EASTMAN CHEMICAL CO - Annual Report: 2021 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| (Mark One) | ||||||||
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the fiscal year ended | December 31, 2021 | |||||||
| 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 incorporation or organization) | (I.R.S. employer 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 | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | EMN | New York Stock Exchange | ||||||||||||
| 1.50% Notes Due 2023 | EMN23 | New York Stock Exchange | ||||||||||||
| 1.875% Notes Due 2026 | EMN26 | 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. | ☒ | ☐ | |||||||||||||||||||||
| 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. | ☐ | ☒ | |||||||||||||||||||||
| 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. | ☒ | ☐ | |||||||||||||||||||||
| Yes | No | ||||||||||||||||||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). | ☒ | ☐ | |||||||||||||||||||||
| 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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. | |||||||||||||||||||||||
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||||||||
| Non-accelerated filer | ☐ | 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. | ☐ | ||||||||||||||||||||||
| Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☒ | ||||||||||||||||||||||
| Yes | No | ||||||||||||||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | ☐ | ☒ | |||||||||||||||||||||
The aggregate market value (based upon the $116.75 closing price on the New York Stock Exchange on June 30, 2021) of the 128,422,406 shares of common equity held by non-affiliates as of December 31, 2021 was $14,993,315,901 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, 2021 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 128,967,878 shares of common stock of the registrant were outstanding at December 31, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2022 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", "forecasts", "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 and opportunities (including potential risks associated with physical impacts of climate change and related voluntary and regulatory carbon requirements); exposure to and effects of hedging raw material and energy prices and costs and foreign currencies exchange and interest rates; disruption or interruption of operations and of raw material or energy supply (including as a result of cyber-attacks or other breaches of information security systems); 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, decisions, and conditions; expectations, strategies, and plans for individual assets and products, businesses, and operating segments, as well as for the whole of Eastman; cash sources and 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, benefits from the integration of, and expected business and financial performance of acquired businesses as well as the subsequent impairment assessments of acquired long-lived assets; strategic, 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 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 known material 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 management is not aware, or presently deems 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, Company press releases, or pre-noticed public investor presentations) on related subjects.
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TABLE OF CONTENTS
| ITEM | PAGE | |||||||
PART I
| 1. | ||||||||
| 1A. | ||||||||
| 1B. | ||||||||
| 2. | ||||||||
| 3. | ||||||||
| 4. | ||||||||
PART II
| 5. | ||||||||
| 7. | ||||||||
| 7A. | ||||||||
| 8. | ||||||||
| 9. | ||||||||
| 9A. | ||||||||
| 9B. | ||||||||
| 9C. | ||||||||
PART III
| 10. | ||||||||
| 11. | ||||||||
| 12. | ||||||||
| 13. | ||||||||
| 14. | ||||||||
SIGNATURES
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PART I
| ITEM 1. BUSINESS | ||
| Page | |||||
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| CORPORATE OVERVIEW | ||
Eastman Chemical Company ("Eastman" or the "Company") is a global specialty materials 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 41 manufacturing facilities and has equity interests in three manufacturing joint ventures in 12 countries that supply products to customers throughout the world. See "Properties" in Part I, Item 2 of this Annual Report on Form 10-K (this "Annual Report"). The Company's headquarters and largest manufacturing facility are located in Kingsport, Tennessee. With a robust portfolio of specialty businesses, Eastman works with customers to deliver innovative products and solutions with 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".
In the first years as a stand-alone company, Eastman was diversified between commodity and more specialty chemical businesses. Beginning in 2004, the Company refocused its strategy and changed its businesses and portfolio of products, first by the divestiture and discontinuance of under-performing assets and commodity businesses and initiatives (including divestiture in 2004 of resins, inks, and monomers product lines, divestiture in 2006 of the polyethylene business, and divestiture from 2007 to 2010 of the polyethylene terephthalate ("PET") assets and business). The Company then pursued growth through the development and acquisition of more specialty businesses and product lines by inorganic acquisition and integration (including acquisitions of Solutia, Inc., a global leader in performance materials and specialty chemicals, in 2012, and Taminco Corporation, a global specialty chemical company, in 2014) and organic development and commercialization of new and enhanced technologies and products.
Eastman currently uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value of Eastman's products and how they perform within customers' and end-user products. Key areas of application development include molecular recycling technologies, thermoplastic conversion, functional films, coatings formulations, care additives, textiles and nonwovens, 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. Management believes that these elements of the Company's innovation-driven growth model, combined with disciplined portfolio management and balanced capital deployment, is transforming Eastman into a global specialty materials company that enhances the quality of life in a material way. As a global specialty materials company, management continuously evaluates the Company's business and operations to improve cost structure, increase investment in growth, and strengthen execution capabilities, including specific initiatives to transform operations, work processes and systems, and business structure alignment, scale, and integration.
In 2021, the Company reported sales revenue of $10.5 billion, earnings before interest and taxes ("EBIT") of $1.3 billion, and net earnings attributable to Eastman of $857 million. Diluted earnings per share were $6.25. Net cash provided by operating activities was $1.6 billion and "free cash flow" (cash provided by or used in operating activities less the amount of net capital expenditures) was $1.1 billion. Excluding non-core items, adjusted EBIT was $1.6 billion and adjusted diluted earnings per share were $8.85. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report for reconciliation of financial measures under accounting principles generally accepted in the United States ("GAAP") to non-GAAP financial measures, description of excluded items, and related information. For Company sales revenue by end-market, see Exhibit 99.01 "2021 Company and Segment Sales Revenue by End-Use Market" of this Annual Report. Approximately 60 percent of 2021 sales revenue was generated from outside the United States and Canada region. For additional information regarding sales by customer location and by segment, see Note 20, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary by Operating Segment", "Sales by Customer Location", and "Risk Factors" in Part II, Item 7 of this Annual Report.
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BUSINESS STRATEGY
Eastman's objective is to be a global specialty materials company that enhances the quality of life in a material way with consistent, sustainable earnings growth and strong cash flow. Integral to the Company's strategy for growth is leveraging its heritage expertise and innovation within its cellulosic biopolymer 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 collaborating and co-innovating with customers and downstream users in existing and new niche markets to creatively solve problems. 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 market share through leadership in attractive niche markets. A consistent increase in earnings is expected to result from both organic growth initiatives and targeted bolt-on acquisitions.
Innovation
Management is pursuing specific opportunities to leverage Eastman's innovation-driven growth model for continued greater than end-market growth by both sustaining the Company's leadership in existing markets and expanding into new markets. Recently developed, introduced, or commercialized innovation products, applications, and technologies include the following:
•Molecular recycling technologies, carbon renewal technology, and polyester renewal technology which are being used for production and commercial sales of multiple products, described below under "Sustainability and Circular Economy"
•Eastman Tritan™ Renew copolyester based on polyester renewal technology which transforms single-use polyester waste into basic building blocks that are then used to make durable, high performance materials;
•Naia™ Renew, a fiber product for the apparel market developed from proprietary cellulosic biopolymer technology;
•Saflex™ E series, an enhanced acoustic interlayer product, formulated to dampen sound, particularly in the high frequency range, and provides improved performance compared to traditional acoustic interlayers;
•Saflex™ Horizon, a next generation polyvinyl butyral ("PVB") interlayer product, supports the longer virtual image distance, expanded field of view, and augmented reality features of advanced Head-up Displays ("HUD") systems;
•Tetrashield™ performance polyester resins based on proprietary monomer technology with improved performance and sustainability features for packaging, industrial, and automotive coatings end-users;
•Performance films ongoing innovation and new product line additions, including faster adhering films, stain resistant top coats, and black paint protection films, and expansion of Eastman's service offerings, including the extended launch of Eastman CORE (trademark and patent pending), an analytics-based software platform that provides automotive groups and professional installers access to shop management and automotive film patterns to improve customer experience and accelerate category development; and
•Cellulosic biopolymers including addition of new microbeads for personal care applications including color cosmetics, sunscreens, and facial lotions in the AFP segment and Aventa™ for use in food service applications in the AM segment.
Sustainability and Circular Economy
Central to Eastman's innovation-driven growth model is management's dedication to enhance the quality of life in a material way with an ongoing commitment to sustainability.
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The Company's long history of technical expertise in chemical processes and polymer science position it to provide innovative solutions to some of the world's most complex problems. Eastman is contributing to development of a more "circular economy". A circular economy focuses on making the most of the world's resources - minimizing waste and maximizing value by providing end-of-life solutions to reduce, reuse, and recycle products and materials. This keeps materials in use and decouples growth from scarce resource consumption, allowing economic development and improvement in quality of life within natural resource limits. The Company's sustainable innovation initiatives include biodegradation, molecular recycling, and strategic collaborations with end-user markets. In 2019, the Company announced the use of its unique platform of solutions to address the challenges of plastic waste in the environment with advanced circular recycling, or molecular recycling, including carbon renewal and polyester renewal technologies. Together, these technologies allow the Company to use plastic waste, such as polyester carpet and textiles, as feedstock and lower greenhouse gas ("GHG") emissions compared to traditional processes. Eastman's scale and integration provide a unique opportunity to accelerate the use of these molecular recycling technologies and make a meaningful positive impact on the environment.
Management approaches sustainability as a source of competitive strength by focusing its innovation strategy on opportunities where disruptive macro trends align with the Company's differentiated technology platforms and applications development capabilities to develop innovative products, applications, and technologies that enable customers' development and sale of sustainable products. Eastman's sustainability-related growth initiatives include targeted products utilizing technologies that enhance end-use product durability, material usage, recyclability, and health and safety impact characteristics to reduce unnecessary waste and GHG emissions associated with climate change. Eastman has focused on communication and collaboration with stakeholders, including policymakers and other interested parties, to build support for the concepts of molecular recycling and mass balance accounting (an accepted and certified protocol that documents and tracks recycled content through complex manufacturing systems). Eastman has committed to reduce its absolute scope 1 (direct GHG emissions occurring from sources that are owned by Eastman) and scope 2 (indirect GHG associated with the purchase of electricity, steam, heat, or cooling and are a result of Eastman's energy use) emissions by one-third by 2030 in order to achieve carbon neutrality by 2050, and to innovate to provide products that enable energy savings and GHG emissions reductions to customers and end-users.
Eastman focuses on the triple challenge of Climate, Circularity, and Caring for Society. Examples of Eastman sustainable solutions within identified disruptive macro trends include:
•Climate:
•Eastman's molecular recycling processes are expected to reduce GHG emissions by 20 percent to 50 percent when compared to processes using fossil fuels in various Renew products;
•Saflex™ Q series advanced acoustic interlayers enables weight reduction of vehicles;
•Solar-absorbing Saflex™ PVB interlayer solutions, such as the Saflex™ S series, Saflex™ Solar Connect, and XIR™ Solar Control Technology, are ideal for electric vehicle ("EV") glass in cabin-forward designs and for larger sunroofs, as they reduce loads on air-conditioning systems and help maximize EV driving range;
•LLumar™ and SunTek™ performance films, in the building and construction market, provide energy savings of 5 percent to 15 percent, depending on glass and film type; and
•Eastman specialty solvents reduce volatile organic compounds ("VOC").
•Circularity:
•Eastman's molecular recycling technology, including carbon renewal and polyester renewal technologies, utilizes plastic waste as a feedstock. Products made with certified recycled content (allocated by International Sustainability & Carbon Certification ("ISCC") mass balance) include:
•Tritan™ Renew coployesters
•Acetate Renew cellulosic biopolymers
•Trēva™ Renew cellulosic biopolymers
•Cristal™ Renew copolyesters
•Naia™ Renew cellulosic yarn
•Began construction of methanolysis manufacturing plant in Kingsport, Tennessee; expected to be mechanically complete by the end of 2022; and
•Announced in January 2022 plans to build the world's largest molecular recycling plant in France.
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•Caring for Society:
•Tetrashield™ performance polyester resins provide Bisphenol A ("BPA")-free coating for food and beverage containers;
•Animal nutrition solutions, including Eastman organic acids and proprietary feed additives for feeding the world, are antibiotic free;
•Saflex™ PVB and HUD acoustic interlayers in the automotive sector are essential to ensure passenger safety. Eastman's materials enable the adoption of digital technologies within the cabin and further advance improvements in solar, heat, and ultraviolet management; and
•Eastman medical polymers provide quality and durability to healthcare providers while ensuring safety for their patients.
FINANCIAL STRATEGY
In its management of the Company's businesses and growth initiatives, management is committed to maintaining a strong financial position with appropriate financial flexibility and liquidity. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility. The Company employs a disciplined and balanced approach to capital allocation and deployment of cash. The priorities for uses of available cash include payment of the quarterly dividend, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management expects that the combination of continued strong cash flow generation, a strong balance sheet, and sufficient liquidity will continue to provide flexibility to pursue growth initiatives.
| BUSINESS SEGMENTS | ||
The Company's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. This organizational structure is based on the management of the strategies, operating models, and sales channels that the various businesses employ and supports the Company's continued transformation towards a global specialty materials company. For segment sales revenue and earnings and segment product lines revenues, see Note 20, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary by Operating Segment" in Part II, Item 7 of this Annual Report. For identification of manufacturing facilities by segment, see Item 2, "Properties" of this Annual Report.
ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT
Overview
In the AFP segment, the Company manufactures materials for products in the transportation; personal care and wellness; food, feed, and agriculture; building and construction; water treatment and energy; consumables; and durables and electronics markets. Key technology platforms are cellulosic biopolymers, polyester polymers, 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 diverse set of end-markets. The segment is focused on producing high-value additives that provide critical functionality but which comprise a small percentage of total customer product cost. The segment principally competes on the differentiated performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. A critical element of the AFP segment's success is its close formulation collaboration with customers through advantaged application development capability.
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Principal Products
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications | ||||||||||
| Animal Nutrition | ||||||||||||||
| Organic acids and derivatives Choline chloride | organic acid-based solutions | BASF SE Perstorp Holding AB Luxi Chemical Group Balchem Corporation Adisseo | formic acid ethylene oxide propane liquefied natural gas | gut health solutions preservation and hygiene industrial applications | ||||||||||
| Care Additives | ||||||||||||||
Alkylamine derivatives Organic acids and derivatives Cellulosic biopolymers Adjust™ | amine derivative-based building blocks for production of flocculants intermediates for surfactants metam-based soil fumigants thiram and ziram-based fungicides plant growth regulator | BASF SE Dow Inc. Huntsman Corporation Corteva, Inc. Argo-Kanesho Co., Ltd. Bayer AG | alkylamines acrylonitrile alcohols ethylene oxide CS2 caustic soda | water treatment personal and home care pharmaceuticals agriculture crop protection | ||||||||||
| Coatings Additives | ||||||||||||||
Polymers cellulosics Tetrashield™ polyesters polyolefins Additives and Solvents Texanol™ Optifilm™ ketones esters glycol ethers oxo alcohols EastaPure™ electronic chemicals | specialty coalescents, specialty solvents, and commodity solvents paint additives and specialty polymers | BASF SE Dow Inc. Oxea Celanese Corporation Alternative Technologies | wood pulp propane propylene | building and construction (architectural coatings) transportation (original equipment manufacturer "OEM") and refinish coatings durable goods (wood, industrial coatings and applications) consumables (graphic arts, inks, and packaging) electronics | ||||||||||
| Specialty Fluids & Energy | ||||||||||||||
Therminol™ Turbo oils Skydrol™ SkyKleen™ Marlotherm™ | heat transfer and aviation fluids | Dow Inc. Exxon Mobil Corporation | benzene phosphorous neo-polyol esters | industrial chemicals and processing (heat transfer fluids for chemical processes) renewable energy commercial aviation | ||||||||||
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Products Held for Sale
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications | ||||||||||
| 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) | ||||||||||
Impera™ | performance resins | Cray Valley Hydrocarbon Specialty Chemicals Exxon Mobil Corporation Kolon Industries, Inc. | alpha methylstyrene piperylene styrene | transportation (tire manufacturing) | ||||||||||
Strategy
Management applies Eastman's innovation-driven growth model in the AFP segment by leveraging proprietary technologies for the continued development of innovative product offerings and focusing growth efforts in end-markets such as transportation, building and construction, consumables, industrial applications, animal nutrition, care additives, and energy. Management believes that the ability to leverage the AFP segment's research, differentiated application development, and production capabilities across multiple markets uniquely positions it to meet evolving needs to improve the quality and performance of its customers' products. For example, Eastman BPA-non intent ("BPA-NI") Tetrashield™ protective resins enable metal packaging coatings formulation with a unique balance of durability and flexibility and allows the coating to stay intact even with hard-to-hold foods and beverages. Such protective resins can also be used in protective coatings, industrial coatings and automotive coatings. The Company is also developing solutions to address the environmental challenges caused by non-biodegradable microplastics in personal care products by leveraging its world-class biodegradable cellulosic biopolymer technology platform in biodegradable microbeads for personal care application.
In 2021, the AFP segment:
•continued to advance growth and innovation of Tetrashield™ resins that enable low-VOC formulations and eliminate energy intensive manufacturing steps, by working with key customers and other brands through the value chain;
•continued to expand capabilities of Eastapure™ electronic chemicals, an excellent choice for use in etching solutions for semiconductor chips and other electronic applications with extremely low metal content;
•increased capacity to produce tertiary amines at its Ghent, Belgium and Pace, Florida facilities by approximately 40 percent and 20 percent, respectively, to meet growing demand for hand sanitizers and other household cleaning products;
•completed raw material conversion project at its Oulu, Finland facility implementing more sustainable technology by switching to liquefied natural gas and improving its environmental footprint;
•introduced Fluid Genius™, a patent-pending product that equips end-users with predictive insights to optimize heat transfer fluid performance by leveraging artificial intelligence technology with Eastman expertise to monitor and maximize the life cycle of heat transfer fluids for a myriad of system applications; and
•acquired 3F Food & Feed ("3F"), a manufacturer of additives for animal feed and human food which is expected to enhance continued global growth of the animal nutrition product lines.
In response to market and business conditions, the Company completed the sale of its rubber additives (including Eastman's Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology. In addition, the Company entered into a definitive agreement to sell its adhesives resins assets and business. The proposed sale consists of hydrocarbon resins (including Eastman Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines.
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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; durables and electronics; building and construction; medical and pharma; and consumables markets. Key technology platforms for this segment include cellulosic biopolymers, 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 BPA free properties. The Saflex™ Q Series product line is a leading acoustic solution for architectural and automotive applications. The Company also maintains a leading solar control technology position in the window films market as well as advanced urethane film and coatings technologies in the paint protection film market. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.
Principal Products
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications | ||||||||||
| Advanced Interlayers | ||||||||||||||
Saflex™ Saflex™ Q Series Saflex™ ST Saflex™ E Series | standard PVB sheet premium PVB sheet | 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 glycol | transportation (automotive safety glass, automotive acoustic glass, and HUD) building and construction (PVB for architectural interlayers) | ||||||||||
| Performance Films | ||||||||||||||
LLumar™ Flexvue™ SunTek™ V-KOOL™ Gila™ | window films and protective films products for aftermarket applied films | 3M Company Saint-Gobain S.A. XPEL, Inc. | polyethylene terephthalate film aliphatic thermoplastic polyurethane film | transportation (automotive after- market window films and paint protection films) building and construction (residential and commercial window films) health and wellness (medical) | ||||||||||
| Specialty Plastics | ||||||||||||||
Tritan™ copolyester Eastar™ copolyesters Spectar™ copolyester Embrace™ copolyester Visualize™ Eastman Aspira™ family of resins Treva™ | standard copolyesters premium copolyesters cellulosic biopolymers | Covestro AG Trinseo S.A. Evonik Industries AG Saudi Basic Industries Corporation Mitsubishi Chemical Corporation S.K. Chemical Industries Sichuan Push Acetati Company Limited Daicel Chemical Industries Ltd. | paraxylene ethylene glycol cellulose purified terephthalic acid waste plastics and textiles | consumables (consumer packaging, cosmetics packaging, in-store fixtures and displays) durable goods (consumer housewares and appliances) health and wellness (medical) electronics (displays) | ||||||||||
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Strategy
Management applies Eastman's innovation-driven growth model in the AM segment by leveraging innovation and technology platforms to develop new and multi-generational products and applications to accelerate AM segment growth and leverage its manufacturing capacity. The segment continues to expand its portfolio of higher margin products in attractive end-markets. Through Eastman's advantaged asset position and expertise in applications development, management believes that the AM segment is well positioned for continued future growth. The advanced interlayers product lines, including acoustic and HUD sheet interlayer products, leverage Eastman's global presence to supply industry leading innovations to automotive and architectural end-markets by collaborating with global and large regional customers. In the automotive end-market, the performance films product line has industry leading technologies, recognized brands, and what management believes is one of the largest distribution and dealer networks which, when combined, position Eastman for further growth, particularly in leading automotive markets such as North America and Asia. The segment's product portfolio is aligned with underlying energy efficiency trends in both automotive and architectural markets. Additionally, the AM segment is positioned to benefit from recent Eastman polyesters and acetyl streams sustainability innovations by leveraging molecular recycling technology to enable various waste plastics to be recycled into specialty plastics products marketed and sold under the "Renew" product designation. See "Corporate Overview - Business Strategy - Sustainability and Circular Economy".
The AM segment expects to continue to improve its product mix from increased sales of premium products, including Tritan™ copolyester, Tritan™ Renew, Visualize™ material, Saflex™ Q acoustic series, Saflex™ HUD interlayer products, LLumar™, V-KOOL™, and SunTek™ window and protective films.
In 2021, the AM segment:
•adopted polyester renewal technology for products in various end-markets including, Tritan™ Renew in durable goods, such as electronic devices, power tools, consumer housewares, small appliances, and eyewear, as well as Cristal™ Renew and Cristal™ One Renew in packaging;
•commercialized new products with improved recyclability including Cristal™ One and Cristal™ One Renew with adoption in cosmetic packaging end markets;
•continued circular economy advancements (including the investment in the world's largest polyester material recycling facility);
•continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
•continued to expand portfolio of differentiated next generation products for both automotive and architectural interlayer films products;
•developed and launched Eastman CORE (trademark and patent pending) digital product data analytics software for accessory sales management and installation of automotive window and paint protection films products;
•developed and launched the third generation of paint protection films leveraging Eastman proprietary Tetrashield™ coating technology to enable what the Company believes is best in class aesthetics and durability in paint protection films; and
•acquired the Matrix Films performance films business expanding paint protection film pattern development capabilities, pattern database, and installation training expertise.
CHEMICAL INTERMEDIATES SEGMENT
Overview
Eastman leverages large scale and vertical integration from the cellulosic biopolymers and acetyl, olefins, and alkylamines streams to support the Company's specialty operating segments with advantaged cost positions. The CI segment sells excess intermediates beyond the Company's internal specialty needs into markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Key technology platforms include acetyls, oxos, plasticizers, polyesters, and alkylamines.
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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 cellulosic biopolymers and acetyl stream product lines, propylene and ethylene used in the production of olefin derivative product lines such as oxo alcohols and plasticizers, and ammonia and methanol used to manufacture methylamines. The CI segment also provides superior reliability to customers through its backward integration into readily available raw materials, such as propane, ethane, coal, and propylene. In addition to a competitive cost position, the plasticizers business expects to continue to benefit from the growth in relative use of non-phthalate rather than phthalate plasticizers in the United States, Canada, and Europe.
Several CI segment product lines are affected by cyclicality, most notably olefin and acetyl-based products. See "Eastman Chemical Company General Information - Manufacturing Streams". This cyclicality is caused by periods of supply and demand imbalance, when either incremental capacity additions are not offset by corresponding increases in demand, or when demand exceeds existing supply. While management continues to take steps to reduce the impact of the trough of these cycles, future results are expected to fluctuate due to both general economic conditions and industry supply and demand.
Principal Products
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications | ||||||||||
| Functional Amines | ||||||||||||||
| Alkylamines | methylamines and salts higher amines and solvents | BASF SE US Amines Limited Oxea GmbH Belle Chemical Company | methanol ammonia acetone ethanol butanol | agrochemicals energy consumables water treatment animal nutrition industrial intermediates | ||||||||||
| 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 Dow Inc. Oxea Celanese Corporation Lonza Ineos Group Holdings S.A. | 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. Lanxess AG | 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) | ||||||||||
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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, and also external licensing opportunities. Through the CI segment, the Company has leveraged the advantage of its highly integrated manufacturing facilities. Scale and feedstock versatility at the Kingsport, Tennessee manufacturing facility allows for competitive advantage in the production of acetic anhydride and other acetyl derivatives. At the Longview, Texas manufacturing site, Eastman uses its proprietary oxo technology in one of the world's largest single-site oxo butyraldehyde manufacturing facilities to produce a wide range of alcohols and other derivative products utilizing local propane and ethane supplies and purchased propylene. The Pace, Florida manufacturing facility, which uses ammonia and methanol feedstocks, is one of the world's largest methylamine production sites in the world. These integrated facilities, combined with large scale production processes and a continuous focus on additional process improvements, allow the CI segment product lines to remain cost competitive and, for some products, cost-advantaged as compared to competitors. Use of refinery-grade propylene ("RGP") in the feedstock mix of the olefin cracking units at the Longview, Texas manufacturing site reduces the amount of other purchased feedstocks. This results in a decrease in ethylene production and excess ethylene sales while maintaining historical levels of propylene production, providing flexibility to reduce participation in the merchant ethylene market, and retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company.
In 2021, the CI segment :
•completed expansion of production capacity at St. Gabriel, Louisiana facility to support a strategic supply partnership;
•completed expansion of methylamines production capacity at Ghent, Belgium facility supporting market growth;
•completed closure of Singapore manufacturing site; and
•began the ethylene production to propylene capital investment which will provide low-cost propylene supply to internal derivatives and create lower volatility and improved earnings potential from enhanced operating flexibility.
FIBERS SEGMENT
Overview
In the Fibers segment, Eastman manufactures and sells acetate tow and triacetin plasticizers for use in filtration media, primarily cigarette filters; natural (undyed), cellulosic staple fibers and yarn for use in apparel, home furnishings, and industrial fabrics; nonwoven media for use in filtration and friction applications, used primarily in transportation, industrial, and agricultural markets; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. The Company is the world's largest producer of acetate yarn and has been in this business for over 85 years.
The Fibers segment's competitive strengths include a reputation for high-quality products, technical expertise, large scale vertically-integrated processes, reliability of supply, internally produced acetate flake supply for Fibers segment's products, a reputation for customer service excellence, and a customer base characterized by strategic long-term customers and end-user relationships. The Company continues to capitalize and build on these strengths to further improve the strategic position of its Fibers segment. In response to challenging acetate tow market conditions, including additional industry capacity and lower capacity utilization rates, the Company has taken actions in recent years expected to stabilize segment earnings, including the establishment of long-term acetate tow customer arrangements and agreements, development of innovative textile and nonwoven applications, and repurposing manufacturing capacity from acetate tow to new products.
The 10 largest Fibers segment customers accounted for approximately 60 percent of the segment's 2021 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.
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Principal Products
| Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications | ||||||||||
| Acetate Tow | ||||||||||||||
Estron™ | cellulose acetate tow | Celanese Corporation Cerdia International Daicel Corporation | wood pulp methanol high sulfur coal | filtration media (primarily cigarette filters) | ||||||||||
| Acetate Yarn and Fiber | ||||||||||||||
Naia™ Estron™ | natural (undyed) acetate yarn solution dyed acetate yarn staple fiber | UAB Dirbtinis Pluostas Lenzing AG Aditya Birla Group | wood pulp methanol high sulfur coal waste plastics and textiles | consumables (apparel, home furnishings, and industrial fabrics) health and wellness (medical tape) | ||||||||||
| Acetyl Chemical Products | ||||||||||||||
Estrobond™ | triacetin cellulose acetate flake acetic acid acetic anhydride | Jiangsu Ruijia Chemistry Co., Ltd. Polynt SpA Daicel Corporation Celanese Corporation Cerdia International | wood pulp methanol high sulfur coal | filtration media (primarily cigarette filters) | ||||||||||
| Nonwovens | ||||||||||||||
| Nonwovens | wetlaid nonwoven media specialty and engineered papers cellulose acetate fiber | Hollingsworth and Vose Company Lydall, Inc. BorgWarner Inc. | natural and synthetic fibers inorganic and metallic additives resins | filtration and friction media for transportation industrial agriculture and mining aerospace markets | ||||||||||
Strategy
Management applies the innovation-driven growth model to 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. The Fibers segment also expects to benefit from Eastman’s recently developed carbon renewal technology, which enables the substitution of fossil fuel feedstock with waste plastics and textiles. Products using this technology are marketed and sold under the "Renew" product designation. See "Corporate Overview - Business Strategy - Sustainability and Circular Economy". The Company supplies 100 percent of the acetate flake raw material to the manufacturing facility of its acetate tow joint venture in China from the Company's manufacturing facility in Kingsport, Tennessee, which the Company recognizes in sales revenue. The Company recognizes earnings in the joint venture through its equity investment, reported in "Other (income) charges, net" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in Part II, Item 8 of this Annual Report. The Company's focus on innovation has resulted in repurposing some of its acetate tow manufacturing capacity to fibers products for textiles and nonwovens markets, resulting in increased capacity utilization and lower acetate tow costs.
To meet customers' evolving needs and further improve the Fibers segment's manufacturing process efficiencies, the Company makes use of its capabilities in fibers technology to maintain a strong focus on incremental product and process improvements.
In 2021, the Fibers segment:
•introduced Naia™ staple fiber for spun yarns for apparel and home textiles; and
•developed Naia™ Renew yarns and staple fibers made from approximately 40 percent recycled plastic and textiles waste, enabled by Eastman's carbon renewal technology.
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The Fibers segment R&D efforts focus on serving new and existing customers, leveraging proprietary cellulosic biopolymers and spinning technology, optimizing asset productivity through process improvement, selective product innovation in response to acetate tow customer needs, and working with suppliers to reduce costs. For textiles, the Fibers segment is offsetting declines in acetate tow through investments in differentiated application development capabilities and new product innovations, including circular solutions, to drive growth in textiles and apparel of Naia™ yarns and fibers.
| EASTMAN CHEMICAL COMPANY GENERAL INFORMATION | ||
Seasonality
Eastman's earnings are typically higher in the second and third quarters, and cash flows from operations are typically highest in the second half of the year due to seasonal demand based on general economic activity in the Company's key markets as described in "Business Segments". Results in all segments except Fibers are typically weaker in the fourth quarter due to seasonal downturns in key markets.
The coatings and inks additives product line of the AFP segment and the intermediates product line of the CI segment are impacted by the cyclicality of key end products and markets, while other operating segments and product lines are more sensitive to global economic conditions. Eastman is exposed to consumer discretionary end-markets and changes in global consumer spending, particularly in the AM and AFP segments. Supply and demand dynamics determine profitability at different stages of business cycles and global economic conditions affect the length of each cycle.
Sales, Marketing, and Distribution
Eastman markets and sells products primarily through a global marketing and sales organization which has a presence in the United States and approximately 30 other countries selling into more than 100 countries around the world. The Company focuses its market engagement on attractive niche markets, leveraging disruptive macro trends, and market activation throughout the value chain with both customers and downstream users. Eastman's strategy is to target industries and markets where the Company can leverage its application development expertise to develop product offerings to provide differentiated value that address current and future customer and market needs. The Company's strategic marketing approach and capabilities leverage the Company's insights about trends, markets, and customers to drive development of specialty products. Through a highly skilled and specialized sales force that is capable of providing differentiated product solutions, Eastman strives to be the preferred supplier in the Company's targeted markets.
The Company's products are also marketed through indirect channels, which include dealers and contract representatives. Sales outside the United States tend to be made more frequently through dealers and contract representatives than sales in the United States. The combination of direct and indirect sales channels, including sales online through its Customer Center website, allows Eastman to reliably serve customers throughout the world.
The Company's products are shipped to customers and to downstream users directly from Eastman manufacturing plants and distribution centers worldwide.
Research and Development
Management applies its innovation-driven growth model to leverage the Company's world class scalable technology platforms that provide a competitive advantage and the foundation for sustainable earnings growth. The Company's R&D strategy for sustainable growth through innovation includes multi-generational product development for specialty products, faster and more differentiated product development by leveraging global application development capabilities, and the creation of value through integration of multiple technology platforms. The Company's innovation strategy is guided by the need to provide practical solutions to sustainability macro-drivers that will improve the quality of life globally through material solutions. This strategy has been accelerated by enhancements of global differentiated application development capabilities that position Eastman as a strategic element of customers' success within attractive niche markets. See examples of recent product and technology innovations in "Corporate Overview - Business Strategy - Innovation".
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Eastman manages certain growth initiatives and costs at the corporate level, including certain R&D costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision-making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional amounts are spent on those projects. The Company continues to explore and invest in R&D initiatives such as high-performance materials and opportunities created by disruptive macro trends including sustainability and development of a more "circular economy". See "Corporate Overview - Business Strategy - Sustainability and Circular Economy".
Manufacturing Streams
Integral to Eastman's strategy for growth is leveraging its heritage expertise and innovation in cellulosic biopolymers and acetyl, olefins, polyester, and alkylamine chemistries in key markets, including transportation, building and construction, consumables, 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 cellulosic biopolymers and acetyl stream, the Company begins with gasification of fossil fuels with oxygen. The resulting synthesis gas is converted into acetic acid and acetic anhydride. Cellulosic biopolymers derivative manufacturing at the Company begins with natural polymers, sourced from sustainably-managed forests, which, when combined with acetyl and olefin chemicals, provide differentiated product lines. Through a new recycling innovation, carbon renewal technology is now enabling the recycling of complex plastics to the basic building blocks of Eastman's cellulosic product stream. The major end-markets for products from the cellulosic biopolymers and acetyl stream include coatings, displays, and thermoplastics.
•In the olefins stream, the Company begins primarily with propane and ethane, which are thermally "cracked" (the process whereby hydrocarbon molecules are broken down and rearranged) into ethylene and propylene in three cracking units at its site in Longview, Texas. As a result of modifications completed in 2018, these units also offer flexibility to use RGP as a diversified feedstock to minimize the impact of olefins spread volatility. The Company purchases some additional propylene to supplement cracking unit production. Propylene derivative products are used in a variety of items such as paints and coatings, automotive safety glass, and non-phthalate plasticizers. Ethylene derivative products are converted for end-uses in the food industry, health and beauty products, detergents, and automotive products.
•In the polyester stream, the Company begins with paraxylene, ethylene glycol, and integrated feedstocks, converting them through a series of intermediate materials to ultimately produce clear, tough, chemically resistant copolyesters. The Company is enhancing the polyester stream by investing in the world's largest plastic-to-plastic polyester renewal facility to enable various waste plastics to be recycled into high quality, specialty copolyester Renew products. Polyester stream products are converted for end-uses in cosmetics and personal care, medical device, durable goods, and food packaging industries.
•In the alkylamines stream, the Company begins with ammonia and alcohol feedstocks to produce methylamines and higher alkylamines, which can then be further converted into alkylamine derivatives. The Company's alkylamines products are primarily used in agriculture, water treatment, consumables, animal nutrition, and oil and gas end-markets.
The Company leverages its expertise and innovation in cellulosic biopolymers 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.
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Sources and Availability of Raw Materials and Energy
Eastman purchases a majority of its key raw materials and energy through different contract mechanisms, generally of one to three years in initial duration with renewal or cancellation options for each party. Most of these agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase; however, from time to time Eastman uses derivative financial instruments for certain key raw materials to mitigate the impact of market price fluctuations. Key raw materials include propane, propylene, paraxylene, methanol, cellulosic biopolymers, fatty alcohol, polyvinyl alcohol, and a wide variety of precursors for specialty organic chemicals. Key purchased energy sources include natural gas, coal, and electricity. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and ongoing performance assessments and benchmarking, as part of its supplier selection process. When appropriate, the Company purchases raw materials from a single source supplier to maximize quality and reduce cost and has contingency plans to minimize the potential impact of any supply disruptions from single source suppliers.
While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and cost are subject to unscheduled plant interruptions occurring during periods of high demand, domestic and world market conditions, changes in government regulation, the ongoing COVID-19 coronavirus global pandemic ("COVID-19"), 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 2021. For additional information about raw materials, see Exhibit 99.02 "Product and Raw Material Information" of this Annual Report.
Intellectual Property, Trademarks, and Licensing
While Eastman's intellectual property portfolio is an important Company asset which it expands and vigorously protects globally through a combination of patents, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular operating segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad range of advanced materials, specialty additives, chemicals, and fibers, Eastman owns over 800 active United States patents and approximately 1,500 active foreign patents, expiring at various times over several years, and owns over 5,300 active worldwide trademark applications and registrations. Eastman continues to actively protect its intellectual property. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot ensure that it will be able to adequately protect its intellectual property assets outside the United States. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.
The Company pursues opportunities to license proprietary technology to third parties where it has determined that the 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.
Information Security
The Company employs information systems to support its business, enable Company transformation, and deploy digital services. The Company utilizes a risk-based, multi-layered information security approach following the U.S. National Institute of Standards and Technology Cybersecurity Framework, including dedicated security operations center monitoring; network-based and host-based protections; a Privacy Council focused upon adherence to privacy regulations; privilege access management controls; annual and on-going information security training and targeted exercises for employees and third parties; encryption of data, backup, recovery, and testing; regular internal and external assessments against information security best practices; and benchmarking utilizing external third parties. As with other manufacturing companies, the Company from time to time experiences attempted cyber-attacks of its information systems. None of these attempts has resulted in a material adverse impact on the Company's operations or financial results, any penalties or settlements. Management, including the Chief Information Officer ("CIO"), reviews information security performance and recent cybersecurity industry trends at least quarterly, and at least annually reviews information security strategy with executive management. See "Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors" in Part II, Item 7 of this Annual Report.
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Under the Company's enterprise-wide approach to risk management, cybersecurity and security of Company information is a "high-level" risk that is reported to and overseen by the Audit Committee of the Board of Directors, which consists of non-employee independent directors with information systems experience. The CIO provides an overview of information security performance and recent cybersecurity industry trends to the Audit Committee of the Board of Directors on a regular basis.
Human Capital
Effective attraction, development, and retention of employees ("human capital"), including workforce and management development, inclusion and diversity initiatives, succession management, corporate culture and leadership quality, morale, and compensation and benefits are vital to the success of Eastman's innovation-driven growth strategy. Management's goal is to continue building a high performing, inclusive culture where everyone is inspired to do their best work. The Compensation and Management Development Committee of the Board of Directors oversees workforce and senior management development and the Board of Directors monitors the culture of the Company and leadership quality, morale, and development.
Eastman places a strong emphasis on the health, safety and well-being of employees — both at work and at home. Eastman's "zero-incident mindset" takes a holistic approach to people and processes by fostering the right behaviors, values, and culture to ensure that employees are operating responsibly, accountably, and safely. In addition to annual process and personal safety performance expectations (see "Executive Compensation" in Part III, Item 11 of this Annual Report), safety and wellness protocols continue to be included for protection against the COVID-19 virus for employees returning to the workplace. In 2021, educational materials were provided to employees and barriers to obtaining the COVID-19 vaccination were removed.
The Company's focus on well-being also includes physical, emotional, and financial health of employees and their families, with on-site and on-demand resources such as fitness classes, health coaches, and financial counselors. Throughout the COVID-19 pandemic, the Company has enhanced mental wellness resources for employees. Eastman's global Employee Assistance Program provided strong support and resources to employees. The Company also developed and communicated flexibility principles and resources to emphasize the importance of balancing work and personal responsibilities.
As Eastman develops new products to meet today's most pressing needs, the Company inspires innovative ideas by making every team member feel valued and empowered to do their best work. Eastman's capacity to innovate and transform depends on its ability to attract and retain the best and brightest talent. Building an inclusive workplace, powered by a diverse global employee population of approximately 14,000 people worldwide is key to promoting innovation and driving results.
The table below shows the percentage of the Company's global employee population by region.
| United States and Canada | 71 | % | |||
| Europe, Middle East, and Africa | 16 | % | |||
| Asia Pacific | 10 | % | |||
| Latin America | 3 | % | |||
| Total | 100 | % | |||
The Company has committed to achieve gender parity in professional and leadership roles globally and to be an industry leader in racial and ethnic diversity in the United States by 2030. In 2021, the Company's female representation globally was 38 percent in professional level roles, 27 percent in leadership roles, and 20 percent at the executive level. In the United States, the Company's racially and ethnically diverse talent was 13 percent at both professional and leadership levels, and 20 percent at the executive level. The non-employee directors of Eastman's Board of Directors are 33 percent female and 11 percent racially and ethnically diverse. See "Information About our Executive Officers" in Part I of this Annual Report and "Directors, Executive Officers and Corporate Governance"— "Election of Directors" in Part III, Item 10 of this Annual Report for more information.
Eastman Resource Groups ("ERGs") exemplify intentional measures the Company is taking to make sure every team member feels valued, respected, and able to perform at their full potential. Each group is actively sponsored by an executive team member and supported by senior leaders to build awareness and understanding of the value and unique qualities of diverse team member populations, promoting inclusive values and behaviors that help tap into the full potential of a diverse workforce.
Eastman is committed to maintaining pay equity. The Company's compensation philosophy, principles, and processes are designed to ensure that all team members are paid fairly and equitably. The Company utilizes a third party to complete a statistical assessment annually to validate pay equity.
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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 2021 sales revenue. No single customer accounted for 10 percent or more of the Company's consolidated sales revenue during 2021.
Compliance With Environmental and Other Government Regulations
The Company is subject to significant and complex governmental laws and regulations, both in the U.S. and internationally, which require and will continue to require significant expenditures to remain in compliance and may, depending on specific facts and circumstances, impact the Company's competitive position. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors -- Legislative, regulatory, or voluntary actions could increase the Company's future health, safety, and environmental compliance costs." in Part II, Item 7 of this Annual Report.) These include health, safety, and environmental laws and regulations; site security regulations; chemical control laws; laws protecting intellectual property; privacy, data sharing and data protection laws; laws regulating energy generation and distribution, such as utilities, pipelines and co-generation facilities; and customs laws and laws regulating import and export of products and technology. As described below, the most significant environmental capital and other expenditures are for compliance with environmental and health and safety laws. In addition to these regulations, compliance with chemical control laws (including the U.S. Toxic Substances Control Act, the U.S. Federal Insecticide, Fungicide, and Rodenticide Act and similar non-U.S. counterparts, and the Registration, Evaluation, Authorization and Restriction of Chemicals ("REACH") program in the European Union) and laws protecting intellectual property (see "Intellectual Property, Trademarks, and Licensing") have the most impact on the Company's day-to-day operations and competitive position.
Environmental
The Company is subject to laws, regulations, and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal, remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Environmental, Safety, and Sustainability 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 GHG gas emissions, energy or climate change, 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 as well as the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations, and testing requirements could result in higher or lower costs.
The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities. Other matters concerning health, safety, and the environment are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and in Note 1, "Significant Accounting Policies" Note 13, "Environmental Matters and Asset Retirement Obligations" and Note 22, "Reserve Rollforwards", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
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Eastman's cash expenditures related to environmental protection and improvement were $281 million, $265 million, and $244 million in 2021, 2020, and 2019, 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, $42 million, and $27 million in 2021, 2020, and 2019, respectively.
Health and Safety
Eastman places a strong emphasis on the health, safety and well-being of its employees. Eastman's "zero-incident mindset" takes a holistic approach to people and processes by fostering the right behaviors, values, and culture to ensure that its employees are operating responsibly, accountably, and safely. See "Human Capital". Under the U.S. Occupational Safety and Health Act of 1970, as administered by the Occupational Safety and Health Administration ("OSHA"), some of the Company's operations are subject to workplace standards under OSHA's Process Safety Management program. From time to time, the Company may incur significant capital expenditures to maintain compliance with the requirements of this program.
Available Information - Securities and Exchange Commission ("SEC") Filings
Eastman makes available free of charge, in the "Investors - SEC Information" section of its Internet website at www.eastman.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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| ITEM 1A. RISK FACTORS | ||
For identification and discussion of the material known factors, risks, and uncertainties that could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.
| ITEM 1B. UNRESOLVED STAFF COMMENTS | ||
None.
| INFORMATION ABOUT OUR EXECUTIVE OFFICERS | ||
Certain information about Eastman's executive officers is provided below:
Mark J. Costa, age 55, is Chair of the Eastman Chemical Company Board of Directors and Chief Executive Officer. Mr. Costa joined the Company in June 2006 as Chief Marketing Officer and leader of corporate strategy and business development; was appointed Executive Vice President, Specialty Plastics and Performance Polymers Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Products and Chief Marketing Officer in May 2009; and became President and a member of the Board of Directors in May 2013. Prior to joining Eastman, Mr. Costa was a senior partner with Monitor Group, a global management consulting firm. He joined Monitor in 1988, and his experience included corporate and business unit strategies, asset portfolio strategies, innovation and marketing, and channel strategies across a wide range of industries. Mr. Costa was appointed Chief Executive Officer in January 2014 and was named Board Chair effective July 2014.
William T. McLain, Jr., age 49, is Senior Vice President and Chief Financial Officer. Mr. McLain joined Eastman in 2000 and has served in high-level finance and accounting roles throughout the organization in the United States, Asia, and Europe. In 2011, Mr. McLain served as Director, Asia Pacific Finance, and in 2013 was appointed to International Controller. In 2014, Mr. McLain was appointed Corporate Controller until 2016 when he became Vice President of Finance. Prior to Eastman, Mr. McLain worked for the public accounting firm PricewaterhouseCoopers LLP. Mr. McLain was appointed to his current position effective February 2020.
Brad A. Lich, age 54, is Executive Vice President and Chief Commercial Officer, with responsibility for the AM and Fibers segments, outside-U.S. regional business leadership, and the marketing, sales, pricing, and supply chain organizations. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for the Coatings business. Other positions of increasing responsibility followed, including General Manager of Emerging Markets of the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segment. In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the CASPI segment, and in 2012 was appointed Vice President and General Manager of the AFP segment. In January 2014, Mr. Lich was appointed Executive Vice President, with responsibility for the AFP and AM segments and the marketing, sales, and pricing organizations. In March 2016, Mr. Lich assumed executive responsibility for outside-U.S. regional business leadership. Mr. Lich was appointed to his current position effective July 2016.
Lucian Boldea, age 50, is Executive Vice President with responsibility for the AFP and CI segments. Dr. Boldea joined Eastman in 1997 as a chemist. During his career at Eastman, he has held various positions in R&D, licensing, business management, and corporate growth platforms leadership in the AM segment. Between 2012 and 2015 he served as Vice President and General Manager, Specialty Plastics, in the AM segment. In 2015, he was appointed Group Vice President and General Manager of the AFP segment and became Senior Vice President of the AFP segment in July 2016. Dr. Boldea was appointed to his current position effective January 2019.
Mark K. Cox, age 56, is Senior Vice President and Chief Manufacturing and Engineering Officer. Mr. Cox joined Eastman in 1986 and has served in a variety of management positions, including commercial, engineering, manufacturing, supply chain, and technology leadership roles. In August 2008, Mr. Cox was appointed Vice President, Chemicals and Fibers Technology. Beginning in May 2009, Mr. Cox served as Vice President, Chemicals, Fibers, and Performance Polymers Technology. He was appointed Vice President, Worldwide Engineering and Construction in August 2010, appointed Senior Vice President and Chief Manufacturing and Engineering Officer effective January 2014, and appointed Senior Vice President and Chief Manufacturing, Supply Chain and Engineering Officer effective March 2016. In June 2021, Mr. Cox announced plans to retire in 2022.
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Stephen G. Crawford, age 57, is Executive Vice President Technology and Chief Sustainability Officer, with executive responsibility for innovation and sustainability. Mr. Crawford joined Eastman in 1984 and held leadership positions of increasing responsibility in both the manufacturing and technology organizations. From 2007 until January 2014 he served as Vice President of Global R&D in the AM and AFP segments. He was appointed Senior Vice President and Chief Technology Officer effective January 2014, and Senior Vice President, Chief Technology and Sustainability Officer effective October 2019. Mr. Crawford was appointed to his current position effective August 2021.
Christopher M. Killian, age 52, is Senior Vice President and Chief Technology Officer. Dr. Killian has responsibility for Eastman's global technology organization. Prior to this position he served as Vice President for Additives and Functional Products, Chemical Intermediates and Corporate Technology and Vice President for Advanced Materials Technology. Dr. Killian joined Eastman in 1996 as a research chemist. During his career at Eastman, he has held various leadership positions in technology and the business including Director, Tritan Growth Platform early in his career. Dr. Killian was appointed to his current position effective June 2021.
Julie A. McAlindon, age 54, is Senior Vice President, Supply Chain, Regions and Transformation. Ms. McAlindon has responsibility for overseeing supply chain, indirect sourcing and procurement, and regional leadership while also leading the transformation of Eastman. Prior to this role, Ms. McAlindon was Chief Procurement Officer and Vice President, Transformation. Ms. McAlindon joined Eastman in 2016. Before joining Eastman, Ms. McAlindon was with Avient Corporation (formerly PolyOne) as senior vice president, designed structures and solutions; and vice president of marketing. Prior to that, Ms. McAlindon's work experience includes a variety of leadership positions with The Dow Chemical Company. Ms. McAlindon was appointed to her current position effective June 2021.
Kellye L. Walker, age 55, is Executive Vice President and Chief Legal Officer. Ms. Walker has overall leadership responsibility for Eastman's legal organization, including corporate governance, compliance and litigation management, as well as government affairs, product stewardship and regulatory affairs, global business conduct and the Company's global health, safety, environment and security organization. Before joining Eastman, Ms. Walker served as executive vice president and chief legal officer of Huntington Ingalls Industries. Prior to that, Ms. Walker's work experience includes serving as general counsel or chief legal officer at American Water Works Company, Diageo North America, and BJ's Wholesale Club. Ms. Walker was appointed to her current position effective April 2020.
Perry Stuckey III, age 62, 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 Rockwell Automation and Monsanto Company. Mr. Stuckey was appointed to his current position effective January 2013.
Michelle R. Stewart, age 50, is Vice President, Corporate Controller and Chief Accounting Officer. Since joining Eastman in 1995, Ms. Stewart has served in a number of positions with increasing responsibility in the financial organization. Prior to joining Eastman, Ms. Stewart was an auditor with KPMG Peat Marwick. Ms. Stewart was appointed to her current position effective October 2021.
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ITEM 2.PROPERTIES
At December 31, 2021, Eastman owned or operated 41 manufacturing facilities and had equity interests in three manufacturing joint ventures in a total of 12 countries. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions; however, none of the principal plants is substantially idle. The Company's plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable and adequate for their use. Unless otherwise indicated, all properties are owned. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Shanghai, China; Rotterdam, the Netherlands; Singapore; and Zug, Switzerland.
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The locations and general character of the Company's manufacturing facilities 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 | |||||||||||||
| Chestertown, Maryland | x | |||||||||||||
Columbia, South Carolina (1) | x | |||||||||||||
| Fieldale, Virginia | x | |||||||||||||
Franklin, Virginia (1)(2) | x | |||||||||||||
Jefferson, Pennsylvania (2) | x | |||||||||||||
| Kingsport, Tennessee | x | x | x | x | ||||||||||
Lemoyne, Alabama (1) | x | |||||||||||||
| Linden, New Jersey | x | |||||||||||||
| Longview, Texas | x | x | x | |||||||||||
| Martinsville, Virginia | x | |||||||||||||
Pace, Florida (3) | x | x | ||||||||||||
| Springfield, Massachusetts | x | |||||||||||||
| St. Gabriel, Louisiana | x | x | ||||||||||||
| Sun Prairie, Wisconsin | x | |||||||||||||
| Texas City, Texas | x | |||||||||||||
| Watertown, New York | x | |||||||||||||
| Europe | ||||||||||||||
Antwerp, Belgium (1) | x | |||||||||||||
Ghent, Belgium (4) | x | x | x | |||||||||||
| Kohtla-Järve, Estonia | x | x | ||||||||||||
Oulu, Finland (3) | x | |||||||||||||
| Dresden, Germany | x | |||||||||||||
| Leuna, Germany | x | x | ||||||||||||
Marl, Germany (3) | x | |||||||||||||
Middelburg, the Netherlands (2) | x | |||||||||||||
| Avila, Spain | x | |||||||||||||
| LA Batllòria, Spain | x | |||||||||||||
| Newport, Wales | x | x | ||||||||||||
(1)Eastman is a guest under an operating agreement with a third party that operates its manufacturing facilities at the site.
(2)Expected to be sold in 2022 as part of the previously announced definitive agreement the Company entered into to sell the adhesives resins business.
(3)Eastman leases from a third party and operates the site.
(4)Eastman has more than one manufacturing facility at this location.
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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 | |||||||||||||
Zibo, China (5) | x | x | ||||||||||||
Ulsan, Korea (6) | x | |||||||||||||
Kuantan, Malaysia (1) | x | |||||||||||||
| Latin America | ||||||||||||||
| Mauá, Brazil | x | |||||||||||||
| Santo Toribio, Mexico | x | |||||||||||||
Uruapan, Mexico (7) | x | |||||||||||||
(1)Eastman leases from a third party and operates the site.
(2)Eastman has more than one manufacturing facility at this location.
(3)Eastman holds a 60 percent share of Solutia Therminol Co., Ltd. Suzhou in the AFP segment.
(4)Eastman holds a 51 percent share of Eastman Specialties Wuhan Youji Chemical Co., Ltd.
(5)Eastman holds a 51 percent share of Qilu Eastman Specialty Chemical, Ltd.
(6)Eastman holds an 80 percent share of Eastman Fibers Korea Limited.
(7)Expected to be sold in 2022 as part of the previously announced definitive agreement the Company entered into to sell the adhesives resins business.
Eastman has 50 percent or less ownership in joint ventures that have manufacturing facilities at the following locations:
| Segment using manufacturing location | ||||||||||||||
| Location | Additives & Functional Products | Advanced Materials | Chemical Intermediates | Fibers | ||||||||||
| Asia Pacific | ||||||||||||||
| Hefei, China | x | |||||||||||||
Nanjing, China (1) | x | |||||||||||||
| Shenzhen, China | x | |||||||||||||
(1)Expected to be sold in 2022 as part of the previously announced definitive agreement the Company entered into to sell the adhesives resins business.
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. The Company also maintains technical service centers around the world.
A summary of properties, classified by type, is included in Note 4, "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. Consistent with the requirements of Securities and Exchange Commission Regulation S-K, Item 103, the Company's threshold for disclosing any environmental legal proceeding involving a governmental authority (including the Jefferson Hills, Pennsylvania proceedings described below) is potential monetary sanctions that management believes will exceed $1 million.
Jefferson Hills, Pennsylvania Environmental Proceeding
In September 2021, Eastman Chemical Resins, Inc. ("ECRI"), a wholly-owned subsidiary of the Company, and the Company received a proposed Consent Decree from the United States Environmental Protection Agency's Region 3 Office ("EPA") and the Pennsylvania Department of Environmental Protection ("PADEP") alleging that ECRI’s Jefferson Hills, Pennsylvania manufacturing operation had violated certain federal and state environmental regulations. Prior to the receipt of this proposed Consent Decree, ECRI and Company representatives met on various occasions with EPA and PADEP representatives and have determined that it is not reasonably likely that any civil penalty assessed by EPA and PADEP will be less than $1,000,000. ECRI and the Company intends to vigorously defend against these allegations.
Solutia Legacy Torts Claims Litigation
Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia, Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible for the defense and indemnification of Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia has agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly-owned subsidiary of Eastman upon Eastman's acquisition of Solutia in July 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto, which was acquired by Bayer AG in June 2018, as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
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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's common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN".
As of December 31, 2021, there were 128,967,878 shares of Eastman's common stock issued and outstanding, which shares were held by 12,164 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation.
See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -Securities Authorized for Issuance Under Equity Compensation Plans" in Part III, Item 12 of this Annual Report for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
In February 2018, the Company's Board of Directors authorized the repurchase of up to $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders.
In December 2021, the Company entered into an accelerated share repurchase program ("ASR") to purchase $500 million of the Company's common stock under the 2018 authorization. In exchange for upfront payment totaling $500 million, the financial institutions committed to deliver shares during the ASR's purchase period, which will end in March 2022. The total number of shares ultimately delivered will be determined at the end of the applicable purchase period based on the volume-weighted average price of the Company's stock during the term of the ASR, less a discount. During the fourth quarter of 2021, 3,658,314 shares for a total of $400 million were delivered to the Company, representing approximately 80 percent of the expected share repurchases under the ASR. The remaining $100 million has been accounted for as a reduction to "Additional paid-in capital" in the Company's Consolidated Statements of Financial Position, as it has been paid, but shares have not yet been delivered.
During 2021, the Company repurchased 8,061,779 shares of common stock for a cost of $900 million, including the shares repurchased under the ASR. As of December 31, 2021, a total of 15,948,995 shares have been repurchased under the 2018 authorization for a total amount of $1,533 million.
In December 2021, the Company's Board of Directors authorized the additional repurchase of up to $2.5 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders. No shares have been repurchased under the December 2021 authorization. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
For additional information, see Note 15, "Stockholders' Equity", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
| Period | Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | Approximate Dollar Value that May Yet Be Purchased Under the Plan or Program | ||||||||||
| October 1-31, 2021 | — | $ | — | — | $ | 1.077 | billion | |||||||
| November 1-30, 2021 | 1,860,353 | $ | 112.88 | 1,860,353 | $ | 0.867 | billion | |||||||
| December 1-31, 2021 | 3,658,314 | $ | 109.34 | 3,658,314 | $ | 2.967 | billion | |||||||
| Total | 5,518,667 | $ | 110.53 | 5,518,667 | ||||||||||
(1)Average price paid per share reflects the weighted average purchase price paid for shares.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Page | |||||
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K (this "Annual Report"). All references to earnings per share ("EPS") contained in this report are to diluted EPS unless otherwise noted. EBIT is the GAAP measure earnings before interest and taxes.
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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, fair value of disposal groups, and related disclosure of contingent assets and liabilities. On an ongoing basis, Eastman evaluates its estimates, including those related to impairment of long-lived assets, environmental costs, pension and other postretirement benefits, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting estimates described below are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
Impairment of Long-Lived Assets
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by Eastman are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of properties and equipment and the review of definite-lived intangible assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value. The Company's assumptions to estimate cash flows in the evaluation of impairment related to long-lived assets are subject to change and impairments may be required in the future. If estimates of fair value less costs to sell are decreased, the carrying amount of the related asset is adjusted, resulting in a charge to earnings.
Goodwill
Goodwill is an asset determined as the residual of the purchase price over the fair value of identified assets and liabilities
acquired in a business combination. Eastman conducts testing of goodwill for impairment annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as an operating segment or one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, members, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
An impairment is recognized when the reporting unit's estimated fair value is less than its carrying value. The Company uses an income approach, specifically a discounted cash flow model in testing the carrying value of goodwill for each reporting unit for impairment. Key assumptions and estimates used in the Company's 2021 goodwill impairment testing included projections of revenues and EBIT determined using the Company's annual multi-year strategic plan, the estimated weighted average cost of capital ("WACC"), and a projected long-term growth rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different estimated fair values of reporting units. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value. For additional information, see Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company had $3.6 billion of goodwill as of December 31, 2021. As a result of the goodwill impairment testing performed during fourth quarter 2021, fair values were determined to exceed the carrying values for each reporting unit tested. Declines in market conditions or forecasted revenue and EBIT could result in an impairment of goodwill.
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets, consisting primarily of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company 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 projections of revenue and an assumed royalty rate savings, discounted by the calculated market participant WACC plus a risk premium. The Company had $372 million in indefinite-lived intangible assets at the time of the annual impairment test. There was no impairment of the Company's indefinite-lived intangible assets as a result of the tests performed during fourth quarter 2021.
Declines in market conditions or forecasted revenue could result in impairment of indefinite-lived intangible assets. For additional information, see Note 1, "Significant Accounting Policies", Note 4, "Properties and Accumulated Depreciation", Note 5, "Goodwill and Other Intangible Assets", and Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of events which might require additional testing before the next annual impairment test and could result in material impairment charges.
Environmental Costs
Eastman recognizes environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company recognizes the minimum undiscounted amount. This undiscounted amount reflects liabilities expected to be paid within approximately 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $253 million to the maximum of $473 million at December 31, 2021. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable and include the amounts recognized at December 31, 2021.
For additional information, see Note 13, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pension and Other Postretirement Benefits
Eastman maintains defined benefit pension and other postretirement benefit plans that provide eligible employees with retirement benefits. The estimated amounts of the costs and obligations related to these benefits primarily reflect the Company's assumptions related to discount rates and expected return on plan assets. For the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 2.88 percent and 1.57 percent, respectively, and weighted average expected returns on plan assets of 7.07 percent and 3.81 percent, respectively, at December 31, 2021. The Company assumed a weighted average discount rate of 2.83 percent for its other postretirement benefit plans at December 31, 2021. The estimated cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The projected benefit obligation as of December 31, 2021 and 2022 expense are affected by year-end 2021 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the assumed discount rate and expected return on plan assets for all pension and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
| Change in Assumption | Impact on 2022 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Pension Plans | Impact on December 31, 2021 Projected Benefit Obligation for Pension Plans | Impact on 2022 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 2021 Benefit Obligation for Other Postretirement Benefit Plans | |||||||||||||
| U.S. | Non-U.S. | ||||||||||||||||
| 25 basis point decrease in discount rate | $-4 Million | $+49 Million | $+42 Million | $-1 Million | $+16 Million | ||||||||||||
| 25 basis point increase in discount rate | $+2 Million | $-47 Million | $-40 Million | $+1 Million | $-15 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 results of operations. The expected return on plan assets is based upon prior performance and the long-term expected returns in the markets in which the plans invest their funds, primarily in U.S. and non-U.S. fixed income securities, U.S. and non-U.S. public equity securities, private equity, and real estate. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on plan assets. Actual returns will be subject to year-to-year variances and could vary materially from assumptions.
The Company calculates service and interest cost components of net periodic benefit costs for its significant defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve to the plans' projected cash flows. This cost approach does not affect the measurement of the total benefit obligation or the annual net periodic benefit cost or credit of the plans because the change in the service and interest costs will be offset in the mark-to-market ("MTM") actuarial gain or loss. The MTM gain or loss, as described in the next paragraph, is typically recognized in the fourth quarter of each year or in any other quarters in which an interim remeasurement is triggered.
The Company uses fair value accounting for plan assets. If actual experience differs from actuarial assumptions, primarily discount rates and long-term assumptions for asset returns which were used in determining the current year expense, the difference is recognized as part of the MTM net gain or loss in fourth quarter each year, and any other quarter in which an interim remeasurement is triggered. See the calculation of the MTM pension and other post-retirement benefits (gain) loss table below in "NON-GAAP FINANCIAL MEASURES - Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings".
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While changes in obligations do not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirements, attrition rates of employees, and other factors.
For further information regarding pension and other postretirement benefit obligations, see Note 11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Income Taxes
Amounts of deferred tax assets and liabilities on Eastman's Consolidated Statements of Financial Position are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning opportunities. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome of future tax consequences differs from management estimates and assumptions, the resulting change to the provision for income taxes could have a material impact on the consolidated results of operations and statements of financial position. As of December 31, 2021, valuation allowances of $339 million have been provided against the deferred tax assets.
The calculation of income tax liabilities involves uncertainties in the application of complex tax laws and regulations, which are subject to legal interpretation and management judgment. Eastman's income tax returns are regularly examined by federal, state and foreign tax authorities, and those audits may result in proposed adjustments which could result in additional income tax liabilities and income tax expense. Income tax expense could be materially impacted to the extent the Company prevails in a tax position or when the statute of limitations expires for a tax position for which a liability for unrecognized tax benefits or valuation allowances have been established, or to the extent payments are required in excess of the established liability for unrecognized tax benefits.
For further information, see Note 8, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", "Liquidity and Other Financial Information - Cash Flows", and "Outlook" in this MD&A.
Management discloses non-GAAP financial measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's and its operating segments' performances, make resource allocation decisions, and evaluate organizational and individual performances in determining certain performance-based compensation. Non-GAAP financial measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP financial measure, but to consider such measures alongside the most directly comparable GAAP financial measure.
Company Use of Non-GAAP Financial Measures
Non-Core Items and any Unusual or Non-Recurring Items Excluded from Non-GAAP Earnings
In addition to evaluating Eastman's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly result from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature.
•Non-core transactions, costs, and losses or gains relate to, among other things, cost reductions, growth and profitability improvement initiatives, changes in businesses and assets, and other events outside of core business operations, and have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions, closure, or shutdowns of businesses or assets, financing transaction costs, and MTM losses or gains for pension and other postretirement benefit plans.
•In 2021 and 2019, the Company recognized an unusual net increase to earnings and an unusual net decrease to earnings, respectively, from adjustments of the net tax benefit recognized in fourth quarter 2017, resulting from tax law changes, primarily the 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"), and related outside-U.S. entity reorganizations as part of the transition to an international treasury services center. Management considered these actions and associated costs and income unusual because of the infrequent nature of such changes in tax law and resulting actions and the significant impacts on earnings.
Because non-core, unusual, or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, management believes it is appropriate to evaluate the financial measures prepared and calculated in accordance with both GAAP and the related non-GAAP financial measures excluding the effect on the Company's results of these non-core, unusual, or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Adjusted Tax Rate and Provision for Income Taxes
In interim periods, Eastman discloses non-GAAP earnings with an adjusted effective tax rate and a resulting adjusted provision for income taxes using the Company's forecasted tax rate for the full year as of the end of the interim period. The adjusted effective tax rate and resulting adjusted provision for income taxes are equal to the Company's projected full year effective tax rate and provision for income taxes on earnings excluding non-core, unusual, or non-recurring items for completed periods. The adjusted effective tax rate and resulting adjusted provision for income taxes may fluctuate during the year for changes in events and circumstances that change the Company's forecasted annual effective tax rate and resulting provision for income taxes excluding non-core, unusual, or non-recurring items. Management discloses this adjusted effective tax rate, and the related reconciliation to the GAAP effective tax rate, to provide investors more complete and consistent comparisons of the Company's operational performance on a period-over-period interim basis and on the same basis as management evaluates quarterly financial results to provide a better indication of expected full year results.
Non-GAAP Cash Flow Measure
Eastman regularly evaluates and discloses to investors and securities analysts an alternative non-GAAP measure of "free cash flow", which management defines as net cash provided by or used in operating activities less the amount of net capital expenditures (typically the GAAP measure additions to properties and equipment). Such net capital expenditures are generally funded from available cash and, as such, management believes they should be considered in determining free cash flow. Management believes this is an appropriate metric to assess the Company's ability to fund priorities for uses of available cash. The priorities for cash after funding operations include payment of quarterly dividends, repayment of debt, funding targeted growth opportunities, and repurchasing shares. Management believes this metric is useful to investors and securities analysts to provide them with information similar to that used by management in evaluating financial performance and potential future cash available for various initiatives and assessing organizational performance in determining certain performance-based compensation and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies. In addition, Eastman may disclose to investors and securities analysts an alternative non-GAAP measure of "free cash flow yield", which management defines as annual free cash flow divided by the Company's market capitalization, and "free cash flow conversion", which management defines as annual free cash flow divided by adjusted net income. Management believes these metrics are useful to investors and securities analysts in comparing cash flow generation with that of peer and other companies.
Non-GAAP Debt Measure
Eastman from time to time evaluates and discloses to investors and securities and credit analysts the non-GAAP debt measure "net debt", which management defines as total borrowings less cash and cash equivalents. Management believes this metric is useful to investors and securities and credit analysts to provide them with information similar to that used by management in evaluating the Company's overall financial position, liquidity, and leverage and because management believes investors, securities analysts, credit analysts and rating agencies, and lenders often use a similar measure to assess and compare companies' relative financial position and liquidity.
Non-GAAP Measures in this Annual Report
The following non-core items are excluded by management in its evaluation of certain earnings results in this Annual Report:
•MTM pension and other postretirement benefit plans gains and losses resulting from the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period;
•Asset impairments and restructuring charges, including severance costs and site closure or shutdown charges, net, of which asset impairments are non-cash transactions impacting profitability;
•Loss on divested business and transaction costs;
•Accelerated depreciation resulting from the closure of a manufacturing facility as part of ongoing site optimization; and
•Early debt extinguishment costs.
The following unusual item is excluded by management in its evaluation of certain earnings results in this Annual Report:
•Adjustments related to the estimated net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act, and tax impact of related outside-U.S. entity reorganizations.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As described above, the alternative non-GAAP measures of cash flow, "free cash flow", and of debt, "net debt", are also presented in this Annual Report.
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Non-core items impacting EBIT: | |||||||||||||||||
| Mark-to-market pension and other postretirement benefits loss (gain), net | $ | (267) | $ | 240 | $ | 143 | |||||||||||
| Asset impairments and restructuring charges, net | 47 | 227 | 126 | ||||||||||||||
| Loss on divested business and transaction costs | 570 | — | — | ||||||||||||||
| Accelerated depreciation | 4 | 8 | — | ||||||||||||||
| Total non-core items impacting EBIT | 354 | 475 | 269 | ||||||||||||||
| Non-core item impacting earnings before income taxes: | |||||||||||||||||
| Early debt extinguishment | 1 | 1 | — | ||||||||||||||
| Total non-core item impacting earnings before income taxes | 1 | 1 | — | ||||||||||||||
| Less: Items impacting provision for income taxes: | |||||||||||||||||
| Tax effect for non-core items | (16) | 115 | 47 | ||||||||||||||
| Adjustments from tax law changes | 15 | — | (7) | ||||||||||||||
| Total items impacting provision for income taxes | (1) | 115 | 40 | ||||||||||||||
| Total items impacting net earnings attributable to Eastman | $ | 356 | $ | 361 | $ | 229 | |||||||||||
Below is the calculation of the "Other components of post-employment (benefit) cost, net" that are not included in the above non-core item "mark-to-market pension and other postretirement benefits loss (gain), net" and that are included in the non-GAAP results.
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Other components of post-employment (benefit) cost, net | $ | (412) | $ | 119 | $ | 60 | |||||||||||
| Service cost | 45 | 42 | 41 | ||||||||||||||
| Net periodic benefit (credit) cost | (367) | 161 | 101 | ||||||||||||||
| Less: Mark-to-market pension and other postretirement benefits loss (gain), net | (267) | 240 | 143 | ||||||||||||||
| Components of post-employment (benefit) cost, net included in non-GAAP earnings measures | $ | (100) | $ | (79) | $ | (42) | |||||||||||
Below is the calculation of the MTM pension and other post-retirement benefits (gain) loss disclosed above.
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Actual return and percentage of return on assets | $ | 278 | 10 | % | $ | 260 | 9 | % | $ | 406 | 15 | % | |||||||||||||||||||||||
| Less: expected return on assets | 168 | 6 | % | 174 | 6 | % | 165 | 6 | % | ||||||||||||||||||||||||||
| Mark-to-market (loss) gain on assets | 110 | 86 | 241 | ||||||||||||||||||||||||||||||||
Actuarial (loss) gain (1) | 157 | (326) | (384) | ||||||||||||||||||||||||||||||||
| Total mark-to-market (loss) gain | $ | 267 | $ | (240) | $ | (143) | |||||||||||||||||||||||||||||
| Global weighted-average assumed discount rate for year ended December 31: | 2.52 | % | 2.07 | % | 2.80 | % | |||||||||||||||||||||||||||||
(1)Actuarial (loss) gain resulted primarily from the change in discount rates from the prior year and changes in other actuarial assumptions.
For more detail about MTM pension and other postretirement benefit plans net gains and losses, including actual and expected return on plan assets and the components of the net gain or loss, see "Critical Accounting Estimates - Pension and Other Postretirement Benefits" above, and Note 11, "Retirement Plans", "Summary of Changes - Actuarial (gain) loss, Actual return on plan assets, and Reserve for third party contributions", and "Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income - Mark-to-market pension and other postretirement benefits (gain) loss, net" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This MD&A includes the effect of the foregoing on the following GAAP financial measures:
•Gross profit,
•Selling, general and administrative ("SG&A") expenses,
•Other components of post-employment (benefit) cost, net,
•EBIT,
•Provision for income taxes,
•Net earnings attributable to Eastman,
•Diluted EPS, and
•Net cash provided by operating activities.
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measure
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, management occasionally has evaluated and disclosed to investors and securities analysts the non-GAAP measure cash provided by or used in operating activities excluding certain non-core, unusual, or non-recurring sources or uses of cash or including cash from or used by activities that are managed as part of core business operations ("adjusted cash provided by or used in operating activities") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Management has used this non-GAAP measure in conjunction with the GAAP measure cash provided by or used in operating activities because it believes it is an appropriate metric to evaluate the cash flows from Eastman's core operations that are available for organic and inorganic growth initiatives and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, management generally excludes the impact of certain non-core activities and decisions of management that it considers not core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations, and generally includes cash from or used in activities that are managed as operating activities and in business operating decisions. Management has disclosed this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision-making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may also disclose to investors and securities analysts the non-GAAP earnings measures "Adjusted EBIT Margin", "Adjusted EBITDA", "Adjusted EBITDA Margin", "Return on Invested Capital" (or "ROIC"), and "Adjusted ROIC". Management defines Adjusted EBIT Margin as the GAAP measure EBIT adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods divided by the GAAP measure sales revenue in the Company's Consolidated Statement of Earnings, Comprehensive Income and Retained Earnings for the same period. Adjusted EBITDA is EBITDA (net earnings before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. Adjusted EBITDA Margin is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's Consolidated Statement of Earnings, Comprehensive Income and Retained Earnings for the same periods. Management defines ROIC as net earnings plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Adjusted ROIC is ROIC adjusted to exclude from net earnings the same non-core, unusual, or non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. Management believes that Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, ROIC, and Adjusted ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman's operating businesses, and from time to time uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of Adjusted EBIT Margin, Adjusted EBITDA, Adjusted EBITDA Margin, ROIC, and Adjusted ROIC to compare the results, returns, and value of the Company with those of peer and other companies.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Eastman's products and operations are managed and reported in four operating segments: Additives & Functional Products ("AFP"), Advanced Materials ("AM"), Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value of Eastman's products and how they perform within customers' and end-user products. Key areas of application development include thermoplastic conversion, functional films, coatings formulations, nonwovens 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. 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 $10.5 billion and $8.5 billion for 2021 and 2020, respectively. EBIT was $1.3 billion and $741 million in 2021 and 2020, respectively. Excluding the non-core items referenced in "Non-GAAP Financial Measures", adjusted EBIT was $1.6 billion and $1.2 billion in 2021 and 2020, respectively. Sales revenue increased in 2021 compared to 2020 primarily due to higher selling prices and higher sales volume. Adjusted EBIT increased in 2021 compared to 2020 primarily due to higher sales volume and favorable product mix, particularly in the AM and AFP segments, and higher selling prices more than offsetting higher raw material and energy costs in the CI segment.
In 2020, capacity utilization was substantially lower due to lower sales volume resulting from the impact of the COVID-19 coronavirus global pandemic ("COVID-19") and the Company's focus on maximizing cash generation by reducing inventories, which reduced EBIT, particularly in the AM segment. As a result, cost reduction actions, including reduced discretionary spending, deferred asset maintenance turnarounds, and adjusted operations to ensure the health and safety of employees and contractors, totaled approximately $150 million in 2020, with approximately 60 percent presented in "Cost of Sales" and approximately 40 percent in "Selling, general and administrative expenses" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. In 2021, demand across key end-markets affected by COVID-19 continued to recover, and despite the ongoing automotive original equipment manufacturer ("OEM") component shortages negatively impacting customers' demand for products in the transportation markets, especially in the AM segment, the Company had higher sales volume and favorable product mix of specialty products, which increased adjusted EBIT.
On November 1, 2021, the Company completed the sale of the rubber additives (including Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology of the global tire additives business of its AFP segment ("rubber additives"). The sale did not include the Eastman Impera™ and other performance resins product lines of the tire additives business.
On October 28, 2021, the Company entered into a definitive agreement to sell the adhesives resins business, which includes hydrocarbon resins (including Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines, of its AFP segment ("adhesives resins") for $1 billion. The final purchase price is subject to working capital and other adjustments at closing. As of the definitive agreement date and until sale, the adhesives resins disposal group will be classified as held for sale.
For additional information on the sale of rubber additives and the pending sale of adhesives resins, see Note 2, "Divestiture and Business Held for Sale", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Discussion of sales revenue and EBIT changes is presented in "Results of Operations" and "Summary by Operating Segment" in this MD&A.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net earnings and EPS and adjusted net earnings and EPS were as follows:
| 2021 | 2020 | ||||||||||||||||||||||
| (Dollars in millions, except diluted EPS) | $ | EPS | $ | EPS | |||||||||||||||||||
| Net earnings attributable to Eastman | $ | 857 | $ | 6.25 | $ | 478 | $ | 3.50 | |||||||||||||||
| Total non-core and unusual items, net of tax | 356 | 2.60 | 361 | 2.65 | |||||||||||||||||||
| Net earnings attributable to Eastman excluding non-core and unusual items | $ | 1,213 | $ | 8.85 | $ | 839 | $ | 6.15 | |||||||||||||||
The Company generated $1.6 billion and $1.5 billion of cash from operating activities in 2021 and 2020, respectively. Free cash flow was $1.1 billion in both 2021 and 2020.
RESULTS OF OPERATIONS
Eastman's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below.
Sales
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Sales | $ | 10,476 | $ | 8,473 | 24 | % | $ | 8,473 | $ | 9,273 | (9) | % | |||||||||||||||||||||||
| Volume / product mix effect | 8 | % | (5) | % | |||||||||||||||||||||||||||||||
| Price effect | 15 | % | (4) | % | |||||||||||||||||||||||||||||||
| Exchange rate effect | 1 | % | — | % | |||||||||||||||||||||||||||||||
2021 Compared to 2020
Sales revenue increased as a result of increases in all operating segments. Further discussion by operating segments is presented in "Summary of Operating Segment" in this MD&A.
2020 Compared to 2019
Sales revenue decreased as a result of decreases in all operating segments. Further discussion by operating segments is presented in "Summary of Operating Segment" in this MD&A.
Gross Profit
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Gross profit | $ | 2,500 | $ | 1,975 | 27 | % | $ | 1,975 | $ | 2,234 | (12) | % | |||||||||||||||||||||||
| Accelerated depreciation | 4 | 8 | 8 | — | |||||||||||||||||||||||||||||||
| Gross profit excluding non-core item | $ | 2,504 | $ | 1,983 | 26 | % | $ | 1,983 | $ | 2,234 | (11) | % | |||||||||||||||||||||||
2021 Compared to 2020
Gross profit included accelerated depreciation resulting from the closure of an advanced interlayers manufacturing facility in North America in the AM segment as part of ongoing site optimization actions. Excluding this non-core item, gross profit increased as a result of increases in all operating segments, except the Fibers segment. Further discussion of sales revenue and EBIT changes is presented in "Summary by Operating Segment" in this MD&A.
2020 Compared to 2019
Gross profit included accelerated depreciation resulting from the closure of an advanced interlayers manufacturing facility in North America in the AM segment as part of ongoing site optimization actions. Excluding this non-core item, gross profit decreased as a result of decreases in all operating segments. Further discussion of sales revenue and EBIT changes is presented in "Summary by Operating Segment" in this MD&A.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 795 | $ | 654 | 22 | % | $ | 654 | $ | 691 | (5) | % | |||||||||||||||||||||||
| Transaction costs | (18) | — | — | — | |||||||||||||||||||||||||||||||
| Selling, general and administrative expenses excluding non-core items | $ | 777 | $ | 654 | 19 | % | $ | 654 | $ | 691 | (5) | % | |||||||||||||||||||||||
2021 Compared to 2020
SG&A expenses in 2021 included transaction costs for the divestiture of rubber additives and the definitive agreement to sell adhesives resins, both of the AFP segment. Excluding these non-core items, SG&A expenses increased primarily as a result of higher variable compensation costs, including for incentive compensation based on annual business performance, and higher discretionary spending corresponding to strengthened business and market conditions.
2020 Compared to 2019
SG&A expenses decreased primarily due to cost reduction actions.
Research and Development Expenses
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Research and development expenses | $ | 254 | $ | 226 | 12 | % | $ | 226 | $ | 234 | (3) | % | |||||||||||||||||||||||
2021 Compared to 2020
R&D expenses increased primarily due to higher growth initiative projects, particularly in the AM and AFP segments.
2020 Compared to 2019
R&D expenses decreased primarily due to cost reduction actions including an increased focus on project prioritization.
41
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) | 2021 | 2020 | 2019 | ||||||||||||||
| Tangible Asset Impairments | |||||||||||||||||
CI & AFP - Singapore (1) | $ | 3 | $ | — | $ | 27 | |||||||||||
| Site optimizations | |||||||||||||||||
AFP - Tire additives (2) | 12 | 5 | — | ||||||||||||||
AM - Advanced interlayers (3) | 1 | — | — | ||||||||||||||
AM - Performance films (4) | — | 5 | — | ||||||||||||||
AFP - Animal nutrition (5) | — | 3 | — | ||||||||||||||
Discontinuation of growth initiatives (6) | — | 8 | — | ||||||||||||||
| 16 | 21 | 27 | |||||||||||||||
| Gain on Sale of Previously Impaired Assets | |||||||||||||||||
| Site optimizations | |||||||||||||||||
AFP - Animal nutrition (5) | (1) | — | — | ||||||||||||||
| (1) | — | — | |||||||||||||||
| Intangible Asset Impairments | |||||||||||||||||
AFP - Tradenames (7) | — | 123 | — | ||||||||||||||
AFP - Customer relationships (8) | — | 2 | — | ||||||||||||||
AFP - Goodwill (9) | — | — | 45 | ||||||||||||||
| — | 125 | 45 | |||||||||||||||
| Severance Charges | |||||||||||||||||
Business improvement and cost reduction actions (10) | 1 | 47 | 45 | ||||||||||||||
CI & AFP - Singapore (1) | — | 6 | — | ||||||||||||||
| Site optimizations | |||||||||||||||||
AFP - Tire additives (2) | — | 3 | — | ||||||||||||||
AM - Advanced interlayers (3) | 1 | 5 | — | ||||||||||||||
AM - Performance films (4) | — | 3 | — | ||||||||||||||
AFP - Animal nutrition (5) | — | 1 | — | ||||||||||||||
| 2 | 65 | 45 | |||||||||||||||
| Other Restructuring Costs | |||||||||||||||||
Cost reduction initiatives (10) | — | 14 | 5 | ||||||||||||||
Discontinuation of growth initiatives contract termination fees (6) | — | 4 | — | ||||||||||||||
CI & AFP - Singapore (1) | 17 | — | — | ||||||||||||||
| Site optimizations | |||||||||||||||||
AFP - Tire additives (2) | 6 | — | — | ||||||||||||||
AM - Advanced interlayers (3) | 5 | — | — | ||||||||||||||
AM - Performance films (4) | 2 | — | — | ||||||||||||||
AFP - Animal nutrition (5) | — | (2) | — | ||||||||||||||
AFP - Discontinued capital project (11) | — | — | 4 | ||||||||||||||
| 30 | 16 | 9 | |||||||||||||||
| Total | $ | 47 | $ | 227 | $ | 126 | |||||||||||
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(1)Asset impairment charges in 2021 of $2 million and $1 million in the CI segment and the AFP segment, respectively, and in 2019 of $22 million and $5 million in the CI segment and the AFP segment, respectively. Severance charges in 2020 of $5 million and $1 million in the CI segment and the AFP segment, respectively, and site closure costs, including contract termination fees, in 2021 of $14 million and $3 million in the CI segment and the AFP segment, respectively, resulting from the previously disclosed plan to discontinue production of certain products at the Singapore manufacturing site. Management expected and realized annual earnings benefit from this closure of approximately $25 million beginning in 2021 within the AFP and CI segments, primarily in "Cost of sales" in the Consolidated Statements Earnings, Comprehensive Income and Retained Earnings.
(2)Asset impairment charges of $8 million in 2021 in the AFP segment for assets associated with divested rubber additives. Asset impairment charges of $4 million and site closure costs of $6 million in the AFP segment in 2021 from the previously reported closure of a tire additives manufacturing facility in Asia Pacific as part of ongoing site optimization. Fixed asset impairments and severance in 2020 in the AFP segment from the closure of a tire additives manufacturing facility in Asia Pacific as part of ongoing site optimization.
(3)Asset impairments, severance charges, and site closure costs in the Advanced Materials ("AM") segment due to the closure of an advanced interlayers manufacturing facility in North America as part of ongoing site optimization. In addition, accelerated depreciation of $4 million and $8 million was recognized in "Cost of sales" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in 2021 and 2020, respectively, related to the closure of this facility.
(4)Fixed asset impairments, severance charges, and site closure costs in the AM segment from the closure of a performance films manufacturing facility in North America as part of ongoing site optimization.
(5)Fixed asset impairments, severance charges, and other restructuring gains in 2020 in the AFP segment from the closure of an animal nutrition manufacturing facility in Asia Pacific as part of ongoing site optimization, and in 2021 a gain from the sale of the previously impaired assets.
(6)Fixed asset impairments and contract termination fees resulting from management's decision to discontinue growth initiatives for polyester based microfibers, including Avra™ performance fibers, the financial results of which were not allocated to an operating segment and reported in "Other".
(7)Intangible asset impairment charges in the AFP segment tire additives business to reduce the carrying values of the Crystex™ and Santoflex™ tradenames to the estimated fair values. The estimated fair values were determined using an income approach, specifically, the relief from royalty method, including some unobservable inputs. The impairments are primarily the result of weakened demand in transportation markets impacted by COVID-19 and increased competitive pricing pressure as a result of global capacity increases.
(8)Intangible asset impairment charge for customer relationships.
(9)Goodwill impairment charge in the AFP segment resulting from the annual impairment test.
(10)Severance and related costs as part of business improvement and cost reduction initiatives which were reported in "Other".
(11)Additional restructuring charge related to a capital project in the AFP segment that was discontinued in 2016.
Other Components of Post-employment (Benefit) Cost, Net
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Other components of post-employment (benefit) cost, net | $ | (412) | $ | 119 | >(100%) | $ | 119 | $ | 60 | 98 | % | ||||||||||||||||||||||||
| Mark-to-market pension and other postretirement benefit gain (loss), net | 267 | (240) | (240) | (143) | |||||||||||||||||||||||||||||||
| Other components of post-employment (benefit) cost, net excluding non-core item | $ | (145) | $ | (121) | 20 | % | $ | (121) | $ | (83) | 46 | % | |||||||||||||||||||||||
For more information regarding "Other components of post-employment (benefit) cost, net" see Note 1, "Significant Accounting Policies", and Note 11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Other (Income) Charges, Net
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Foreign exchange transaction losses (gains), net | $ | 10 | $ | 16 | $ | 9 | |||||||||||
| (Income) loss from equity investments and other investment (gains) losses, net | (16) | (15) | (10) | ||||||||||||||
| Other, net | (11) | 7 | 4 | ||||||||||||||
| Other (income) charges, net | $ | (17) | $ | 8 | $ | 3 | |||||||||||
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For more information regarding components of foreign exchange transaction losses, see Note 10, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Earnings Before Interest and Taxes
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| EBIT | $ | 1,281 | $ | 741 | 73 | % | $ | 741 | $ | 1,120 | (34) | % | |||||||||||||||||||||||
| Mark-to-market pension and other postretirement benefit loss (gain), net | (267) | 240 | 240 | 143 | |||||||||||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 47 | 227 | 227 | 126 | |||||||||||||||||||||||||||||||
| Loss on divested business and transaction costs | 570 | — | — | — | |||||||||||||||||||||||||||||||
| Accelerated depreciation | 4 | 8 | 8 | — | |||||||||||||||||||||||||||||||
| EBIT excluding non-core items | $ | 1,635 | $ | 1,216 | 34 | % | $ | 1,216 | $ | 1,389 | (12) | % | |||||||||||||||||||||||
Net Interest Expense
| 2021 Compared to 2020 | 2020 Compared to 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||
| Gross interest expense | $ | 206 | $ | 218 | $ | 218 | $ | 225 | |||||||||||||||||||||||||||
| Less: Capitalized interest | 5 | 4 | 4 | 4 | |||||||||||||||||||||||||||||||
| Interest Expense | 201 | 214 | 214 | 221 | |||||||||||||||||||||||||||||||
| Less: Interest income | 3 | 4 | 4 | 3 | |||||||||||||||||||||||||||||||
| Net interest expense | $ | 198 | $ | 210 | (6) | % | $ | 210 | $ | 218 | (4) | % | |||||||||||||||||||||||
2021 Compared to 2020
Net interest expense decreased primarily as a result of lower total borrowings.
2020 Compared to 2019
Net interest expense decreased primarily as a result of prior year repayment of public debt and lower interest rates.
Early Debt Extinguishment Costs
In fourth quarter 2021, the Company amended and restated the $1.50 billion revolving credit agreement (the "Credit Facility"). This resulted in a charge of $1 million for early debt extinguishment costs which was attributable to unamortized fees.
In third quarter 2020, the Company repaid the 364-Day Term Loan Credit Agreement (the "Term Loan") using available cash. The early repayment resulted in a charge of $1 million for early debt extinguishment costs for unamortized issuance costs.
For additional information regarding the early debt extinguishment costs, see Note 9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||
| Provision for income taxes and effective tax rate | $ | 215 | 20 | % | $ | 41 | 8 | % | $ | 140 | 16 | % | |||||||||||||||||||||||
Tax provision for non-core items (1) | (16) | 115 | 47 | ||||||||||||||||||||||||||||||||
| Adjustments from tax law changes | 15 | — | (7) | ||||||||||||||||||||||||||||||||
| Adjusted provision for income taxes and effective tax rate | $ | 214 | 15 | % | $ | 156 | 16 | % | $ | 180 | 15 | % | |||||||||||||||||||||||
(1)Provision for income taxes for non-core items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
The 2021 effective tax rate includes a $78 million decrease to the provision for income taxes primarily related to previously unrecognized tax positions resulting from finalization of prior years' income tax audits, partially offset by current year increases. Additionally, the 2021 effective tax rate includes impacts of the divestiture of rubber additives, including an increase to the provision for income taxes related to non-deductible losses partially offset by a decrease to the provision for income taxes from the revaluation of deferred tax liabilities.
The 2020 effective tax rate includes a $27 million decrease to the provision for income taxes as a result of a decrease in unrecognized tax positions and a $7 million decrease to the provision for income taxes related to adjustments to certain prior year tax returns.
The 2019 effective tax rate includes a $7 million increase to the provision for income taxes resulting from adjustments to the net tax benefit recognized in fourth quarter 2017 resulting from tax law changes, primarily the Tax Reform Act and from outside-U.S. entity reorganizations. The 2019 effective tax rate also includes adjustments to the tax provision to reflect finalization of prior year's income tax returns and an increase to state income taxes related to additional valuation allowance provided against state income tax credits.
For more information, see Note 8, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Net Earnings Attributable to Eastman and Diluted Earnings per Share
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | $ | EPS | $ | EPS | $ | EPS | |||||||||||||||||||||||||||||
| Net earnings and diluted earnings per share attributable to Eastman | $ | 857 | $ | 6.25 | $ | 478 | $ | 3.50 | $ | 759 | $ | 5.48 | |||||||||||||||||||||||
Non-core items, net of tax: (1) | |||||||||||||||||||||||||||||||||||
| Mark-to-market pension and other postretirement benefit loss (gain), net | (202) | (1.46) | 180 | 1.32 | 109 | 0.79 | |||||||||||||||||||||||||||||
| Accelerated depreciation | 3 | 0.02 | 6 | 0.05 | — | — | |||||||||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 39 | 0.28 | 174 | 1.28 | 113 | 0.81 | |||||||||||||||||||||||||||||
| Loss on divested business and transaction costs | 530 | 3.86 | — | — | — | — | |||||||||||||||||||||||||||||
| Early debt extinguishment costs | 1 | 0.01 | 1 | — | — | — | |||||||||||||||||||||||||||||
| Unusual item, net of tax: | |||||||||||||||||||||||||||||||||||
| Adjustments from tax law changes | (15) | (0.11) | — | — | 7 | 0.05 | |||||||||||||||||||||||||||||
| Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 1,213 | $ | 8.85 | $ | 839 | $ | 6.15 | $ | 988 | $ | 7.13 | |||||||||||||||||||||||
(1)The provision for income taxes for non-core items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
45
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 20, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
| Additives & Functional Products Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Compared to 2020 | 2020 Compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2020 | 2019 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 3,700 | $ | 3,022 | $ | 678 | 22 | % | $ | 3,022 | $ | 3,273 | $ | (251) | (8) | % | ||||||||||||||||||||||||||||||||||
| Volume / product mix effect | 272 | 9 | % | (116) | (4) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Price effect | 358 | 12 | % | (145) | (4) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange rate effect | 48 | 1 | % | 10 | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss) before interest and taxes | $ | (54) | $ | 312 | $ | (366) | >(100%) | $ | 312 | $ | 496 | $ | (184) | (37) | % | |||||||||||||||||||||||||||||||||||
| Loss on divested business and transaction costs | 570 | — | 570 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 21 | 136 | (115) | 136 | 54 | 82 | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT excluding non-core items | 537 | 448 | 89 | 20 | % | 448 | 550 | (102) | (19) | % | ||||||||||||||||||||||||||||||||||||||||
2021 Compared to 2020
Sales revenue increased primarily due to higher selling prices and higher sales volume. Higher selling prices were primarily due to higher raw material, energy, and distribution prices. Higher sales volume was primarily due to strengthened demand and improved market conditions for coatings additives products sold in transportation, building and construction, and durable goods end-markets, resulting in a more favorable product mix.
Earnings (loss) before interest and taxes in 2021 included loss on business held for sale and related transaction costs, asset impairments, restructuring charges resulting from manufacturing facility closures, contract termination fees, and a gain on the sale of impaired assets. EBIT in 2020 included asset impairment and restructuring charges resulting from the impairment of tradenames and customer relationships, and the closure of manufacturing facilities. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding these non-core items, EBIT increased primarily due to $178 million of higher sales volume. This increase was partially offset by higher raw material and energy costs and higher distribution costs offsetting higher selling prices by $95 million.
2020 Compared to 2019
Sales revenue decreased primarily due to lower selling prices and lower sales volume. Lower selling prices were due to lower raw material prices and competitive activity in animal nutrition, tire additives, and adhesives resins products. The negative impact of COVID-19 on demand resulted in lower sales volume of aviation fluids and coatings additives sold into transportation end-markets resulting in less favorable product mix.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EBIT in 2020 included asset impairment and restructuring charges resulting from the impairment of tradenames and customer relationships and the closure of manufacturing facilities. EBIT in 2019 included a goodwill impairment, an asset impairment related to discontinued production at the Singapore manufacturing site, and restructuring charges. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding these non-core items, EBIT decreased primarily due to $133 million of lower sales volume and higher manufacturing costs primarily due to lower capacity utilization and reduction of inventory. These higher costs were partially offset by $41 million in cost reduction actions.
Initiatives
In 2021, the AFP segment:
•continued to advance growth and innovation of Tetrashield™ resins that enable low-volatile organic compounds ("VOC") formulations and eliminate energy intensive manufacturing steps, by working with key customers and other brands through the value chain;
•continued to expand capabilities of Eastapure™ electronic chemicals, an excellent choice for use in etching solutions for semiconductor chips and other electronic applications with extremely low metal content;
•increased capacity to produce tertiary amines at its Ghent, Belgium and Pace, Florida facilities by approximately 40 percent and 20 percent, respectively, to meet growing demand for hand sanitizers and other household cleaning products;
•completed raw material conversion project at its Oulu, Finland facility implementing more sustainable technology by switching to liquefied natural gas and improving its environmental footprint;
•introduced Fluid Genius™, a patent-pending product that equips end-users with predictive insights to optimize heat transfer fluid performance by leveraging artificial intelligence technology with Eastman expertise to monitor and maximize the life cycle of heat transfer fluids for a myriad of system applications;
•acquired 3F Food & Feed ("3F"), a manufacturer of additives for animal feed and human food which is expected to enhance continued global growth of the animal nutrition product lines;
•completed the sale of the rubber additives (including Eastman's Crystex™ insoluble sulfur and Santoflex™ antidegradants) and other product lines and related assets and technology; and
•entered into a definitive agreement to sell its adhesives resins assets and business, consisting of hydrocarbon resins (including Eastman Impera™ tire resins), pure monomer resins, polyolefin polymers, rosins and dispersions, and oleochemical and fatty-acid based resins product lines.
| Advanced Materials Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Compared to 2020 | 2020 Compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2020 | 2019 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 3,027 | $ | 2,524 | $ | 503 | 20 | % | $ | 2,524 | $ | 2,688 | $ | (164) | (6) | % | ||||||||||||||||||||||||||||||||||
| Volume / product mix effect | 406 | 16 | % | (101) | (4) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Price effect | 57 | 2 | % | (67) | (2) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange rate effect | 40 | 2 | % | 4 | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT | $ | 519 | $ | 427 | $ | 92 | 22 | % | $ | 427 | $ | 517 | $ | (90) | (17) | % | ||||||||||||||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 9 | 13 | (4) | 13 | 1 | 12 | ||||||||||||||||||||||||||||||||||||||||||||
| Accelerated depreciation | 4 | 8 | (4) | 8 | — | 8 | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT excluding non-core items | 532 | 448 | 84 | 19 | % | 448 | 518 | (70) | (14) | % | ||||||||||||||||||||||||||||||||||||||||
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2021 Compared to 2020
Sales revenue increased primarily due to higher sales volume. Demand strengthened for specialty plastics products sold into durables goods, medical, and electronics end-markets, advanced interlayers products sold into transportation end-markets, and performance films premium automotive products, resulting in a more favorable product mix.
EBIT in 2021 and 2020 included asset impairments and restructuring charges and accelerated depreciation resulting from a manufacturing facility closure. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding these non-core items, EBIT increased primarily due to $307 million of higher sales volume and a favorable product mix, partially offset by higher raw material and energy costs and higher distribution costs offsetting higher selling prices by $191 million and $35 million of higher growth initiatives costs.
2020 Compared to 2019
Sales revenue decreased due to lower sales volume and lower selling prices. The negative impact of COVID-19 on demand resulted in lower sales volume of advanced interlayers products sold into transportation end-markets, partially offset by increased sales volume in the fourth quarter for consumer durables and increased sales volume of certain standard copolyester products used in applications for personal care and wellness and consumables end-markets, resulting in a less favorable product mix. Lower selling prices were primarily attributed to lower raw material prices, particularly for paraxylene used in copolyester products.
EBIT in 2020 included severance charges, accelerated depreciation, and asset impairment and restructuring charges from a manufacturing facility closure. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding these non-core items, EBIT decreased primarily due to $128 million of lower sales volume and higher manufacturing costs due to lower capacity utilization and reduction of inventory. These higher costs were partially offset by $53 million in cost reduction actions and lower raw material and energy costs offsetting lower selling prices by $19 million.
Initiatives
In 2021, the AM segment:
•adopted polyester renewal technology for products in various end-markets including, Tritan™ Renew in durable goods, such as electronic devices, power tools, consumer housewares, small appliances, and eyewear, as well as Cristal™ Renew and Cristal™ One Renew in packaging;
•commercialized new products with improved recyclability including Cristal™ One and Cristal™ One Renew with adoption in cosmetic packaging end markets;
•continued circular economy advancements (including the investment in the world's largest polyester material recycling facility);
•continued the growth of Tritan™ copolyester in the durable goods and health and wellness markets, supported by continued market and application development;
•continued to expand portfolio of differentiated next generation products for both automotive and architectural interlayer films products;
•developed and launched Eastman CORE (trademark and patent pending) digital product data analytics software for accessory sales management and installation of automotive window and paint protection films products;
•developed and launched the third generation of paint protection films leveraging Eastman proprietary Tetrashield™ coating technology to enable what the Company believes is best in class aesthetics and durability in paint protection films; and
•acquired the Matrix Films performance films business expanding paint protection film pattern development capabilities, pattern database, and installation training expertise.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Chemical Intermediates Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Compared to 2020 | 2020 Compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2020 | 2019 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 2,849 | $ | 2,090 | $ | 759 | 36 | % | $ | 2,090 | $ | 2,443 | $ | (353) | (14) | % | ||||||||||||||||||||||||||||||||||
| Volume / product mix effect | (47) | (3) | % | (175) | (7) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Price effect | 792 | 38 | % | (180) | (7) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange rate effect | 14 | 1 | % | 2 | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT | $ | 445 | $ | 166 | $ | 279 | 168 | % | $ | 166 | $ | 170 | $ | (4) | (2) | % | ||||||||||||||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 16 | 5 | 11 | 5 | 22 | (17) | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT excluding non-core item | 461 | 171 | 290 | 170 | % | 171 | 192 | (21) | (11) | % | ||||||||||||||||||||||||||||||||||||||||
2021 Compared to 2020
Sales revenue increased primarily due to higher selling prices, resulting from higher raw material, energy, and distribution prices. This increase was partially offset by lower sales volume, primarily due to the discontinued production of certain products at the Singapore manufacturing facility.
EBIT in 2021 and 2020 included restructuring charges resulting from the discontinued production of certain products. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding this non-core item, EBIT increased primarily due to higher selling prices more than offsetting higher raw material and energy costs and higher distribution costs by $277 million.
2020 Compared to 2019
Sales revenue decreased primarily due to lower selling prices across the segment attributed to lower raw material prices, and lower sales volume in most product lines attributed to the negative impact of COVID-19 on demand and increased competitive pressure.
EBIT in 2020 and 2019 included restructuring charges resulting from the discontinued production of certain products. For more information regarding asset impairments and restructuring charges see Note 16, "Asset Impairments and Restructuring Charges, Net", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Excluding this non-core item, EBIT decreased due to $66 million of lower sales volume and higher manufacturing costs due to lower capacity utilization, and lower selling prices partially offset by lower raw material and energy costs, totaling $17 million. The higher manufacturing costs were partially offset by $38 million of cost reduction actions and $18 million of technology licensing earnings in 2020.
Initiatives
In 2021, the CI segment:
•completed expansion of production capacity at St. Gabriel, Louisiana facility to support a strategic supply partnership;
•completed expansion of methylamines production capacity at Ghent, Belgium facility supporting market growth;
•completed closure of Singapore manufacturing site; and
•began the ethylene production to propylene capital investment which will provide low-cost propylene supply to internal derivatives and create lower volatility and improved earnings potential from enhanced operating flexibility.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Fibers Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 Compared to 2020 | 2020 Compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Change | Change | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Sales | $ | 900 | $ | 837 | $ | 63 | 8 | % | $ | 837 | $ | 869 | $ | (32) | (4) | % | ||||||||||||||||||||||||||||||||||
| Volume / product mix effect | 57 | 7 | % | (18) | (2) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Price effect | 2 | — | % | (14) | (2) | % | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange rate effect | 4 | 1 | % | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||
| EBIT | $ | 142 | $ | 180 | $ | (38) | (21) | % | $ | 180 | $ | 194 | $ | (14) | (7) | % | ||||||||||||||||||||||||||||||||||
2021 Compared to 2020
Sales revenue increased primarily due to higher sales volume of textile products due to strengthened end-market demand attributed to continued recovery of the textiles end-market negatively impacted by COVID-19. Acetate tow sales volume was relatively unchanged.
EBIT decreased primarily due to higher raw material and energy costs and higher distribution costs, totaling $37 million.
2020 Compared to 2019
Sales revenue decreased primarily due to lower textile products sales volume attributed to the impact of COVID-19 on demand and lower acetate tow selling prices primarily due to previously negotiated multi-year contracts.
EBIT decreased primarily due to $26 million of lower sales volume and higher manufacturing costs due to lower capacity utilization and reduction of inventory. These higher costs were partially offset by $10 million in cost reduction actions.
Initiatives
In 2021, the Fibers segment:
•introduced Naia™ staple fiber for spun yarns for apparel and home textiles; and
•developed Naia™ Renew yarns and staple fibers made from approximately 40 percent recycled plastic and textiles waste, enabled by Eastman's carbon renewal technology.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Loss before interest and taxes | ||||||||||||||||||||
| Growth initiatives and businesses not allocated to operating segments | $ | (134) | $ | (95) | $ | (102) | ||||||||||||||
| Pension and other postretirement benefit plans income (expense), net not allocated to operating segments | 375 | (156) | (97) | |||||||||||||||||
| Asset impairments and restructuring charges, net | (1) | (73) | (49) | |||||||||||||||||
| Other income (charges), net not allocated to operating segments | (11) | (20) | (9) | |||||||||||||||||
| Gain (loss) before interest and taxes before non-core items | $ | 229 | $ | (344) | $ | (257) | ||||||||||||||
| Mark-to-market pension and other postretirement benefit plans loss (gain), net | (267) | 240 | 143 | |||||||||||||||||
| Asset impairments and restructuring charges, net | 1 | 73 | 49 | |||||||||||||||||
| Loss before interest and taxes excluding non-core items | (37) | (31) | (65) | |||||||||||||||||
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 operating segment results for any of the periods presented and are included in "Other". In 2021, the Company recognized severance and related costs as part of business improvement and cost reduction initiatives. In 2020, the Company recognized severance and related costs as part of business improvement and cost reduction initiatives, contract termination fees, and asset impairments charges from discontinue growth initiatives. In 2019, the Company recognized severance and related restructuring costs. For more information regarding asset impairments and restructuring charges and debt extinguishment costs see Note 16, "Asset Impairments and Restructuring Charges, Net" and Note 9, "Borrowings", respectively, to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
SALES BY CUSTOMER LOCATION
| Sales Revenue | |||||||||||||||||||||||||||||||||||||||||
| Change | Change | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | $ | % | 2020 | 2019 | $ | % | |||||||||||||||||||||||||||||||||
| United States and Canada | $ | 4,578 | $ | 3,579 | $ | 999 | 28 | % | $ | 3,579 | $ | 3,885 | $ | (306) | (8) | % | |||||||||||||||||||||||||
| Europe, Middle East, and Africa | 2,735 | 2,299 | 436 | 19 | % | 2,299 | 2,544 | (245) | (10) | % | |||||||||||||||||||||||||||||||
| Asia Pacific | 2,549 | 2,111 | 438 | 21 | % | 2,111 | 2,278 | (167) | (7) | % | |||||||||||||||||||||||||||||||
| Latin America | 614 | 484 | 130 | 27 | % | 484 | 566 | (82) | (14) | % | |||||||||||||||||||||||||||||||
| Total | $ | 10,476 | $ | 8,473 | $ | 2,003 | 24 | % | $ | 8,473 | $ | 9,273 | $ | (800) | (9) | % | |||||||||||||||||||||||||
2021 Compared to 2020
Sales revenue increased 24 percent due to increases in sales revenue across all regions. Higher sales revenue was primarily due to higher selling prices (up 15 percent) and higher sales volume (up 8 percent) across all regions. The most significant increase in sales revenue occurred in United States and Canada, primarily due to higher selling prices and sales volume in the CI and AFP segments. The increase in Asia Pacific was partially offset by lower sales volume in the CI segment primarily resulting from the closure of the Singapore manufacturing facility.
2020 Compared to 2019
Sales revenue decreased 9 percent due to decreases in sales revenue across all regions. Lower sales revenue was primarily due to lower sales volume (down 5 percent) and lower selling prices (down 4 percent) across all regions. The most significant decrease in sales revenue occurred in United States and Canada, primarily due to lower selling prices in all operating segments and lower sales volume in the CI and AM segments. Europe, Middle East, and Africa also had an significant decrease in sales revenue due to lower sales volume and lower selling prices in all operating segments.
See Note 20, "Segment and Regional Sales Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for segment sales revenues by customer location.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND OTHER FINANCIAL INFORMATION
Cash Flows
The Company had cash and cash equivalents as follows:
| (Dollars in millions) | December 31, | ||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash and cash equivalents | $ | 459 | $ | 564 | $ | 204 | |||||||||||
Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements. However, the Company's cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing of Eastman's products, capacity utilization, and other factors described under "Risk Factors" in this MD&A. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility.
| For years ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 1,619 | $ | 1,455 | $ | 1,504 | |||||||||||
| Investing activities | (29) | (394) | (480) | ||||||||||||||
| Financing activities | (1,690) | (704) | (1,043) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (5) | 3 | (3) | ||||||||||||||
| Net change in cash and cash equivalents | (105) | 360 | (22) | ||||||||||||||
| Cash and cash equivalents at beginning of period | 564 | 204 | 226 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 459 | $ | 564 | $ | 204 | |||||||||||
2021 Compared to 2020
Cash provided by operating activities increased $164 million due to higher net earnings, partially offset by higher net working capital (trade receivables, inventories, and trade payables), as higher inventories and trade receivables more than offset higher trade payables.
Cash used in investing activities decreased $365 million due to the proceeds from the divestiture of rubber additives in the AFP segment partially offset by higher capital expenditures related to growth initiatives and acquisitions in the AFP and AM segments.
Cash used in financing activities increased $986 million primarily due to higher share repurchases.
2020 Compared to 2019
Cash provided by operating activities decreased $49 million due to lower net earnings, partially offset by lower net working capital (trade receivables, inventories, and trade payables), primarily due to a decrease in inventories.
Cash used in investing activities decreased $86 million due to lower additions to properties and equipment. Additionally, there were acquisitions in the AFP and Fibers segments in 2019.
Cash used in financing activities decreased $339 million due to lower share repurchases and lower debt repayments.
| For years ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||
| Net cash provided by operating activities | $ | 1,619 | $ | 1,455 | $ | 1,504 | |||||||||||
| Additions to properties and equipment | (555) | (383) | (425) | ||||||||||||||
| Free cash flow | $ | 1,064 | $ | 1,072 | $ | 1,079 | |||||||||||
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Working Capital Management
Eastman applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable a full range of capital allocation options in support of the Company's strategy. Eastman expects to continue utilizing the programs described below to support free cash flow consistent with the Company's past practices.
The Company has an off balance sheet, uncommitted accounts receivable factoring program under which entire invoices may be sold, without recourse, to third-party financial institutions. Available capacity under these agreements, which the Company uses as a routine source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. The total amount of receivables sold in 2021 and 2020 were $1.2 billion and $1.5 billion, respectively. Based on the original terms of receivables sold for certain agreements and actual outstanding balance of receivables under service agreements, the Company estimates that $239 million and $150 million of these receivables would have been outstanding as of December 31, 2021 and 2020, respectively, had they not been sold under these factoring agreements.
Eastman works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working
capital and cash flows. The Company has a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Eastman to a participating financial institution. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for additional information regarding both programs.
Debt and Other Commitments
| (Dollars in millions) | Payments Due for | |||||||||||||||||||||||||||||||||||||||||||
| Period | Debt Securities | Credit Facilities and Other | Interest Payable | Purchase Obligations | Operating Leases | Other Liabilities | Total | |||||||||||||||||||||||||||||||||||||
| 2022 | $ | 747 | $ | — | $ | 167 | $ | 164 | $ | 55 | $ | 269 | $ | 1,402 | ||||||||||||||||||||||||||||||
| 2023 | 850 | — | 154 | 156 | 44 | 77 | 1,281 | |||||||||||||||||||||||||||||||||||||
| 2024 | 241 | — | 135 | 148 | 31 | 87 | 642 | |||||||||||||||||||||||||||||||||||||
| 2025 | 698 | — | 117 | 124 | 24 | 81 | 1,044 | |||||||||||||||||||||||||||||||||||||
| 2026 | 565 | — | 106 | 116 | 18 | 84 | 889 | |||||||||||||||||||||||||||||||||||||
| 2027 and beyond | 2,058 | — | 1,183 | 2,436 | 53 | 960 | 6,690 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 5,159 | $ | — | $ | 1,862 | $ | 3,144 | $ | 225 | $ | 1,558 | $ | 11,948 | ||||||||||||||||||||||||||||||
At December 31, 2021, Eastman's borrowings totaled approximately $5.2 billion with various maturities. In fourth quarter 2021, the Company repaid the 3.5% notes due December 2021 ($300 million principal) using available cash. In fourth quarter 2020, the Company repaid the 4.5% notes due January 2021 ($185 million principal) using available cash. In second quarter 2020, the Company borrowed $250 million under a new Term Loan and in third quarter 2020, the Term Loan was repaid using available cash, For information about debt and related interest, see Note 9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
For information about purchase obligations and operating leases, see Note 12, "Leases and Other Commitments", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Amounts in other liabilities represent the current estimated cash payments required to be made by the Company primarily for pension and other postretirement benefits, accrued compensation benefits, environmental loss contingency estimates, uncertain tax liabilities, and commodity and foreign exchange hedging in the periods indicated. Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, management is unable to determine the timing of payments related to uncertain tax liabilities and these amounts are included in the "2027 and beyond" line item.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The amount and timing of pension and other postretirement benefit payments included in other liabilities is dependent upon interest rates, health care cost trends, actual returns on plan assets, retirement and attrition rates of employees, continuation or modification of the benefit plans, and other factors. Such factors can significantly impact the amount and timing of any future contributions by the Company. Excess contributions are periodically made by management in order to keep the plans' funded status above 80 percent under the funding provisions of the Pension Protection Act to avoid partial benefit restrictions on accelerated forms of payment. The Company's U.S. defined benefit pension plans are not currently under any benefit restrictions. See Note 11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report, for more information regarding pension and other postretirement benefit obligations.
The resolution of uncertainties related to environmental matters included in other liabilities may have a material adverse effect on the Company's consolidated results of operations in the period recognized, however, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and, if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position, results of operations, or cash flows. See Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for the Company's accounting policy for environmental costs, and see Note 13, "Environmental Matters and Asset Retirement Obligations", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for more information regarding outstanding environmental matters and asset retirement obligations.
Credit Facility and Commercial Paper Borrowings
The Company has access to a $1.50 billion Credit Facility that was amended and restated in December 2021. The amendments include the addition of sustainability-linked pricing terms and extends the maturity to December 2026. This resulted in a charge of $1 million for early debt extinguishment costs which was attributable to unamortized fees. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility provides available liquidity for general corporate purposes and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At December 31, 2021, the Company had no outstanding borrowings under the Credit Facility. At December 31, 2021, the Company had no outstanding commercial paper borrowings. See Note 9, "Borrowings", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
The Credit Facility contains customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all covenants at December 31, 2021. The total amount of available borrowings under the Credit Facility was approximately $1.50 billion as of December 31, 2021.
Net Debt
| December 31, | December 31, | ||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||
| Total borrowings | $ | 5,159 | $ | 5,618 | |||||||
| Less: Cash and cash equivalents | 459 | 564 | |||||||||
Net debt (1) | $ | 4,700 | $ | 5,054 | |||||||
(1)Includes a non-cash decrease of $113 million in 2021 and a non-cash increase of $132 million in 2020 resulting from foreign currency exchange rates.
Capital Expenditures
Capital expenditures were $555 million, $383 million, and $425 million in 2021, 2020, and 2019, respectively. Capital expenditures in 2021 were primarily for the AM segment methanolysis plastic-to-plastic molecular recycling manufacturing facility in Kingsport, Tennessee, and other targeted growth initiatives and site modernization projects.
The Company expects that 2022 capital spending will be approximately $700 million, primarily for targeted growth initiatives, including the AM segment methanolysis plastic-to-plastic molecular recycling manufacturing facility and the Tritan™ capacity expansion, both in Kingsport, Tennessee, and other targeted growth initiatives and site modernization projects.
54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company had capital expenditures related to environmental protection and improvement of approximately $38 million, $42 million, and $27 million in 2021, 2020, and 2019, respectively. The Company does not currently expect near term environmental capital expenditures arising from requirements of environmental laws and regulations to materially impact the Company's planned level of annual capital expenditures for environmental control facilities.
Dividends and Stock Repurchases
In February 2018, the Company's Board of Directors authorized the repurchase of up to an additional $2 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders. As of December 31, 2021, a total of 15,948,995 shares have been repurchased under the 2018 authorization for a total amount of $1,533 million. During 2021, the Company repurchased a total of 8,061,779 shares for a total cost of approximately $900 million, of which $400 million was repurchased under an accelerated share repurchase program ("ASR") entered into in December 2021. An additional $100 million of share repurchases under the ASR have been accounted for as a reduction to "Additional paid-in capital" in the Company's Consolidated Statements of Financial Position, as it has been paid, but shares have not yet been delivered. See Note 15, "Stockholders' Equity", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report for details of the ASR program.
In December 2021, the Company's Board of Directors authorized the additional repurchase of up to $2.5 billion of the Company's outstanding common stock at such time, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders. No shares have been repurchased under the December 2021 authorization.
The Board of Directors has declared a cash dividend of $0.76 per share during the first quarter of 2022, payable on April 1, 2022 to stockholders of record on March 15, 2022. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
INFLATION
In 2021, the Company experienced rapid, broad-based inflation across its portfolio, including higher raw material and energy costs. The cost of raw materials is generally based on market prices, although derivative financial instruments are utilized, as appropriate, to mitigate short-term market price fluctuations. Management expects the volatility of raw material and energy prices and costs to continue and the Company will continue to pursue pricing and hedging strategies and ongoing cost control initiatives to offset the effects. For additional information, see "Risk Factors" in Part II, Item 7, and Note 10, "Derivative and Non-Derivative Financial Instruments", to the Company's consolidated financial statements in Part II, Item 8, of this Annual Report.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards, see Note 1, "Significant Accounting Policies", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
In 2022, management expects adjusted EPS to be between $9.50 and $10.00 and operating cash flow to be greater than $1.6 billion. These expectations assume:
•innovation and market development driving growth above underlying end-markets;
•timing of price increases in response to higher raw material, energy, and distribution prices and disciplined cost management to positively impact financial results;
•earnings to be negatively impacted by the divested rubber additives and adhesives resins product lines, continued investment in growth, and normalization of selling price/cost spreads in the Chemical Intermediates segment;
•interest expense of approximately $190 million;
•depreciation and amortization of approximately $490 million; and
•the full-year effective tax rate on adjusted earnings before income tax to be between 15 and 16 percent.
In addition, the Company expects to deploy strong operating cash flow and divestiture proceeds through the combination of bolt-on mergers and acquisitions and share repurchases, and to have capital expenditures of approximately $700 million.
The Company's 2022 financial results forecast does not include non-core, unusual, or non-recurring items. Accordingly, management is unable to reconcile projected earnings excluding non-core, unusual, or non-recurring items to projected reported GAAP earnings without unreasonable efforts.
See "Risk Factors" below.
RISK FACTORS
In addition to factors described elsewhere in this Annual Report, the following are the material known factors, risks, and uncertainties that could cause actual results to differ materially from those under "Outlook" and in the forward-looking statements made in this Annual Report and elsewhere from time to time. See "Forward-Looking Statements". The following risk factors are not necessarily presented in the order of importance. In addition, there may be other factors, not currently known to the Company, which could, in the future, materially adversely affect the Company, its business, financial condition, or results of operations. This and other related disclosures made by the Company in this Annual Report, and elsewhere from time to time, represent management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission, in Company press releases, or other public presentations) on related subjects.
Risks Related to Global Economy and Industry Conditions
Continued uncertain conditions in the global economy, labor market, and financial markets could negatively impact the Company.
The Company's business and operating results were impacted by the last global recession, and its related impacts, such as the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that impacted the global economy. Similarly, as a company which operates and sells products worldwide, uncertainty in the global economy, labor market, and capital markets (including resulting from the continuing COVID-19 pandemic and subsequent changes and disruptions in business, political, and economic conditions) have impacted and may adversely impact demand for and the costs of certain Eastman products and accordingly results of operations, and may adversely impact the Company's financial condition and cash flows and ability to access the credit and capital markets under attractive rates and terms and negatively impact the Company's liquidity or ability to pursue certain growth initiatives.
56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Volatility in costs for strategic raw material and energy commodities or disruption in the supply and transportation of these commodities and in transportation of company products could adversely impact the Company's financial results.
Eastman is reliant on certain strategic raw material and energy commodities for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in raw material and energy costs. These risk mitigation measures do not eliminate all exposure to market fluctuations and may limit the Company from fully benefiting from lower raw material costs and, conversely, offset the impact of higher raw material costs. In addition, the global COVID-19 pandemic and subsequent changes and disruptions in business and economic conditions, which has adversely impacted cost and availability and transportation of commodities and transportation of Company products, natural disasters, plant interruptions, supply chain and transportation disruptions (related to the global COVID-19 pandemic and otherwise), changes in laws or regulations, levels of unemployment and inflation, higher interest rates, war or other outbreak of hostilities or terrorism, and breakdown or degradation of transportation and supply chain infrastructure used for delivery of strategic raw material and energy commodities and for transportation of Company products, could adversely impact both the cost and availability of these commodities and sales of Company products.
The Company's substantial global operations subject it to risks of doing business in other countries, including U.S. and non-U.S. trade relations, which could adversely impact its business, financial condition, and results of operations.
More than half of Eastman's sales for 2021 were to customers outside of North America. The Company expects sales from international markets to continue to represent a significant portion of its sales. Also, a significant portion of the Company's manufacturing capacity is located outside of the United States. Accordingly, the Company's business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements, and economic conditions of many jurisdictions including the unique geographic impacts of the global COVID-19 pandemic. Fluctuations in exchange rates may impact product demand and may adversely impact the profitability in U.S. dollars of products and services provided in foreign countries. In addition, the U.S. and foreign countries have imposed and may impose additional taxes or otherwise tax Eastman's foreign income (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Income Taxes" in Part II, Item 7 of this Annual Report), or adopt or increase restrictions on foreign trade or investment, including currency exchange controls, tariffs or other taxes, or limitations on imports or exports (including recent and proposed changes in U.S. trade policy and resulting retaliatory actions by other countries, including China, which have recently reduced and which may increasingly reduce demand for and increase costs of impacted products or result in U.S.-based trade counterparties limiting trade with U.S.-based companies or non-U.S. customers limiting their purchases from U.S.-based companies). Certain legal and political risks are also inherent in the operation of a company with Eastman's global scope. For example, it may be more difficult for Eastman to enforce its agreements or collect receivables through foreign legal systems, and the laws of some countries may not protect the Company's intellectual property rights to the same extent as the laws of the U.S. Failure of foreign countries to have laws to protect Eastman's intellectual property rights or an inability to effectively enforce such rights in foreign countries could result in loss of valuable proprietary information. There is also risk that foreign governments may nationalize private enterprises in certain countries where Eastman operates. Social and cultural norms in certain countries may not support compliance with Eastman's corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where Eastman operates are a risk to the Company's financial performance. As Eastman continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage and mitigate these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse impact on Eastman's business, financial condition, or results of operations.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks Related to the Company's Business and Strategy
The Company's business is subject to operating risks common to chemical and specialty materials manufacturing businesses, including cybersecurity risks, any of which could disrupt manufacturing operations or related infrastructure and adversely impact results of operations.
As a global specialty materials company, Eastman's business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation and supply chain interruptions, remediation, chemical spills, and discharges or releases of toxic or hazardous substances or gases. Significant limitation on the Company's ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse impact on the Company's sales revenue, costs, results of operations, credit ratings, and financial condition. Disruptions could occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as supply chain disruption, computer or equipment malfunction at third-party service providers, natural disasters, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber-attacks, or breakdown or degradation of transportation and supply chain infrastructure used for delivery of supplies to the Company or for delivery of products to customers. The Company has in the past experienced cyber-attacks and breaches of its computer information systems, although none of these have had a material adverse impact on the Company's operations and financial results. While the Company remains committed to managing cyber related risk, no assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material impact on operations (see "Business - Eastman Chemical Company General Information - Information Security" in Part I, Item 1 of this Annual Report). Unplanned disruptions of manufacturing operations or related infrastructure could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on the Company's results of operations.
Growth initiatives may not achieve desired business or financial objectives and may require significant resources in addition to or different from those available or in excess of those estimated or budgeted for such initiatives.
Eastman continues to identify and pursue growth opportunities through both organic and inorganic initiatives, such as Eastman's sustainable innovation initiatives which aim to develop a more "circular economy." These and other growth opportunities include development and commercialization or licensing of innovative new products and technologies and related employee leadership, expertise, skill development and retention, expansion into new markets and geographic regions, alliances, ventures, and acquisitions that complement and extend the Company's portfolio of businesses and capabilities. Such initiatives are necessarily constrained by availability and development of additional resources, including development, attraction, and retention of employee leadership, application development, and sales and marketing talent and capabilities. There can be no assurance that such innovation, development and commercialization or licensing efforts, investments, or acquisitions and alliances (including integration of acquired businesses) will receive necessary governmental or regulatory approvals, or result in financially successful commercialization of products, or acceptance by existing or new customers, or successful entry into new markets or otherwise achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations. There also can be no assurance that capital projects for growth efforts can be completed within the time or at the costs projected due, among other things, to demand for and availability of construction materials and labor and obtaining regulatory approvals and operating permits and reaching agreement on terms of key agreements and arrangements with potential suppliers and customers. Any such delays or cost overruns or the inability to obtain such approvals or to reach such agreements on acceptable terms could negatively impact the returns from any proposed or current investments and projects.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant acquisitions or divestitures could expose the Company to risks and uncertainties, the occurrence of any of which could materially adversely affect the Company's business, financial condition, and results of operations.
While acquisitions and divestitures have been and continue to be a part of Eastman's strategy, acquisitions of large companies and acquisitions or divestitures of businesses subject the Company to a number of risks and uncertainties, the occurrence of any of which could have a material adverse effect on Eastman. These include, but are not limited to, the possibility that the actual and projected future financial performance of the acquired or remaining business may be significantly worse than expected and that, in the case of an acquired business and as reported in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Impairment of Long-Lived Assets - Goodwill" in Part II, Item 7 of this Annual Report, the carrying values of goodwill and certain assets from acquisitions may, as has been the case for certain acquired assets, be impaired resulting in non-cash charges to future earnings and, in the case of a divested business, the divestiture could reduce Eastman's revenue and, potentially, margins and increase its costs and liabilities in the form of transition costs and retained liabilities from the operations divested, including environmental liabilities; that significant additional indebtedness may constrain the Company's ability to access the credit and capital markets at attractive interest rates and favorable terms, which may negatively impact the Company's liquidity or ability to pursue certain growth initiatives; that the Company may not be able to achieve the cost, revenue, tax, or other "synergies" expected from any acquisition, or that there may be delays in achieving any such synergies; that management's time and effort may be dedicated to the integration of the new business or specific assets or product lines or separation of the divested business or specific assets or product lines resulting in a loss of focus on the successful operation of the Company's legacy businesses; and that the Company may be required to expend significant additional resources in order to integrate any acquired business or specific assets or product lines into Eastman or separate any divested business or specific assets or product lines from Eastman, or that the integration or separation efforts will not achieve the expected benefits.
Risks Related to Regulatory Changes and Compliance
Legislative, regulatory, or voluntary actions, including associated with physical impacts of climate change, could increase the Company's future health, safety, and environmental compliance costs.
Eastman, its facilities, and its businesses are subject to complex health, safety, and environmental laws, regulations, and related voluntary actions, both in the U.S. and internationally, which require and will continue to require significant expenditures to remain in compliance with such laws, regulations, and voluntary actions. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. For example, any amount accrued for environmental matters reflects the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number of and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and actions, and testing requirements could result in higher costs. Specifically, while the Company's sustainability and "circular economy" innovation initiatives are sources of competitive strength (see "Business - Corporate Overview - Business Strategy - Circular Economy and Sustainability" in Part I, Item 1 of this Annual Report), future changes in legislation and regulation and related voluntary actions associated with physical impacts of climate change may increase the likelihood that the Company's manufacturing facilities will in the future be impacted by carbon requirements, regulation of greenhouse gas emissions, and energy policy, and may result in capital expenditures, increases in costs for raw materials and energy, limitations on raw material and energy source and supply choices, and other direct and indirect compliance or other costs or consequences including decreased demand for products related to carbon-based energy sources or increased demand for goods that result in lower emissions than competing products and reputational risk resulting from operations with greenhouse gas emissions. See "Business - Eastman Chemical Company General Information - Compliance With Environmental and Other Government Regulations" in Part I, Item 1 of this Annual Report.
59
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Eastman has exposure to various market risks principally due to changes in foreign currency exchange rates, the pricing of various commodities, and interest rates. In an effort to manage these risks, the Company employs various strategies, including pricing, inventory management, and hedging. The Company enters into derivative contracts which are governed by policies, procedures, and internal processes set forth by its Board of Directors.
The Company determines its exposures to market risk by utilizing sensitivity analyses, which measure the potential losses in fair value resulting from one or more selected hypothetical changes in foreign currency exchange rates, commodity prices, or interest rates.
Foreign Currency Risk
Due to a portion of the Company's operating cash flows and borrowings being denominated in foreign currencies, the Company is exposed to market risk from changes in foreign currency exchange rates. The Company continually evaluates its foreign currency exposure based on current market conditions and the locations in which the Company conducts business. The Company manages most foreign currency exposures on a consolidated basis, which allows the Company to net certain exposures and take advantage of natural offsets. To mitigate foreign currency risk, from time to time, the Company enters into derivative instruments to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period and denominated in foreign currencies, and enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. The gains and losses on these contracts offset changes in the value of related exposures. Additionally, the Company, from time to time, enters into non-derivative and derivative instruments to hedge the foreign currency exposure of the net investment in certain foreign operations. The foreign currency change in the designated investment values of the foreign subsidiaries will generally be offset by a foreign currency change in the carrying value of the euro-denominated borrowings. It is the Company's policy to enter into foreign currency derivative and non-derivative instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency derivative financial instruments for speculative purposes.
At December 31, 2021, the market risk associated with certain cash flows under these derivative transactions assuming a 10 percent adverse move in the U.S. dollar relative to these foreign currencies was $49 million, with an additional $5 million exposure for each additional one percentage point adverse change in those foreign currency rates. Since the Company utilizes currency-sensitive derivative instruments for hedging anticipated foreign currency transactions, a loss in fair value from those instruments is generally offset by an increase in the value of the underlying anticipated transactions.
At December 31, 2021, a 10 percent fluctuation in the euro currency rate would have had a $238 million impact on the designated net investment values in the foreign subsidiaries. As a result of the designation of the euro-denominated borrowings and designated cross-currency interest rate swaps as hedges of the net investments, foreign currency translation gains and losses on the borrowings and designated cross-currency interest rate swaps are recorded as a component of the "Change in cumulative translation adjustment" within "Other comprehensive income (loss), net of tax" in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in Part II, Item 8 of this Annual Report. Therefore, a foreign currency change in the designated investment values of the foreign subsidiaries will generally be offset by a foreign currency change in the carrying value of the euro-denominated borrowings or the foreign currency change in the designated cross-currency interest rate swaps.
Commodity Risk
The Company is exposed to fluctuations in market prices for certain of its raw materials and energy, as well as contract sales of certain commodity products. To mitigate short-term fluctuations in market prices for certain commodities, principally propane, ethane, natural gas, paraxylene, ethylene, and benzene, as well as selling prices for ethylene, the Company enters into derivative transactions, from time to time, to hedge the cash flows related to certain sales and purchase transactions expected within a rolling three year period. At December 31, 2021, the market risk associated with these derivative contracts, assuming an instantaneous parallel shift in the underlying commodity price of 10 percent and no corresponding change in the selling price of finished goods, was $12 million, with an additional $1 million of exposure at December 31, 2021 for each one percentage point move in closing price thereafter.
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Interest Rate Risk
Eastman is exposed to interest rate risk primarily as a result of its borrowing and investing activities, which include long-term borrowings used to maintain liquidity and to fund its business operations and capital requirements. The nature and amount of the Company's long-term and short-term debt may vary from time to time as a result of business requirements, market conditions, and other factors. The Company manages global interest rate exposure as part of regular operational and financing strategies. The Company had no variable interest rate borrowings (including credit facility borrowings and commercial paper borrowings) at December 31, 2021.
Eastman may enter into interest rate swaps, collars, or similar instruments with the objective of reducing interest rate volatility relating to the Company's borrowing costs. As of December 31, 2021, the Company had interest rate swaps outstanding with notional values of $150 million. For purposes of calculating the market risks associated with the fair value of interest-rate-sensitive instruments, the Company uses a hypothetical 10 percent increase in interest rates. The corresponding market risk of the interest rate swap hedging the interest rate risk on the 3.8% bonds maturing March 2025 and the interest rate swap hedging the variability in interest rates for long-term debt issuances was $1 million as of December 31, 2021.
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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| ITEM | Page | ||||
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | |||||
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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"). Eastman has prepared these consolidated financial statements in accordance with accounting principles generally accepted in the United States, and the statements of necessity include some amounts that are based on management's best estimates and judgments.
Eastman's accounting systems include extensive internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. The Company's policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner that is above reproach.
The accompanying consolidated financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, who were responsible for conducting their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report is included herein.
The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of non-management Board members. PricewaterhouseCoopers LLP and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with PricewaterhouseCoopers LLP and Eastman's Director of Corporate Audit Services, both privately and with management present, to discuss accounting, auditing, policies and procedures, internal controls, and financial reporting matters.
| /s/ Mark J. Costa | /s/ William T. McLain, Jr. | |||||||
| Mark J. Costa | William T. McLain, Jr. | |||||||
| Chief Executive Officer | Senior Vice President and | |||||||
| Chief Financial Officer | ||||||||
| February 24, 2022 | February 24, 2022 | |||||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Eastman Chemical Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Eastman Chemical Company and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of earnings, comprehensive income and retained earnings, and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Annual Goodwill Impairment Assessments - Certain Reporting Units in the Additives & Functional Products and Chemical Intermediates Segments
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3,641 million as of December 31, 2021, and the goodwill associated with the Additives & Functional Products and Chemical Intermediates segments was $1,585 million and $760 million, respectively. Management conducts testing of goodwill for impairment annually in the fourth quarter or more frequently when events and circumstances indicate an impairment may have occurred. Management uses an income approach, specifically a discounted cash flow model in testing the carrying value of goodwill of each reporting unit for impairment. Key assumptions and estimates used in the Company’s goodwill impairment testing included projections of revenues and earnings before interest and taxes (“EBIT”), the estimated weighted average cost of capital (“WACC”) and a projected long-term growth rate. The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for certain reporting units in the Additives & Functional Products and Chemical Intermediates segments is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to projections of revenues and EBIT, the estimated WACC, and the projected long-term growth rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of certain reporting units in the Additives & Functional Products and Chemical Intermediates segments.
These procedures also included, among others (i) testing management’s process for developing the fair value estimate of certain reporting units in the Additives & Functional Products and Chemical Intermediates segments, (ii) evaluating the appropriateness of the discounted cash flow model, (iii) testing the completeness, accuracy and relevance of underlying data used in the model, and (iv) evaluating the significant assumptions used by management related to projections of revenues and EBIT, the estimated WACC, and the projected long-term growth rate. Evaluating management’s assumptions related to projections of revenues and EBIT and the projected long- term growth rate involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external industry reports, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow model and the estimated WACC assumption.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 24, 2022
We have served as the Company's auditor since 1993.
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CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
| For years ended December 31, | |||||||||||||||||
| (Dollars in millions, except per share amounts) | 2021 | 2020 | 2019 | ||||||||||||||
| Sales | $ | 10,476 | $ | 8,473 | $ | 9,273 | |||||||||||
| Cost of sales | 7,976 | 6,498 | 7,039 | ||||||||||||||
| Gross profit | 2,500 | 1,975 | 2,234 | ||||||||||||||
| Selling, general and administrative expenses | 795 | 654 | 691 | ||||||||||||||
| Research and development expenses | 254 | 226 | 234 | ||||||||||||||
| Asset impairments and restructuring charges, net | 47 | 227 | 126 | ||||||||||||||
| Other components of post-employment (benefit) cost, net | (412) | 119 | 60 | ||||||||||||||
| Other (income) charges, net | (17) | 8 | 3 | ||||||||||||||
| Loss on divested business | 552 | — | — | ||||||||||||||
| Earnings before interest and taxes | 1,281 | 741 | 1,120 | ||||||||||||||
| Net interest expense | 198 | 210 | 218 | ||||||||||||||
| Early debt extinguishment costs | 1 | 1 | — | ||||||||||||||
| Earnings before income taxes | 1,082 | 530 | 902 | ||||||||||||||
| Provision for income taxes | 215 | 41 | 140 | ||||||||||||||
| Net earnings | 867 | 489 | 762 | ||||||||||||||
| Less: Net earnings attributable to noncontrolling interest | 10 | 11 | 3 | ||||||||||||||
| Net earnings attributable to Eastman | $ | 857 | $ | 478 | $ | 759 | |||||||||||
| Basic earnings per share attributable to Eastman | $ | 6.35 | $ | 3.53 | $ | 5.52 | |||||||||||
| Diluted earnings per share attributable to Eastman | $ | 6.25 | $ | 3.50 | $ | 5.48 | |||||||||||
| Comprehensive Income | |||||||||||||||||
| Net earnings including noncontrolling interest | $ | 867 | |||||||||||||||