EASTMAN CHEMICAL CO - Annual Report: 2017 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One) | |
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017 | |
OR | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________ |
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 62-1539359 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification no.) |
200 South Wilcox Drive | |
Kingsport, Tennessee | 37662 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
1.50% Notes Due 2023 | New York Stock Exchange | |
1.875% Notes Due 2026 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Yes | No | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | [X] | |
Yes | No | |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. | [X] | |
Yes | No | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | [X] | |
Yes | No | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | [X] | |
Yes | No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | [X] | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company) Emerging growth company [ ] | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ [ ] | ||
Yes | No | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | [X] |
The aggregate market value (based upon the $83.99 closing price on the New York Stock Exchange on June 30, 2017) of the 142,397,967 shares of common equity held by non-affiliates as of December 31, 2017 was $11,960,005,248 using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude common stock that may be deemed beneficially owned as of December 31, 2017 by Eastman Chemical Company's directors and executive officers and charitable foundation, some of whom might not be held to be affiliates upon judicial determination. A total of 142,966,679 shares of common stock of the registrant were outstanding at December 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2018 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10 to 14 of this Annual Report on Form 10-K (this "Annual Report") as indicated herein.
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FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Annual Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, (Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended). Forward-looking statements are all statements, other than statements of historical fact, that may be made by Eastman Chemical Company ("Eastman" or the "Company") from time to time. In some cases, you can identify forward-looking statements by terminology such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would," and similar expressions or expressions of the negative of these terms. Forward-looking statements may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; exposure to, and effects of hedging of, raw material and energy prices and costs; foreign currencies and interest rates; disruption of raw material or energy supply; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin and sales; pending and future legal proceedings; earnings, cash flow, dividends, stock repurchases and other expected financial results, events, and conditions; expectations, strategies, and plans for individual assets and products, businesses, and operating segments, as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans and activities; pension expenses and funding; credit ratings; anticipated and other future restructuring, acquisition, divestiture, and consolidation activities; cost reduction and control efforts and targets; the timing and costs of, and benefits from, the integration of, and expected business and financial performance of, acquired businesses; strategic and technology and product innovation initiatives and development, production, commercialization and acceptance of new products, services and technologies and related costs; asset, business, and product portfolio changes; and expected tax rates and net interest costs.
Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report. Other factors, risks or uncertainties of which we are not aware, or presently deem immaterial, could also cause actual results to differ materially from those in the forward-looking statements.
The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date such statements are made. Except as may be required by law, the Company undertakes no obligation to update or alter these forward-looking statements, whether as a result of new information, future events, or otherwise. Investors are advised, however, to consult any further public Company disclosures (such as filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
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TABLE OF CONTENTS
ITEM | PAGE |
PART I
PART II
5. | ||
6. | ||
7. | ||
7A. | ||
8. | ||
9. | ||
9A. | ||
9B. |
PART III
10. | ||
11. | ||
12. | ||
13. | ||
14. |
PART IV
SIGNATURES
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PART I
ITEM 1. BUSINESS |
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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 48 manufacturing sites and equity interests in three manufacturing joint ventures in 14 countries that supply products to customers throughout the world. The Company's headquarters and largest manufacturing site are located in Kingsport, Tennessee. With a robust portfolio of specialty businesses, Eastman works with customers to deliver innovative products and solutions while maintaining a commitment to safety and sustainability. Eastman's businesses are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. See "Business Segments".
Acquisitions have supported Eastman's strategy to increase emphasis on specialty businesses and have provided opportunities for the integration of technology platforms enabling differentiated product development targeting new niche markets. In July 2012, the Company acquired Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. In June 2014, the Company acquired BP plc's global aviation turbine engine oil business. In August 2014, the Company acquired Knowlton Technologies, LLC, a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs. In December 2014, Eastman acquired Taminco Corporation, a global specialty chemical company and Commonwealth Laminating & Coating, Inc., a specialty films business. Results of the acquired businesses are included in Eastman's financial results for the periods presented in this Annual Report on Form 10-K (this "Annual Report").
Eastman 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 processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, non-wovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. Management believes that these elements of the Company's innovation-driven growth model combined with disciplined portfolio management and balanced capital deployment will result in consistent, sustainable earnings growth and strong cash flow.
In 2017, the Company reported sales revenue of $9.5 billion, operating earnings of $1.5 billion, and net earnings attributable to Eastman of $1.4 billion. Diluted earnings per share attributable to Eastman were $9.47. Cash provided by operating activities was $1.7 billion. Excluding non-core and unusual items, adjusted net earnings were $1.1 billion and adjusted earnings per diluted share were $7.61. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report for reconciliation of non-GAAP to GAAP measures, description of excluded items, and related information. For Company sales revenue by end-market, see Exhibit 99.01 "2017 Company and Segment Sales Revenue by End-Use Market" of this Annual Report.
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BUSINESS STRATEGY
Eastman's objective is to be an outperforming specialty chemical company with consistent earnings growth and strong cash flow. Integral to the Company's strategy for growth is leveraging its heritage of expertise and innovation within its cellulose and acetyl, olefins, polyester, and alkylamine chemistries. For each of these "streams", the Company has developed and acquired a combination of assets and technologies that combine scale and integration across multiple manufacturing units and sites as a competitive advantage. Management uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development, and relentlessly engaging the market. The Company sells differentiated products into diverse markets and geographic regions 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 such as external growth through acquisitions that are complementary or additive to existing products and joint ventures.
In 2017, as part of the Company's strategy to increase emphasis on specialty businesses and products, the Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company.
Growth and Innovation
Management is pursuing specific opportunities to leverage Eastman's innovation-driven growth model for continued near-term and long-term greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. These opportunities which are expected to add greater than two percent on a compounded basis to revenue from 2018 through 2020, currently include:
• | AFP segment: |
• | Growth and innovation of Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia in 2017 that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and facilitating the introduction of new products for the tire markets. |
• | Growth and innovation of Tetrashield® performance polyester resins based on proprietary monomer technology. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets. |
• | Growth and innovation of Impera® high performance resins for tires. When used as additives in tire compound formulations, Impera® resins enable tire manufacturers to improve the safety and handling of tires, balance tire performance and fuel economy needs, and achieve superior levels of tack for tire construction. |
• | Growth and innovation of Aerafin® polymer, developed from proprietary olefin technology. These olefin polymers enable improved processing time and other benefits including low odor, improved adhesion, exceptional peel performance, and thermal stability for adhesive applications within the hygiene market. |
• | Growth in animal nutrition and solar specialty fluids through enhanced commercial execution. |
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• | AM segment: |
• | Continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018. |
• | Growth and innovation of Saflex® and head up displays ("HUD") acoustic interlayers used in the transportation and building and construction markets, supported by construction of a manufacturing facility for polyvinyl butyral ("PVB") resin at the Kuantan, Malaysia site which became fully operational in first quarter 2018. |
• | Growth and innovation of Treva™, a cellulose-based engineering bioplastic that offers high performance, sustainability, and design flexibility in applications that require complex and intricate designs and high safety requirements such as eyeglass frames, wearable electronics, and lenses. |
• | Growth in performance films in North America and China through strengthened sales channel, marketing, and commercial execution strategies and capabilities. |
• | Fibers segment: |
• | Leveraging the innovation-driven growth model to focus on growth and innovation in the textiles market through new product offerings including: |
▪ | Naia®, a yarn for the apparel market developed from Eastman's proprietary cellulose ester technology. |
▪ | Avra™, a family of fibers for the performance apparel market developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance. |
▪ | Vestera™, a new wood pulp-based alternative for the nonwoven industry used in personal hygiene applications. |
Sustainability
Because of Eastman's proprietary and differentiated technologies, applications development capabilities and advantaged feedstocks, the Company views sustainability as a source of competitive strength for growth. Eastman is committed to innovation and growth efforts focused on opportunities where disruptive macro trends align with the Company's differentiated and innovative technology platforms and applications development. Eastman has identified disruptive macro trends to align with the corporate strategy and drive innovation of new products that enable customers' development and sales of sustainable products. Examples of Eastman's leading position in providing sustainable solutions within identified disruptive macro trends include:
• | Health and wellness: Tritan® copolyester, Tetrashield® performance polyester resins, and Vestera™ cellulosic fiber. |
• | Natural resource efficiency: Saflex® Q series advanced acoustic interlayers, Impera® high performance resins for tires, and Treva™ proprietary engineering bioplastic. |
• | Emerging middle class: Saflex® and HUD acoustic interlayers, Regalite® hydrocarbon resins, Naia® cellulosic yarn, and Avra™ performance fibers. |
• | Feeding a growing population: Eastman organic acids, Enhanz™ feed additive, and Banguard™ crop protection. |
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. Eastman management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategic and financial flexibility. The Company employs a disciplined and balanced approach to capital allocation and deployment of cash. The priorities for uses of available cash include payment of the quarterly dividend, repayment of debt, funding targeted organic and inorganic growth initiatives, and repurchasing shares. Management expects that the combination of continued strong cash flow generation, strong balance sheet, and sufficient liquidity will continue to provide flexibility to pursue growth initiatives.
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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 strategy of continued transformation towards a specialty portfolio of products.
Sales revenue and costs related to growth initiatives, R&D, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are included in "Other". For identification of manufacturing sites, see Item 2, "Properties". For additional information concerning the Company's operating segments, see Note 19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT
Overview
In the AFP segment, the Company manufactures chemicals for products in the transportation, consumables, building and construction, animal nutrition, crop protection, energy, personal and home care, and other markets. In 2017, the AFP segment had sales revenue of $3.3 billion, 35 percent of Eastman's total sales. Key technology platforms in this segment are cellulose esters, polyester polymers, insoluble sulfur, hydrocarbon resins, alkylamine derivatives, and propylene derivatives.
The AFP segment's sales growth is typically 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 unique performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. A critical element of the AFP segment's success is its close formulation collaboration with customers through advantaged application development capability.
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Principal Products
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Coatings and Inks Additives | ||||
Polymers cellulosics Tetrashield® polyesters polyolefins Additives and Solvents Texanol® Optifilm® ketones esters glycol ethers oxo alcohols | specialty coalescents, specialty solvents, and commodity solvents paint additives and specialty polymers | BASF SE DowDuPont Inc. Oxea Celanese Corporation Alternative Technologies | wood pulp propane propylene | building and construction (architectural coatings) transportation (OEM) and refinish coatings durable goods (wood, industrial coatings and applications) consumables (graphic arts, inks, and packaging) |
Adhesives Resins | ||||
Piccotac® Regalite® Eastotac® Eastoflex® Aerafin® | hydrocarbon resins and rosin resins mainly for hot-melt and pressure sensitive adhesives | Exxon Mobil Corporation Kolon Industries, Inc. Evonik Industries | C9 resin oil piperylene gum rosin propylene | consumables (resins used in hygiene and packaging adhesives) building and construction (resins for construction adhesives and interior flooring) |
Tire Additives | ||||
Crystex® | insoluble sulfur rubber additive | Oriental Carbon & Chemicals Limited Shikoku Chemicals Corporation | sulfur naphthenic process oil | transportation (tire manufacturing) other rubber products (such as hoses, belts, seals, and footwear) |
Santoflex® | antidegradant rubber additive | Jiangsu Sinorgchem Technology Co., Ltd. Korea Kumho Petrochemical Co., Ltd. Lanxess AG | nitrobenzene aniline methyl isobutyl ketone | transportation (tire manufacturing) other rubber products (such as hoses, belts, seals, and footwear) |
Impera® | performance resins | Cray Valley Hydrocarbon Specialty Chemicals Exxon Mobil Corporation Kolon Industries Incorporated | alpha methylstyrene piperylene styrene | transportation (tire manufacturing) |
10
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Care Chemicals | ||||
Alkylamine derivatives | amine derivative-based building blocks for production of flocculants intermediates for surfactants | BASF SE DowDuPont Inc. Huntsman Corporation | alkylamines ammonia alcohols ethylene oxide | water treatment personal and home care |
Specialty Fluids | ||||
Therminol® Turbo Oils Skydrol® SkyKleen® | heat transfer and aviation fluids | DowDuPont Inc. Exxon Mobil Corporation | benzene phosphorous neo-polyol esters | industrial chemicals and processing (heat transfer fluids for chemical processes) renewable energy commercial aviation |
Animal Nutrition | ||||
Formic acid solutions Enhanz™ | formic acid-based solutions | BASF SE Perstorp Luxi Chemical Group Feicheng Acid Chemicals | sulfuric acid formic acid | animal nutrition |
Crop Protection | ||||
Alkylamine derivatives Banguard™ | metam-based soil fumigants thiram and ziram-based fungicides plant growth regulator | DowDuPont Inc. Argo-Kanesho Co., Ltd. Bayer BASF SE | alkylamines CS2 caustic soda | agriculture crop protection |
Percentage of Total Segment Sales | |||
Product Lines | 2017 | 2016 | 2015 |
Coatings and Inks Additives | 23% | 24% | 24% |
Adhesives Resins | 18% | 21% | 21% |
Tire Additives | 17% | 17% | 17% |
Care Chemicals | 17% | 15% | 15% |
Specialty Fluids | 13% | 11% | 11% |
Animal Nutrition and Crop Protection | 12% | 12% | 12% |
Total | 100% | 100% | 100% |
Percentage of Total Segment Sales | |||
Sales by Customer Location | 2017 | 2016 | 2015 |
United States and Canada | 35% | 37% | 38% |
Asia Pacific | 23% | 21% | 21% |
Europe, Middle East, and Africa | 36% | 35% | 35% |
Latin America | 6% | 7% | 6% |
Total | 100% | 100% | 100% |
See Exhibit 99.01 for AFP segment revenue by end-use market.
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Strategy
Management applies the 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, consumables, building and construction, industrial applications, animal nutrition, care chemicals, crop protection, and energy. Eastman management believes that the ability to leverage the AFP segment's research, differentiated application development, and production capabilities across multiple markets 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. In order to address identified market needs, the Company is also developing new technologies such as polyester resins for coatings, sustainable solvents, and cellulose esters and hydrocarbon resins for tires.
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 2017, the Company:
• | advanced growth and innovation of Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and facilitating the introduction of new products into the tire markets; |
• | advanced growth and innovation of Tetrashield® performance polyester resins based on proprietary monomer technology. These polyester resins provide a combination of improved performance and sustainability, particularly for the automotive coatings, industrial, and food packaging markets; |
• | advanced growth and innovation of Impera® high performance resins for tires. When used as additives in tire compound formulations, Impera® resins enable tire manufacturers to improve the safety and handling of tires, balance tire performance and fuel economy needs, and achieve superior levels of tack for tire construction; |
• | advanced growth and innovation of Aerafin® polymer, developed from proprietary olefin technology. These olefin polymers enable improved processing time and other benefits including low odor, improved adhesion, exceptional peel performance, and thermal stability for adhesive applications within the hygiene market; and |
• | accelerated growth in animal nutrition and solar specialty fluids through enhanced commercial execution. |
ADVANCED MATERIALS SEGMENT
Overview
In the AM segment, the Company produces and markets polymers, films, and plastics with differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness markets. In 2017, the AM segment had sales revenue of $2.6 billion, 27 percent of Eastman's total sales. Key technology platforms for this segment include cellulose esters, copolyesters, and 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 solution for architectural and automotive applications. The Company maintains what management believes is a leading solar control technology position in the window film market through the use of high performance sputter coatings which enhance solar heat rejection while maintaining superior optical properties. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.
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Principal Products
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Specialty Plastics | ||||
Tritan® copolyester Eastar® copolyesters Spectar® copolyester Embrace® copolyester Visualize® Eastman Aspira™ family of resins Flexvue® Treva™ | copolyesters cellulose esters | Covestro Trinseo Evonik Industries AG Saudi Basic Industries Corporation Mitsubishi Chemical Corporation S.K. Chemical Industries Sichuan Push Acetati Company Limited Daicel Chemical Industries Ltd SABIC | paraxylene ethylene glycol cellulose purified terephthalic acid | consumables (consumer packaging, cosmetics packaging, in-store fixtures and displays) durable goods (consumer housewares and appliances) health and wellness (medical) electronics (displays) |
Advanced Interlayers | ||||
Saflex® Saflex® Q Series | PVB sheet specialty PVB intermediates | Sekisui Chemical Co., Ltd. Kuraray Co., Ltd Kingboard (Fo Gang) Specialty Resins Limited, Chang Chun Petrochemical Co., Ltd | polyvinyl alcohol vinyl acetate monomer butyraldehyde 2-ethyl hexanol ethanol triethylene gylcol | transportation (automotive safety glass, automotive acoustic glass, and HUD) building and construction (PVB for architectural interlayers) |
Performance Films | ||||
LLumar® SunTek® V-KOOL® Gila® | window film and protective film products for aftermarket applied films | 3M Company Saint-Gobain S.A. Beijing Kangde Xin Composite Material Company, LLC "KDX" | polyethylene terephthalate film | transportation (automotive after- market window film and paint protection film) building and construction (residential and commercial window films) |
Percentage of Total Segment Sales | |||
Product Lines | 2017 | 2016 | 2015 |
Specialty Plastics | 51% | 50% | 51% |
Advanced Interlayers | 33% | 34% | 33% |
Performance Films | 16% | 16% | 16% |
Total | 100% | 100% | 100% |
Percentage of Total Segment Sales | |||
Sales by Customer Location | 2017 | 2016 | 2015 |
United States and Canada | 36% | 37% | 38% |
Asia Pacific | 33% | 32% | 31% |
Europe, Middle East, and Africa | 26% | 26% | 26% |
Latin America | 5% | 5% | 5% |
Total | 100% | 100% | 100% |
See Exhibit 99.01 for AM segment revenue by end-use market.
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Strategy
Management applies the innovation-driven growth model in the AM segment by leveraging innovation and technology platforms into new products and applications, accelerating AM segment growth, and leveraging its manufacturing capacity. The segment continues to expand its portfolio of higher margin products in attractive end markets. Through Eastman's advantaged asset position and expertise in applications development, management believes that the AM segment is well positioned for future growth. The advanced interlayers product lines, including acoustic PVB sheet and HUD interlayers, leverage Eastman's global presence to supply industry leading innovations to automotive and architectural end markets by collaborating with global and large regional customers. In the automotive end market, the performance films product line has industry leading technologies, recognized brands, and what management believes is one of the largest distribution and dealer networks which, when combined, position Eastman for further growth, particularly in leading automotive markets such as North America and Asia. The segment's product portfolio is aligned with underlying energy efficiency trends in both automotive and architectural markets. Additionally, increased demand for BPA-free products has created new opportunities for various copolyester applications.
The AM segment expects to continue to improve product mix from increased sales of premium products, including Tritan® copolyester, Visualize® material, Saflex® Q acoustic series and Saflex® HUD interlayer products, LLumar®, V-KOOL®, and SunTek® window and protective films.
The acquisition of Commonwealth Laminating & Coating, Inc. in December 2014 further expanded the AM segment's product portfolio and sales channel network in the diverse window film markets, enabled further manufacturing and distribution efficiencies, and added industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.
In 2017, the Company:
• | advanced the continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018; |
• | advanced growth and innovation of Saflex® and HUD acoustic interlayers used in the transportation and building and construction markets, supported by construction of a manufacturing facility for PVB resin at the Kuantan, Malaysia site which became fully operational in first quarter 2018; |
• | advanced growth and innovation of Treva™, a cellulose-based engineering bioplastic that offers high performance, sustainability, and design flexibility in applications that require complex and intricate designs and high safety requirements such as eyeglass frames, wearable electronics, and lenses; and |
• | strengthened growth in performance films in North America and China through improved sales channel, marketing, and commercial execution strategies and capabilities. |
CHEMICAL INTERMEDIATES SEGMENT
Overview
The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support 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 2017, the CI segment had sales revenue of $2.7 billion, 29 percent of Eastman's total sales. Key technology platforms include acetyls, oxos, plasticizers, polyesters, and alkylamines.
The CI segment product lines benefit from competitive cost positions primarily resulting from the use of and access to lower cost raw materials, and the Company's scale, technology, and operational excellence. Examples include coal used in the production of cellulose and acetyl stream product lines, feedstocks used in the production of olefin derivative product lines such as oxo alcohols and plasticizers, and ammonia and methanol used to manufacture methylamines. The CI segment also provides superior reliability to customers through its backward integration into readily available raw materials, such as ethane, propane, and coal. In addition to a competitive cost position, the plasticizers business 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.
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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
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Intermediates | ||||
Oxo alcohols and derivatives Acetic acid and derivatives Acetic anhydride Ethylene Glycol ethers Esters | Olefin derivatives, acetyl derivatives, ethylene, commodity solvents | Lyondell Bassell, BASF SE DowDuPont Inc. Oxea BP plc Celanese Corporation Lonza Flint Hills Resources | propane ethane propylene coal natural gas paraxylene metaxylene | industrial chemicals and processing building and construction (paint and coating applications, construction chemicals, building materials) pharmaceuticals and agriculture health and wellness packaging |
Plasticizers | ||||
Eastman 168® DOP Benzoflex® TXIB® Effusion™ | primary non- phthalate and phthalate plasticizers and a range of niche non- phthalate plasticizers | BASF SE Exxon Mobil Corporation LG Chem, Ltd. Emerald Performance Materials | propane propylene paraxylene | building and construction (non-phthalate plasticizers used in interior surfaces) consumables (food packaging, packaging adhesives, and glove applications) health and wellness (medical devices) |
Functional Amines | ||||
Alkylamines | methylamines and salts higher amines and solvents | BASF SE Chemours U.S. Amines Oxea | methanol ammonia acetone ethanol butanol | agrochemicals energy consumables water treatment animal nutrition industrial intermediates |
Percentage of Total Segment Sales | |||
Product Lines | 2017 | 2016 | 2015 |
Intermediates | 64% | 65% | 65% |
Plasticizers | 19% | 20% | 20% |
Functional Amines | 17% | 15% | 15% |
Total | 100% | 100% | 100% |
Percentage of Total Segment Sales | |||
Sales by Customer Location | 2017 | 2016 | 2015 |
United States and Canada | 68% | 69% | 69% |
Asia Pacific | 14% | 12% | 12% |
Europe, Middle East, and Africa | 12% | 13% | 13% |
Latin America | 6% | 6% | 6% |
Total | 100% | 100% | 100% |
See Exhibit 99.01 for CI segment revenue by end-use market.
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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. Through the CI segment, the Company has leveraged the advantage of its highly integrated manufacturing facilities. For example, the Kingsport, Tennessee manufacturing facility allows for the production of acetic anhydride and other acetyl derivatives from coal rather than natural gas or other petroleum feedstocks. At the Longview, Texas manufacturing facility, Eastman uses its proprietary oxo 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 over competitors.
In 2017, to support the increased emphasis on specialty businesses and products, the Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company.
The Company is party to an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant to further improve the Company's long-term competitive cost position. The Company expects to begin purchasing propylene from this plant in first half 2018. Prior to beginning these purchases, the Company will continue to benefit from a propylene market contract with an advantaged cost position for purchased propylene.
FIBERS SEGMENT
Overview
In the Fibers segment, Eastman manufactures and sells Estron® acetate tow and Estrobond® triacetin plasticizers for use in filtration media, primarily cigarette filters; Estron® natural (undyed) and Chromspun® solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman is one of the world's two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began production in the early 1950s. The Company is the world's largest producer of acetate yarn and has been in this business for over 85 years. In 2017, the Fibers segment had sales revenue of $852 million, 9 percent of Eastman's total sales.
The largest 10 Fibers segment customers accounted for approximately 70 percent of the segment's 2017 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, balanced internally produced acetate flake supply for Fibers products, a reputation for customer service excellence, and a customer base characterized by strategic long-term customer and end user relationships. The Company continues to capitalize and build on these strengths to further improve the strategic position of its Fibers segment. Despite continued challenging acetate tow market conditions, including additional industry capacity and lower capacity utilization rates, management expects continued strong Fibers segment cash flow.
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Principal Products
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Acetate Tow | ||||
Estron® | cellulose acetate tow | Celanese Corporation Rhodia Acetow Daicel Corporation Mitsubishi Rayon Co. Ltd. | wood pulp methanol high sulfur coal | filtration media (primarily cigarette filters) |
Acetyl Chemical Products | ||||
Estrobond® | triacetin cellulose acetate flake acetic acid acetic anhydride | Jiangsu Ruijia Chemistry Co., Ltd. Polynt SPA Daicel Corporation Celanese Corporation Rhodia Acetow | wood pulp methanol high sulfur coal | filtration media (primarily cigarette filters) |
Acetate Yarn | ||||
Estron® Chromspun® Naia® Avra™ Vestera™ | natural (undyed) acetate yarn solution dyed acetate yarn natural (undyed) polyester yarn | UAB Dirbtinis Pluostas Industrias del Acetato de Celulosa S.A. Mitsubishi Rayon Co. Ltd. Invista Nan Ya Plastics Corporation | wood pulp methanol high sulfur coal polyethylene terephthalate | consumables (apparel, home furnishings, and industrial fabrics) health and wellness (medical tape) |
Percentage of Total Segment Sales | |||
Product Lines | 2017 | 2016 | 2015 |
Acetate Tow | 77% | 80% | 78% |
Acetyl Chemical Products | 15% | 13% | 14% |
Acetate Yarn | 8% | 7% | 8% |
Total | 100% | 100% | 100% |
Percentage of Total Segment Sales | |||
Sales by Customer Location | 2017 | 2016 | 2015 |
United States and Canada | 22% | 21% | 21% |
Asia Pacific | 37% | 44% | 49% |
Europe, Middle East, and Africa | 37% | 29% | 26% |
Latin America | 4% | 6% | 4% |
Total | 100% | 100% | 100% |
Strategy
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 180,000 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.
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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 market. During 2017, the Company advanced innovation of new product offerings including Naia®, a yarn for the apparel market developed from Eastman's proprietary cellulose ester technology; Avra™, a family of fibers for the performance apparel market developed from a combination of Eastman proprietary spinning technology and polymer chemistry enabling unique fiber capabilities of size, shape, comfort, and performance; and Vestera™, a new wood pulp-based alternative for the nonwoven industry used in personal hygiene applications.
As a result of challenging market conditions for acetate tow, the Company closed its Workington, UK acetate tow manufacturing facility in 2015. Following an increase in acetate flake capacity at the Kingsport, Tennessee site in 2015, the Fibers segment could supply all its acetate tow and yarn spinning capacity from this low-cost flake asset. In order to fully utilize the increased capacity and reduce fixed costs, in June 2016, the Company sold its 50 percent interest in Primester, which manufactures cellulose acetate at the Company's Kingsport, Tennessee site.
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EASTMAN CHEMICAL COMPANY GENERAL INFORMATION |
Financial Information About Geographic Areas
Eastman operates as a global business with approximately 55 percent of its 2017 sales revenue generated from outside the United States and Canada region. The United States and Canada region contains the highest concentration of the Company's long-lived assets with approximately 75 percent located in the United States. The Company has expanded its international manufacturing presence and is also able to transport products globally to meet demand. While all regions are affected by uncertainty and volatility in the global economy, the degree of the impact on the various regions is dependent on the mix of the Company's operating segments and products in each region. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report. For sales by customer location by business segments, see "Business Segments". For sales revenue by geographic areas, see Note 19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Sales by Customer Location" in Part II, Item 7 of this Annual Report. For long-lived assets by geographic areas, see Note 19, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
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 the AM segment are typically weaker in fourth quarter due to seasonal downturns in key markets.
The coatings and inks additives product line of the AFP segment and the intermediates product 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. Supply and demand dynamics determine profitability at different stages of business cycles and global economic conditions affect the length of each cycle.
Despite sensitivity to global economic conditions, the product portfolios of each operating segment are expected to continue to provide an overall stable foundation for earnings growth.
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 distributors, dealers, and contract representatives. Sales outside the United States tend to be made more frequently through distributors, dealers, and contract representatives than sales in the United States. The combination of direct and indirect sales channels, including sales online through its Customer Center website, allows Eastman to reliably serve customers throughout the world.
The Company's products are shipped to customers and to downstream users directly from Eastman manufacturing plants and distribution centers worldwide.
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Sources and Availability of Raw Material and Energy
Eastman purchases approximately 75 percent of its key raw materials and energy through different contract mechanisms, generally of two to five years in initial duration with renewal or cancellation options for each party. Most of these agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase, and Eastman uses derivative financial instruments for certain of its key raw materials to mitigate the impact of market price fluctuations. Key raw materials include propane, cellulose, paraxylene, propylene, methanol, fatty alcohol, polyvinyl alcohol, and a wide variety of precursors for specialty organic chemicals. Key purchased energy sources include natural gas, coal, and electricity. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and on-going performance 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 cost improvements, 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 45 percent in 2017. For additional information about raw materials, see Exhibit 99.02 "Product and Raw Material Information" of this Annual Report.
Manufacturing Streams
Integral to Eastman's strategy for growth is leveraging its heritage of expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries in key markets, including transportation, building and construction, consumables, filtration media, and agriculture. For each of these chemistries, Eastman has developed and acquired a combination of assets and technologies that are operated within four manufacturing "streams", combining scale and integration across multiple manufacturing units and sites as a competitive advantage.
• | In the cellulose and acetyl stream, the Company begins with coal which is gasified with oxygen in its coal gasification facility. The resulting synthesis gas is converted into a number of chemicals including methanol, methyl acetate, acetic acid, and acetic anhydride. The Company's ability to use coal is a long-term raw material cost advantage. Cellulose derivative manufacturing at the Company begins with natural polymers, sourced from managed forests, which, when combined with acetyl and olefin chemicals, provide differentiated product lines. Cellulose and acetyl stream products include, but are not limited to, cellulose fibers, plastics, and esters. The major end markets for products from the cellulose and acetyl stream include coatings, displays, thermoplastics, and filtration media. |
• | 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 the "olefin" chemicals ethylene and propylene in three cracking units at its facility in Longview, Texas. The Company purchases additional propylene for use at its Longview facility and other facilities outside the United States. Propylene derivative products are used in a variety of items such as paints and coatings, automotive safety glass, and non-phthalate plasticizers. Ethylene derivative products are converted for end uses in the food industry, health and beauty products, detergents, and automotive products. Historically, periodic additions of large blocks of capacity have caused profit margins of light olefins to expand and contract, resulting in "ethylene" or "olefins" cycles. The Company believes it is positioned to be less impacted by these cycles than more commodity-based producers due to its diverse derivatives products and focus on more specialty markets. |
• | In the polyester stream, the Company begins with purchased paraxylene and produces purified terephthalic acid ("PTA") and dimethyl terephthalate ("DMT") for polyesters and copolyesters. PTA or DMT is then reacted with various glycols, which the Company either makes or purchases, along with other raw materials (some of which the Company makes and are proprietary) to produce copolyesters. The Company believes that this backward integration of polyester manufacturing is a competitive advantage, giving Eastman a low-cost position, and a more reliable intermediate supply. In addition, Eastman can add specialty monomers to copolyesters to provide clear, tough, chemically resistant product characteristics. As a result, the Company's copolyesters effectively compete with materials such as polycarbonate and acrylic. |
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• | In the alkylamines stream, the Company begins with ammonia and alcohols to produce methylamines and higher alkylamines, which can then be further reacted with other chemicals to produce alkylamine derivatives. The Company's alkylamines products are primarily used in agriculture, water treatment, consumables, animal nutrition, and oil and gas end markets. The Company is recognized as one of the leading global producers of alkylamines. Methylamines are manufactured by reacting methanol with ammonia in a catalytic reactor, purified by distillation and used as building blocks to produce downstream derivatives or sold externally to merchant customers. The term "higher alkylamines" refers to amines produced with alcohols (ethyl, n butyl, n propyl, isopropyl and cyclohexyl amines). The use of different alcohols results in the creation of different higher alkylamines which are used both internally to produce derivatives or sold externally to the merchant market. |
The Company leverages its expertise and innovation in cellulose and acetyl, olefins, polyester, and alkylamine chemistries and technologies, to meet demand and create new uses and opportunities for the Company's products in key markets. Through integration and optimization across these streams, the Company is able to create unique and differentiated products that have a performance advantage over competitive materials.
Capital Expenditures
Capital expenditures were $649 million, $626 million, and $652 million in 2017, 2016, and 2015, respectively. Capital expenditures in 2017 were primarily for AFP and AM segments manufacturing expansions in Kuantan, Malaysia, an AM segment expansion of Tritan® copolyester capacity in Kingsport, Tennessee, an AFP segment expansion of specialty ketones manufacturing capacity in Kingsport, Tennessee, and site modernization projects in Longview, Texas. Capital expenditures in 2017 included $49 million for repair and reconstruction of the manufacturing facilities damaged in the previously reported fourth quarter 2017 coal gasification incident. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Overview" for a description of the coal gasification incident and its impact on financial results. The Company expects that 2018 capital spending will be approximately $550 million primarily for targeted growth initiatives and maintenance.
Employees
Eastman employs approximately 14,000 men and women worldwide. Approximately 10 percent of the total worldwide labor force is represented by collective labor agreements, mostly outside the United States.
Customers
Eastman has an extensive customer base and, while it is not dependent on any one customer, loss of certain top customers could adversely affect the Company until such business is replaced. The top 100 customers accounted for approximately 55 percent of the Company's 2017 sales revenue. No single customer accounted for 10 percent or more of the Company's consolidated sales revenue during 2017.
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 that expire at various times, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular operating segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad range of advanced materials, specialty additives, chemicals, and fibers, Eastman owns over 700 active United States patents and more than 1,600 active foreign patents, expiring at various times over several years, and owns over 5,000 active worldwide trademark applications and registrations. Eastman continues to actively protect its intellectual property. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot ensure that it will be able to adequately protect its intellectual property assets outside the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II Item 7 of this Annual Report.
The Company pursues opportunities to license proprietary technology to third parties 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.
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Research and Development
For 2017, 2016, and 2015, Eastman's R&D expenses totaled $215 million, $219 million, and $242 million, respectively. Management applies the innovation-driven growth model to leverage the Company's world class scalable technology platforms that provide a competitive advantage and the foundation for sustainable earnings growth. The Company's R&D strategy for sustainable growth through innovation includes multi-generational product development for specialty products, faster and more differentiated product development, and the creation of value through integration of multiple technology platforms. This strategy has been accelerated by recent enhancements of global differentiated application development capabilities that position Eastman as a strategic element of the Company's customers’ success within attractive niche markets. These enhanced AM segment growth in the automotive market through new solutions such as Saflex® and HUD acoustic interlayers and in the AFP segment's launch of Tetrashield® performance polyester resins for solutions in the transportation and food packaging markets.
The Company manages certain growth initiatives and costs at the corporate level, including certain R&D costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional amounts are spent on those projects. The Company continues to explore and invest in R&D initiatives such as high performance materials and advanced cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles. In 2017, the Company shifted some R&D resources from process technology to application development with focus on new product introductions.
Environmental
Eastman's cash expenditures related to environmental protection and improvement were $257 million, $267 million, and $290 million, in 2017, 2016, and 2015, respectively, and include operating costs associated with environmental protection equipment and facilities, engineering costs, and construction costs. These cash expenditures include environmental capital expenditures of approximately $38 million, $45 million, and $52 million in 2017, 2016, and 2015, respectively.
The Company is subject to significant and complex laws, regulations, and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal, and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Health, Safety, Environmental and Security Committee of Eastman's Board of Directors oversees the Company's policies and practices concerning health, safety, and the environment and its processes for complying with related laws and regulations, and monitors related matters.
The Company's policy is to operate its plants and facilities in compliance with all applicable laws and regulations such that it protects the environment and the health and safety of its employees and the public. The Company intends to continue to make expenditures for environmental protection and improvements in a timely manner consistent with its policies and with 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.
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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, 2017, Eastman's backlog of firm sales orders represented less than 10 percent of the Company's total consolidated revenue for the year. These orders are primarily short-term and all orders are expected to be filled in the following year. The Company manages its inventory levels to control the backlog of products depending on customers' needs. In areas where the Company is the single source of supply, or competitive forces or customers' needs dictate, the Company may carry additional inventory to meet customer requirements.
Available Information - SEC Filings
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 Company is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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 |
None.
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EXECUTIVE OFFICERS OF THE COMPANY |
Certain information about Eastman's executive officers is provided below:
Mark J. Costa, age 51, is Chief Executive Officer and Chair of the Eastman Chemical Company Board of Directors. Mr. Costa joined the Company in June 2006 as Senior Vice President, Corporate Strategy and Marketing; was appointed Executive Vice President, Polymers Business Group Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer in May 2009; and became President and a member of the Board of Directors of the Company in May 2013. Prior to joining Eastman, Mr. Costa was a senior partner with Monitor Group ("Monitor"). He joined Monitor, a global management consulting firm, in 1988, and his experience included corporate and business unit strategies, asset portfolio strategies, innovation and marketing, and channel strategies across a wide range of industries. Mr. Costa was appointed Chief Executive Officer in January 2014 and was named Board Chair effective July 2014.
Curtis E. Espeland, age 53, is Executive Vice President and Chief Financial Officer. Mr. Espeland joined Eastman in 1996, and has served in various financial management positions of increasing responsibility, including Director of Internal Auditing; Director of Finance, Asia Pacific; Director of Corporate Planning and Forecasting; Vice President and Controller; Vice President, Finance, Eastman Division; Vice President, Finance, Polymers; and Senior Vice President and Chief Financial Officer from 2008 until December 2013. He served as the Company's Chief Accounting Officer from December 2002 to 2008. Prior to joining Eastman, Mr. Espeland was an audit and business advisory manager with Arthur Andersen LLP in the United States, Eastern Europe, and Australia. Mr. Espeland was appointed to his current position effective January 2014.
Brad A. Lich, age 50, is Executive Vice President and Chief Commercial Officer, with responsibility for the Advanced Materials ("AM") and Fibers segments, outside U.S. regional business leadership, and the marketing, sales, pricing, and procurement organizations. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for the Coatings business. Other positions of increasing responsibility followed, including General Manager of Emerging Markets of the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the CASPI segment, and in 2012 was appointed Vice President and General Manager of the Additives & Functional Products ("AFP") segment. In January 2014, Mr. Lich was appointed Executive Vice President, with responsibility for the AFP and AM segments and the marketing, sales, and pricing organizations. In March 2016, Mr. Lich assumed executive responsibility for outside U.S. regional business leadership. Mr. Lich was appointed to his current position effective July 2016.
Lucian Boldea, age 46, is Senior Vice President with responsibility for the AFP segment. Mr. Boldea joined Eastman in 1997 as a chemist. During his career at Eastman, he has held various positions in R&D, licensing, business management, and corporate growth platforms leadership. These positions included Technology Director for the former Performance Chemicals and Intermediates ("PCI") segment and Director of Corporate Growth Platforms. In 2015, he was Group Vice President and General Manager of the AFP segment. Mr. Boldea was appointed to his current position effective July 2016.
Mark K. Cox, age 52, is Senior Vice President and Chief Manufacturing, Supply Chain, and Engineering Officer. Mr. Cox joined Eastman in 1986 and has served in a variety of management positions, including leadership roles within the business management, manufacturing, and technology areas. Additionally, he has held responsibility for Eastman's Corporate Six Sigma program. In August 2008, Mr. Cox was appointed Vice President, Chemicals and Fibers Technology. Beginning in May 2009, Mr. Cox served as Vice President, Chemicals, Fibers, and Performance Polymers Technology. He was appointed Vice President, Worldwide Engineering and Construction in August 2010, appointed Senior Vice President and Chief Manufacturing and Engineering Officer effective January 2014, and to his current position effective March 2016.
Stephen G. Crawford, age 53, is Senior Vice President and Chief Technology Officer, with executive responsibility for corporate innovation. Mr. Crawford joined Eastman in 1987. Since then, he has held several leadership positions of increasing responsibility in both the manufacturing and technology organizations. Since 2007, he has served as Vice President of Global R&D in the AM and AFP segments. Mr. Crawford was appointed to his current position effective January 2014.
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David A. Golden, age 52, is Senior Vice President, Chief Legal & Sustainability Officer and Corporate Secretary. Mr. Golden has overall responsibility for Eastman's Legal, Corporate Health, Safety, Environment, Security, Product Safety and Regulatory Affairs, Sustainability, Government Relations, Community Affairs, and Public Policy functions. He also has overall responsibility for Eastman's Global Business Conduct and International Trade Compliance programs. Prior to this position, he was Vice President, Associate General Counsel, and Corporate Secretary with overall responsibility for Eastman's Legal Department. Mr. Golden joined Eastman in 1995 as an attorney and has held positions of increasing responsibility, including serving as the Director of Internal Audit from October 2005 to October 2007 and Vice President and Assistant General Counsel responsible for the Company's commercial and international law groups from 2007 to 2010. Mr. Golden was appointed Senior Vice President, Chief Legal Officer, and Corporate Secretary in January 2013 and to his current position including executive leadership of the Company's sustainability efforts in March 2016. Prior to joining Eastman, he worked as an attorney in the Atlanta office of the law firm of Hunton & Williams.
Perry Stuckey III, age 58, is Senior Vice President, Chief Human Resources Officer. Mr. Stuckey joined Eastman in 2011 as Vice President, Global Human Resources, and was responsible for Eastman's human resources strategy and services worldwide. Mr. Stuckey's work experience includes a variety of global human resource management positions in manufacturing, industrial automation, and bio-technology companies, including Hill-Rom Company, Rockwell Automation, and Monsanto Company. Mr. Stuckey was appointed to his current position in January 2013.
Damon C. Warmack, age 60, is Senior Vice President, Corporate Development and Chemical Intermediates. Mr. Warmack joined Eastman in 1980, working in a series of sales and product management positions. He was located in Taiwan, Hong Kong, Shanghai, and Singapore with a range of assignments including the establishment of Eastman's commercial presence in China, joint venture development and management, and serving as Vice President and Managing Director, Asia Pacific. In addition, he served as Vice President and General Manager of Resins, Inks, and Monomers, leading the restructure and divestiture of this business. Mr. Warmack then served as Vice President and General Manager of the former CASPI segment and then of the former PCI segment. More recently, he had responsibility for corporate development and strategic planning, playing a lead role in the Company's business portfolio transformation through acquisitions and divestitures. Mr. Warmack was appointed to his current position effective July 2016.
Scott V. King, age 49, is Vice President, Corporate Controller and Chief Accounting Officer. Since joining Eastman in 1999 as Manager, Corporate Consolidations and External Reporting, Mr. King has held various positions of increasing responsibility in the financial organization. He was first appointed Corporate Controller in August 2007 and has served as Chief Accounting Officer since September 2008. Prior to joining Eastman, Mr. King was an audit and business advisory manager with PricewaterhouseCoopers LLP.
ITEM 2. | PROPERTIES |
At December 31, 2017, Eastman owned or operated 48 manufacturing sites and had equity interests in three manufacturing joint ventures in a total of 14 countries. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions; however, none of the principal plants are 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.
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The locations and general character of the Company's manufacturing sites are:
Segment using manufacturing location | ||||
Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
USA | ||||
Alvin, Texas (1) | x | |||
Anniston, Alabama | x | |||
Axton, Virginia | x | |||
Canoga Park, California (2) | x | |||
Cartersville, Georgia (1) | x | |||
Chestertown, Maryland | x | |||
Columbia, South Carolina (1) | x | |||
Franklin, Virginia (1) | x | |||
Jefferson, Pennsylvania | x | |||
Kingsport, Tennessee | x | x | x | x |
Lemoyne, Alabama (1) | x | |||
Linden, New Jersey | x | |||
Longview, Texas | x | x | x | |
Martinsville, Virginia (3) | x | |||
Monongahela, Pennsylvania | x | |||
Pace, Florida | x | x | ||
Sauget, Illinois | x | |||
Springfield, Massachusetts | x | |||
St. Gabriel, Louisiana | x | x | ||
Sun Prairie, Wisconsin | x | |||
Texas City, Texas | x | |||
Trenton, Michigan | x | |||
Watertown, New York (4) | ||||
Europe | ||||
Antwerp, Belgium (1) | x | x | ||
Ghent, Belgium (3) | x | x | x | |
Kohtla-Järve, Estonia | x | x | ||
Oulu, Finland (2) | x | |||
Dresden, Germany | x | |||
Leuna, Germany | x | x | ||
Nienburg, Germany | x | |||
Middelburg, the Netherlands | x | |||
Newport, Wales | x | x |
(1) | Eastman is a guest under an operating agreement with a third party 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 site at this location. |
(4) | This location supports developing businesses of the Eastman microfiber technology platform, the financial results of which are not identifiable to an operating segment and are included in "Other". |
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Segment using manufacturing location | ||||
Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
Asia Pacific | ||||
Nanjing, China | x | x | ||
Suzhou, China (1)(2)(3) | x | x | ||
Wuhan, China (4) | x | |||
Yixing, China | x | |||
Zibo, China (5) | x | x | ||
Kashima, Japan | x | |||
Ulsan, Korea (6) | x | |||
Kuantan, Malaysia (1) | x | x | ||
Jurong Island, Singapore (1) | x | x | ||
Latin America | ||||
Itupeva, Brazil (7) | x | |||
Mauá, Brazil | x | |||
Santo Toribio, Mexico | x | |||
Uruapan, Mexico | x |
(1) | Eastman leases from a third party and operates the site. |
(2) | Eastman has more than one manufacturing site at this location. |
(3) | Eastman holds a 60 percent share 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) | 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 sites at the following locations:
Segment using manufacturing location | ||||
Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers |
Asia Pacific | ||||
Hefei, China | x | |||
Nanjing, China | x | |||
Shenzhen, China | x |
Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases approximately 200 stand-alone distribution facilities in approximately 30 countries. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Shanghai, China; Miami, Florida; Capelle aan den IJssel, the Netherlands; Zug, Switzerland; Singapore; and Kingsport, Tennessee. 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.
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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 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 as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a)Eastman Chemical Company's ("Eastman" or the "Company") common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN". The following table presents the high and low sales prices of the common stock on the NYSE and the cash dividends per share declared by the Company's Board of Directors for each quarterly period of 2017 and 2016:
High | Low | Cash Dividends Declared | ||||||||||
2017 | First Quarter | $ | 82.10 | $ | 74.78 | $ | 0.51 | |||||
Second Quarter | 86.28 | 76.11 | 0.51 | |||||||||
Third Quarter | 90.97 | 81.91 | 0.51 | |||||||||
Fourth Quarter | 94.96 | 86.58 | 0.56 | |||||||||
2016 | First Quarter | $ | 74.98 | $ | 56.03 | $ | 0.46 | |||||
Second Quarter | 78.79 | 65.19 | 0.46 | |||||||||
Third Quarter | 72.50 | 63.10 | 0.46 | |||||||||
Fourth Quarter | 77.98 | 62.70 | 0.51 |
As of December 31, 2017, there were 142,966,679 shares of Eastman's common stock issued and outstanding, which shares were held by 15,804 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation. The Company's Board of Directors has declared a cash dividend of $0.56 per share during the first quarter of 2018, payable on April 6, 2018 to stockholders of record on March 15, 2018. Quarterly dividends on common stock, if declared by the Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. The payment of dividends is a business decision made by the Board of Directors, from time to time, based on the Company's earnings, financial position and prospects, and such other considerations as the Board considers relevant. Accordingly, while management currently expects that the Company will continue to pay a quarterly cash dividend, its dividend practice may change at any time.
See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance Under Equity Compensation Plans" of this Annual Report on Form 10-K (this "Annual Report") for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
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(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers:
In February 2014, the Board of Directors authorized the repurchase of up to $1 billion of the Company's outstanding common stock. As of December 31, 2017, a total of 10,726,827 shares have been repurchased under this authorization for a total amount of $848 million. During 2017, the Company repurchased 4,184,637 shares of common stock for a total cost of approximately $350 million. In February 2018, the Company's Board of Directors authorized the repurchase of up to an additional $2 billion of Eastman's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interests of the Company. For additional information, see Note 14, "Stockholders' Equity", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Period | Total Number of Shares Purchased | Average Price Paid Per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs | ||||||
October 1 - 31, 2017 | 280,114 | $ | 89.25 | 280,114 | $ | 202 | ||||
November 1 - 30, 2017 | — | $ | — | — | $ | 202 | ||||
December 1 - 31, 2017 | 543,740 | $ | 91.96 | 543,740 | $ | 152 | ||||
Total | 823,854 | $ | 91.04 | 823,854 |
(1)Average price paid per share reflects the weighted average purchase price paid for shares.
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ITEM 6. | SELECTED FINANCIAL DATA |
Statements of Earnings Data | Year Ended December 31, | ||||||||||||||||||
(Dollars in millions, except per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
Sales | $ | 9,549 | $ | 9,008 | $ | 9,648 | $ | 9,527 | $ | 9,350 | |||||||||
Operating earnings | 1,532 | 1,383 | 1,384 | 1,162 | 1,862 | ||||||||||||||
Earnings from continuing operations | 1,388 | 859 | 854 | 755 | 1,172 | ||||||||||||||
Earnings from discontinued operations | — | — | — | 2 | — | ||||||||||||||
Net earnings | 1,388 | 859 | 854 | 757 | 1,172 | ||||||||||||||
Less: Net earnings attributable to noncontrolling interest | 4 | 5 | 6 | 6 | 7 | ||||||||||||||
Net earnings attributable to Eastman | $ | 1,384 | $ | 854 | $ | 848 | $ | 751 | $ | 1,165 | |||||||||
Amounts attributable to Eastman: | |||||||||||||||||||
Earnings from continuing operations, net of tax | $ | 1,384 | $ | 854 | $ | 848 | $ | 749 | $ | 1,165 | |||||||||
Earnings from discontinued operations, net of tax | — | — | — | 2 | — | ||||||||||||||
Net earnings attributable to Eastman | $ | 1,384 | $ | 854 | $ | 848 | $ | 751 | $ | 1,165 | |||||||||
Basic earnings per share attributable to Eastman: | |||||||||||||||||||
Earnings from continuing operations | $ | 9.56 | $ | 5.80 | $ | 5.71 | $ | 5.01 | $ | 7.57 | |||||||||
Earnings from discontinued operations | — | — | — | 0.02 | — | ||||||||||||||
Net earnings | $ | 9.56 | $ | 5.80 | $ | 5.71 | $ | 5.03 | $ | 7.57 | |||||||||
Diluted earnings per share attributable to Eastman: | |||||||||||||||||||
Earnings from continuing operations | $ | 9.47 | $ | 5.75 | $ | 5.66 | $ | 4.95 | $ | 7.44 | |||||||||
Earnings from discontinued operations | — | — | — | 0.02 | — | ||||||||||||||
Net earnings | $ | 9.47 | $ | 5.75 | $ | 5.66 | $ | 4.97 | $ | 7.44 | |||||||||
Statements of Financial Position Data | |||||||||||||||||||
Current assets | $ | 3,143 | $ | 2,866 | $ | 2,878 | $ | 3,173 | $ | 2,840 | |||||||||
Net properties | 5,607 | 5,276 | 5,130 | 5,087 | 4,290 | ||||||||||||||
Goodwill | 4,527 | 4,461 | 4,518 | 4,486 | 2,637 | ||||||||||||||
Intangible assets, net of accumulated amortization | 2,373 | 2,479 | 2,650 | 2,905 | 1,781 | ||||||||||||||
Total assets | 15,999 | 15,457 | 15,580 | 16,072 | 11,845 | ||||||||||||||
Current liabilities | 1,982 | 1,795 | 2,056 | 2,022 | 1,470 | ||||||||||||||
Long-term borrowings | 6,147 | 6,311 | 6,577 | 7,248 | 4,254 | ||||||||||||||
Total liabilities | 10,519 | 10,849 | 11,559 | 12,482 | 7,970 | ||||||||||||||
Total Eastman stockholders' equity | 5,403 | 4,532 | 3,941 | 3,510 | 3,796 | ||||||||||||||
Dividends declared per share | 2.09 | 1.89 | 1.66 | 1.45 | 1.25 |
On December 5, 2014, Eastman completed its acquisition of Taminco Corporation ("Taminco"), a global specialty chemical company. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Taminco's debt of $1.1 billion. The acquisition was accounted for as a business combination. Taminco's former specialty amines and crop protection businesses are managed and reported as part of the Additives & Functional Products ("AFP") segment and its former functional amines business are managed and reported as part of the Chemical Intermediates ("CI") segment.
On December 11, 2014, the Company acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") for a total purchase price of $438 million including the repayment of debt. The acquisition was accounted for as a business combination and the acquired business is managed and reported in the Advanced Materials ("AM") segment.
On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and the acquired business is managed and reported in the AFP segment.
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On August 6, 2014, the Company acquired Knowlton Technologies, LLC, for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired business is a developing business of the Eastman microfiber technology platform, the financial results of which are not identifiable to an operating segment and are included in "Other".
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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 2017 Annual Report on Form 10-K. All references to earnings per share ("EPS") contained in this report are to diluted earnings per share unless otherwise noted.
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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 contingent assets and liabilities. On an ongoing basis, Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's management believes the critical accounting estimates described below are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants. 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.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. Key assumptions and estimates used in the Company's 2017 goodwill impairment testing included projections of revenues, expenses, and cash flows determined using the Company's annual multi-year strategic plan and a market participant tax rate. The most critical assumptions are the estimated discount rate and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different determinations. In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.
If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including a valuation of the estimated fair value of the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the tests performed during fourth quarter 2017, there were no impairments of the Company's goodwill. Fair values substantially exceeded the carrying values for each reporting unit tested, except for the crop protection reporting unit (part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report).
As of December 31, 2017, goodwill of $274 million is allocated to the crop protection reporting unit. As of fourth quarter testing, crop protection had an estimated fair value that exceeded the carrying value including goodwill by nine percent. The crop protection reporting unit is directly impacted by the agricultural market. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the discount rate. The Company performed a sensitivity analysis of both of those assumptions. The fair value was eight percent less than the carrying value with a one percent decrease in the target market long-term growth rate and ten percent less than the carrying value with a one percent increase in the discount rate. The business performance for 2017 exceeded expectations used in the previous impairment analysis. Although management believes its estimate of fair value is reasonable, if the crop protection reporting unit's financial performance falls below expectations or there are negative revisions to key assumptions, the Company may be required to recognize an impairment charge.
Indefinite-lived Intangible Assets
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 $539 million in indefinite-lived intangible assets at the time of impairment testing. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2017. The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of triggering events which might require additional testing before the next annual impairment test.
Environmental Costs
Eastman accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum undiscounted amount. This undiscounted accrued amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $280 million to the maximum of $483 million and from the best estimate or minimum of $295 million to the maximum of $503 million at December 31, 2017 and December 31, 2016, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts accrued at both December 31, 2017 and December 31, 2016.
35
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. Currently, the Company's environmental assets are expected to reach the end of their useful lives at different times over the next 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged to earnings will be impacted. For sites that have environmental asset retirement obligations, the best estimate for these asset retirement obligation costs accrued to date was $24 million and $26 million at December 31, 2017 and December 31, 2016, respectively.
The Company's total amount reserved for environmental loss contingencies, including the remediation and closure and post-closure costs described above, was $304 million and $321 million at December 31, 2017 and December 31, 2016, 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.
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 3.57 percent and 2.25 percent, respectively, and weighted average expected returns on plan assets of 7.48 percent and 4.83 percent, respectively at December 31, 2017. The Company assumed a weighted average discount rate of 3.54 percent for its other postretirement benefit plans and an expected return on plan assets of 3.75 percent for its voluntary employees' beneficiary association retiree trust at December 31, 2017. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
The Company performed a five-year experience study of the assumptions for the U.S. plans in 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, 2017 and 2018 expense are affected by year-end 2017 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Assumption | Impact on 2018 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Pension Plans | Impact on December 31, 2017 Projected Benefit Obligation for Pension Plans | Impact on 2018 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 2017 Benefit Obligation for Other Postretirement Benefit Plans | |
U.S. | Non-U.S. | ||||
25 basis point decrease in discount rate | -$3 Million | +$57 Million | +$43 Million | -$1 Million | +$18 Million |
25 basis point increase in discount rate | +$3 Million | -$55 Million | -$39 Million | +$1 Million | -$17 Million |
25 basis point decrease in expected return on plan assets | +$7 Million | No Impact | No Impact | <+$0.5 Million | No Impact |
25 basis point increase in expected return on plan assets | -$7 Million | No Impact | No Impact | <-$0.5 Million | No Impact |
The assumed discount rate and expected return on plan assets used to calculate the Company's pension and other postretirement benefit obligations are established each December 31. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected cash flows of the pension and other postretirement benefit obligations. Because future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on the results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the trusts invest their funds, primarily in U.S. and non-U.S. fixed income, U.S. and non-U.S. public equity, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions.
In 2016, the Company changed the approach used to calculate service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans. The Company elected to calculate service and interest costs by applying the specific spot rates along the yield curve to the plans' projected cash flows. The change does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, 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 2017, 2016, and 2015 due to the actual experience versus actuarial assumptions for the defined benefit pension and other postretirement benefit plans were a net gain of $21 million, net loss of $97 million, and net loss of $115 million, respectively. The 2017 MTM net gain included an actuarial loss of approximately $115 million, resulting primarily from the Company's December 31, 2017 weighted-average assumed discount rate of 3.25 percent, down from the prior year, and changes in other actuarial assumptions. Overall asset values increased approximately $135 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual return was approximately $315 million, or an approximately 11 percent gain, which was above the expected return of approximately $180 million, or approximately 7 percent.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While changes in obligations do not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirement, attrition rates of employees, and other factors. For further information regarding pension and other postretirement benefit obligations, see Note 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 accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon facts and information currently available, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be adversely affected by monetary damages, costs or expenses, and charges against earnings in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities on Eastman's balance sheet are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the (benefit from) provision for income taxes could have a material impact on the consolidated results of operations and statement of financial position. As of December 31, 2017 and 2016, valuation allowances of $410 million and $278 million, respectively, have been provided against the deferred tax assets. The Company recognizes income tax positions that are more likely than not to be realized and accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet.
On December 22, 2017, the 2017 "Tax Cuts and Jobs Act" ("Tax Reform Act") was enacted. Accounting for the impacts of newly enacted tax legislation are generally required to be completed in the period of enactment. Following enactment of the Tax Reform Act, the SEC provided guidance for initial accounting for the Tax Reform Act in Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"). The period to finalize accounting for the Tax Reform Act is up to one year following the enactment date and SAB 118 allows companies to provide for the impact of the Tax Reform Act under three scenarios: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of the Tax Reform Act and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply accounting based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Because enactment of the Tax Reform Act was close to Eastman's year end, the Company was not able to complete the accounting for certain effects of the changes in tax law, but has been able to reasonably estimate the effects and has recognized those estimates as provisional amounts as of December 31, 2017. For further information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
As of December 31, 2017, management estimated a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. The final impact of the recent tax law changes on the Company may differ due to changes in the Company's current interpretation and assumptions, clarification and implementation guidance, and actions the Company may take. In addition, any future additional changes in U.S. tax law may have a significant impact on the provision for income taxes to recognize an incremental tax liability in the period the change occurs.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", and "Outlook" in this MD&A.
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items
In addition to evaluating Eastman's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly 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 of businesses, financing transaction costs, and MTM losses or gains for pension and other postretirement benefit plans. |
• | In 2017, two events resulted in unusual net costs and gains - net costs resulting from the fourth quarter coal gasification incident described below and a net income tax benefit resulting primarily from fourth quarter tax law changes and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. Management considers the coal gasification incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption, and considers the one-time net tax benefit unusual because of the infrequent nature of such changes in tax law and the significant one-time impact on fourth quarter and full year earnings. |
Because non-core, unusual, or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on 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.
Adjusted Tax Rate and Provision for Income Taxes
In interim periods, Eastman discloses non-GAAP earnings with an adjusted effective tax rate and a resulting adjusted provision for income taxes using the Company's current forecasted tax rate for the full year. The adjusted effective tax rate and resulting adjusted provision for income taxes are equal to the Company's projected full year effective tax rate and provision for income taxes on earnings excluding non-core, unusual, or non-recurring items for completed periods. The adjusted effective tax rate and resulting adjusted provision for income taxes may fluctuate during the year for changes in events and circumstances that change the Company's forecasted annual effective tax rate and resulting provision for income taxes excluding non-core, unusual, or non-recurring items. Management discloses this adjusted effective tax rate, and the related reconciliation to the GAAP effective tax rate, to provide investors more complete and consistent comparisons of the Company's operational performance on a period-over-period interim basis and on the same basis as management evaluates quarterly financial results to provide a better indication of expected full year results.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performances, make resource allocation decisions and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain results in this Annual Report:
• | MTM pension and other postretirement benefit plans gains and losses resulting from the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period; |
• | Asset impairments and restructuring charges, net, of which asset impairments are non-cash transactions impacting profitability; |
• | Acquisition integration and transaction costs; |
• | Costs resulting from the sale of acquired inventories at fair value, net of the last-in, first-out ("LIFO") impact for certain of these inventories (as required by acquisition accounting, these inventories were marked to fair value); |
• | Early debt extinguishment and other related costs resulting from repayment of borrowings; |
• | Cost of disposition of claims against operations that were discontinued by Solutia, Inc. 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; |
• | Gain from sale of the Company's 50 percent interest in the Primester cellulose acetate flake joint venture; and |
• | Tax benefit associated with a previously impaired site. |
The following unusual items are excluded by management in its evaluation of certain results in this Annual Report:
• | Net costs of the disruption, repairs, and reconstruction of the Kingsport site's coal gasification operations area resulting from the previously reported October 4, 2017 explosion ("the coal gasification incident"); and |
• | Estimated net income tax benefit resulting from tax law changes (primarily the Tax Reform Act) and a tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. |
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures -- Excluded Non-Core and Unusual Items
(Dollars in millions) | 2017 | 2016 | 2015 | ||||||||
Non-core items impacting operating earnings: | |||||||||||
Mark-to-market pension and other postretirement benefits (gain) loss, net | $ | (21 | ) | $ | 97 | $ | 115 | ||||
Asset impairments and restructuring charges, net | 8 | 45 | 183 | ||||||||
Acquisition integration and transaction costs | — | 9 | 28 | ||||||||
Additional costs of acquired inventories | — | — | 7 | ||||||||
Unusual item impacting operating earnings: | |||||||||||
Net costs resulting from coal gasification incident | 112 | — | — | ||||||||
Total non-core and unusual items impacting operating earnings | 99 | 151 | 333 | ||||||||
Non-core items impacting earnings before income taxes: | |||||||||||
Early debt extinguishment and other related costs | — | 85 | — | ||||||||
Cost of disposition of claims against discontinued Solutia operations | 9 | 5 | — | ||||||||
Gains from sale of businesses | (3 | ) | (17 | ) | — | ||||||
Total non-core items impacting earnings before income taxes | 6 | 73 | — | ||||||||
Less: Items impacting (benefit from) provision for income taxes: | |||||||||||
Tax effect for non-core and unusual items | 30 | 75 | 90 | ||||||||
Tax benefit associated with previously impaired site | 8 | — | — | ||||||||
Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | 339 | — | — | ||||||||
Total items impacting (benefit from) provision for income taxes | 377 | 75 | 90 | ||||||||
Total items impacting net earnings attributable to Eastman | $ | (272 | ) | $ | 149 | $ | 243 |
The non-core item "mark-to-market pension and other postretirement benefits (gain) loss, net" does not include a $61 million credit, $44 million credit, and $4 million credit for defined benefit pension and other postretirement benefit plans credits or costs for the years ended December 31, 2017, 2016, and 2015, respectively. The calculated MTM gains and losses included expected amounts of and percentage returns on assets of approximately $180 million (7 percent), $175 million (7 percent), and $190 million (7 percent) for the years ended December 31, 2017, 2016, and 2015, respectively, compared with actual amounts of and percentage returns on plan assets of approximately $315 million (11 percent), $250 million (9 percent), and $15 million loss (-1 percent) for the years ended December 31, 2017, 2016, and 2015, respectively.
For more detail about MTM pension and other postretirement benefit plans net gains and losses, including actual and expected return on plan assets and the components of the net gain or loss, see "Critical Accounting Estimates - Pension and Other Postretirement Benefits" above and Note 10, "Retirement Plans", "Summary of Changes" - Actuarial (gain) loss, Curtailment gain, Actual return on plan assets, and Reserve for third party contributions and "Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income" - Curtailment gain and Mark-to-market pension and other postretirement benefits (gain) loss, net to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following financial measures:
• | Gross profit, |
• | Selling, general, and administrative ("SG&A") expenses, |
• | Research and development ("R&D") expenses, |
• | Operating earnings, |
• | Other (income) charges, net, |
• | (Benefit from) provision for income taxes, |
• | Net earnings attributable to Eastman, and |
• | Diluted earnings per share. |
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measures
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, from time to time, management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain non-core, unusual, or non-recurring 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 operating activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, management generally excludes the impact of certain non-core activities and decisions of management because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
From time to time, Eastman evaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as adjusted cash provided by operating activities, described above, less the amount of capital expenditures. Management believes such capital expenditures are generally funded from available cash and, as such, should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of cash. The priorities for cash after funding operations include payment of quarterly dividends, additional repayment of debt, organic and inorganic growth opportunities, and 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.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "Adjusted EBITDA", "EBITDA Margin", and "Return on Invested Capital" (or "ROIC"). Management defines Adjusted EBITDA as EBITDA (net earnings or net earnings per share before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, 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 Adjusted EBITDA, EBITDA Margin, and ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman's operating businesses, and, from time to time, uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of Adjusted EBITDA, EBITDA Margin, and ROIC to compare the results, returns, and value of the Company with those of peer and other companies.
43
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 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 processing, functional films, coatings formulations, rubber additive formulations, adhesives formulations, non-wovens and textiles, and animal nutrition. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. Management believes that these elements of the Company's innovation-driven growth model combined with disciplined portfolio management and balanced capital deployment will result in consistent, sustainable earnings growth and strong cash flow.
The Company generated sales revenue of $9.5 billion and $9.0 billion for 2017 and 2016, respectively. Sales revenue increased $541 million in 2017 as increases in the AFP, CI, and AM segments more than offset a decline in the Fibers segment.
Operating earnings were $1.5 billion and $1.4 billion in 2017 and 2016, respectively. Excluding the non-core and unusual items referenced in "Non-GAAP Financial Measures", adjusted operating earnings were $1.6 billion in 2017 and $1.5 billion in 2016. Operating earnings and adjusted operating earnings increased in 2017 due to increases in the CI, AFP, and AM segments partially offset by decreased Fibers segment operating earnings.
Net earnings and EPS attributable to Eastman and adjusted net earnings and EPS attributable to Eastman were as follows:
2017 | 2016 | ||||||||||||||
(Dollars in millions, except diluted EPS) | $ | EPS | $ | EPS | |||||||||||
Net earnings attributable to Eastman | $ | 1,384 | $ | 9.47 | $ | 854 | $ | 5.75 | |||||||
Total non-core and unusual items, net of tax(1)(2) | (272 | ) | (1.86 | ) | 149 | 1.01 | |||||||||
Net earnings attributable to Eastman excluding non-core and unusual items | $ | 1,112 | $ | 7.61 | $ | 1,003 | $ | 6.76 |
(1) | See "Results of Operations - Net Earnings and Diluted Earnings per Share" for the tax effected amount of non-core and unusual items. |
(2) | The (benefit from) provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. |
The Company generated $1.7 billion of cash from operating activities in 2017, compared to $1.4 billion of cash generated from operating activities during 2016.
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. While the Company continues to assess the financial impact of the incident, the total impact, net of insurance recoveries, is expected to reduce earnings by a total of between $25 million and $50 million spread across 2017 and 2018. Costs in fourth quarter 2017 of the disruption, repairs, and reconstruction of coal gasification operations were $112 million, net of insurance recoveries.
RESULTS OF OPERATIONS
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.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Sales | $ | 9,549 | $ | 9,008 | 6 | % | $ | 9,008 | $ | 9,648 | (7 | )% | |||||||||
Volume / product mix effect | 4 | % | 1 | % | |||||||||||||||||
Price effect | 2 | % | (7 | )% | |||||||||||||||||
Exchange rate effect | — | % | (1 | )% |
2017 Compared to 2016
Sales revenue increased $541 million as increases in the AFP, CI, and AM segments more than offset a decline in the Fibers segment.
2016 Compared to 2015
Sales revenue decreased $640 million primarily due to lower selling prices in all operating segments and lower Fibers segment sales volume more than offsetting higher sales volume in the other operating segments.
Gross Profit
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Gross Profit | $ | 2,454 | $ | 2,350 | 4 | % | $ | 2,350 | $ | 2,580 | (9 | )% | |||||||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | (11 | ) | 78 | 78 | 84 | ||||||||||||||||
Net costs resulting from coal gasification incident | 112 | — | — | — | |||||||||||||||||
Additional costs of acquired inventories | — | — | — | 7 | |||||||||||||||||
Gross Profit excluding non-core and unusual items | $ | 2,555 | $ | 2,428 | 5 | % | $ | 2,428 | $ | 2,671 | (9 | )% |
2017 Compared to 2016
Gross profit included an $11 million MTM pension and other postretirement benefit gain, net in 2017 and a $78 million MTM pension and other postretirement benefit loss, net in 2016. Gross profit in 2017 included $112 million of net costs resulting from the coal gasification incident. Excluding these non-core and unusual items, gross profit increased as a result of increases in the CI, AFP, and AM segments more than offsetting a decline in the Fibers segment. Gross profit in 2017 was increased by lower labor and manufacturing costs from corporate cost reduction actions.
2016 Compared to 2015
Gross profit included a $78 million and $84 million MTM pension and other postretirement benefit loss, net in 2016 and 2015, respectively. Gross profit in 2015 was negatively impacted $7 million in the AM segment by the sale of Commonwealth inventories, which were marked to fair value in the acquisition. Excluding these non-core items, gross profit decreased primarily due to CI and Fibers segment results. Gross profit in 2016 includes the benefit of lower labor and manufacturing costs from corporate cost reduction actions taken in 2016.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Selling, General & Administrative Expenses | $ | 699 | $ | 703 | (1 | )% | $ | 703 | $ | 771 | (9 | )% | |||||||||
Mark-to-market pension and other postretirement benefit gain (loss), net | 8 | (14 | ) | (14 | ) | (18 | ) | ||||||||||||||
Acquisition integration and transaction costs | — | (9 | ) | (9 | ) | (28 | ) | ||||||||||||||
Selling, General, and Administrative Expenses excluding non-core items | $ | 707 | $ | 680 | 4 | % | $ | 680 | $ | 725 | (6 | )% |
2017 Compared to 2016
SG&A expenses included an $8 million MTM pension and other postretirement benefit gain, net in 2017 and a $14 million MTM pension and other postretirement benefit loss, net in 2016. Included in 2016 SG&A expenses are transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014. Excluding these non-core items, SG&A expenses increased primarily due to higher performance-based variable compensation costs, and strategic initiative expenditures partially offset by cost reductions resulting from corporate actions taken in 2016.
2016 Compared to 2015
SG&A expenses included a $14 million and $18 million MTM pension and other postretirement benefit loss, net in 2016 and 2015, respectively. Included in 2016 SG&A expenses are transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014. Included in 2015 SG&A expenses are integration and transaction costs associated with the Taminco and Commonwealth acquisitions. Excluding these non-core items, SG&A expenses decreased primarily due to lower costs resulting from corporate cost reduction actions taken in 2016 and lower variable compensation costs.
Research and Development Expenses
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Research & Development Expenses | $ | 215 | $ | 219 | (2 | )% | $ | 219 | $ | 242 | (10 | )% | |||||||||
Mark-to-market pension and other postretirement benefit gain (loss), net | 2 | (5 | ) | (5 | ) | (13 | ) | ||||||||||||||
Research & Development Expenses excluding non-core item | $ | 217 | $ | 214 | 1 | % | $ | 214 | $ | 229 | (7 | )% |
2017 Compared to 2016
R&D expenses included a $2 million MTM pension and other postretirement benefit gain, net in 2017 and a $5 million MTM pension and other postretirement benefit loss, net in 2016. Excluding this non-core item, R&D expenses were slightly higher in 2017. The Company has shifted R&D investment by eliminating multiple programs and reallocating resources in the Company's core segments. R&D investments are being focused where disruptive macro trends create unmet needs in attractive niche markets where the Company's core technologies can deliver material solutions.
2016 Compared to 2015
R&D expenses included a $5 million and $13 million MTM pension and other postretirement benefit loss, net in 2016 and 2015, respectively. Excluding this non-core item, R&D expenses were lower primarily due to corporate cost reduction actions taken in 2016.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
For years ended December 31, | |||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | ||||||||
Asset impairments | $ | 1 | $ | 12 | $ | 85 | |||||
Gain on sale of assets, net | — | (2 | ) | (1 | ) | ||||||
Intangible asset and goodwill impairments | — | — | 22 | ||||||||
Severance charges | 6 | 32 | 68 | ||||||||
Site closure and restructuring charges | 1 | 3 | 9 | ||||||||
Total | $ | 8 | $ | 45 | $ | 183 |
2017
In fourth quarter 2017 asset impairments and restructuring charges, net included $3 million of asset impairments and restructuring charges, including severance, in the AFP segment related to the closure of a facility in China. Additionally, the Company recognized restructuring charges of approximately $5 million for severance.
2016
The Company impaired a capital project in the AFP segment that resulted in a charge of $12 million.
As part of an announced plan to reduce costs, the Company recognized restructuring charges of $34 million primarily for severance. Management anticipated and realized total cost savings of approximately $50 million mostly in 2017 primarily in SG&A expenses and cost of sales.
The Company recognized a gain of $2 million in the AFP segment for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France.
2015
The Company took actions to reduce non-operations workforce resulting in restructuring charges of $51 million for severance. These actions were taken to offset the impacts of low oil prices, a strengthened U.S. dollar, and the continued weak worldwide economic and business conditions. Management expected total cost savings of approximately $55 million, which were realized in 2016, primarily in SG&A expenses and cost of sales.
As a result of the annual impairment testing of indefinite-lived intangible assets, the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-KOOL® window films products tradename to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia in 2012. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.
Net asset impairments and restructuring charges included $81 million of asset impairments and $17 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing site. Management expected annual cost savings in the Fibers segment of approximately $20 million as a result of the closure which cost savings have been realized as of the end of 2016. Additionally, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $3 million.
Additionally, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Earnings
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Operating earnings | $ | 1,532 | $ | 1,383 | 11 | % | $ | 1,383 | $ | 1,384 | — | % | |||||||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | (21 | ) | 97 | 97 | 115 | ||||||||||||||||
Net costs resulting from coal gasification incident | 112 | — | — | — | |||||||||||||||||
Asset impairments and restructuring charges, net | 8 | 45 | 45 | 183 | |||||||||||||||||
Acquisition integration and transaction costs | — | 9 | 9 | 28 | |||||||||||||||||
Additional costs of acquired inventories | — | — | — | 7 | |||||||||||||||||
Operating earnings excluding non-core and unusual items | $ | 1,631 | $ | 1,534 | 6 | % | $ | 1,534 | $ | 1,717 | (11 | )% |
Net Interest Expense
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | Change | 2016 | 2015 | Change | |||||||||||||||
Gross interest expense | $ | 251 | $ | 265 | $ | 265 | $ | 273 | |||||||||||||
Less: Capitalized interest | 7 | 7 | 7 | 7 | |||||||||||||||||
Interest Expense | 244 | 258 | 258 | 266 | |||||||||||||||||
Less: Interest income | 3 | 3 | 3 | 3 | |||||||||||||||||
Net interest expense | $ | 241 | $ | 255 | (5 | )% | $ | 255 | $ | 263 | (3 | )% |
2017 Compared to 2016
Net interest expense decreased $14 million primarily as a result of prior year refinancing of certain outstanding public debt and repayment of term loan borrowings in 2017.
2016 Compared to 2015
Net interest expense decreased $8 million primarily as a result of the Company refinancing certain outstanding public debt with proceeds of the sale of new euro-denominated debt securities in second quarter 2016.
Early Debt Extinguishment and Other Related Costs
In November 2016, the Company sold additional euro-denominated 1.50% notes due May 2023 in the principal amount of €200 million ($213 million) and euro-denominated 1.875% notes due November 2026 in the principal amount of €500 million ($534 million). In December 2016, the Company borrowed $300 million under a second five-year term loan agreement ("2021 Term Loan"). Proceeds from the notes and 2021 Term Loan borrowings were used for the early repayment of the 2.4% notes due June 2017 ($500 million principal) and 6.30% notes due November 2018 ($160 million principal) and partial redemptions of the 4.5% notes due January 2021 ($65 million principal), 3.6% notes due August 2022 ($150 million principal), 7 1/4% debentures due January 2024 ($47 million principal), 7 5/8% debentures due June 2024 ($11 million principal), 3.8% notes due March 2025 ($100 million principal), and 7.60% debentures due February 2027 ($28 million principal). The early repayments resulted in a charge of $76 million for early debt extinguishment costs and related derivatives and hedging items.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 26, 2016, the Company sold euro-denominated 1.50% notes due 2023 in the principal amount of €550 million ($614 million). Proceeds from the sale of the notes, net of transaction costs, were used for the early repayment of $500 million of 2.4% notes due June 2017 and repayment of other borrowings. The early repayment resulted in a charge of $9 million for early debt extinguishment costs primarily attributable to the early redemption premium and related unamortized costs.
For additional information regarding the early debt extinguishment costs, see Note 8, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Other (Income) Charges, Net
(Dollars in millions) | 2017 | 2016 | 2015 | ||||||||
Foreign currency transaction losses (gains), net | $ | 5 | $ | 27 | $ | 6 | |||||
(Income) loss from equity investments and other investment (gains) losses, net | (14 | ) | (15 | ) | (15 | ) | |||||
Cost of disposition of claims against discontinued Solutia operations | 9 | 5 | — | ||||||||
Gains from sale of businesses | (3 | ) | (17 | ) | — | ||||||
Other, net | 5 | (6 | ) | 1 | |||||||
Other (income) charges, net | $ | 2 | $ | (6 | ) | $ | (8 | ) | |||
Cost of disposition of claims against discontinued Solutia operations | (9 | ) | (5 | ) | — | ||||||
Gains from sale of businesses | 3 | 17 | — | ||||||||
Other (income) charges, net excluding non-core items | $ | (4 | ) | $ | 6 | $ | (8 | ) |
Included in other (income) charges, net are primarily losses or gains on foreign exchange transactions, equity investments, and non-operating assets.
In 2017, the net loss on the revaluation of foreign entity assets and liabilities was partially offset by a net gain on the foreign exchange non-qualifying derivatives, both items impacted primarily by the euro. See Note 9, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report. Also included in 2017 other (income) charges, net is a $9 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012 and a $3 million gain from the sale of the formulated electronics cleaning solutions business.
In 2016, the net loss from foreign exchange non-qualifying derivatives was partially offset by the net gain on the revaluation of foreign entity assets and liabilities, both items impacted primarily by the euro. Included in 2016 other (income) charges, net is $5 million cost of disposition of claims against operations that were discontinued by Solutia prior to the Company's acquisition of Solutia in 2012. Also included in 2016 other (income) charges, net is a gain of $17 million from the sale of the Company's interest in the Primester joint venture equity investment. For additional information, see Note 5, "Equity Investments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
In 2015, the net loss from foreign exchange non-qualifying derivatives was partially offset by the net gain on the revaluation of foreign entity assets and liabilities, both items impacted primarily by the euro.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Benefit from) Provision for Income Taxes
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2016 | 2015 | |||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||
(Benefit from) provision for income taxes and effective tax rate | $ | (99 | ) | (8 | )% | $ | 190 | 18 | % | $ | 190 | 18 | % | $ | 275 | 24 | % | ||||||||||
Tax provision for non-core and unusual items | 30 | 75 | 75 | 90 | |||||||||||||||||||||||
Tax benefit associated with previously impaired site | 8 | — | — | — | |||||||||||||||||||||||
Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | 339 | — | — | — | |||||||||||||||||||||||
Adjusted provision for income taxes and effective tax rate | $ | 278 | 20 | % | $ | 265 | 21% | $ | 265 | 21 | % | $ | 365 | 25 | % |
The 2017 effective tax rate was lower than the 2016 effective tax rate due to 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 (see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for principal impacts of the tax law change that resulted in the one-time net tax benefit), 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. The 2016 effective tax rate included one-time tax benefits discussed immediately below.
The 2016 effective tax rate was lower than 2015 due to a benefit in the foreign rate variance as a result of higher earnings in foreign jurisdictions partially offset by a reduction in the U.S. federal tax manufacturing deduction due to a decrease in domestic taxable income. The 2016 effective tax rate includes a tax benefit of $16 million related to foreign tax credits as a result of the amendment of prior year income tax returns, a $16 million one-time benefit for the restoration of tax basis for which depreciation deductions were previously limited, and a $9 million tax benefit primarily due to adjustments to the tax provision to reflect the finalization of 2014 foreign income tax returns.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings Attributable to Eastman and Diluted Earnings per Share
2017 | 2016 | 2015 | |||||||||||||||||||||
(Dollars in millions, except per share amounts) | $ | EPS | $ | EPS | $ | EPS | |||||||||||||||||
Net earnings and diluted earnings per share attributable to Eastman | $ | 1,384 | $ | 9.47 | $ | 854 | $ | 5.75 | $ | 848 | $ | 5.66 | |||||||||||
Non-core items, net of tax: (1) | |||||||||||||||||||||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | (14 | ) | (0.09 | ) | 68 | 0.46 | 70 | 0.47 | |||||||||||||||
Asset impairments and restructuring charges, net | (3 | ) | (0.02 | ) | 28 | 0.19 | 151 | 1.00 | |||||||||||||||
Acquisition transaction, integration, and financing costs | — | — | 5 | 0.04 | 18 | 0.12 | |||||||||||||||||
Additional costs of acquired inventories | — | — | — | — | 4 | 0.03 | |||||||||||||||||
Early debt extinguishment and other related costs | — | — | 56 | 0.37 | — | — | |||||||||||||||||
Cost of disposition of claims against discontinued Solutia operations | 5 | 0.03 | 3 | 0.02 | — | — | |||||||||||||||||
Gains from sale of businesses | (1 | ) | (0.01 | ) | (11 | ) | (0.07 | ) | — | — | |||||||||||||
Unusual items, net of tax: (1) | |||||||||||||||||||||||
Net costs resulting from coal gasification incident | 80 | 0.55 | — | — | — | — | |||||||||||||||||
Estimated net tax benefit from tax law changes and tax loss from outside-U.S. entity reorganizations | (339 | ) | (2.32 | ) | — | — | — | — | |||||||||||||||
Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 1,112 | $ | 7.61 | $ | 1,003 | $ | 6.76 | $ | 1,091 | $ | 7.28 |
(1) | The (benefit from) provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible. |
51
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 Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Additives & Functional Products Segment | ||||||||||||||||||||||||
2017 Compared to 2016 | 2016 Compared to 2015 | |||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||
Sales | $ | 3,343 | $ | 2,979 | $ | 364 | 12 | % | $ | 2,979 | $ | 3,159 | $ | (180 | ) | (6 | )% | |||||||
Volume / product mix effect | 313 | 10 | % | 46 | 1 | % | ||||||||||||||||||
Price effect | 45 | 2 | % | (214 | ) | (7 | )% | |||||||||||||||||
Exchange rate effect | 6 | — | % | (12 | ) | — | % | |||||||||||||||||
Operating earnings | 646 | 601 | 45 | 7 | % | 601 | 660 | (59 | ) | (9 | )% | |||||||||||||
Asset impairments and restructuring charges, net | 3 | 10 | (7 | ) | 10 | — | 10 | |||||||||||||||||
Net costs resulting from coal gasification incident | 8 | — | 8 | — | — | — | ||||||||||||||||||
Operating earnings excluding non-core and unusual items | 657 | 611 | 46 | 8 | % | 611 | 660 | (49 | ) | (7 | )% |
2017 Compared to 2016
Sales revenue increased primarily due to higher sales volume across the segment, including for specialty fluids due to the timing of customer solar energy project completions, animal nutrition products, and tire additives products.
Operating earnings in 2017 included $3 million of asset impairment and restructuring charges, including severance, related to the closure of a facility in China and $8 million of net costs resulting from the coal gasification incident. Operating earnings in 2016 included $10 million of asset impairment and restructuring charges, net including the impairment of a capital project resulting in a charge of $12 million partially offset by a $2 million gain for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France. Excluding these non-core and unusual items, operating earnings increased primarily due to higher sales volume of $97 million partially offset by higher raw material and energy costs, including the reduced negative impact of hedges of commodity prices on raw material costs, exceeding higher selling prices by $60 million.
2016 Compared to 2015
Sales revenue decreased due to lower selling prices primarily attributed to lower raw material prices and competitive pressure across the segment, particularly in Asia Pacific. The impact of lower selling prices was partially offset by higher sales volume across the segment.
Operating earnings in 2016 included $10 million of asset impairment and restructuring charges, net including the impairment of a capital project resulting in a charge of $12 million partially offset by a $2 million gain for the sale of previously impaired assets at the Crystex® insoluble sulfur R&D site in France. Excluding these non-core items, operating earnings decreased primarily due to lower selling prices more than offsetting lower raw material and energy costs by $74 million, partially offset by higher sales volumes of $20 million.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Growth Initiatives
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 2017, the Company advanced growth and innovation of Crystex® insoluble sulfur rubber additives through completion of an expansion of the manufacturing facility in Kuantan, Malaysia that management expects will produce material qualified for commercial sales in 2018. This expansion is expected to allow the Company to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and facilitating the introduction of new products into the tire markets.
Advanced Materials Segment | ||||||||||||||||||||||||
2017 Compared to 2016 | 2016 Compared to 2015 | |||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||
Sales | $ | 2,572 | $ | 2,457 | $ | 115 | 5 | % | $ | 2,457 | $ | 2,414 | $ | 43 | 2 | % | ||||||||
Volume / product mix effect | 113 | 5 | % | 119 | 5 | % | ||||||||||||||||||
Price effect | 1 | — | % | (67 | ) | (3 | )% | |||||||||||||||||
Exchange rate effect | 1 | — | % | (9 | ) | — | % | |||||||||||||||||
Operating earnings | 482 | 471 | 11 | 2 | % | 471 | 384 | 87 | 23 | % | ||||||||||||||
Additional costs of acquired inventories | — | — | — | — | 7 | (7 | ) | |||||||||||||||||
Asset impairments and restructuring charges, net | — | — | — | — | 18 | (18 | ) | |||||||||||||||||
Net costs resulting from coal gasification incident | 11 | — | 11 | — | — | — | ||||||||||||||||||
Operating earnings excluding non-core and unusual items | 493 | 471 | 22 | 5 | % | 471 | 409 | 62 | 15 | % |
2017 Compared to 2016
Sales revenue increased primarily due to higher sales volume across the segment, including of premium products such as automotive performance films, Tritan® copolyester, and Saflex® acoustic interlayers.
Operating earnings in 2017 included $11 million of net costs resulting from the coal gasification incident. Excluding this unusual item, operating earnings increased primarily due to the combined impact of higher sales volume, lower unit costs due to higher capacity utilization, and improved product mix of premium products of $83 million. The increase was partially offset by higher raw material and energy costs of $48 million and increased costs of growth initiatives.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2016 Compared to 2015
Sales revenue increased due to higher sales volume of premium products, including Tritan® copolyester, Saflex® acoustic interlayers, and automotive performance films, partially offset by lower selling prices, primarily for other copolyesters, primarily attributed to lower raw material prices.
Operating earnings in 2015 included $18 million of indefinite-lived intangible asset impairments, primarily to reduce the carrying value of trade names in the window films market to their estimated current fair value. Operating earnings in 2015 also included additional costs of acquired Commonwealth inventories of $7 million.
Excluding these non-core items, operating earnings increased primarily due to the combined impact of higher sales volume and improved product mix of premium products and lower unit costs due to higher capacity utilization of $71 million.
Growth Initiatives
The acquisition of Commonwealth in December 2014 further expanded the AM segment's product portfolio and sales channel network in the diverse window film markets, enabled further manufacturing and distribution efficiencies, and added industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.
In 2017, the Company advanced the continued success of Tritan® copolyester in the durable goods and health and wellness markets, supported by construction of an additional 60,000 metric ton expansion of Tritan® copolyester capacity at the Kingsport, Tennessee manufacturing facility expected to be complete in early 2018 and fully operational in first half 2018.
In 2017, the Company advanced growth and innovation of Saflex® and head up displays acoustic interlayers used in the transportation and building and construction markets, supported by construction of a manufacturing facility for polyvinyl butyral ("PVB") resin at the Kuantan, Malaysia site which became fully operational in first quarter 2018.
Chemical Intermediates Segment | ||||||||||||||||||||||||
2017 Compared to 2016 | 2016 Compared to 2015 | |||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||
Sales | $ | 2,728 | $ | 2,534 | $ | 194 | 8 | % | $ | 2,534 | $ | 2,811 | $ | (277 | ) | (10 | )% | |||||||
Volume / product mix effect | (55 | ) | (2 | )% | 48 | 2 | % | |||||||||||||||||
Price effect | 253 | 10 | % | (317 | ) | (11 | )% | |||||||||||||||||
Exchange rate effect | (4 | ) | — | % | (8 | ) | (1 | )% | ||||||||||||||||
Operating earnings | 255 | 171 | 84 | 49 | % | 171 | 294 | (123 | ) | (42 | )% | |||||||||||||
Net costs resulting from coal gasification incident | 44 | — | 44 | — | — | — | ||||||||||||||||||
Operating earnings excluding unusual item | 299 | 171 | 128 | 75 | % | 171 | 294 | (123 | ) | (42 | )% |
2017 Compared to 2016
Sales revenue increased due to higher selling prices attributed to higher raw material prices and improved market conditions. The increase was partially offset by lower intermediates sales volume due to the coal gasification incident.
54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating earnings in 2017 included $44 million of net costs resulting from the coal gasification incident. Excluding this unusual item, operating earnings increased primarily due to the reduced negative impact of hedges of commodity prices on raw material costs, primarily for propane, of $100 million, lower scheduled maintenance costs of $24 million, and lower operating costs of $21 million. The increase was partially offset by higher raw material and energy costs more than offsetting higher selling prices by $27 million.
2016 Compared to 2015
Sales revenue decreased due to lower selling prices partially offset by higher sales volume of olefin-based and functional amines products. The lower selling prices were primarily attributed to the lower raw material prices and competitive pressures due to lower oil prices for most of the year.
Operating earnings decreased primarily due to lower selling prices more than offsetting lower raw material and energy costs by $181 million, partially offset by the reduced impact of commodity hedge losses on raw material costs of $28 million and higher sales volume of $16 million.
Cost and Growth Initiatives
In 2017, to support the increased emphasis on specialty businesses and products, the Company continued to pursue strategic options to divest or otherwise monetize its excess ethylene capacity position and certain commodity olefin intermediates product lines, while retaining its cost-advantaged integrated position to propylene which supports specialty derivatives throughout the Company.
The Company is party to an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant to further improve the Company's long-term competitive cost position. The Company expects to begin purchasing propylene from this plant in first half 2018. Prior to beginning these purchases, the Company will continue to benefit from a propylene market contract with an advantaged cost position for purchased propylene.
Fibers Segment | ||||||||||||||||||||||||
2017 Compared to 2016 | 2016 Compared to 2015 | |||||||||||||||||||||||
(Dollars in millions) | Change | Change | ||||||||||||||||||||||
2017 | 2016 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||
Sales | $ | 852 | $ | 992 | $ | (140 | ) | (14 | )% | $ | 992 | $ | 1,219 | $ | (227 | ) | (19 | )% | ||||||
Volume / product mix effect | (53 | ) | (5 | )% | (150 | ) | (13 | )% | ||||||||||||||||
Price effect | (86 | ) | (9 | )% | (74 | ) | (6 | )% | ||||||||||||||||
Exchange rate effect | (1 | ) | — | % | (3 | ) | — | % | ||||||||||||||||
Operating earnings | 175 | 310 | (135 | ) | (44 | )% | 310 | 292 | 18 | 6 | % | |||||||||||||
Asset impairments and restructuring charges, net | — | — | — | — | 98 | (98 | ) | |||||||||||||||||
Net costs resulting from coal gasification incident | 49 | — | 49 | — | — | |||||||||||||||||||
Operating earnings excluding non-core and unusual items | 224 | 310 | (86 | ) | (28 | )% | 310 | 390 | (80 | ) | (21 | )% |
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2017 Compared to 2016
Sales revenue decreased primarily due to lower selling prices and lower sales volume, particularly for acetate tow. Lower acetate tow selling prices were primarily attributed to lower industry capacity utilization rates. Lower acetate tow sales volume was primarily attributed to reduced sales in China.
Operating earnings in 2017 included $49 million of net costs resulting from the coal gasification incident. Excluding this unusual item, operating earnings decreased primarily due to approximately $103 million of lower selling prices and lower sales volume, partially offset by lower operating costs resulting from changes in segment business operations and assets.
2016 Compared to 2015
Sales revenue decreased primarily due to lower sales volume and lower selling prices, particularly for acetate tow. Lower acetate tow sales volume was primarily due to reduced sales in China attributed to weaker demand and customer backward integration and inventory destocking. Lower acetate tow selling prices were primarily due to lower industry capacity utilization rates.
Excluding the non-core item, operating earnings decreased due primarily to approximately $90 million of lower sales volume and lower selling prices exceeding lower raw material and energy costs, partially offset by lower operating costs resulting from changes in segment business operations and assets.
Costs and Growth Initiatives
The Fibers segment R&D efforts focus on serving existing customers, leveraging proprietary cellulose ester and spinning technology for differentiated application development in new markets, optimizing asset productivity, and working with suppliers to reduce costs. For acetate tow, these efforts are assisting customers in the effective use of the segment's products and customers' product development efforts. Beyond acetate tow, these efforts are using the elements of the innovation-driven growth model to focus on innovation in the textiles market.
As a result of challenging market conditions for acetate tow, the Company closed its Workington, UK acetate tow manufacturing facility in 2015. Management expected annual cost savings in the Fibers segment of approximately $20 million as a result of the closure, which had been realized as of the end of 2016. Following an increase in flake capacity at the Kingsport, Tennessee site in 2015, the Fibers segment could supply all its acetate tow and yarn spinning capacity from this low-cost flake asset. In order to fully utilize the increased capacity and reduce fixed costs, in June 2016, the Company sold its 50 percent interest in Primester, which manufactures cellulose acetate at the Company's Kingsport, Tennessee site.
Other
(Dollars in millions) | 2017 | 2016 | 2015 | |||||||||
Sales | $ | 54 | $ | 46 | $ | 45 | ||||||
Operating loss | ||||||||||||
Growth initiatives and businesses not allocated to operating segments | $ | (114 | ) | $ | (82 | ) | $ | (87 | ) | |||
Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | 93 | (44 | ) | (76 | ) | |||||||
Restructuring and acquisition integration and transaction costs | (5 | ) | (44 | ) | (83 | ) | ||||||
Operating loss before non-core items | (26 | ) | (170 | ) | (246 | ) | ||||||
Mark-to-market pension and other postretirement benefit plans (gain) loss, net | (21 | ) | 97 | 115 | ||||||||
Acquisition integration and transaction costs | — | 9 | 28 | |||||||||
Asset impairments and restructuring charges, net | 5 | 35 | 67 | |||||||||
Operating loss excluding non-core items | $ | (42 | ) | $ | (29 | ) | $ | (36 | ) |
56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sales revenue and costs related to growth initiatives, R&D costs, certain components of pension and other postretirement benefits, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are included in "Other". Sales revenue in all periods presented above are primarily sales from the microfiber technology platform.
Included in 2017 operating losses are restructuring charges of approximately $5 million for severance.
Included in 2016 operating losses are restructuring costs of $34 million primarily for severance resulting from the Company's previously announced plan to reduce costs, primarily in 2017. Also included in 2016 operating losses were transaction costs for final resolution of the 2011 Sterling Chemicals, Inc. acquisition purchase price and integration costs for the Commonwealth business acquired in December 2014.
Included in 2015 operating losses are integration and transaction costs of $28 million, primarily for the acquired Taminco and Commonwealth businesses. Included in 2015 operating losses are $51 million of severance costs for a corporate reduction in force, $11 million of asset impairments and restructuring charges resulting from management's decision not to continue a growth initiative, and $4 million of severance associated with the integration of Taminco.
The Company continues to explore and invest in R&D initiatives such as high performance materials and advanced cellulosics that are aligned with disruptive macro trends such as health and wellness, natural resource efficiency, an increasing middle class in emerging economies, and feeding a growing population. An example of such an initiative is the Eastman microfiber technology platform which leverages the Company's core competency in polyesters, spinning capability, and in-house application expertise for use in a wide range of applications including liquid and air filtration, high strength packaging in nonwovens, and performance apparel in textiles.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES BY CUSTOMER LOCATION
Sales Revenue | |||||||||||||||||||||||||||
Change | Change | ||||||||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||
United States and Canada | $ | 4,189 | $ | 4,025 | $ | 164 | 4 | % | $ | 4,025 | $ | 4,350 | $ | (325 | ) | (7 | )% | ||||||||||
Asia Pacific | 2,306 | 2,163 | 143 | 7 | % | 2,163 | 2,333 | (170 | ) | (7 | )% | ||||||||||||||||
Europe, Middle East, and Africa | 2,539 | 2,305 | 234 | 10 | % | 2,305 | 2,422 | (117 | ) | (5 | )% | ||||||||||||||||
Latin America | 515 | 515 | — | — | % | 515 | 543 | (28 | ) | (5 | )% | ||||||||||||||||
$ | 9,549 | $ | 9,008 | $ | 541 | 6 | % | $ | 9,008 | $ | 9,648 | $ | (640 | ) | (7 | )% |
2017 Compared to 2016
Sales revenue in United States and Canada increased primarily due to higher CI segment selling prices.
Sales revenue in Asia Pacific increased primarily due to higher AFP, AM, and CI segments sales volume partially offset by lower Fibers segment sales volume.
Sales revenue in Europe, Middle East, and Africa increased primarily due to higher AFP and Fibers segments sales volume. Higher AFP segment sales volume is primarily due to higher sales volume across the segment, including specialty fluids due to the timing of customer solar energy project completions, tire additives products, and animal nutrition products.
Sales revenue in Latin America was unchanged.
2016 Compared to 2015
Sales revenue in United States and Canada decreased primarily due to lower selling prices in all operating segments, particularly in the CI and AFP segments.
Sales revenue in Asia Pacific decreased primarily due to lower selling prices in all operating segments and lower Fibers segment sales volume partially offset by higher sales volume in the other operating segments.
Sales revenue in Europe, Middle East, and Africa decreased primarily due to lower selling prices in all operating segments.
Sales revenue in Latin America decreased primarily due to lower selling prices in all operating segments, particularly in the CI and AFP segments, partially offset by higher CI, Fibers, and AFP segments sales volume.
See "Business - Business Segments" in Part I, Item 1 of this Annual Report for regional segment sales revenues by customer location.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
Cash Flows
(Dollars in millions) | 2017 | 2016 | 2015 | ||||||||
Net cash provided by (used in): |