partnerships or other arrangements with third-parties, or divestments.
ADVANCED MATERIALS SEGMENT
Overview
In the AM segment, the Company produces and markets polymers, films, and plastics with differentiated performance properties for value-added end-uses in transportation, consumables, building and construction, durable goods, and health and wellness markets. Key technology platforms for this segment include cellulose esters, copolyesters, and polyvinyl butyral ("PVB") and polyester films.
Eastman's technical, application development, and market development capabilities enable the AM segment to modify its polymers, films, and plastics to control and customize their final properties for development of new applications with enhanced functionality. For example, Tritan™ copolyesters are a leading solution for food contact applications due to their performance and processing attributes and Bisphenol A ("BPA") free properties. The Saflex™ Q Series product line is a leading acoustic solution for architectural and automotive applications. The Company also maintains a leading solar control technology position in the window film market through the use of high performance sputter coatings which enhance solar heat rejection while maintaining superior optical properties. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.
Principal Products
See Exhibit 99.01 for AM segment revenue by end-use market.
Strategy
Management applies Eastman's innovation-driven growth model in the AM segment by leveraging innovation and technology platforms into new and multi-generational products and applications to accelerate AM segment growth and leverage its manufacturing capacity. The segment continues to expand its portfolio of higher margin products in attractive end-markets. Through Eastman's advantaged asset position and expertise in applications development, management believes that the AM segment is well positioned for continued future growth. The advanced interlayers product lines, including acoustic and HUD sheet interlayer products, leverage Eastman's global presence to supply industry leading innovations to automotive and architectural end-markets by collaborating with global and large regional customers. In the automotive end-market, the performance films product line has industry leading technologies, recognized brands, and what management believes is one of the largest distribution and dealer networks which, when combined, position Eastman for further growth, particularly in leading automotive markets such as North America and Asia. The segment's product portfolio is aligned with underlying energy efficiency trends in both automotive and architectural markets. Additionally, the AM segment is positioned to benefit from recent Eastman polyesters stream sustainability innovations by leveraging advanced circular recycling technology to enable various waste plastics to be recycled into specialty copolyester products.
The AM segment expects to continue to improve its product mix from increased sales of premium products, including Tritan™ copolyester, Visualize™ material, Saflex™ Q acoustic series, Saflex™ HUD interlayer products, LLumar™, V-KOOL™, and SunTek™ window and protective films.
In 2019, the AM segment:
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continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
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strengthened growth in automotive paint protection films in North America and China through an improved sales channel, marketing, and commercial execution strategies and capabilities;
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finalized development and announced the launch of Eastman CORE (trademark and patent pending) next generation analytics-based software platform for automotive window and paint protection film products, enabling more efficient application and overall business management for dealers; and
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developed and enhanced Eastman's sustainability capabilities and commercial opportunities, including strategic collaborations with third parties to secure a consistent source of recyclable copolyester feedstock and to innovate new sustainable specialty plastic solutions.
The AM segment is pursuing specific opportunities to leverage Eastman's innovation-driven growth model to create greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. Product innovation continues to be a focus, including the recent introduction of Treva™, a cellulose-based engineering bioplastic.
CHEMICAL INTERMEDIATES SEGMENT
Overview
The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support the Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond the Company's internal specialty needs into markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Key technology platforms include acetyls, oxos, plasticizers, polyesters, and alkylamines.
The CI segment product lines benefit from competitive cost positions primarily resulting from the use of and access to lower cost raw materials, and the Company's scale, technology, and operational excellence. Examples include coal used in the production of cellulose and acetyl stream product lines, feedstocks used in the production of olefin derivative product lines such as oxo alcohols and plasticizers, and ammonia and methanol used to manufacture methylamines. The CI segment also provides superior reliability to customers through its backward integration into readily available raw materials, such as propane, ethane, coal, and propylene. In addition to a competitive cost position, the plasticizers business expects to continue to benefit from the growth in relative use of non-phthalate rather than phthalate plasticizers in the United States, Canada, and Europe.
Several CI segment product lines are affected by cyclicality, most notably olefin and acetyl-based products. See "Eastman Chemical Company General Information - Manufacturing Streams". This cyclicality is caused by periods of supply and demand imbalance, when either incremental capacity additions are not offset by corresponding increases in demand, or when demand exceeds existing supply. While management continues to take steps to reduce the impact of the trough of these cycles, future results are expected to occasionally fluctuate due to both general economic conditions and industry supply and demand.
Principal Products
See Exhibit 99.01 for CI segment revenue by end-use market.
Strategy
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. Through the CI segment, the Company has leveraged the advantage of its highly integrated manufacturing facilities. The Kingsport, Tennessee manufacturing facility allows for the production of acetic anhydride and other acetyl derivatives from coal rather than natural gas or other petroleum feedstocks. At the Longview, Texas manufacturing site, Eastman uses its proprietary oxo technology in one of the world's largest single-site oxo butyraldehyde manufacturing facilities to produce a wide range of alcohols and other derivative products utilizing local propane and ethane supplies and purchased propylene. The Pace, Florida manufacturing facility, which uses ammonia and methanol feedstocks, is the largest methylamine production site in the world. These integrated facilities, combined with large scale production processes and a continuous focus on additional process improvements, allow the CI segment product lines to remain cost competitive and, for some products, cost-advantaged as compared to competitors.
In 2018, the Company completed modifications to the olefin cracking units at the Longview, Texas manufacturing site. These modifications allowed for the introduction of refinery-grade propylene ("RGP") into the feedstock mix while also reducing the amount of other purchased feedstocks. This feedstock shift resulted in a significant decrease in ethylene production and excess ethylene sales in 2019, while maintaining historical levels of propylene production. The RGP project provided the flexibility to significantly reduce the Company's participation in the merchant ethylene market, while retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company.
FIBERS SEGMENT
Overview
In the Fibers segment, Eastman manufactures and sells Estron™ acetate tow and Estrobond™ triacetin plasticizers for use in filtration media, primarily cigarette filters; Estron™ natural (undyed), Chromspun™ solution-dyed acetate yarns, Naia™ cellulosic fibers and yarn for use in apparel, home furnishings, and industrial fabrics; nonwovens for use in filtration and friction media, used primarily in transportation, industrial, and agricultural markets; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman is one of the world's two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began production in the early 1950s. The Company is the world's largest producer of acetate yarn and has been in this business for over 85 years.
The largest 10 Fibers segment customers accounted for approximately 70 percent of the segment's 2019 sales revenue, and include multinational as well as regional cigarette producers, fabric manufacturers, and other acetate fiber producers.
The Company's long history and experience in fibers markets are reflected in the Fibers segment's operating expertise, both within the Company and in support of its customers' processes. The Fibers segment's knowledge of the industry and of customers' processes allows it to assist its customers in maximizing their processing efficiencies, promoting repeat sales, and developing mutually beneficial, long-term customer relationships.
The Company's fully integrated fibers manufacturing process employs unique technology that allows it to use a broad range of high-purity wood pulps for which the Company has dependable sources of supply.
Contributing to profitability in the Fibers segment is the limited number of competitors and significant barriers to entry. These barriers include, but are not limited to, high capital costs for integrated manufacturing facilities.
The Fibers segment's competitive strengths include a reputation for high-quality products, technical expertise, large scale vertically-integrated processes, reliability of supply, internally produced acetate flake supply for Fibers segment's products, a reputation for customer service excellence, and a customer base characterized by strategic long-term customer and end-user relationships. The Company continues to capitalize and build on these strengths to further improve the strategic position of its Fibers segment. In response to challenging acetate tow market conditions, including additional industry capacity and lower capacity utilization rates, the Company has taken actions in recent years expected to stabilize segment earnings including, establishing long-term acetate tow customer arrangements and agreements, development of innovative textile and nonwoven applications, and repurposing manufacturing capacity from acetate tow to new products.
Principal Products
Strategy
Management applies the innovation-driven growth model in the Fibers segment by leveraging its strong customer relationships and industry knowledge to maintain a leading industry position in the global market. The segment benefits from a state-of-the-art, world class, acetate flake production facility at the Kingsport, Tennessee site, which is supplied from Eastman's vertically integrated coal gasification facility and is the largest and most integrated acetate tow site in the world. Eastman's global acetate tow capacity is approximately 150,000 metric tons, not including the Company's participation in an acetate tow joint venture manufacturing facility in China. The Company supplies 100 percent of the acetate flake raw material to the China manufacturing joint venture from the Company's manufacturing facility in Kingsport, Tennessee, which the Company recognizes in sales revenue. The Company recognizes earnings in the joint venture through its equity investment, reported in "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in Part II, Item 8 of this Annual Report. The Company's focus on innovation has resulted in repurposing some of its acetate tow manufacturing capacity to fibers products for textiles and nonwovens markets, resulting in increased capacity utilization and lower acetate tow costs.
The Company makes use of its capabilities in fibers technology to maintain a strong focus on incremental product and process improvements, with the goals of meeting customers' evolving needs and further improving the segment's manufacturing process efficiencies.
The Fibers segment R&D efforts focus on serving existing customers, 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 segment's products and customers' product development efforts. Beyond acetate tow, management is applying the innovation-driven growth model to leverage its fibers technology and expertise to focus 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; Avra™ performance fibers for the apparel, home furnishings and industrial fabrics markets developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™ wood pulp-based alternative for the nonwoven industry used in personal hygiene applications.
In 2019 the Company acquired Industrias del Acetato de Celulosa. S.A. ("INACSA"), a cellulosic yarn business in LA Batllòria, Spain as a targeted addition to the Fibers segment's acetate yarn business.
EASTMAN CHEMICAL COMPANY GENERAL INFORMATION
Seasonality and Cyclicality
Eastman's earnings are typically higher in second and third quarters, and cash flows from operations are typically highest in the second half of the year due to seasonal demand based on general economic activity in the Company's key markets as described in "Business Segments". Results in all segments except Fibers are typically weaker in fourth quarter due to seasonal downturns in key markets.
The coatings and inks additives product line of the AFP segment and the intermediates product line of the CI segment are impacted by the cyclicality of key end products and markets, while other operating segments and product lines are more sensitive to global economic conditions. Eastman is exposed to consumer discretionary end-markets, particularly in the AM and AFP segments, and changes in global consumer spending impact the results in these segments. Supply and demand dynamics determine profitability at different stages of business cycles and global economic conditions affect the length of each cycle.
Sales, Marketing, and Distribution
Eastman markets and sells products primarily through a global marketing and sales organization which has a presence in the United States and approximately 30 other countries selling into more than 100 countries around the world. The Company focuses its market engagement on attractive niche markets, leveraging disruptive macro trends, and market activation throughout the value chain with both customers and downstream users. Eastman's strategy is to target industries and markets where the Company can leverage its application development expertise to develop product offerings to provide differentiated value that address current and future customer and market needs. The Company's strategic marketing approach and capabilities leverage the Company's insights about trends, markets, and customers to drive development of specialty products. Through a highly skilled and specialized sales force that is capable of providing differentiated product solutions, Eastman strives to be the preferred supplier in the Company's targeted markets.
The Company's products are also marketed through indirect channels, which include dealers and contract representatives. Sales outside the United States tend to be made more frequently through dealers and contract representatives than sales in the United States. The combination of direct and indirect sales channels, including sales online through its Customer Center website, allows Eastman to reliably serve customers throughout the world.
The Company's products are shipped to customers and to downstream users directly from Eastman manufacturing plants and distribution centers worldwide.
Sources and Availability of Raw Materials and Energy
Eastman purchases approximately 75 percent of its key raw materials and energy through different contract mechanisms, generally of one to three years in initial duration with renewal or cancellation options for each party. Most of these agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase; however, from time to time Eastman uses derivative financial instruments for certain key raw materials to mitigate the impact of market price fluctuations. Key raw materials include propane, propylene, paraxylene, methanol, cellulose, fatty alcohol, polyvinyl alcohol, and a wide variety of precursors for specialty organic chemicals. Key purchased energy sources include natural gas, coal, and electricity. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and ongoing performance assessments and benchmarking, as part of its supplier selection process. When appropriate, the Company purchases raw materials from a single source supplier to maximize quality and reduce cost, and has contingency plans to minimize the potential impact of any supply disruptions from single source suppliers.
While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and cost are subject to unscheduled plant interruptions occurring during periods of high demand, domestic and world market conditions, changes in government regulation, natural disasters, war or other outbreak of hostilities or terrorism or other political factors, or breakdown or degradation of transportation infrastructure. Eastman's operations or products have in the past, and may in the future, be adversely affected by these factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report. The Company's raw material and energy costs as a percent of total cost of operations were approximately 40 percent in 2019. For additional information about raw materials, see Exhibit 99.02 "Product and Raw Material Information" of this Annual Report.
Manufacturing Streams
Integral to Eastman's strategy for growth is leveraging its heritage expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries in key markets, including transportation, building and construction, consumables, filtration media, and agriculture. For each of these chemistries, Eastman has developed and acquired a combination of assets and technologies that are operated within four manufacturing "streams", combining scale and integration across multiple manufacturing units and sites as a competitive advantage.
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In the cellulose and acetyl stream, the Company begins with coal which is gasified with oxygen in its coal gasification facility. The resulting synthesis gas is converted into acetic acid and acetic anhydride. Cellulose derivative manufacturing at the Company begins with natural polymers, sourced from managed forests, which, when combined with acetyl and olefin chemicals, provide differentiated product lines. Through a new recycling innovation, carbon renewal technology is now enabling the recycling of complex plastics to the basic building blocks of Eastman's cellulosic product stream. The major end-markets for products from the cellulose and acetyl stream include coatings, displays, thermoplastics, and filtration media.
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In the olefins stream, the Company begins primarily with propane and ethane, which are "cracked" (the process whereby hydrocarbon molecules are broken down and rearranged) into ethylene and propylene in three cracking units at its site in Longview, Texas. As a result of modifications completed in 2018, these units also offer flexibility to use RGP as a diversified feedstock to minimize the impact of olefins spread volatility. The Company purchases some additional propylene to supplement cracking unit production. Propylene derivative products are used in a variety of items such as paints and coatings, automotive safety glass, and non-phthalate plasticizers. Ethylene derivative products are converted for end-uses in the food industry, health and beauty products, detergents, and automotive products.
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In the polyester stream, the Company begins with paraxylene and glycol feedstocks, converting them through a series of intermediate materials to ultimately produce copolyesters. Eastman can add specialty monomers to copolyesters to provide clear, tough, chemically resistant product characteristics. As a result, the Company's copolyesters effectively compete with materials such as polycarbonate and acrylic. The polyester stream is now leveraging advanced circular recycling technology to enable various waste plastics to be recycled into high quality, specialty copolyester products.
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In the alkylamines stream, the Company begins with ammonia and alcohol feedstocks to produce methylamines and higher alkylamines, which can then be further converted into alkylamine derivatives. The Company's alkylamines products are primarily used in agriculture, water treatment, consumables, animal nutrition, and oil and gas end-markets.
The Company leverages its expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries and technologies, to meet demand and create new uses and opportunities for the Company's products in key markets. Through integration and optimization across these streams, the Company is able to create unique and differentiated products that have a performance advantage over competitive materials.
Human Capital
Eastman employs approximately 14,500 people worldwide. Approximately 10 percent of the total worldwide labor force is represented by collective labor agreements, mostly outside the United States.
Effective attraction, development, and retention of, and compensation and benefits to, human resource talent (or "human capital"), including workforce and management development, diversity and inclusion initiatives, succession planning, and corporate culture and leadership quality, morale, and development are vital to the success of Eastman's innovation-driven growth strategy. The Compensation and Management Development Committee of the Board of Directors oversees workforce and senior management development and the Board of Directors monitors the culture of the Company and leadership quality, morale and development.
Customers
Eastman has an extensive customer base and, while it is not dependent on any one customer, loss of certain top customers could adversely affect the Company until such business is replaced. The top 100 customers accounted for approximately 55 percent of the Company's 2019 sales revenue. No single customer accounted for 10 percent or more of the Company's consolidated sales revenue during 2019.
Intellectual Property and Trademarks
While Eastman's intellectual property portfolio is an important Company asset which it expands and vigorously protects globally through a combination of patents, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular operating segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad range of advanced materials, specialty additives, chemicals, and fibers, Eastman owns over 700 active United States patents and more than 1,500 active foreign patents, expiring at various times over several years, and owns over 5,300 active worldwide trademark applications and registrations. Eastman continues to actively protect its intellectual property. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot ensure that it will be able to adequately protect its intellectual property assets outside the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.
The Company pursues opportunities to license proprietary technology to third parties where it has determined competitive impact to its businesses will be minimal. These arrangements typically are structured to require payments at significant project milestones such as signing, completion of design, and start-up.
Research and Development
Management applies its innovation-driven growth model to leverage the Company's world class scalable technology platforms that provide a competitive advantage and the foundation for sustainable earnings growth. The Company's R&D strategy for sustainable growth through innovation includes multi-generational product development for specialty products, faster and more differentiated product development by leveraging global application development capabilities, and the creation of value through integration of multiple technology platforms. The Company leverages core competencies in polyesters, cellulose esters, thermoplastic processing, textile capability, and in-house application expertise for use in a wide range of applications to provide solutions to markets which are in search of new and improved products. This strategy has been accelerated by enhancements of global differentiated application development capabilities that position Eastman as a strategic element of customers' success within attractive niche markets. See examples of recent product and technology innovations in "Corporate Overview - Business Strategy - Innovation".
Eastman manages certain growth initiatives and costs at the corporate level, including certain R&D costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision-making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional amounts are spent on those projects. The Company continues to explore and invest in R&D initiatives such as high-performance materials and opportunities created by disruptive macro trends including sustainability and development of a more "circular economy". See "Corporate Overview - Business Strategy - Sustainability".
Environmental
The Company is subject to significant and complex laws, regulations, and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal, remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Health, Safety, Environmental and Security Committee of Eastman's Board of Directors oversees the Company's policies and practices concerning health, safety, and the environment and its processes for complying with related laws and regulations and monitors related matters.
The Company's policy is to operate its plants and facilities in compliance with all applicable laws and regulations such that it protects the environment and the health and safety of its employees and the public. The Company intends to continue to make expenditures for environmental protection and improvements in a timely manner consistent with its policies and with available technology. In some cases, applicable environmental regulations such as those adopted under the Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, and related actions of regulatory agencies determine the timing and amount of environmental costs incurred by the Company. Likewise, any new legislation or regulations related to greenhouse gas emissions and energy, or the repeal of such legislation or regulations, could impact the timing and amount of environmental costs incurred by the Company.
The Company accrues environmental costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. In some instances, the amount cannot be reasonably estimated due to insufficient information, particularly as to the nature and timing of future expenditures. In these cases, the liability is monitored until such time that sufficient information exists. With respect to a contaminated site, the amount accrued reflects liabilities expected to be paid out within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations, and testing requirements could result in higher or lower costs.
Eastman's cash expenditures related to environmental protection and improvement were $244 million, $274 million, and $257 million in 2019, 2018, and 2017, 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 $27 million, $44 million, and $38 million in 2019, 2018, and 2017, 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. Other matters concerning health, safety, and the environment are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and in Note 1, "Significant Accounting Policies"; Note 12, "Environmental Matters and Asset Retirement Obligations"; and Note 21, "Reserve Rollforwards" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Backlog
As of December 31, 2019, Eastman's backlog of firm sales orders represented less than 10 percent of the Company's total consolidated revenue for the year. These orders are primarily short-term, and all orders are expected to be filled in the following year. The Company manages its inventory levels to control the backlog of products depending on customers' needs. In areas where the Company is the single source of supply, or competitive forces or customers' needs dictate, the Company may carry additional inventory to meet customer requirements.
Available Information - Securities and Exchange Commission ("SEC") Filings
Eastman makes available free of charge, in the "Investors - SEC Information" section of its Internet website (www.eastman.com), its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. The 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.

ITEM 1A - RISK FACTORS
ITEM 1A. RISK FACTORS
For identification and discussion of the most significant risks applicable to the Company and its business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.

ITEM 1B - UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Certain information about Eastman's executive officers is provided below:
Mark J. Costa, age 53, is Chief Executive Officer and Chair of the Eastman Chemical Company Board of Directors. Mr. Costa joined the Company in June 2006 as Senior Vice President, Corporate Strategy and Marketing; was appointed Executive Vice President, Polymers Business Group Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer in May 2009; and became President and a member of the Board of Directors 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.
Curtis E. Espeland, age 55, is Executive Vice President and Chief Financial Officer. Mr. Espeland joined Eastman in 1996, and has served in various financial management positions of increasing responsibility, including Director of Internal Audit; Director of Finance, Asia Pacific; Director of Corporate Planning and Forecasting; Vice President and Controller; Vice President, Finance, Eastman Division; Vice President, Finance, Polymers; and Senior Vice President and Chief Financial Officer from 2008 until December 2013. He served as the Company's Chief Accounting Officer from December 2002 to 2008 and was appointed to his current position effective January 2014. Prior to joining Eastman, Mr. Espeland was an audit and business advisory manager with Arthur Andersen LLP in the United States, Eastern Europe, and Australia. (As previously reported, on February 28, 2020 Mr. Espeland will be succeeded as Chief Financial Officer by current Vice President, Finance, William T. McLain, Jr., and will continue to serve as an executive officer until his retirement in mid-2020. Mr. McLain, age 47, joined Eastman in 2000 and has served in high-level finance and accounting roles throughout the organization in the United States, Asia, and Europe. Most recently Mr. McLain served as Vice President, Finance. He has previously served as Corporate Controller; Treasurer; and Director, Finance for Asia Pacific. Prior to Eastman, Mr. McLain worked for the public accounting firm PricewaterhouseCoopers LLP.)
Brad A. Lich, age 52, is Executive Vice President and Chief Commercial Officer, with responsibility for the AM and Fibers segments, outside-U.S. regional business leadership, and the marketing, sales, pricing, and procurement organizations. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for the Coatings business. Other positions of increasing responsibility followed, including General Manager of Emerging Markets of the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the CASPI segment, and in 2012 was appointed Vice President and General Manager of the 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 48, 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 54, 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 business management, 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 55, is Senior Vice President and Chief Technology and Sustainability Officer, with executive responsibility for corporate 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.
Clark L. Jordan, age 55, is Vice President, Interim Chief Legal Officer and Corporate Secretary. Mr. Jordan has overall responsibility for Eastman's Legal, Corporate Health, Safety, Environmental, Security, Product Safety, Regulatory Affairs, and Global Trade Compliance organizations. Mr. Jordan joined Eastman in 1995 and was an in-house attorney until 1997. In 2011, after holding various positions in private legal practice, Mr. Jordan returned to Eastman as Director Global Business Conduct and Senior Business Counsel. Mr. Jordan was appointed Vice President, Global Trade Compliance and Assistant General Counsel effective February 2015, and to his current position in August 2019.
Perry Stuckey III, age 60, is Senior Vice President, Chief Human Resources Officer. Mr. Stuckey joined Eastman in 2011 as Vice President, Global Human Resources, and was responsible for Eastman's human resources strategy and services worldwide. Mr. Stuckey's work experience includes a variety of global human resource management positions in manufacturing, industrial automation, and bio-technology companies, including Hill-Rom Company, Rockwell Automation, and Monsanto Company. Mr. Stuckey was appointed to his current position in January 2013.
Scott V. King, age 51, is Vice President, Corporate Controller and Chief Accounting Officer. Since joining Eastman in 1999 as Manager, Corporate Consolidations and External Reporting, Mr. King has held various positions of increasing responsibility in the financial organization. He was first appointed Corporate Controller in August 2007 and has served as Chief Accounting Officer since September 2008. Prior to joining Eastman, Mr. King was an audit and business advisory manager with PricewaterhouseCoopers LLP.

ITEM 2 - PROPERTIES
ITEM 2.
PROPERTIES
At December 31, 2019, Eastman owned or operated 50 manufacturing facilities and had equity interests in three manufacturing joint ventures in a total of 15 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:
(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)
Eastman has more than one manufacturing facility at this location.
(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)
In fourth quarter 2019, management approved a plan to discontinue production of certain products at this location by the end of 2020.
(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:
Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases approximately 240 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, "Properties and Accumulated Depreciation", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.

ITEM 3 - LEGAL PROCEEDINGS
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.
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 - RESERVED
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
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, 2019, there were 135,993,046 shares of Eastman's common stock issued and outstanding, which shares were held by 13,222 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation.
See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance Under Equity Compensation Plans" for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
(c) Not applicable.

ITEM 6 - SELECTED FINANCIAL DATA
ITEM 6.
SELECTED FINANCIAL DATA

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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, and related disclosure of contingencies. On an ongoing basis, Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting estimates described below are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of properties and equipment and definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. The Company's assumptions related to long-lived assets are subject to change and impairments may be required in the future. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset is adjusted, resulting in a charge to earnings.
Goodwill
Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach and applies a discounted cash flow model in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC"), and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value. For additional information, see Note 1, "Significant Accounting Policies", 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
As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report). The Company reduced the carrying value of the crop protection reporting unit to its estimated fair value through recognition of a $45 million goodwill impairment. The impairment was primarily due to the impact of recent regulatory changes in the European Union on the current period and forecasted revenue and EBIT and a decrease in the long-term growth rate assumed in the goodwill impairment model. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the WACC. The Company performed a sensitivity analysis of both of those assumptions, assuming a one percent decrease in the expected long-term growth rate or a one percent increase in the WACC, and both scenarios independently yielded an estimated fair value for the crop protection reporting unit below carrying value. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
Indefinite-lived Intangible Assets
Eastman conducts testing of indefinite-lived intangible assets annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The carrying value of an indefinite-lived intangible asset is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying value.
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium.
The Company had $537 million in indefinite-lived intangible assets at the time of impairment testing. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2019.
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.
For additional information, see 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.
Environmental Costs
Eastman recognizes environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum undiscounted amount. This undiscounted amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $260 million to the maximum of $487 million and from the best estimate or minimum of $271 million to the maximum of $508 million at December 31, 2019 and December 31, 2018, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at both December 31, 2019 and December 31, 2018.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company also establishes reserves for closure and post-closure costs associated with the environmental and other assets it maintains. Environmental assets include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the anticipated future costs associated with the retirement or closure of the asset based on its expected life and the applicable regulatory closure requirements. The Company recognizes the asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. These future estimated costs are charged to earnings over the estimated useful life of the assets. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted. For sites that have environmental asset retirement obligations, the best estimate for these asset retirement obligation costs recognized to date was $27 million and $25 million at December 31, 2019 and December 31, 2018, respectively.
The Company's total amount reserved for environmental loss contingencies, including the remediation and closure and post-closure costs described above, was $287 million and $296 million at December 31, 2019 and December 31, 2018, respectively. This loss contingency reserve represents the best estimate or minimum for undiscounted remediation costs and the best estimate of the amount accrued to date for discounted asset retirement obligation costs. For additional information, see Note 12, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits primarily reflect the Company's assumptions related to discount rates and expected return on plan assets. For valuing the obligations and assets of the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 3.25 percent and 1.56 percent, respectively, and weighted average expected returns on plan assets of 7.37 percent and 4.26 percent, respectively, at December 31, 2019. The Company assumed a weighted average discount rate of 3.21 percent for its other postretirement benefit plans. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
The Company performed a five-year experience study of the assumptions for the U.S. plans in 2017 which included a review of the mortality tables. As a result of the experience study, the Company has updated the mortality assumptions used to a modified RP-2017 table with modified MP-2017 improvement scale and no collar adjustment.
The projected benefit obligation as of December 31, 2019 and 2020 expense are affected by year-end 2019 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the assumed discount rate and expected return on plan assets for all pension and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The assumed discount rate and expected return on plan assets used to calculate the Company's pension and other postretirement benefit obligations are established each December 31. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected cash flows of the pension and other postretirement benefit obligations. Because future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the plans invest their funds, primarily in U.S. and non-U.S. fixed income securities, U.S. and non-U.S. public equity securities, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions.
The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows. This cost approach does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, as described in the next paragraph, is typically recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered. For additional information, see Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company uses fair value accounting for plan assets. If actual experience differs from actuarial assumptions, primarily discount rates and long-term assumptions for asset returns which were used in determining the current year expense, the difference is recognized as part of the MTM net gain or loss in fourth quarter each year, and any other quarter in which an interim remeasurement is triggered. The MTM net gain or loss applied to net earnings in 2019, 2018, and 2017 due to the actual experience versus actuarial assumptions for the defined benefit pension and other postretirement benefit plans were a net loss of $143 million, a net loss of $99 million, and a net gain of $21 million, respectively. The 2019 MTM net loss includes an actuarial loss of approximately $385 million, resulting primarily from the Company's December 31, 2019 weighted-average assumed discount rate of 2.80 percent, which is lower than for the prior year, and changes in other actuarial assumptions. Overall asset values increased approximately $240 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual gain was approximately $405 million, or approximately 15 percent, which was above the expected return of approximately $165 million, or approximately 6 percent.
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, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Litigation and Contingent Liabilities
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon currently available facts, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against its overall financial condition, results of operations, or cash flows in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities on Eastman's Consolidated Statements of Financial Position are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the provision for (benefit from) income taxes could have a material impact on the consolidated results of operations and statements of financial position. As of December 31, 2019 and 2018, valuation allowances of $453 million and $487 million, respectively, have been provided against the deferred tax assets.
The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and management judgment. Eastman's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments. The Company has evaluated these potential issues under the more-likely-than-not standard of the accounting literature. 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. Income tax expense could be materially impacted to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent payments are required in excess of the established liability for unrecognized tax benefits.
The Company accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet. For further information, see Note 7, "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", "Liquidity and Other Financial Information", and "Outlook" in this MD&A.
Management discloses non-GAAP financial measures because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's and its operating segments' performances, make resource allocation decisions, and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP financial measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP financial measure, but to consider such measures alongside the most directly comparable GAAP financial measure.
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items Excluded from Non-GAAP Earnings
In addition to 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, and other events outside of core business operations, and have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions, closure, or shutdowns of businesses or assets, financing transaction costs, and MTM losses or gains for pension and other postretirement benefit plans.
•
In 2018 the Company recognized unusual income from 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 resulting from the previously reported October 4, 2017 explosion (the "coal gasification incident"). Management considers the coal gasification incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption.
•
In 2018 the Company recognized unusual costs and in both 2019 and 2018 unusual net decreases to earnings from adjustments of 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"), and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Management considers these actions and associated costs and income unusual because of the infrequent nature of such changes in tax law and resulting actions and the significant 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 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 in order to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization. Management believes this metric is useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain earnings results in this Annual Report:
•
MTM pension and other postretirement benefit plans gains and losses resulting from the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period;
•
Asset impairments and restructuring charges, including severance costs and site closure or shutdown charges, net, of which asset impairments are non-cash transactions impacting profitability;
•
Early debt extinguishment and other related costs resulting from repayment of borrowings;
•
Cost of disposition of claims against operations that were discontinued by Solutia, Inc. ("Solutia") prior to the Company's acquisition of Solutia in 2012;
•
Gain from sale of the formulated electronics cleaning solutions business, which was part of the Additives & Functional Products segment; and
•
Tax benefit associated with a previously impaired site.
The following unusual items are excluded by management in its evaluation of certain earnings results in this Annual Report:
•
Costs 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; and
•
Estimated net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act, and tax impact of related outside-U.S. entity reorganizations and related subsequent adjustments recognized in 2018 and 2019.
As described above, the alternative non-GAAP measure "free cash flow" is presented in this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings
Below is the calculation of the "Other components of post-employment (benefit) cost, net" that are not included in the above non-core item "mark-to-market pension and other postretirement benefits gain (loss), net" and that are included in the non-GAAP results.
Below is the calculation of the MTM pension and other post-retirement benefits (gain) loss disclosed above.
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, "Retirement Plans", "Summary of Changes - Actuarial (gain) loss, Actual return on plan assets, and Reserve for third party contributions", and "Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income - Mark-to-market pension and other postretirement benefits (gain) loss, net" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following GAAP financial measures:
•
Gross profit,
•
Selling, general and administrative ("SG&A") expenses,
•
Other components of post-employment (benefit) cost, net,
•
Other (income) charges, net,
•
EBIT,
•
Provision for (benefit from) income taxes,
•
Net earnings attributable to Eastman,
•
Diluted EPS, and
•
Net cash provided by operating activities.
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measure
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, management occasionally has evaluated and disclosed to investors and securities analysts the non-GAAP measure cash provided by or used in operating activities excluding certain non-core, unusual, or non-recurring sources or uses of cash or including cash from or used by activities that are managed as part of core business operations ("adjusted cash provided by or used in operating activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management has used this non-GAAP measure in conjunction with the GAAP measure cash provided by or used in operating activities because it believes it is an appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, management generally excludes the impact of certain non-core activities and decisions of management that it considers not core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. Management has disclosed this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "EBIT Margin", "Adjusted EBITDA", "EBITDA Margin", and "Return on Invested Capital" (or "ROIC"). Management defines EBIT Margin as the GAAP measure EBIT adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods divided by the GAAP measure sales revenue in the Company's income statement for the same period. Adjusted EBITDA is EBITDA (net earnings before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. EBITDA Margin is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statement for the same periods. Management defines ROIC as net earnings plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Management believes that EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC are useful as supplemental measures in evaluating the performance of and returns 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 EBIT Margin, Adjusted EBITDA, EBITDA Margin, and ROIC to compare the results, returns, and value of the Company with those of peer and other companies.
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: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value 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, nonwovens and textiles, animal nutrition, and chemical and plastics recycling technologies. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends. Management believes that these elements of the Company's innovation-driven growth model, combined with disciplined portfolio management and balanced capital deployment, will result in consistent, sustainable earnings growth and strong cash flow.
The Company generated sales revenue of $9.3 billion and $10.2 billion for 2019 and 2018, respectively. EBIT was $1.1 billion and $1.6 billion in 2019 and 2018, respectively. Excluding the non-core and unusual items referenced in "Non-GAAP Financial Measures", adjusted EBIT was $1.4 billion and $1.6 billion in 2019 and 2018, respectively. Discussion of sales revenue and EBIT changes is presented in "Results of Operations" and "Summary by Operating Segment" in this MD&A.
Net earnings and EPS and adjusted net earnings and EPS were as follows:
The Company generated $1.5 billion of cash from operating activities in both 2019 and 2018. Free cash flow was $1.1 billion in both 2019 and 2018.
As previously reported, in fourth quarter 2017 an explosion in the Kingsport site's coal gasification area disrupted manufacturing operations, primarily for the Fibers and CI segments which are significant internal users of cellulose and acetyl stream intermediates. The incident, net of insurance, reduced 2017 earnings by $112 million and increased 2018 earnings by $83 million. The cumulative net costs of the incident were $29 million. Costs net of insurance of the disruption, repairs, and reconstruction of coal gasification operations in 2017 were recognized in "Cost of sales" and insurance net of costs in 2018 was recognized in "Cost of sales" and "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
2019 Compared to 2018
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.
2018 Compared to 2017
Sales revenue increased as a result of increases in all operating segments.
Gross Profit
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.
2018 Compared to 2017
Gross profit included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, gross profit decreased primarily due to raw material, energy, and distribution costs exceeding selling prices across most segments and higher growth initiative costs being partially offset by higher sales volume in the AM and AFP segments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
2019 Compared to 2018
SG&A expenses in 2018 included $7 million of costs of professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Excluding this item, SG&A expenses decreased primarily due to lower variable compensation costs resulting from Company performance and cost management actions.
2018 Compared to 2017
SG&A expenses in 2018 included $7 million of costs of professional fees resulting from fourth quarter 2017 tax law changes and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Excluding this item, SG&A expenses decreased primarily due to lower variable compensation costs mostly offset by higher costs of growth initiatives.
Research and Development Expenses
2019 Compared to 2018
R&D expenses were relatively unchanged.
2018 Compared to 2017
R&D expenses increased primarily due to higher costs of growth initiatives.
Asset Impairments and Restructuring Charges, Net
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2019, management approved a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020 resulting in an asset impairment charge of $27 million. Eastman is evaluating alternative uses for the site after the end of 2020. Additional restructuring charges of up to $50 million are expected in 2020. This action is projected to result in an estimated annual earnings benefit of approximately $25 million within the AFP and CI segments beginning mostly in 2021.
As a result of the annual impairment test of goodwill the Company reduced the carrying value of the crop protection reporting unit (part of the AFP segment) to its estimated fair value through recognition of a $45 million goodwill impairment. The impairment was primarily due to the recent and expected continuing impact of recent regulatory changes in the European Union and a decrease in the long-term growth rate assumed for the reporting unit in the goodwill impairment model.
In 2019, as part of business improvement and cost reduction initiatives, the Company recognized restructuring charges of $45 million for severance and $5 million for related costs. Management anticipated total cost savings from these actions of approximately $50 million, most of which was recognized in 2019 primarily in cost of sales and SG&A expenses. Additionally, in 2019 the Company recognized a $4 million restructuring charge related to a capital project in the AFP segment that was discontinued in 2016.
In 2018, asset impairments and restructuring charges, net consisted of restructuring charges of approximately $6 million for severance. As a result of the annual impairment test of goodwill the Company reduced the carrying value of the crop protection reporting unit (part of the AFP segment) to its estimated fair value through recognition of a $38 million goodwill impairment. The impairment was primarily due to an increase in the WACC applied to the impairment analysis and the estimated impact of future regulatory changes. Additionally, the Company recognized an intangible asset impairment of $1 million in the AM segment.
In 2017, asset impairments and restructuring charges, net were $3 million of asset impairments and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China and restructuring charges of approximately $5 million for severance.
Other Components of Post-employment (Benefit) Cost, Net
For more information regarding "Other components of post-employment (benefit) cost, net" see Note 1, "Significant Accounting Policies", and Note 10, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other (Income) Charges, Net
(1)
Net impact of revaluation of foreign entity assets and liabilities and effect of foreign exchange non-qualifying derivatives.
(2)
Gain from sale of the AFP segment formulated electronic cleaning solution business.
Earnings Before Interest and Taxes
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense
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.
2018 Compared to 2017
Net interest expense decreased $6 million primarily as a result of U.S. dollar to euro cross-currency swaps and reduced debt partly offset by increased interest rates.
Early Debt Extinguishment and Other Related Costs
In fourth quarter 2018, 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.
For additional information regarding the early debt extinguishment costs, see Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Provision for (Benefit from) Income Taxes
(1)
Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The 2019 effective tax rate includes a $7 million increase to 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. 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 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, and from outside-U.S. entity reorganizations. 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.
The 2017 effective tax rate included a $339 million net benefit resulting from tax law changes, primarily the Tax Reform Act, and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center, a $20 million benefit due to amendments to prior years' domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years' foreign income tax returns. The 2017 effective tax rate also includes an $8 million tax benefit due to a tax ruling permitting deductibility of a liquidation loss on a previously impaired site.
For more information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Net Earnings Attributable to Eastman and Diluted Earnings per Share
(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: 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, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
2019 Compared to 2018
Sales revenue decreased primarily due to lower sales volume, lower selling prices, and an unfavorable shift in foreign currency exchange rates. The lower sales volume was primarily attributed to weaker end-market demand resulting from global trade-related pressures, particularly in transportation markets and other consumer discretionary end markets. Lower selling prices were primarily due to lower raw material prices, including for care chemicals, and increased competitive pressure in markets for tire additives, animal nutrition, and adhesives resins.
EBIT in 2019 included a $45 million goodwill 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. EBIT in 2018 included a goodwill impairment charge related to the crop protection business and coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices of $133 million, lower sales volume of $101 million, and an unfavorable shift in foreign currency exchange rates of $22 million, partially offset by lower raw material costs of $136 million.
2018 Compared to 2017
Sales revenue increased due to higher sales volume, higher selling prices across most product lines, and a favorable shift in foreign currency exchange rates. The higher sales volume was primarily attributed to volume growth in care chemicals, coatings and inks additives, tire additives, and animal nutrition, and products previously reported in the CI segment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBIT in 2018 included a goodwill impairment charge related to the crop protection business and coal gasification incident insurance in excess of costs. EBIT in 2017 included net costs resulting from the coal gasification incident, asset impairment and restructuring charges, including severance, related to the closure of a facility in China, and a gain from sale of the formulated electronics cleaning solutions business. Excluding these non-core and unusual items, EBIT increased primarily due to higher sales volume of $54 million largely offset by higher raw material, energy, and distribution costs more than exceeding higher selling prices by $20 million, primarily due to fourth quarter competitive pressure in adhesives resins, and higher growth initiative costs of approximately $20 million.
Growth Initiatives
In 2019, the AFP segment:
•
advanced growth and innovation of Regalite™ UltraPure hydrocarbon resin, a new class of clean tackifying hydrocarbon resins, through a capacity expansion at the Middelburg, Netherlands manufacturing site;
•
acquired the Marlotherm™ heat transfer assets in Marl, Germany and the related formulations, intellectual property, and customer contracts, as a targeted addition to the specialty fluids business;
•
advanced growth of Impera™ resins through capacity expansions for the production of performance resins for tires at both the Middelburg, Netherlands, and Jefferson, Pennsylvania, manufacturing sites to serve demand from tire manufacturers around the world for product solutions that enable improved safety, efficiency, and performance;
•
continued to enhance our ability to serve the global customer base in low volatile organic compound ("VOC") coatings and other markets by completing the final phase of a ketones capacity expansion at the Kingsport, Tennessee manufacturing site in fourth quarter 2019; and
•
responded to growing demand for purified water and sustainable waste water treatment across the globe with world scale production units for Dimethylaminoethanol ("DMAE"/"DMEA") in Europe (Belgium) and North America (Louisiana) and decided to expand capacity in China to respond to stricter regulation and rapidly growing demand in Asia (DMAE is used as a key component into flocculants that are critical for municipal and industrial water treatments).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 Compared to 2018
Sales revenue decreased due to lower sales volume and an unfavorable shift in foreign currency exchange rates. Increased sales volume of premium products, including paint protection film, Tritan™ copolyester, and Saflex™ acoustic and architectural interlayers, was more than offset by decreased sales volume of standard copolyester and interlayers products related to underlying market declines in transportation and consumer durable end markets.
EBIT in 2019 included a restructuring charge for severance costs. EBIT in 2018 included coal gasification incident insurance in excess of costs and a charge for an impairment of an indefinite-lived intangible asset. Excluding these non-core and unusual items, EBIT increased primarily due to lower raw material costs of $49 million, mostly offset by an 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.
2018 Compared to 2017
Sales revenue increased primarily due to higher sales volume and improved product mix across the segment, including for premium products such as performance films, Saflex™ head-up displays, and Tritan™ copolyester. While 2018 had higher sales volume compared with 2017, fourth quarter 2018 had lower specialty plastics sales volume compared to fourth quarter 2017 attributed to customer inventory destocking related to uncertainty caused by the U.S. - China trade dispute.
EBIT in 2018 included coal gasification incident insurance in excess of costs and a charge for an impairment of an indefinite-lived intangible asset. EBIT in 2017 included net costs resulting from the coal gasification incident. Excluding these non-core and unusual items, EBIT increased primarily due to higher sales volume and improved product mix of premium products of $94 million, partially offset by higher raw material (particularly for paraxylene in the second half of the year), energy, and distribution costs of $67 million and higher growth initiative costs of approximately $25 million.
Growth Initiatives
In 2019, the AM segment:
•
continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
•
strengthened growth in automotive paint protection films in North America and China through an improved sales channel, marketing, and commercial execution strategies and capabilities;
•
finalized development and announced the launch of Eastman CORE (trademark and patent pending) next generation analytics-based software platform for automotive window and paint protection film products, enabling more efficient application and overall business management for dealers; and
•
developed and enhanced Eastman's sustainability capabilities and commercial opportunities, including strategic collaborations with third parties to secure a consistent source of recyclable copolyester feedstock and to innovate new sustainable specialty plastic solutions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2019 Compared to 2018
Sales revenue decreased primarily due to lower selling prices across the segment attributed to lower raw material prices and increased competitive activity. Sales revenue was also negatively impacted by lower functional amines products sales volume attributed to weaker demand in agricultural end-markets resulting from wet weather in North America and lower intermediates products sales volume attributed to increased competitive activity.
EBIT in 2019 included an asset impairment charge resulting from management's approval of a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020. EBIT in 2018 included coal gasification incident insurance in excess of costs. Excluding these non-core and unusual items, EBIT decreased primarily due to lower selling prices more than offsetting lower raw material costs of $63 million and lower sales volumes of $9 million.
2018 Compared to 2017
Sales revenue increased due to higher selling prices across most product lines, particularly for acetyl derivatives attributed to favorable market conditions and for olefin derivatives due to higher raw material and energy costs. Higher selling prices were partially offset by lower sales volume primarily attributable to lower merchant ethylene sales, products previously reported in the CI segment being reported in the AFP segment in 2018, and supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities. Lower merchant ethylene sales are primarily due to the decision to reduce operating rates of the olefins cracking units at the Longview, Texas manufacturing facility due to spot ethylene prices. Lower sales volume was partially offset by higher functional amines products sales attributed to strengthened agriculture and energy markets.
EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased due to lower sales volume of $62 million, and higher planned manufacturing shutdown costs of $21 million. The decrease was partially offset by higher selling prices exceeding higher raw material, energy, and distribution costs of $61 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost and Growth Initiatives
To maintain and enhance its status as a low-cost producer and optimize earnings, the CI segment continuously focuses on cost control, operational efficiency, and capacity utilization. This includes focusing on products used internally by other operating segments, thereby supporting growth in specialty product lines throughout the Company, and also external licensing opportunities.
In 2018, the Company completed modifications to the olefin cracking units at the Longview, Texas manufacturing site. These modifications allowed for the introduction of refinery-grade propylene ("RGP") into the feedstock mix while also reducing the amount of other purchased feedstocks. This feedstock shift resulted in a significant decrease in ethylene production and excess ethylene sales in 2019, while maintaining historical levels of propylene production. The RGP project provided the flexibility to significantly reduce the Company's participation in the merchant ethylene market, while retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company.
2019 Compared to 2018
Sales revenue decreased primarily due to lower acetate tow sales volume attributed to weakened market demand resulting from general market decline and customer buying patterns.
EBIT included coal gasification incident insurance in excess of costs in 2018. Excluding this unusual item, EBIT decreased primarily due to lower acetate tow sales volume of $24 million.
2018 Compared to 2017
Sales revenue increased primarily due to sales of nonwovens products previously reported in "Other" of $57 million and higher sales volume, particularly for textiles products. The higher sales revenue was partially offset by lower selling prices, particularly for acetate tow. Lower acetate tow selling prices were primarily attributed to lower industry capacity utilization.
EBIT included coal gasification incident insurance in excess of costs in 2018 and coal gasification incident net costs in 2017. Excluding these unusual items, EBIT decreased primarily due to the net impact of $7 million of lower selling prices, particularly for acetate tow attributed to lower capacity utilization, and higher raw material and energy costs, partially offset by volume growth of textiles products.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost and Growth Initiatives
In 2019 the Company acquired Industrias del Acetato de Celulosa. S.A. ("INACSA"), a cellulosic yarn business in LA Batllòria, Spain as a targeted addition to the Fibers segment's acetate yarn business.
The Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in new markets, optimizing asset productivity, and working with suppliers to reduce costs. For acetate tow, these efforts are assisting customers in the effective use of the segment's products and customers' product development efforts. Beyond acetate tow, management is applying the innovation-driven growth model to leverage its fibers technology and expertise to focus 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; Avra™ performance fibers for the apparel, home furnishings and industrial fabrics markets developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™ wood pulp-based alternative for the nonwoven industry used in personal hygiene applications.
Other
Sales revenue and costs related to growth initiatives, R&D costs, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any periods presented and are included in "Other". See "Eastman Chemical Company General Information - Research and Development", in Part I, Item 1 of this Annual Report.
Sales revenue in 2017 was primarily sales from the nonwovens products. Beginning first quarter 2018, sales revenue and innovation costs from the nonwovens and textiles innovation products previously reported in "Other" are reported in the Fibers segment due to accelerating commercial progress of growth initiatives. See Note 19, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES BY CUSTOMER LOCATION
2019 Compared to 2018
Sales revenue in United States and Canada decreased primarily due to lower selling prices and lower sales volume in all operating segments, particularly in the CI and AFP segments.
Sales revenue in Europe, Middle East, and Africa decreased primarily due to unfavorable foreign currency exchange rates in all operating segments, lower AFP segment selling prices, and lower AFP and CI segments sales volume. These items were partially offset by higher sales volume in the AM segment.
Sales revenue in Asia Pacific decreased primarily due to lower sales volume in all operating segments, particularly in the AFP and AM segments, and lower CI and AFP segments selling prices.
Sales revenue in Latin America decreased primarily due to lower selling prices, particularly in the CI segment.
2018 Compared to 2017
Sales revenue in United States and Canada increased primarily due to higher CI, AFP, and AM segments selling prices and higher AFP and AM segments sales volume. The increase was partially offset by lower CI segment sales volume, primarily resulting from lower merchant ethylene sales.
Sales revenue in Europe, Middle East, and Africa increased primarily due to a favorable shift in foreign currency exchange rates across the segments, higher CI, AM, and Fibers segments sales volume, and higher AFP and CI segments selling prices. These items were partially offset by lower AFP segment sales volume.
Sales revenue in Asia Pacific increased primarily due to higher AFP and AM segments sales volume and higher CI and AFP segments selling prices partially offset by lower Fibers segment selling prices.
Sales revenue in Latin America increased primarily due to higher AM, AFP, and CI segments sales volume and higher CI segment selling prices.
See Note 19, "Segment and Regional Sales Information", in Part II, Item 8 of this Annual Report for segment sales revenues by customer location.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND OTHER FINANCIAL INFORMATION
Cash Flows
The Company had cash and cash equivalents as follows:
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.
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).
Cash used in investing activities increased $17 million. Twelve months 2018 included $65 million proceeds from coal gasification incident insurance for property damage. Excluding this item, cash used in investing activities decreased $48 million due to lower capital expenditures partially offset by acquisitions of businesses in the AFP and Fibers segments. Lower capital expenditures were due to significant capital projects related to key growth initiatives being completed and put into service during 2018.
Cash used in financing activities was relatively unchanged with increased net debt repayments and dividend payments offset by lower share repurchases.
2018 Compared to 2017
Cash provided by operating activities decreased primarily due to increased inventory resulting from reduced demand and higher cost raw materials inventory in fourth quarter 2018.
Cash used in investing activities decreased primarily due to decreased capital expenditures as significant capital projects related to key growth initiatives were completed and put into service during 2018. See "Capital Expenditures" below.
Cash used in financing activities increased primarily due to increased share repurchases and dividend payments partially offset by reduced net debt repayments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(1)
Cash proceeds from insurance for coal gasification incident property damage.
Working Capital Management and Off Balance Sheet Arrangements
Eastman applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable a full range of capital allocation options in support of the Company's strategy. Eastman expects to continue utilizing the programs described below to support free cash flow consistent with our past practices.
Eastman works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, in 2019, the Company introduced a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a participating financial institution. A downgrade in Eastman's credit rating or changes in the financial markets could limit the financial institution's willingness to commit funds to, and participate in, the program. Management does not believe such risk would have a material impact on the Company's working capital or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for additional information regarding the program.
In 2019, the Company expanded off balance sheet, uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. The total amount of receivables sold in 2019 and 2018 were $857 million and $219 million, respectively. Based on the original terms of receivables sold for certain agreements and actual outstanding balance of receivables under service agreements, the Company estimates that $169 million and $76 million of these receivables would have been outstanding as of December 31, 2019 and December 31, 2018, respectively, had they not been sold under these factoring agreements.
Revolving Credit Facilities and Commercial Paper Borrowings
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At December 31, 2019, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2019, commercial paper borrowings were $170 million with a weighted average interest rate of 2.03 percent. 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 up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2019, the Company had no borrowings under the A/R Facility. See Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Credit Facility and A/R Facility contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all covenants at both December 31, 2019 and December 31, 2018. The amount of available borrowings under the A/R and Credit Facilities was approximately $1.75 billion as of December 31, 2019. For additional information, see Section 5.03 of the Credit Facility at Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
Debt and Other Commitments
At December 31, 2019, Eastman's borrowings totaled approximately $5.8 billion with various maturities. In fourth quarter 2019, the Company repaid the 2.7% notes due January 2020 ($250 million principal) using available cash. In fourth quarter 2018 the Company refinanced certain outstanding public debt with proceeds of the sale of new debt securities, which extended the weighted average maturity of outstanding debt while retaining adequate levels of pre-payable debt and near-term maturities.
Estimated future payments of debt securities assumes the repayment of principal upon stated maturity, and actual amounts and the timing of such payments may differ materially due to repayment or other changes in the terms of such debt prior to maturity. For information on debt securities, credit facilities and other, and interest payable, see Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
For information about purchase obligations and operating leases, see Note 11, "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, environmental loss contingency reserves, accrued compensation benefits, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2025 and beyond" line item.
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, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for more information regarding pension and other postretirement benefit obligations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The resolution of uncertainties related to environmental matters included in other liabilities may have a material adverse effect on the Company's consolidated results of operations in the period recognized, however, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See 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, "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.
Capital Expenditures
Capital expenditures were $425 million, $528 million ($463 million net of proceeds from property damage insurance for 2017 coal gasification incident), and $649 million in 2019, 2018, and 2017, respectively. Capital expenditures in 2019 were primarily for targeted growth initiatives and site modernization projects at the Longview, Texas; Kingsport, Tennessee; and Jefferson, Pennsylvania manufacturing sites.
The Company expects that 2020 capital spending will be between $450 million and $475 million, primarily for targeted growth initiatives and site modernization projects.
The Company had capital expenditures related to environmental protection and improvement of approximately $27 million, $44 million, and $38 million in 2019, 2018, and 2017, respectively. The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities.
Stock Repurchases and Dividends
In February 2014, the Company'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. As of December 31, 2019, a total of 6,753,164 shares have been repurchased under the February 2018 authorization for a total amount of $573 million. During 2019, the Company repurchased a total of 4,282,409 shares for a total cost of approximately $325 million.
The Board of Directors has declared a cash dividend of $0.66 per share during the first quarter of 2020, payable on April 3, 2020 to stockholders of record on March 16, 2020.
INFLATION
In recent years, general economic inflation has not had a material adverse impact on Eastman's costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy 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 Note 9, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards, see Note 1, "Significant Accounting Policies", to Eastman's consolidated financial statements in Part II, Item 8 of this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
In 2020, management expects adjusted EPS to be between $7.20 to $7.60 and free cash flow to be between $1.0 billion to $1.1 billion. These expectations assume:
•
earnings to benefit from higher sales volume due to increased new business revenue, less market and customer inventory destocking, and stable growth in some end-markets, actions to reduce operating costs by $20 million to $40 million, and lower pension and depreciation costs;
•
earnings to be negatively impacted by lower product margins in the CI segment and adhesive resins, tire additives, and animal nutrition products in the AFP segment, higher variable compensation costs, and a stronger U.S. dollar;
•
interest expense of approximately $215 million;
•
the full-year effective tax rate on reported earnings before income tax to be similar to 2019;
•
depreciation and amortization of approximately $560 million;
•
capital expenditures between $450 million and $475 million;
•
debt reduction greater than $400 million; and
•
continued share repurchases.
The Company's 2020 financial results forecasts do not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected full-year 2020 earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts. These forecasts also do not include the possible impact on business and financial results of the recent coronavirus outbreak, including negative impact on overall business and market conditions; Eastman manufacturing sites and distribution, sales, and service facilities closure or reduced availability, including for employee health and safety; and Eastman products market demand weakness and supply chain disruption.
See "Risk Factors" below.
RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward-Looking Statements".
Continued uncertain conditions in the global economy and the financial markets could negatively impact the Company.
The Company's business and operating results were affected by the impact of the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that affected the global economy. Continued uncertainty in the global economy and global capital markets may adversely affect Eastman's results of operations, financial condition, and cash flows. In addition, the Company's ability to access the credit and capital markets under attractive rates and terms could be constrained, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
Volatility in costs for strategic raw material and energy commodities or disruption in the supply of these commodities could adversely affect the Company's financial results.
Eastman is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in raw material and energy costs. These risk mitigation measures do not eliminate all exposure to market fluctuations and may limit the Company from fully benefiting from lower raw material costs and, conversely, offset the impact of higher raw material costs. In addition, natural disasters, pandemic illness (including the recent coronavirus outbreak), plant interruptions, changes in laws or regulations, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation infrastructure used for delivery of strategic raw material and energy commodities, could adversely impact both the cost and availability of these commodities.
Loss or financial weakness of any of the Company's largest customers could adversely affect the Company's financial results.
Although Eastman has an extensive customer base, loss of, or material financial weakness of, certain of the Company's largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced. No assurances can be made that the Company would be able to regain or replace any lost customers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's business is subject to operating risks common to chemical manufacturing businesses, including cyber security risks, any of which could disrupt manufacturing operations or related infrastructure and adversely affect results of operations.
As a global specialty chemicals manufacturing company, Eastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse effect on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness (including the recent coronavirus outbreak), changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber attacks and breaches of its computer information systems, although none of these have had a material adverse effect on the Company's operations. While the Company remains committed to managing cyber related risk, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. Unplanned disruptions of manufacturing operations or related infrastructure could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's results of operations. As previously reported, manufacturing operations and earnings have been negatively impacted by the fourth quarter 2017 operational incident in the Kingsport manufacturing facility coal gasification operations area and the second quarter 2018 third-party supplier operational disruptions at the Texas City and Longview, Texas manufacturing facilities.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives. These growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by available and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively affect the returns from any proposed or current investments and projects.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's substantial global operations subject it to risks of doing business in other countries, including U.S. and non-U.S. trade relations, which could adversely affect its business, financial condition, and results of operations.
More than half of Eastman's sales for 2019 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. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. or foreign countries have imposed and may impose additional taxes or otherwise tax Eastman's foreign income, or adopt or increase restrictions on foreign trade or investment, including currency exchange controls, tariffs or other taxes, or limitations on imports or exports (including recent and proposed changes 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 these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect on Eastman's business, financial condition, or results of operations.
Legislative, regulatory, or voluntary actions could increase the Company's future health, safety, and environmental compliance costs.
Eastman and its facilities and businesses are subject to complex health, safety, and environmental laws, regulations and related voluntary actions, both in 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, future changes in legislation and regulation and related voluntary actions associated with physical impacts of climate change may increase the likelihood that the Company's manufacturing facilities will in the future be impacted by carbon requirements, regulation of greenhouse gas emissions, and energy policy, and may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct compliance costs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.
While acquisitions have been and continue to be a part of Eastman's growth strategy, acquisitions of large companies and businesses (such as the previous acquisitions of Taminco Corporation and Solutia, Inc.) subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to, the possibilities that the actual and projected future financial performance of the acquired business may be significantly worse than expected and that, as reported in "Critical Accounting Estimates - Impairment of Long-Lived Assets - Goodwill" in Part II, Item 7 of this Annual Report, the carrying values of certain assets from acquisitions may be impaired resulting in charges to future earnings; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the new business resulting in a loss of focus on the successful operation of the Company's existing businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business into Eastman or that the integration efforts will not achieve the expected benefits.
In addition to the foregoing most significant known risk factors to the Company, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. The foregoing discussion of the most significant risk factors to the Company does not necessarily present them in order of importance. This disclosure, including that under "Outlook" and other forward-looking statements and related disclosures made by the Company in this Annual Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Eastman has exposure to various market risks principally due to changes in foreign currency exchange rates, the pricing of various commodities, and interest rates. In an effort to manage these risks, the Company employs various strategies, including pricing, inventory management, and hedging. The Company enters into derivative contracts which are governed by policies, procedures, and internal processes set forth by its Board of Directors.
The Company determines its exposures to market risk by utilizing sensitivity analyses, which measure the potential losses in fair value resulting from one or more selected hypothetical changes in foreign currency exchange rates, commodity prices, or interest rates.
Foreign Currency Risk
Due to a portion of the Company's operating cash flows and borrowings being denominated in foreign currencies, the Company is exposed to market risk from changes in foreign currency exchange rates. The Company continually evaluates its foreign currency exposure based on current market conditions and the locations in which the Company conducts business. The Company manages most foreign currency exposures on a consolidated basis, which allows the Company to net certain exposures and take advantage of natural offsets. To mitigate foreign currency risk, from time to time, the Company enters into derivative instruments to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies, and enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. The gains and losses on these contracts offset changes in the value of related exposures. Additionally, the Company, from time to time, enters into non-derivative and derivative instruments to hedge the foreign currency exposure of the net investment in certain foreign operations. The foreign currency change in the designated investment values of the foreign subsidiaries will generally be offset by a foreign currency change in the carrying value of the euro-denominated borrowings. It is the Company's policy to enter into foreign currency derivative and non-derivative instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency derivative financial instruments for speculative purposes.
At December 31, 2019, the market risk associated with certain cash flows under these derivative transactions assuming a 10 percent adverse move in the U.S. dollar relative to these foreign currencies was $74 million, with an additional $7 million exposure for each additional one percentage point adverse change in those foreign currency rates. At December 31, 2018, the market risk associated with cash flows under these derivative transactions assuming a 10 percent adverse move in the U.S. dollar relative to those currencies was $28 million, with an additional $3 million exposure for each additional one percentage point adverse change in those exchange rates. Since the Company utilizes currency-sensitive derivative instruments for hedging anticipated foreign currency transactions, a loss in fair value from those instruments is generally offset by an increase in the value of the underlying anticipated transactions.
In January 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €150 million ($180 million) maturing January 2021 and €266 million ($320 million) maturing August 2022.
In October 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €165 million ($190 million) maturing January 2024, €104 million ($120 million) maturing March 2025, and €165 million ($190 million) maturing February 2027.
At December 31, 2019, a 10 percent fluctuation in the euro currency rate would have had a $235 million impact on the designated net investment values in the foreign subsidiaries. At December 31, 2018, a 10 percent fluctuation in the euro currency rate would have had a $240 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 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"). Eastman has prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States, and the statements of necessity include some amounts that are based on management's best estimates and judgments.
Eastman's accounting systems include extensive internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. The Company's policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner that is above reproach.
The accompanying consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who were responsible for conducting their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report is included herein.
The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of non-management Board members. PricewaterhouseCoopers LLP, and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with PricewaterhouseCoopers LLP and Eastman's Director of Corporate Audit Services, both privately and with management present, to discuss accounting, auditing, policies and procedures, internal controls, and financial reporting matters.
/s/ Mark J. Costa
/s/ Curtis E. Espeland
Mark J. Costa
Curtis E. Espeland
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
February 26, 2020
February 26, 2020
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, 2019 and 2018, and the related consolidated statements of earnings, comprehensive income and retained earnings and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment - Crop Protection Reporting Unit
As described in Note 4 to the consolidated financial statements, the Company's consolidated goodwill balance was $4.4 billion as of December 31, 2019. The Company conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company 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 goodwill impairment testing included projections of revenues and earnings before interest and income taxes ("EBIT") determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC"), and a projected long-term growth rate. As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products ("AFP") operating segment). The Company recognized a goodwill impairment of $45 million in the crop protection reporting unit. The impairment was primarily due to the impact of recent regulatory changes in the European Union on current period and forecasted revenue and EBIT and a decrease in the long-term growth rate. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the crop protection reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and in evaluating the audit evidence supporting management's significant assumptions, including projections of revenue and EBIT determined using the Company's annual multi-year strategic plan, the estimated WACC, and the projected long-term growth rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
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 the Company's reporting units. These procedures also included, among others (i) testing management's process for developing the fair value estimate of the crop protection reporting unit, (ii) evaluating the appropriateness of the discounted cash flow model, (iii) testing the completeness, accuracy and relevance of underlying data used in the model, and (iv) evaluating the significant assumptions used by management, including projections of revenue and EBIT determined using the Company's annual multi-year strategic plan, the estimated WACC, and the projected long-term growth rate. Evaluating management's assumptions related the impact of recent regulatory changes in the European Union on current period and forecasted revenue and EBIT and the long-term growth rate involved evaluating (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 the evaluation of the Company's discounted cash flow model, including the evaluation of the WACC.
/s/ PricewaterhouseCoopers LLP
Cincinnati, OH
February 26, 2020
We have served as the Company's auditor since 1993.
CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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.
Recently Adopted Accounting Standards
Accounting Standards Update ("ASU") 2016-02 Leases: On January 1, 2019, Eastman adopted this standard, and related releases, under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard and adoption did not result in an impact to retained earnings. Upon adoption, operating right-to-use assets and lease liabilities were $219 million. The new standard establishes two types of leases: finance and operating. Both finance and operating leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Consolidated Statement of Financial Position. For further information, see Note 11, "Leases and Other Commitments".
ASU 2018-02 Income Statement - Reporting Comprehensive Income: On January 1, 2019, Eastman adopted this standard in the current period resulting in the reclassification of $20 million of stranded tax expense from accumulated other comprehensive income (loss) ("AOCI") to retained earnings as a result of the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). The amount of the reclassification is the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances related to items remaining in AOCI.
ASU 2018-15 Internal-Use Software - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract: On January 1, 2019, Eastman adopted this standard prospectively which did not result in a material impact on the Company's financial statements and related disclosures.
ASU 2018-16 Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes: On January 1, 2019, Eastman adopted this standard prospectively for qualifying new or redesignated hedging relationships. Management does not expect the adoption of this standard will materially impact the Company's financial statements and related disclosures.
Accounting Standards Issued But Not Adopted as of December 31, 2019
ASU 2016-13 Financial Instruments - Credit Losses: In June 2016, the Financial Accounting Standards Board ("FASB") issued this standard relating to credit losses and subsequent related releases. The amendments require a financial asset (including trade receivables) to be presented at the net amount expected to be collected through the use of allowances for credit losses valuation account. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This standard is effective for annual reporting periods beginning after December 15, 2019. The new standard application is mixed among the various elements that include modified retrospective and prospective transition methods. Management does not expect that changes in its accounting required by the new standard will materially impact the Company's financial statements and related disclosures.
ASU 2018-13 Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued this update as a part of its 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. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented. Management does not expect that changes required by the new standard will materially impact the Company's related disclosures.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU 2018-14 Retirement Benefits - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans: In August 2018, the FASB issued this update as a part of its disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The primary change impacting Eastman is the addition of disclosures related to significant gains and losses related to changes in the benefit obligation for the period and weighted-average interest crediting rates for cash balance plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all periods presented. Management does not expect that changes required by the new standard will materially impact the Company's related disclosures.
ASU 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers): In November 2018, the FASB issued clarification in regards to which contracts are accounted for under Topic 808 and Topic 606 as well as alignment of guidance between the two pronouncements. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Upon adoption, this update is to be applied retrospectively to the date of initial application of Topic 606. Management is currently evaluating the impact on the Company's financial statements and related disclosures.
ASU 2019-01 Leases - Codification Improvements: In March 2019, the FASB issued this update in response to stakeholder inquiries regarding the new leasing standard. This standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Upon adoption, this update is to be applied as of the adoption date and under the same transition methodology of ASU 2016-02 Leases. Management is currently evaluating the impact on the Company's financial statements and related disclosures.
ASU 2019-12 Income Taxes - Simplifying 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. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Adoption methods vary based on the specific items impacted. Management is currently evaluating the 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.
The timing of Eastman's customer billings does not always match the timing of revenue recognition. When the Company is entitled to bill a customer in advance of the recognition of revenue, a contract liability is recognized. When the Company is not entitled to bill a customer until a period after the related recognition of revenue, a contract asset is recognized. Contract assets represent the Company's right to consideration for the exchange of goods under a contract, but which are not yet billable to a customer for consignment inventory or pursuant to certain shipping terms. Contract liabilities were not material as of December 31, 2019 or December 31, 2018. Contract assets were $65 million and $62 million as of December 31, 2019 and December 31, 2018, respectively, and are included as a component of "Miscellaneous receivables" in the Consolidated Statements of Financial Position.
For additional information, see Note 19, "Segment and Regional Sales Information".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. The estimated amounts of the costs and obligations related to these benefits reflect the Company's assumptions related to discount rates, expected return on plan assets, rate of compensation increase or decrease for employees, and health care cost trends. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
Eastman's pension and other postretirement benefit plans costs consist of two elements: 1) ongoing costs recognized quarterly, which are comprised of service and interest costs, expected returns on plan assets, and amortization of prior service credits; and 2) mark-to-market ("MTM") gains and losses recognized annually, in the fourth quarter of each year, primarily resulting from changes in actuarial assumptions for discount rates and the differences between actual and expected returns on plan assets. Any interim remeasurements triggered by a curtailment, settlement, or significant plan changes are recognized in the quarter in which such remeasurement event occurs.
For additional information, see Note 10, "Retirement Plans".
Environmental Costs
Eastman 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.
The current portion of accruals for environmental liabilities is included in payables and other current liabilities and the long-term portion is included in other long-term liabilities. These accruals exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred.
For additional information see Note 12, "Environmental Matters and Asset Retirement Obligations".
Share-based Compensation
Eastman recognizes compensation expense in the financial statements for stock options and other share-based compensation awards based upon the grant-date fair value over the substantive vesting period. For additional information, see Note 17, "Share-Based Compensation Plans and Awards".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Restructuring of Operations
Eastman records restructuring charges for costs incurred in connection with consolidation of operations, exited business or product lines, or shutdowns of specific sites that are expected to be substantially completed within twelve months. These restructuring charges are recorded as incurred, and are associated with site closures, legal and environmental matters, demolition, contract terminations, obsolete inventory, or other costs and charges directly related to the restructuring. The Company records severance charges for employee separations when the separation is probable and reasonably estimable. In the event employees are required to perform future service, the Company records severance charges ratably over the remaining service period of those employees. For additional information, see Note 15, "Asset Impairments and Restructuring Charges, Net".
Income Taxes
The provision for (benefit from) income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for (benefit from) income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of Eastman's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely reinvested.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.
In conjunction with its evaluation of the provisions of the Tax Reform Act, in 2018, the Company made an accounting policy election to account for taxes resulting from the global intangible low-tax income ("GILTI") as a component of the provision for income taxes.
Cash and Cash Equivalents
Cash and cash equivalents include cash, time deposits, and readily marketable securities with original maturities of three months or less.
Fair Value Measurements
Eastman records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Eastman maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company calculates the allowance based on an assessment of the risk in the accounts receivable portfolio. Write-offs are recorded at the time a customer receivable is deemed uncollectible. Allowance for doubtful accounts was $11 million at both December 31, 2019 and 2018. 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 lower 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.
Properties
Eastman records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition into earnings. Asset impairments are reflected as increases in accumulated depreciation for properties that have been placed in service. In instances when an asset has not been placed in service and is impaired, the associated costs are removed from the appropriate property accounts.
Depreciation and Amortization
Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method. Estimated useful lives for buildings and building equipment generally range from 20 to 50 years. Estimated useful lives generally ranging from 3 to 33 years are applied to machinery and equipment in the following categories: computer software (3 to 5 years); office furniture and fixtures and computer equipment (5 to 10 years); vehicles, railcars, and general machinery and equipment (5 to 20 years); and manufacturing-related improvements (20 to 33 years). Accelerated depreciation is reported when the estimated useful life is shortened and continues to be reported in cost of sales.
Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset. Amortization expense is reported in cost of sales.
For additional information, see Note 4, "Goodwill and Other Intangible Assets".
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of properties and equipment and the review of definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants.
Goodwill
Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach and applies a discounted cash flow model in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and earnings before interest and taxes ("EBIT") determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC") and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.
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 WACC plus a risk premium.
For additional information, see Note 4, "Goodwill and Other Intangible Assets".
Leases
As noted above, On January 1, 2019, Eastman adopted ASU 2016-02 Leases. For accounting policy and elections, see Note 11, "Leases and Other Commitments".
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. Under the equity method of accounting, 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.
Derivative and Non-Derivative Financial Instruments
Eastman uses derivative and non-derivative instruments to manage its exposure to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. The Company does not enter into derivative transactions for speculative purposes.
Counterparties to the derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company's derivative instruments are recognized as either assets or liabilities on the Consolidated Statements of Financial Position and measured at fair value. For qualifying derivatives designated as cash flow hedges, the effective portion of the changes in the fair value are reported as a component of AOCI in the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying derivatives designated as fair value hedges, the effective portion of the changes in the fair value are reported as "Long-term borrowings" on the Consolidated Statements of Financial Position and recognized in earnings when the hedged items affect earnings. For qualifying derivative or non-derivative instruments designated as net investment hedges, the net change in the hedge instrument and item being hedged is reported as a component of "Cumulative translation adjustment" ("CTA") within AOCI located in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Any hedge components excluded from the assessment of effectiveness are recognized in earnings, the initial value of the excluded component, using a systematic and rational method over the life of the hedging instrument. Changes in the fair value of nonqualifying derivatives or derivatives that are not designated as hedges, are recognized in current earnings. Hedge accounting will be discontinued prospectively for all hedges that no longer qualify for hedge accounting treatment. Cash flows from derivative instruments designated as hedges are reported in the same category as the cash flows from the items being hedged.
For additional information, see Note 9, "Derivative and Non-Derivative Financial Instruments".
Litigation and Contingent Liabilities
Eastman and its operations from time to time are, and in the future may be, parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a contingent loss liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.
Working Capital Management and Off Balance Sheet Arrangements
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, the Company introduced a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a participating financial institution. Eastman's responsibility is limited to making payments on the terms originally negotiated with suppliers, regardless of whether the suppliers sells their receivables to the financial institution. The range of payment terms Eastman negotiates with suppliers are consistent, regardless of whether a supplier participates in the program. All of Eastman's accounts payable and associated payments are reported consistently in the Company's Consolidated Statements of Financial Position and Consolidated Statements of Cash Flows regardless of whether they are associated with a vendor who participates in the program.
In 2019, the Company expanded off balance sheet, uncommitted accounts receivable factoring agreements under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amount of receivables sold in 2019 and 2018 were $857 million and $219 million, respectively, representing less than full capacity due to implementation of new agreements across periods.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
2.
INVENTORIES
Inventories valued on the LIFO method were approximately 50 percent and 55 percent of total inventories at December 31, 2019 and December 31, 2018, respectively.
3.
PROPERTIES AND ACCUMULATED DEPRECIATION
Depreciation expense was $450 million, $437 million, and $420 million for 2019, 2018, and 2017, respectively.
Cumulative construction-period interest of $98 million and $115 million, reduced by accumulated depreciation of $38 million and $54 million, is included in net properties at December 31, 2019 and 2018, respectively.
Eastman capitalized $4 million of interest in 2019, $4 million of interest in 2018, and $8 million of interest in 2017.
4.
GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill follow:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Eastman conducts testing of goodwill annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. A reporting unit's goodwill is considered to be impaired when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach and applies a discounted cash flow model in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2019 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated WACC, and a projected long-term growth rate. As a result of the goodwill impairment testing performed during fourth quarter 2019, fair values were determined to exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products ("AFP") segment).
In fourth quarter 2019 and 2018, as a result of the annual impairment test of goodwill, the Company recognized goodwill impairments of $45 million and $38 million, respectively, in the crop protection reporting unit. The impairment in 2019 was primarily due to the impact of recent regulatory changes in the European Union on current period and forecasted revenue and EBIT and a decrease in the long-term growth rate for the reporting unit assumed in the goodwill impairment model. The impairment in 2018 was primarily due to the WACC applied to the impairment analysis and the estimated impact of future regulatory changes. The crop protection reporting unit's goodwill after the reduction for impairment was $190 million as of December 31, 2019.
As of December 31, 2019, the reported balance of goodwill included accumulated impairment losses of $106 million, $12 million, and $14 million in the AFP segment, Chemical Intermediates ("CI") segment, and other segments, respectively.
As of December 31, 2018, the reported balance of goodwill included accumulated impairment losses of $61 million, $12 million, and $14 million in the AFP segment, CI segment, and other segments, respectively.
The carrying amounts of intangible assets follow:
Amortization expense of definite-lived intangible assets was $160 million, $164 million, and $164 million for 2019, 2018, and 2017, respectively. Estimated amortization expense for future periods is $130 million in 2020, $125 million in 2021, and $115 million each year for 2022 through 2024.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
5.
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, and sealants. These also include a joint venture with a 50 percent interest for the manufacture of compounded cellulose diacetate ("CDA") in Shenzhen, China. CDA is a bio-derived material, which is used in various injection molded applications, including but not limited to ophthalmic frames, tool handles, and other end-use products. At December 31, 2019 and 2018, the Company's total investment in these joint ventures was $106 million and $100 million, respectively, included in "Other noncurrent assets" in the Consolidated Statements of Financial Position.
6.
PAYABLES AND OTHER CURRENT LIABILITIES
The "Other" above consists primarily of accruals for the current portion of operating lease liabilities, interest payable, the current portion of derivative hedging liabilities, the current portion of environmental liabilities, and miscellaneous accruals.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
7.
INCOME TAXES
Components of earnings before income taxes and the provision for (benefit from) U.S. and other income taxes from operations follow:
(1)
A one-time transition tax of $71 million on deferred foreign income tax is included for 2017.
(2)
Includes a one-time benefit of $517 million primarily due to the remeasurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate and a one-time $72 million valuation allowance on deferred tax assets for foreign tax credit carryforwards for 2017.
The following represents the deferred tax (benefit) charge recorded as a component of AOCI in the Consolidated Statements of Financial Position:
Total income tax expense (benefit) included in the consolidated financial statements was composed of the following:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Differences between the provision for (benefit from) income taxes and income taxes computed using the U.S. Federal statutory income tax rate follow:
(1)
Includes a one-time net benefit primarily due to the remeasurement of certain net deferred tax liabilities using the lower U.S. corporate income tax rate partially offset by the transition tax on deferred foreign income and changes in the valuation of deferred tax assets associated with tax law changes and the tax impact from intercompany reorganization activities in 2017 and a net incremental adjustment to those amounts under the Tax Reform Act in 2018 and 2019.
The 2019 effective tax rate includes a $7 million increase to 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. 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.
The 2017 effective tax rate included a $339 million net tax benefit, primarily resulting from the Tax Reform Act, and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The net tax benefit included a benefit from the one-time revaluation of deferred tax liabilities, partially offset by a one-time transition tax on deferred foreign income and changes in valuation of deferred tax assets associated with tax law changes and outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The 2017 effective tax rate also included a $20 million benefit due to amendments to prior years' domestic income tax returns, and a $30 million benefit reflecting the finalization of prior years' foreign income tax returns. The 2017 effective tax rate also included an $8 million tax benefit due to a tax ruling permitting deductibility of a liquidation loss on a previously impaired site.
The U.S. Department of Treasury has issued a number of proposed regulations related to implementation of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformity to the current federal tax code. Finalization of these regulations in future periods may result in changes in the period of enactment to the amounts currently reported in the Consolidated Statements of Financial Position.
As of December 31, 2019 and 2018, a non-current income tax payable of approximately $6 million and $56 million, respectively, attributable to the transition tax is reflected in "Other long-term liabilities" of the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with its evaluation of the provisions of the Tax Reform Act, in 2018, the Company made an accounting policy election to account for taxes resulting from GILTI as a component of the provision for income taxes.
The significant components of deferred tax assets and liabilities follow:
(1)
Revised from Note 7, "Income Taxes", to the Company's 2018 Annual Report on Form 10-K, which reported net operating loss carryforwards as $708 million, valuation allowance as $466 million, and investments as $(274) million.
Beginning January 1, 2019, the Company did not assert indefinite reinvestment on short-term liquid assets of certain foreign subsidiaries. All other foreign earnings, including basis differences, continue to be considered indefinitely reinvested. As of December 31, 2019 unremitted earnings of subsidiaries outside the U.S. totaled approximately $2.5 billion of which a substantial portion has already been subject to U.S. tax. The Company has not determined the deferred tax liability associated with these unremitted earnings and basis differences, as such determination is not practicable.
For certain consolidated foreign subsidiaries, income and losses directly flow through to taxable income in the U.S. These entities are also subject to taxation in the foreign tax jurisdictions. Net operating loss carryforwards exist to offset future taxable income in foreign tax jurisdictions and valuation allowances are provided to reduce deferred related tax assets if it is more likely than not that this benefit will not be realized. Changes in the estimated realizable amount of deferred tax assets associated with net operating losses for these entities could result in changes in the deferred tax asset valuation allowance in the foreign tax jurisdiction. At the same time, because these entities are also subject to tax in the U.S., a deferred tax liability for the expected future taxable income will be established concurrently. Therefore, the impact of any reversal of valuation allowances on consolidated income tax expense will be only to the extent that there are differences between the U.S. statutory tax rate and the tax rate in the foreign jurisdiction. A valuation allowance of $24 million at December 31, 2019 has been provided against the deferred tax asset resulting from these operating loss carryforwards.
At December 31, 2019, foreign net operating loss carryforwards totaled $2.1 billion. Of this total, $23 million will expire in 1 to 20 years and $2.1 billion have no expiration date. A valuation allowance of approximately $262 million has been provided against such net operating loss carryforwards.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019, federal net operating loss carryforwards of $8 million were available to offset future taxable income, which expire from 2028 to 2030. At December 31, 2019, foreign tax credit carryforwards of approximately $75 million were available to reduce possible future U.S. income taxes and which expire from 2020 to 2028. As a result of the Tax Reform Act, the Company may no longer be able to utilize certain U.S. foreign tax credit carryforwards. A valuation allowance of $45 million has been established on a portion of deferred tax assets as of December 31, 2019.
At December 31, 2019, a partial valuation allowance of $72 million has been provided against state tax credits that the Company may not be able to utilize.
A partial valuation allowance of $47 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.
Amounts due to and from tax authorities as recorded in the Consolidated Statements of Financial Position:
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(1)
All of the unrecognized tax benefits would, if recognized, impact the Company's effective tax rate.
A reconciliation of the beginning and ending amounts of accrued interest related to unrecognized tax positions is as follows:
Accrued penalties related to unrecognized tax positions were immaterial as of December 31, 2019, 2018, and 2017.
Eastman files income tax returns in the U.S. and various state and foreign jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations by tax authorities for years before 2011 for Eastman legal entities and years before 2002 for Solutia legal entities. With few exceptions, Eastman is no longer subject to state and local income tax examinations by tax authorities for years before 2011. Solutia and related subsidiaries are no longer subject to state and local income tax examinations for years before 2000. With few exceptions, the Company is no longer subject to foreign income tax examinations by tax authorities for tax years before 2011.
It is reasonably possible that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, unrecognized tax benefits could decrease within the next twelve months by up to $28 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
8.
BORROWINGS
(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 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.
In fourth quarter 2018, the Company sold 3.5% notes due December 2021 in the principal amount of $300 million and 4.5% notes due December 2028 in the principal amount of $500 million. Net proceeds from the notes were $789 million and were used, together with available cash, for the early and full repayment of the 5.5% notes due November 2019 ($250 million principal) and the partial redemption of the 2.7% notes due January 2020 ($550 million principal). Total consideration for these redemptions was $806 million ($800 million total principal and $6 million for the early redemption premiums) and is reported as financing activities on the Consolidated Statements of Cash Flows. The early repayment resulted in a charge of $7 million for early debt extinguishment costs which were primarily attributable to the early redemption premiums and related unamortized costs. The book value of the redeemed debt was $799 million.
Revolving Credit Facilities and Commercial Paper Borrowings
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring October 2023. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At December 31, 2019 and 2018, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2019, commercial paper borrowings were $170 million with a weighted average interest rate of 2.03 percent. At December 31, 2018, the Company's commercial paper borrowings were $130 million with a weighted average interest rate of 2.91 percent.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has access to up to $250 million under an accounts receivable securitization agreement (the "A/R Facility") that expires April 2020. Eastman Chemical Financial Corporation ("ECFC"), a subsidiary of the Company, has an agreement to sell interests in trade receivables under the A/R Facility to a third party purchaser. Third party creditors of ECFC have first priority claims on the assets of ECFC before those assets would be available to satisfy the Company's general obligations. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and ECFC pays a fee to maintain availability of the A/R Facility. At December 31, 2019, the Company had no borrowings under the A/R Facility. At December 31, 2018, the Company's borrowings under the A/R Facility were $50 million with an interest rate of 3.39 percent.
Through September 2019, the Company had access to borrowings of up to €150 million ($163 million) under a receivables facility based on the discounted value of selected customer accounts receivable. These arrangements included receivables in the United States, Belgium, and Finland, and were subject to various eligibility requirements. Borrowings under this facility were subject to interest at an agreed spread above LIBOR and EURIBOR plus administration and insurance fees and were classified as short-term. In October 2019, this receivables facility was terminated and the balance was repaid using available A/R Facility borrowings. At December 31, 2018, the Company's amount of outstanding borrowings under this facility were $112 million with a weighted average interest rate of 1.70 percent.
The Credit Facility and A/R Facility contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all covenants at both December 31, 2019 and December 31, 2018.
Fair Value of Borrowings
Eastman has classified its total borrowings at December 31, 2019 and 2018 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies". The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other borrowings primarily under the commercial paper and receivables facility equals the carrying value and is classified as Level 2. At December 31, 2019 and 2018, the fair value of total borrowings was $6.275 billion and $6.216 billion, respectively. The Company had no borrowings classified as Level 1 or Level 3 as of December 31, 2019 and 2018.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
9.
DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS
Overview of Hedging Programs
Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The change in the hedge instrument is reported as a component of AOCI located in the Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from
cash flow hedges are classified as operating activities in the Consolidated Statements of Cash Flows.
Foreign Currency Exchange Rate Hedging
Eastman manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to changes in foreign currency exchange rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. To manage the remaining exposure, the Company enters into currency option and forward cash flow hedges to hedge probable anticipated, but not yet committed, export sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies (principally the euro). Additionally, the Company, from time to time, enters into forward exchange contract cash flow hedges to hedge certain firm commitments denominated in foreign currencies.
Commodity Hedging
Certain raw material and energy sources used by Eastman, as well as sales of certain commodity products by the Company, are subject to price volatility caused by weather, supply and demand conditions, economic variables and other unpredictable factors. This volatility is primarily related to the market pricing of propane, ethane, natural gas, paraxylene, ethylene, and benzene. In order to mitigate expected fluctuations in market prices, from time to time, the Company enters into option and forward contracts and designates these contracts as cash flow hedges. The Company currently hedges commodity price risks using derivative financial instrument transactions within a rolling three year period. The Company weights its hedge portfolio more heavily in the first year with declining coverage over the remaining periods.
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage interest rate risk effectively, the Company, from time to time, enters into cash flow interest rate derivative instruments, primarily forward starting swaps and treasury locks, to hedge the Company's exposure to movements in interest rates prior to anticipated debt offerings. These instruments are designated as cash flow hedges.
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges are recognized on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated fair value of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is recognized in earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from fair value hedges are classified as operating activities in the Consolidated Statements of
Cash Flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Hedging
Eastman's policy is to manage interest expense using a mix of fixed and variable rate debt. To manage the Company's mix of fixed and variable rate debt effectively, from time to time, the Company enters into interest rate swaps in which the Company agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. These swaps are designated as hedges of the fair value of the underlying debt obligations and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps.
Net Investment Hedges
Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investment in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the CTA within AOCI located in the Consolidated Statements of Financial Position. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. In the event of a complete or substantially complete liquidation of the net investment, cash flows from net investment hedges are classified as investing activities in the Consolidated Statements of Cash Flows.
For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities" or "Other noncurrent assets" within the Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Consolidated Statements of Cash Flows.
In January 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €150 million ($180 million) maturing January 2021 and €266 million ($320 million) maturing August 2022.
In October 2018, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €165 million ($190 million) maturing January 2024, €104 million ($120 million) maturing March 2025, and €165 million ($190 million) maturing February 2027.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Financial Position and Financial Performance of Hedging Instruments
The following table presents the notional amounts outstanding at December 31, 2019 and 2018 associated with Eastman's hedging programs.
Fair Value Measurements
For additional information on fair value measurement, see Note 1, "Significant Accounting Policies".
All the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs that are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not realize a credit loss during the years ended December 31, 2019 or 2018.
All the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company does not have any cash collateral due under such agreements.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has elected to present derivative contracts on a gross basis within the Consolidated Statements of Financial Position. The following table presents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are located within the Consolidated Statements of Financial Position as of December 31, 2019 and 2018.
In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges noted in the table above, the Company had a carrying value of $1.4 billion associated with non-derivative instruments designated as foreign currency net investment hedges as of both December 31, 2019 and 2018. The designated foreign currency-denominated borrowings are included as part of "Long-term borrowings" within the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019 and 2018, the following amounts were included within the Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
(1)
At both December 31, 2019 and 2018, the cumulative amount of fair value hedging loss adjustment remaining for hedged liabilities for which hedge accounting has been discontinued was $7 million.
The following table presents the effect of the Company's hedging instruments on Other comprehensive income (loss), net of tax ("OCI") and financial performance for the twelve months ended December 31, 2019 and 2018:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for 2019 and 2018.
The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in line item "Other (income) charges, net" of the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. The Company recognized a net loss of $2 million and net loss of $13 million during 2019 and 2018, respectively, on these derivatives.
Pre-tax monetized positions and MTM gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included losses of $50 million at December 31, 2019 and losses of $112 million at December 31, 2018. Losses in AOCI decreased in 2019 compared to 2018 primarily as a result of a decrease in foreign currency exchange rates, particularly the euro. If realized, approximately $24 million in pre-tax losses will be reclassified into earnings during the next 12 months.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
10.
RETIREMENT PLANS
As described below, Eastman offers various postretirement benefits to its employees.
Defined Contribution Plans
Eastman sponsors a defined contribution employee stock ownership plan (the "ESOP"), which is a component of the Eastman Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP"), under Section 401(a) of the Internal Revenue Code. Eastman made a contribution in February 2020 to the EIP/ESOP for substantially all U.S. employees equal to 5 percent of their eligible compensation for the 2019 plan year. Employees may allocate contributions to other investment funds within the EIP from the ESOP at any time without restrictions. Allocated shares in the ESOP totaled 2,076,203; 2,119,614; and 2,130,176 shares as of December 31, 2019, 2018, and 2017, respectively. Dividends on shares held by the EIP/ESOP are charged to retained earnings. All shares held by the EIP/ESOP are treated as outstanding in computing earnings per share ("EPS").
In 2006, the Company amended its EIP/ESOP to provide a Company match of 50 percent of the first 7 percent of an employee's compensation contributed to the plan for employees who are hired on or after January 1, 2007. Employees who are hired on or after January 1, 2007, are also eligible for the contribution to the ESOP as described above.
Charges for domestic contributions to the EIP/ESOP were $68 million, $67 million, and $64 million for 2019, 2018, and 2017, respectively.
Defined Benefit Pension Plans and Other Postretirement Benefit Plans
Pension Plans
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits.
Effective January 1, 2000, the Company's Eastman Retirement Assistance Plan, a U.S. defined benefit pension plan, was amended. Employees' accrued pension benefits earned prior to January 1, 2000 are calculated based on previous plan provisions using the employee's age, years of service, and final average compensation as defined in the plans. The amended plan uses a pension equity formula to calculate an employee's retirement benefits from January 1, 2000 forward. Benefits payable will be the combined pre-2000 and post-1999 benefits. Employees hired on or after January 1, 2007 are not eligible to participate in Eastman's U.S. defined benefit pension plans.
Benefits are paid to employees from trust funds. Contributions to the trust funds are made as permitted by laws and regulations. The pension trust funds do not directly own any of the Company's common stock.
Pension coverage for employees of Eastman's non-U.S. operations is provided, to the extent deemed appropriate, through separate plans. The Company systematically provides for obligations under such plans by depositing funds with trustees, under insurance policies, or by book reserves.
Other Postretirement Benefit Plans
Under its other postretirement benefit plans in the U.S., Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Eastman provides a subsidy for pre-Medicare health care and dental benefits to eligible retirees hired prior to January 1, 2007 that will end on December 31, 2021. Company funding is also provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary balance sheet of the change in plan assets during 2019 and 2018, the funded status of the plans and amounts recognized in the Consolidated Statements of Financial Position.
Summary of Changes
Information for pension plans with projected benefit obligations in excess of plan assets:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information for pension plans with accumulated benefit obligations in excess of plan assets:
Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income
The estimated prior service credit for the other postretirement benefit plans that will be amortized from AOCI into net periodic cost in 2020 is $38 million.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Plan Assumptions
The assumptions used to develop the projected benefit obligation for Eastman's significant U.S. and non-U.S. defined benefit pension plans and U.S. postretirement benefit plans are provided in the following tables.
The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows.
A 6.50 percent rate of increase in per capita cost of covered health care benefits is assumed for 2020. The rate is assumed to decrease gradually to five percent in 2026 and remain at that level thereafter. A one percent increase or decrease in health care cost trend would have had no material impact on the 2019 service and interest costs or the 2019 benefit obligation, because the Company's contributions for benefits are fixed.
In 2017, the Company performed a five year experience study on assumptions for the U.S. plans, including a review of the mortality tables. As a result of the study, the Company has updated the mortality assumptions used to a modified RP-2017 table with a modified MP-2017 improvement scale and no collar adjustment.
The fair value of plan assets for the U.S. pension plans at December 31, 2019 and 2018 was $1.9 billion and $1.8 billion, respectively, while the fair value of plan assets at December 31, 2019 and 2018 for non-U.S. pension plans was $820 million and $713 million, respectively. At December 31, 2019 and 2018, the expected weighted-average long-term rate of return on U.S. pension plan assets was 7.37 percent and 7.43 percent, respectively. The expected weighted-average long-term rate of return on non-U.S. pension plans assets was 4.26 percent and 4.49 percent at December 31, 2019 and 2018, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
The following tables reflect the fair value of the defined benefit pension plans assets.
(1)
Cash & Cash Equivalents: Funds generally invested in actively managed collective trust funds or interest bearing accounts.
(2)
Public Equity - United States: Common stock equity securities which are primarily valued using a market approach based on the quoted market prices.
(3)
Other Investments: Primarily consist of insurance contracts which are generally valued using a crediting rate that approximates market returns and investments in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.
(4)
Investments Measured at Net Asset Value: The underlying debt and public equity investments in this category are generally held in common trust funds, which are either actively or passively managed investment vehicles, that are valued at the net asset value per unit/share multiplied by the number of units/shares held as of the measurement date. The other alternative investments in this category are valued under the practical expedient method which is based on the most recently reported net asset value provided by the management of each private investment fund, adjusted as appropriate, for any lag between the date of the financial reports and the measurement date.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following tables reflect the fair value of the postretirement benefit plan assets. The postretirement benefit plan is for the voluntary employees' beneficiary association ("VEBA") trust the Company assumed as part of the Solutia acquisition.
(1)
Debt: The fixed income securities are primarily valued upon a market approach, using matrix pricing and considering a security's relationship to other securities for which quoted prices in an active market may be available, or an income approach, converting future cash flows to a single present value amount. Inputs used in developing fair value estimates include reported trades, broker quotes, benchmark yields, and base spreads.
(2)
Cash & Cash Equivalents: Funds generally invested in actively managed collective trust funds or interest bearing accounts.
The Company valued assets with unobservable inputs (Level 3), primarily insurance contracts, using a crediting rate that approximates market returns and investments in underlying securities whose market values are unobservable and determined using pricing models, discounted cash flow methodologies, or similar techniques.
(1)
Primarily consists of insurance contracts.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the target allocation for the Company's U.S. and non-U.S. pension and postretirement benefit plans assets for 2020 and the asset allocation at December 31, 2019 and 2018, by asset category.
(1)
U.S. primarily consists of private equity and natural resource and energy related limited partnership investments. Non-U.S. primarily consists of annuity contracts and alternative investments.
Investment Strategy
Eastman's investment strategy for its defined benefit pension plans is to maximize the long-term rate of return on plan assets within an acceptable level of risk in order to meet or exceed the plan's actuarially assumed long-term rate of return and to minimize the cost of providing pension benefits. A periodic asset/liability study is conducted in order to assist in the determination and, if necessary, modification of the appropriate long-term investment policy for the plan. The investment policy establishes a target allocation range for each asset class and the fund is managed within those ranges. The plans use a number of investment approaches including investments in equity, real estate, and fixed income funds in which the underlying securities are marketable in order to achieve this target allocation. The plans also invest in private equity and other funds. Diversification is created through investments across various asset classes, geographies, fund managers, and individual securities. This investment process is designed to provide for a well-diversified portfolio with no significant concentration of risk. The investment process is monitored by an investment committee that includes senior management.
Eastman's investment strategy for its VEBA trust is to invest in intermediate-term, well diversified, high quality investment instruments, with a primary objective of capital preservation.
The expected rate of return for all plans was determined primarily by modeling the expected long-term rates of return for the categories of investments held by the plans and the targeted allocation percentage against various potential economic scenarios.
The Company made no contributions to its U.S. defined benefit pension plans in 2019 or 2018. For 2020 calendar year, there are no minimum required cash contributions for the U.S. defined benefit pension plans under the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended.
The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
11.
LEASES AND OTHER COMMITMENTS
Leases
On January 1, 2019, Eastman adopted ASU 2016-02 Leases and related releases under the modified retrospective optional transition method such that prior period financial statements have not been adjusted to reflect the impact of the new standard. The new standard establishes two types of leases: finance and operating. Both types of leases have associated right-to-use assets and lease liabilities that have been valued at the present value of the lease payments and recognized on the Consolidated Statements of Financial Position which did not result in an impact to retained earnings. The discount rate used in the measurement of a right-to-use asset and lease liability is the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, the collateralized incremental borrowing rate is used.
Upon adoption, the Company elected the practical expedient package wherein: expired or existing contracts were not reassessed as to whether these contracts are or contained a lease; expired or existing contracts were not reassessed for operating or financing classification; and initial direct costs for existing leases were not reassessed. The Company also elected the practical expedient not to assess whether existing or expired land easements that were not previously accounted for under the prior standard are or contain a lease. Lastly, the Company elected the accounting policy not to apply the recognition and measurement requirements to short-term leases with a term of 12 months or less that do not include a bargain purchase option.
The Company has operating leases, as a lessee, with customary terms that do not include: significant variable lease payments; significant reasonably certain extensions or options required to be included in the lease term; restrictions; or other covenants for real property, rolling stock, and machinery and equipment. Real property leases primarily consist of office space and rolling stock leases primarily for railcars and fleet vehicles. At December 31, 2019, operating right-to-use assets of $197 million are included as a part of "Other noncurrent assets" in the Consolidated Statements of Financial Position and includes $8 million of assets previously classified as lease intangibles. Operating lease liabilities are included as a part of "Payables and other current liabilities" and "Other long-term liabilities" in the Consolidated Statements of Financial Position.
As of December 31, 2019, maturities of operating lease liabilities is provided below:
There have been no material changes to the future minimum lease payments as of December 31, 2018 as accounted for under the previous lease standard.
The Company has operating leases, primarily leases for railcars, with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease that will expire beginning in first quarter 2020. Residual guarantee payments that become probable and estimable are recognized as rent expense over the remaining life of the applicable lease. Management's current expectation is that the likelihood of material residual guarantee payments is remote.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Lease costs during the period and other information is provided below:
Debt and Other Commitments
Eastman's obligations are summarized in the following table.
Estimated future payments of debt securities assumes the repayment of principal upon stated maturity, and actual amounts and the timing of such payments may differ materially due to repayment or other changes in the terms of such debt prior to maturity.
Eastman had various purchase obligations at December 31, 2019 totaling approximately $2.6 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, environmental loss contingency reserves, accrued compensation benefits, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2025 and beyond" line item.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of approximately $35 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.
12.
ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS
Certain Eastman manufacturing facilities generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for certain cleanup costs. In addition, the Company will incur costs for environmental remediation and closure and post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies". The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of 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 the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future liquidity or financial condition. The Company's total reserve for environmental loss contingencies was $287 million and $296 million at December 31, 2019 and December 31, 2018, respectively.
Environmental Remediation and Environmental Asset Retirement Obligations
The Company's total environmental reserve that management believes to be probable and reasonably estimable for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Payables and other current liabilities" and "Other long-term liabilities" in the Consolidated Statements of Financial Position as follows:
Environmental Remediation
Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $260 million to the maximum of $487 million and from the best estimate or minimum of $271 million to the maximum of $508 million at December 31, 2019 and December 31, 2018, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at both December 31, 2019 and December 31, 2018.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Costs of certain remediation projects included in the environmental reserve are subject to a cost-sharing arrangement with Monsanto Company ("Monsanto") under the provisions of the Amended and Restated Settlement Agreement effective February 28, 2008 (the "Effective Date"), into which Solutia entered with Monsanto upon its emergence from bankruptcy (the "Monsanto Settlement Agreement"). Under the provisions of the Monsanto Settlement Agreement, Solutia, which became a wholly-owned subsidiary of Eastman on July 2, 2012, shares responsibility with Monsanto for remediation at certain locations outside of the boundaries of plant sites in Anniston, Alabama and Sauget, Illinois (the "Shared Sites"). Solutia is responsible for the funding of environmental liabilities at the Shared Sites up to a total of $325 million from the Effective Date. If remediation costs for the Shared Sites exceed this amount, such costs will thereafter be shared equally between Solutia and Monsanto. Including payments by Solutia prior to its acquisition by Eastman, $99 million had been paid for costs at the Shared Sites as of December 31, 2019. As of December 31, 2019, an additional $197 million has been recognized for estimated future remediation costs at the Shared Sites, over a period of approximately 30 years.
Reserves for environmental remediation include liabilities expected to be paid within approximately 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included within "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. Changes in the reserves for environmental remediation liabilities for twelve months ended 2019 are summarized below:
Environmental Asset Retirement Obligations
An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. Eastman recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligations are discounted to expected present value and subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist of primarily closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate recognized to date for these environmental asset retirement obligation costs was $27 million and $25 million at December 31, 2019 and December 31, 2018, respectively.
Other
Environmental costs are capitalized if they extend the life of the related property, increase its capacity, or mitigate the possibility of future contamination. The cost of operating and maintaining environmental control facilities is charged to expense as incurred. Eastman's cash expenditures related to environmental protection and improvement were $244 million, $274 million, and $257 million in 2019, 2018, and 2017, respectively, and include operating costs associated with environmental protection equipment and facilities, engineering costs, and construction costs. The cash expenditures above include environmental capital expenditures of approximately $27 million, $44 million, and $38 million in 2019, 2018, and 2017, respectively.
The Company also has contractual asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland. These recognized non-environmental asset retirement obligations were $48 million and $46 million at December 31, 2019 and December 31, 2018, respectively, and are included as part of "Other long-term liabilities" in the Consolidated Statements of Financial Position.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
13.
LEGAL MATTERS
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
14.
STOCKHOLDERS' EQUITY
A reconciliation of the changes in stockholders' equity for 2019, 2018, and 2017 is provided below:
(1)
Cash dividends includes cash dividends paid and dividends declared, but unpaid.
(2)
Share-based compensation expense is the fair value of share-based awards.
(3)
On January 1, 2018, the Company adopted new accounting standards for revenue recognition and derivatives and hedging, which resulted in increases to beginning retained earnings of $53 million and $2 million, respectively. The Company also adopted a new accounting standard for income taxes, which resulted in a decrease to beginning retained earnings of $39 million.
(4)
Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards.
(5)
On January 1, 2019, the Company adopted a new accounting standard for reporting comprehensive income, which resulted in a reclassification of stranded tax effects from the Tax Reform Act from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information.
Eastman is authorized to issue 400 million shares of all classes of stock, of which 50 million may be preferred stock, par value $0.01 per share, and 350 million may be common stock, par value $0.01 per share. The Company declared dividends per share of $2.52 in 2019, $2.30 in 2018, and $2.09 in 2017.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company established a benefit security trust in 1997 to provide a degree of financial security for unfunded obligations under certain unfunded plans and contributed to the trust a warrant to purchase up to 6 million shares of common stock of the Company for par value. The warrant, which remains outstanding, is exercisable by the trustee if the Company does not meet certain funding obligations, which obligations would be triggered by certain occurrences, including a change in control or potential change in control, as defined, or failure by the Company to meet its payment obligations under certain covered unfunded plans. Such warrant is excluded from the computation of diluted EPS because the conditions upon which the warrant becomes exercisable have not been met.
The additions to paid-in capital in 2019, 2018, and 2017 are primarily for compensation expense of equity awards and employee stock option exercises.
In February 2014, the Company's Board of Directors authorized repurchase of up to $1 billion of the Company's outstanding common stock. The Company completed the $1 billion repurchase authorization in May 2018, acquiring a total of 12,215,950 shares. 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. As of December 31, 2019, a total of 6,753,164 shares have been repurchased under this authorization for a total of $573 million. During 2019, the Company repurchased 4,282,409 shares of common stock for a cost of approximately $325 million. During 2018, the Company repurchased 3,959,878 shares of common stock for a cost of approximately $400 million. During 2017, the Company repurchased 4,184,637 shares of common stock for a cost of approximately $350 million.
The Company's charitable foundation held 50,798 issued and outstanding shares of the Company's common stock at December 31, 2019, 2018, and 2017 which are included in treasury stock in the Consolidated Statements of Financial Position and excluded from calculations of diluted EPS.
The following table sets forth the computation of basic and diluted EPS:
(1)
EPS is calculated using whole dollars and shares.
Shares underlying stock options excluded from the 2019, 2018, and 2017 calculations of diluted EPS were 2,183,875, 619,706, and 204,978, respectively, because the grant price of these options was greater than the average market price of the Company's common stock and the effect of including them in the calculation of diluted EPS would have been antidilutive.
Shares of common stock issued, including shares held in treasury, are presented below:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income (Loss)
(1)
Benefit plans unrecognized prior service credits includes $29 million reclassification of stranded tax expense from AOCI to retained earnings and unrealized gains (losses) on derivative instruments includes $9 million reclassification of stranded tax benefit from AOCI to retained earnings. See Note 1, "Significant Accounting Policies", for additional information.
Amounts of other comprehensive income (loss) are presented net of applicable taxes. Eastman records deferred income taxes on the cumulative translation adjustment related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are recognized on the cumulative translation adjustment of other subsidiaries outside the United States, as the cumulative translation adjustment is considered to be a component of indefinitely invested, unremitted earnings of these foreign subsidiaries.
Components of total other comprehensive income (loss) recorded in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
For additional information regarding the impact of reclassifications into earnings, refer to Note 9, "Derivative and Non-Derivative Financial Instruments", and Note 10, "Retirement Plans".
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
15.
ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
Components of asset impairments and restructuring charges, net, are presented below:
In December 2019, management approved a plan to discontinue production of certain products at the Singapore manufacturing site by the end of 2020 resulting in an asset impairment charge of $27 million impacting the AFP and CI segments. As a result of the annual impairment test of goodwill, the Company recognized a $45 million goodwill impairment in the crop protection reporting unit (part of the AFP segment). Additionally, in 2019, as part of business improvement and cost reduction initiatives, the Company recognized restructuring charges of $45 million for severance and $5 million for related costs. Also included was an additional $4 million restructuring charge related to a capital project in the AFP segment that was discontinued in 2016.
In 2018 asset impairments and restructuring charges, net consisted of restructuring charges of approximately $6 million for severance. As a result of the annual impairment test of goodwill, the Company recognized a $38 million goodwill impairment in the crop protection reporting unit (part of the AFP segment). Additionally, the Company recognized an intangible asset impairment of $1 million in the Advanced Materials ("AM") segment.
In 2017 asset impairments and restructuring charges, net were $3 million of asset impairment and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China and restructuring charges of approximately $5 million for severance.
Reconciliations of the beginning and ending restructuring liability amounts are as follows:
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Substantially all costs remaining for severance are expected to be applied to the reserves within one year.
16.
OTHER (INCOME) CHARGES, NET
(1)
Net impact of revaluation of foreign entity assets and liabilities and effects of foreign exchange non-qualifying derivatives.
(2)
Gain resulting from the sale of the formulated electronic cleaning solution business in the AFP segment in 2017.
17.
SHARE-BASED COMPENSATION PLANS AND AWARDS
2017 Omnibus Stock Compensation Plan
Eastman's 2017 Omnibus Stock Compensation Plan ("2017 Omnibus Plan") was approved by stockholders at the May 4, 2017 Annual Meeting of Stockholders and shall remain in effect until its fifth anniversary. The 2017 Omnibus Plan authorizes the Compensation and Management Development Committee of the Board of Directors to grant awards, designate participants, determine the types and numbers of awards, determine the terms and conditions of awards and determine the form of award settlement. Under the 2017 Omnibus Plan, the aggregate number of shares reserved and available for issuance is 10 million, which consist of shares not previously authorized for issuance under any other plan. The number of shares covered by an award is counted against this share reserve as of the grant date of the award. Shares covered by full value awards (e.g. performance shares and restricted stock awards) are counted against the total number of shares available for issuance or delivery under the plan as 2.5 shares for every one share covered by the award. Any stock distributed pursuant to an award may consist of, in whole or in part, authorized and unissued stock, treasury stock, or stock purchased on the open market. Under the 2017 Omnibus Plan and previous plans, the forms of awards have included restricted stock and restricted stock units, stock options, stock appreciation rights ("SARs"), and performance shares. The 2017 Omnibus Plan is flexible as to the number of specific forms of awards, but provides that stock options and SARs are to be granted at an exercise price not less than 100 percent of the per share fair market value on the date of the grant.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Director Stock Compensation Subplan
Eastman's 2018 Director Stock Compensation Subplan ("Directors' Subplan"), a component of the 2017 Omnibus Plan, remains in effect until terminated by the Board of Directors or the earlier termination of the 2017 Omnibus Plan. The Directors' Subplan provides for structured awards of restricted shares to non-employee members of the Board of Directors. Restricted shares awarded under the Directors' Subplan are subject to the same terms and conditions of the 2017 Omnibus Plan. The Directors' Subplan does not constitute a separate source of shares for grant of equity awards and all shares awarded are part of the 10 million shares authorized under the 2017 Omnibus Plan. Shares of restricted stock are granted on the first day of a non-employee director's initial term of service and shares of restricted stock are granted each year to each non-employee director on the date of the annual meeting of stockholders.
It has been the Company's practice to issue new shares rather than treasury shares for equity awards for compensation plans, including the 2017 Omnibus Plan and the Directors' Subplan, that require settlement by the issuance of common stock and to withhold or accept back shares awarded to cover the related income tax obligations of employee participants. Shares of unrestricted common stock owned by non-employee directors are not eligible to be withheld or acquired to satisfy the withholding obligation related to their income taxes. Shares of unrestricted common stock owned by specified senior management level employees are accepted by the Company to pay the exercise price of stock options in accordance with the terms and conditions of their awards.
Compensation Expense
For 2019, 2018, and 2017, total share-based compensation expense (before tax) of approximately $59 million, $64 million, and $52 million, respectively, was recognized in "Selling, general and administrative expense" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards of which approximately $9 million, $9 million, and $8 million, respectively, related to stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the forms of award notice. Approximately $3 million for both 2019 and 2018 and $2 million for 2017 of stock option compensation expense was recognized each year due to qualifying termination eligibility preceding the requisite vesting period.
Stock Option Awards
Options have been granted on an annual basis by the Compensation and Management Development Committee of the Board of Directors under the 2017 Omnibus Plan and predecessor plans to employees. Option awards have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is 10 years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.
The weighted average assumptions used in the determination of fair value for stock options awarded in 2019, 2018, and 2017 are provided in the table below:
The volatility rate of grants is derived from historical Company common stock price volatility over the same time period as the expected term of each stock option award. The volatility rate is derived by mathematical formula utilizing the weekly high closing stock price data over the expected term.
The expected dividend yield is calculated using the Company's average of the last four quarterly dividend yields.
The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
The weighted average expected term reflects the analysis of historical share-based award transactions and includes option swap and reload grants which may have much shorter remaining expected terms than new option grants.
A summary of the activity of the Company's stock option awards for 2019, 2018, and 2017 is presented below:
The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable at December 31, 2019:
The range of exercise prices of options outstanding at December 31, 2019 is approximately $38 to $104 per share. The aggregate intrinsic value of total options outstanding and total options exercisable at December 31, 2019 is $18 million and $17 million, respectively. Intrinsic value is the amount by which the closing market price of the stock at December 31, 2019 exceeds the exercise price of the option grants.
The weighted average remaining contractual life of all exercisable options at December 31, 2019 is 5.5 years.
The weighted average fair value of options granted during 2019, 2018, and 2017 was $13.12, $15.90, and $11.79, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018, and 2017, was $2 million, $15 million, and $19 million, respectively. Cash proceeds received by the Company from option exercises totaled $9 million and the related tax benefit was de minimis for 2019. Cash proceeds received by the Company from option exercises and the related tax benefit totaled $18 million and $3 million, respectively, for 2018 and $22 million and $5 million, respectively, for 2017. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017 was $8 million, $7 million, and $6 million, respectively.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the changes in the Company's nonvested options during the year ended December 31, 2019 is presented below:
For nonvested options at December 31, 2019, approximately $5 million in compensation expense will be recognized over the next two years.
Other Share-Based Compensation Awards
In addition to stock option awards, Eastman has awarded long-term performance share awards, restricted stock awards, and SARs. The long-term performance share awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-rata over the three year performance period. The number of long-term performance award target shares granted for the 2019-2021, 2018-2020, and 2017-2019 periods were 412 thousand, 310 thousand, and 357 thousand, respectively. The target shares granted are assumed to be 100 percent. At the end of the three-year performance period, the actual number of shares awarded can range from zero percent to 250 percent of the target shares granted based on the award notice. The number of restricted stock awards granted during 2019, 2018, and 2017 were 189 thousand, 160 thousand, and 172 thousand, respectively. The fair value of a restricted stock award is equal to the closing stock price of the Company's stock on the date of grant and normally vests over a period of three years. The recognized compensation expense before tax for these other share-based awards in the years ended December 31, 2019, 2018, and 2017 was approximately $50 million, $55 million, and $44 million, respectively. The unrecognized compensation expense before tax for these same type awards at December 31, 2019 was approximately $55 million and will be recognized primarily over a period of two years.
18.
SUPPLEMENTAL CASH FLOW INFORMATION
Included in the line item "Other items, net" of the "Operating activities" section of the Consolidated Statements of Cash Flows are specific changes to certain balance sheet accounts as follows:
The above changes included transactions such as accrued taxes, deferred taxes, environmental liabilities, monetized positions from raw material and energy, currency, and certain interest rate hedges, prepaid insurance, miscellaneous deferrals, value-added taxes, and other miscellaneous accruals.
Cash flows from derivative financial instruments accounted for as hedges are classified in the same category as the item being hedged.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cash paid for interest and income taxes is as follows:
19.
SEGMENT AND REGIONAL SALES INFORMATION
The Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers.
Additives & Functional Products Segment
In the AFP segment, the Company manufactures chemicals for products in the transportation, consumables, building and construction, animal nutrition, crop protection, energy, personal and home care, and other markets.
The products the Company manufactures in the coatings and inks additives product line can be broadly classified as polymers and additives and solvents and include specialty coalescents, specialty solvents, paint additives, and specialty polymers. The adhesives resins product line consists of hydrocarbon and rosin resins. The tire additives product line includes insoluble sulfur rubber additives, antidegradant rubber additives, and performance resins. The care chemicals business consists of amine derivative-based building blocks for the production of flocculants and intermediates for surfactants. In the specialty fluids product line, the Company produces heat transfer and aviation fluids products. The animal nutrition business consists of organic acid-based solutions product lines. The crop protection business consists of metam-based soil fumigants, thiram and ziram-based fungicides, and plant growth regulator products.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Advanced Materials Segment
In the AM segment, the Company produces and markets polymers, films, and plastics with differentiated performance properties for value-added end-uses in transportation, consumables, building and construction, durable goods, and health and wellness markets.
The specialty plastics product line consists of two primary products: copolyesters and cellulose esters. The advanced interlayers product line includes polyvinyl butyral sheet and specialty polyvinyl butyral intermediates. The performance films product line primarily consists of window film and protective film products for aftermarket applied films.
Chemical Intermediates Segment
The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support the Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond the Company's internal specialty needs into markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals.
In the intermediates product line, the Company produces olefin derivatives, acetyl derivatives, ethylene, and commodity solvents. The plasticizers product line consists of a unique set of primary non-phthalate and phthalate plasticizers and a range of niche non-phthalate plasticizers. The functional amines product lines include methylamines and salts, and higher amines and solvents.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fibers Segment
In the Fibers segment, Eastman manufactures and sells cellulose acetate tow for use in filtration media, primarily cigarette filters. The acetyl chemicals product line consists of triacetin, cellulose acetate flake, and acetyl raw materials for other acetate fiber producers. The acetate yarn product line consists of natural (undyed) acetate and polyester yarn and solution-dyed acetate yarn for use in apparel, home furnishings, and industrial fabrics. The nonwovens product line consists primarily of the nonwovens innovation products previously reported in "Other".
Other
Sales revenue in the table below for "Other" in 2017 is primarily sales from the nonwovens innovation products. Beginning first quarter 2018, sales revenue and innovation costs from the nonwovens and textiles innovation products previously reported in "Other" are reported in the Fibers segment due to accelerating commercial progress of growth initiatives.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1)
The chief operating decision maker holds operating segment management accountable for accounts receivable, inventory, fixed assets, goodwill, and intangible assets.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Sales are attributed to geographic areas based on customer location and long-lived assets are attributed to geographic areas based on asset location.
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
20.
QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(1)
Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount.
(1)
Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full year amount.
21.
RESERVE ROLLFORWARDS
Valuation and Qualifying Accounts
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1)
Revised from Note 21, "Reserve Rollforwards", to the Company's 2018 Annual Report on Form 10-K, which reported deferred tax valuation allowance as $466 million.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A - CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Eastman maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of December 31, 2019, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Management, including the CEO and CFO, does not expect that the Company's disclosure controls and procedures can prevent all possible errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance; judgments in decision-making can be faulty; and breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and while the Company's disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to possible errors or fraud may occur and not be detected.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company's internal control over financial reporting includes policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and acquisitions and dispositions of assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of its internal control over financial reporting as of December 31, 2019 based on the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially effect, the Company's internal control over financial reporting.

ITEM 9B - OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
None.
PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1 - -Election of Directors" to (but not including) the subheading "The Board of Directors and Corporate Governance" and under the subheading "Board Committees--Audit Committee" (except for the material under the subheading "Board Committees--Audit Committee--Audit Committee Report", which is not incorporated by reference herein), each as included and to be filed in the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders (the "2020 Proxy Statement"), is incorporated by reference herein in response to this Item. Certain information concerning executive officers of Eastman is set forth under the heading "Information About our Executive Officers" in Part I of this Annual Report on Form 10-K (this "Annual Report").
The Company has adopted a Code of Ethics and Business Conduct applicable to the Chief Executive Officer, the Chief Financial Officer, and the Controller of the Company. The Company has posted such Code of Ethics and Business Conduct on its website (www.eastman.com) in the "Investors -- Corporate Governance" section.

ITEM 11 - EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1 - -Election of Directors--Board Committees--Compensation and Management Development Committee--Compensation Committee Report", under the subheading "Director Compensation", and under the heading "Executive Compensation", each as included and to be filed in the 2020 Proxy Statement, is incorporated by reference herein in response to this Item.

ITEM 12 - SECURITY OWNERSHIP
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The material under the headings "Stock Ownership of Directors and Executive Officers--Common Stock" and "Principal Stockholders" as included and to be filed in the 2020 Proxy Statement is incorporated by reference herein in response to this Item.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved by Stockholders
Stockholders approved the Company's 2007 Omnibus Long-Term Compensation Plan, the 2012 Omnibus Stock Compensation Plan, and the 2017 Omnibus Stock Compensation Plan. Although stock and stock-based awards are still outstanding under the 2007 Omnibus Long-Term Compensation Plan and the 2012 Omnibus Stock Compensation Plan, no shares are available under these plans for future awards. All future share-based awards are made from the 2017 Omnibus Stock Compensation Plan and the 2018 Director Stock Compensation Subplan, a component of the 2017 Omnibus Stock Compensation Plan.
Equity Compensation Plans Not Approved by Stockholders
Stockholders have approved all compensation plans under which shares of Eastman common stock are authorized for issuance.
Summary Equity Compensation Plan Information Table
The following table sets forth certain information as of December 31, 2019 with respect to compensation plans under which shares of Eastman common stock may be issued.
(1)
Represents shares of common stock issuable upon exercise of outstanding options granted under Eastman Chemical Company's 2007 Omnibus Long-Term Compensation Plan, the 2012 Omnibus Stock Compensation Plan, and the 2017 Omnibus Stock Compensation Plan.
(2)
Shares of common stock available for future awards under the Company's 2017 Omnibus Stock Compensation Plan, including the 2018 Director Stock Compensation Subplan, a component of the 2017 Omnibus Stock Compensation Plan.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The material under the heading "Proposals to be Voted On at the Annual Meeting--Item 1 - -Election of Directors", subheadings "Director Independence" and "Transactions with Directors, Executive Officers, and Related Persons", each as included and to be filed in the 2020 Proxy Statement, is incorporated by reference herein in response to this Item.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning amounts billed for professional services rendered by the principal accountant and pre-approval of such services by the Audit Committee of the Company's Board of Directors under the heading "Item 3 - Ratification of Appointment of Independent Registered Public Accounting Firm" as included and to be filed in the 2020 Proxy Statement is incorporated by reference herein in response to this Item.
PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
None.
*
Denotes exhibit filed or furnished herewith.
**
Management contract or compensatory plan or arrangement filed pursuant to Item 601(b) (10) (iii) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Eastman Chemical Company
By:
/s/ Mark J. Costa
Mark J. Costa
Chief Executive Officer
Date:
February 26, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
/s/ Mark J. Costa
Chief Executive Officer and
February 26, 2020
Mark J. Costa
Director
PRINCIPAL FINANCIAL OFFICER:
/s/ Curtis E. Espeland
Executive Vice President and
February 26, 2020
Curtis E. Espeland
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ Scott V. King
Vice President, Corporate Controller
February 26, 2020
Scott V. King
and Chief Accounting Officer
SIGNATURE
TITLE
DATE
DIRECTORS* (other than Mark J. Costa, who also signed as Principal Executive Officer):
/s/ Humberto P. Alfonso
Director
February 26, 2020
Humberto P. Alfonso
/s/ Brett D. Begemann
Director
February 26, 2020
Brett D. Begemann
/s/ Michael P. Connors
Director
February 26, 2020
Michael P. Connors
/s/ Robert M. Hernandez
Director
February 26, 2020
Robert M. Hernandez
/s/ Julie F. Holder
Director
February 26, 2020
Julie F. Holder
/s/ Renée J. Hornbaker
Director
February 26, 2020
Renée J. Hornbaker
/s/ Lewis M. Kling
Director
February 26, 2020
Lewis M. Kling
/s/ Kim A. Mink
Director
February 26, 2020
Kim A. Mink
/s/ James J. O'Brien
Director
February 26, 2020
James J. O'Brien
/s/ David W. Raisbeck
Director
February 26, 2020
David W. Raisbeck
* Edward L. Doheny II and Charles K. Stevens III were appointed to the Board of Directors in February 2020.

Market Capitalization: 8950159.66796875
1-Year Return: -0.01141658611595631
252-Day Return: $252_day_return