EASTMAN CHEMICAL CO - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| (Mark One) | ||||||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the quarterly period ended | March 31, 2023 | |||||||
| OR | ||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the transition period from ______________ to ______________ | ||||||||
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
| Delaware | 62-1539359 | |||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
| incorporation or organization) | Identification no.) | |||||||
| 200 South Wilcox Drive | ||||||||
| Kingsport | Tennessee | 37662 | ||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | 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 | ||||||||||||
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). Yes ☒ No ☐
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class | Number of Shares Outstanding at March 31, 2023 | ||||
| Common Stock, par value $0.01 per share | 119,151,802 | ||||
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1
TABLE OF CONTENTS
| ITEM | PAGE | |||||||
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
SIGNATURES
2
FORWARD-LOOKING STATEMENTS
Certain statements made or incorporated by reference in this Quarterly 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", "could", 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 including heightened inflation, capital market volatility, interest rate and currency fluctuations, and economic slowdown or recession; 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 "Risk Factors" in Part II, Item 1A of this Quarterly 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 of this Quarterly Report. 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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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
| First Quarter | |||||||||||
| (Dollars in millions, except per share amounts) | 2023 | 2022 | |||||||||
| Sales | $ | 2,412 | $ | 2,714 | |||||||
| Cost of sales | 1,883 | 2,164 | |||||||||
| Gross profit | 529 | 550 | |||||||||
| Selling, general and administrative expenses | 191 | 196 | |||||||||
| Research and development expenses | 62 | 65 | |||||||||
| Asset impairments and restructuring charges, net | 22 | 2 | |||||||||
| Other components of post-employment (benefit) cost, net | (3) | (31) | |||||||||
| Other (income) charges, net | 11 | (12) | |||||||||
| Gain on divested business | — | (3) | |||||||||
| Earnings before interest and taxes | 246 | 333 | |||||||||
| Net interest expense | 52 | 46 | |||||||||
| Earnings before income taxes | 194 | 287 | |||||||||
| Provision for income taxes | 60 | 51 | |||||||||
| Net earnings | 134 | 236 | |||||||||
| Less: Net earnings attributable to noncontrolling interest | — | 1 | |||||||||
| Net earnings attributable to Eastman | $ | 134 | $ | 235 | |||||||
| Basic earnings per share attributable to Eastman | $ | 1.13 | $ | 1.82 | |||||||
| Diluted earnings per share attributable to Eastman | $ | 1.12 | $ | 1.80 | |||||||
| Comprehensive Income | |||||||||||
| Net earnings including noncontrolling interest | $ | 134 | $ | 236 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Change in cumulative translation adjustment | (1) | 7 | |||||||||
| Defined benefit pension and other postretirement benefit plans: | |||||||||||
| Amortization of unrecognized prior service credits | (5) | (6) | |||||||||
| Derivatives and hedging: | |||||||||||
| Unrealized gain (loss) during period | (7) | 40 | |||||||||
| Reclassification adjustment for (gains) losses included in net income, net | (2) | (4) | |||||||||
| Total other comprehensive income (loss), net of tax | (15) | 37 | |||||||||
| Comprehensive income including noncontrolling interest | 119 | 273 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interest | — | 1 | |||||||||
| Comprehensive income attributable to Eastman | $ | 119 | $ | 272 | |||||||
| Retained Earnings | |||||||||||
| Retained earnings at beginning of period | $ | 8,973 | $ | 8,557 | |||||||
| Net earnings attributable to Eastman | 134 | 235 | |||||||||
| Cash dividends declared | (94) | (98) | |||||||||
| Retained earnings at end of period | $ | 9,013 | $ | 8,694 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| March 31, | December 31, | ||||||||||
| (Dollars in millions, except per share amounts) | 2023 | 2022 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 599 | $ | 493 | |||||||
| Trade receivables, net of allowance for credit losses | 1,051 | 957 | |||||||||
| Miscellaneous receivables | 286 | 320 | |||||||||
| Inventories | 1,944 | 1,894 | |||||||||
| Other current assets | 93 | 114 | |||||||||
| Total current assets | 3,973 | 3,778 | |||||||||
| Properties | |||||||||||
| Properties and equipment at cost | 13,153 | 12,942 | |||||||||
| Less: Accumulated depreciation | 7,895 | 7,782 | |||||||||
| Net properties | 5,258 | 5,160 | |||||||||
| Goodwill | 3,703 | 3,664 | |||||||||
| Intangible assets, net of accumulated amortization | 1,203 | 1,210 | |||||||||
| Other noncurrent assets | 846 | 855 | |||||||||
| Total assets | $ | 14,983 | $ | 14,667 | |||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities | |||||||||||
| Payables and other current liabilities | $ | 1,957 | $ | 2,125 | |||||||
| Borrowings due within one year | 1,014 | 1,126 | |||||||||
| Total current liabilities | 2,971 | 3,251 | |||||||||
| Long-term borrowings | 4,636 | 4,025 | |||||||||
| Deferred income tax liabilities | 662 | 671 | |||||||||
| Post-employment obligations | 629 | 628 | |||||||||
| Other long-term liabilities | 823 | 856 | |||||||||
| Total liabilities | 9,721 | 9,431 | |||||||||
| Stockholders' equity | |||||||||||
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 222,703,492 and 222,348,557 for 2023 and 2022, respectively) | 2 | 2 | |||||||||
| Additional paid-in capital | 2,325 | 2,315 | |||||||||
| Retained earnings | 9,013 | 8,973 | |||||||||
| Accumulated other comprehensive income (loss) | (220) | (205) | |||||||||
| 11,120 | 11,085 | ||||||||||
Less: Treasury stock at cost (103,602,488 and 103,602,488 shares for 2023 and 2022, respectively) | 5,932 | 5,932 | |||||||||
| Total Eastman stockholders' equity | 5,188 | 5,153 | |||||||||
| Noncontrolling interest | 74 | 83 | |||||||||
| Total equity | 5,262 | 5,236 | |||||||||
| Total liabilities and stockholders' equity | $ | 14,983 | $ | 14,667 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| First Three Months | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Operating activities | |||||||||||
| Net earnings | $ | 134 | $ | 236 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 141 | 121 | |||||||||
| Gain on divested business | — | (3) | |||||||||
| Benefit from deferred income taxes | (7) | (24) | |||||||||
| Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |||||||||||
| (Increase) decrease in trade receivables | (91) | (127) | |||||||||
| (Increase) decrease in inventories | (44) | (184) | |||||||||
| Increase (decrease) in trade payables | (132) | 152 | |||||||||
| Pension and other postretirement contributions (in excess of) less than expenses | (19) | (43) | |||||||||
| Variable compensation payments (in excess of) less than expenses | (16) | (168) | |||||||||
| Other items, net | 32 | 57 | |||||||||
| Net cash (used in) provided by operating activities | (2) | 17 | |||||||||
| Investing activities | |||||||||||
| Additions to properties and equipment | (174) | (112) | |||||||||
| Proceeds from sale of businesses | 16 | — | |||||||||
| Acquisition, net of cash acquired | (73) | — | |||||||||
| Additions to capitalized software | (2) | (3) | |||||||||
| Other items, net | (19) | (2) | |||||||||
| Net cash used in investing activities | (252) | (117) | |||||||||
| Financing activities | |||||||||||
| Net increase (decrease) in commercial paper and other borrowings | (326) | 236 | |||||||||
| Proceeds from borrowings | 796 | — | |||||||||
| Dividends paid to stockholders | (94) | (98) | |||||||||
| Proceeds from stock option exercises and other items, net | (19) | (9) | |||||||||
| Net cash provided by financing activities | 357 | 129 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3 | (1) | |||||||||
| Net change in cash and cash equivalents | 106 | 28 | |||||||||
| Cash and cash equivalents at beginning of period | 493 | 459 | |||||||||
| Cash and cash equivalents at end of period | $ | 599 | $ | 487 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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1.SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company ("Eastman" or the "Company") in accordance and consistent with the accounting policies stated in the Company's 2022 Annual Report on Form 10-K, and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of that report, with the exception of recently adopted accounting standards noted below. The December 31, 2022 financial position data included herein was derived from the consolidated financial statements included in the 2022 Annual Report on Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP").
In the opinion of management, the unaudited consolidated financial statements include all normal recurring adjustments necessary for the fair statement of the interim financial information in conformity with GAAP. These statements contain some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of business ventures in which Eastman has a controlling interest. Eastman accounts for other joint ventures and investments where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. Certain prior period data has been reclassified in the unaudited consolidated financial statements and accompanying footnotes to conform to current period presentation, including sales revenue, earnings before interest and taxes ("EBIT"), and goodwill related to the product moves announced in first quarter 2023. See Note 3, "Goodwill", and Note 14, "Segment Information", for more information.
Recently Adopted Accounting Standards
Accounting Standards Update ("ASU") 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers: On January 1, 2023, Eastman adopted prospectively this update, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 Revenue from Contracts with Customers, as if it had originated the contracts. The adoption did not have a significant impact on the Company's financial statements and related disclosures.
ASU 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method: On January 1, 2023, Eastman adopted this update which clarifies the guidance in Accounting Standards Codification ("ASC") 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets. This ASU amends the guidance in ASU 2017-12 (released on August 28, 2017) that, among other things, established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the "portfolio layer" method and addresses feedback from stakeholders regarding its application. The adoption did not have a significant impact on the Company's financial statements and related disclosures.
ASU 2022-02 Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures: On January 1, 2023, Eastman adopted this update which amends the requirements for accounting for credit losses under ASC 326, eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40, and enhances creditors' disclosure requirements related to loan refinancings and restructurings for borrowers experiencing financial difficulty. This ASU also amends the guidance on "vintage disclosures" to require disclosure of gross write-offs by year of origination. The adoption did not have a significant impact on the Company's financial statements and related disclosures.
ASU 2022-04 Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations: On January 1, 2023, Eastman adopted this update which requires the buyer in a supplier finance program to disclose qualitative and quantitative information about the program. Required disclosures include information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the disclosure of rollforward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The adoption did not have a significant impact on the Company's financial position, results of operations, or cash flows. The required disclosures are included as part of "Working Capital Management and Off Balance Sheet Arrangements" disclosure below.
8
Accounting Standards Issued But Not Adopted as of March 31, 2023
ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions: The Financial Accounting Standards Board ("FASB") issued this update in June 2022, which states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. Management does not expect that changes required by the new standard will have a significant impact on the Company's financial statements and related disclosures.
Working Capital Management and Off Balance Sheet Arrangements
The Company has an off balance sheet, uncommitted accounts receivable factoring program under which entire invoices may be sold, without recourse, to third-party financial institutions. Under these agreements, the Company sells the invoices at face value, less a transaction fee, which substantially equals the carrying value and fair value with no gain or loss recognized, and no credit loss exposure is retained. Available capacity under these agreements, which the Company uses as a routine source of working capital funding, is dependent on the level of accounts receivable eligible to be sold and the financial institutions' willingness to purchase such receivables. In addition, certain agreements also require that the Company continue to service, administer, and collect the sold accounts receivable at market rates. The total amounts sold under the program in first quarter 2023 and 2022 were $677 million and $502 million, respectively.
The Company works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. Under a supplier finance program, the Company's suppliers may voluntarily sell receivables due from Eastman to a participating financial institution. Eastman's responsibility is limited to making payments on the terms originally negotiated with suppliers, regardless of whether the suppliers sell their receivables to the financial institution. The range of payment terms Eastman negotiates with suppliers are consistent, regardless of whether a supplier participates in the program. No fees are paid by Eastman for the supplier finance platform or services fees. Eastman or the financial institution may terminate the program at any time with immediate effect upon 90 days' notice. Confirmed obligations in the supplier finance program of $87 million and $100 million at March 31, 2023 and December 31, 2022, respectively, are included in "Payables and other current liabilities" on the Unaudited Consolidated Statements of Financial Position.
2.INVENTORIES
| March 31, | December 31, | ||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Finished goods | $ | 1,437 | $ | 1,347 | |||||||
| Work in process | 291 | 297 | |||||||||
| Raw materials and supplies | 709 | 743 | |||||||||
| Total inventories at FIFO or average cost | 2,437 | 2,387 | |||||||||
| Less: LIFO reserve | 493 | 493 | |||||||||
| Total inventories | $ | 1,944 | $ | 1,894 | |||||||
Inventories valued on the last-in, first-out ("LIFO") method were approximately 50 percent of total inventories at both March 31, 2023 and December 31, 2022.
3.GOODWILL
As a result of product moves between the Additives & Functional Products ("AFP") segment and the Chemical Intermediates ("CI") segment that occurred in first quarter 2023, goodwill was reassigned to segments using a relative fair value allocation. In conjunction with the product moves and as required by GAAP, during first quarter 2023 Eastman performed an impairment assessment and concluded that no indication of an impairment existed. For further information on the product moves, see Note 1, "Significant Accounting Policies", and Note 14, "Segment Information".
9
Changes to the carrying value of goodwill follow:
| (Dollars in millions) | Advanced Materials | Additives & Functional Products | Chemical Intermediates | Other | Total | ||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 1,296 | $ | 1,601 | $ | 757 | $ | 10 | $ | 3,664 | |||||||||||||||||||
| Adjustments to net goodwill resulting from reorganization | — | 569 | (569) | — | — | ||||||||||||||||||||||||
| Acquisition | 37 | — | — | — | 37 | ||||||||||||||||||||||||
| Currency translation adjustments | (3) | 3 | 2 | — | 2 | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 1,330 | $ | 2,173 | $ | 190 | $ | 10 | $ | 3,703 | |||||||||||||||||||
The reported balance of goodwill included accumulated impairment losses of $106 million, $12 million, and $14 million in the AFP segment, the CI segment, and other segment, respectively, at both March 31, 2023 and December 31, 2022.
4.INCOME TAXES
| First Quarter | |||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||
| Provision for income taxes and tax rate | $ | 60 | 31 | % | $ | 51 | 18 | % | |||||||||||||||
First quarter 2023 provision for income taxes includes a $23 million increase from adjustments to state valuation allowance recognized as a result of recently issued state guidance related to 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"). First quarter 2022 provision for income taxes included adjustments from finalization of prior years' income tax returns.
At March 31, 2023 and December 31, 2022, Eastman had $237 million and $235 million, respectively, in unrecognized tax benefits. At March 31, 2023, it is expected that, as a result of the resolution of federal, state, and foreign examinations and appeals, and the expiration of various statutes of limitation, the total amounts of unrecognized tax benefits could decrease by up to $55 million within the next 12 months.
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5.BORROWINGS
| March 31, | December 31, | ||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Borrowings consisted of: | |||||||||||
1.50% notes due May 2023 (1) | $ | 816 | $ | 800 | |||||||
7.25% debentures due January 2024 | 198 | 198 | |||||||||
7.625% debentures due June 2024 | 43 | 43 | |||||||||
3.80% notes due March 2025 | 694 | 693 | |||||||||
1.875% notes due November 2026 (1) | 542 | 530 | |||||||||
7.60% debentures due February 2027 | 196 | 196 | |||||||||
4.5% notes due December 2028 | 495 | 495 | |||||||||
5.75% notes due March 2033 (2) | 496 | — | |||||||||
4.8% notes due September 2042 | 494 | 494 | |||||||||
4.65% notes due October 2044 | 877 | 877 | |||||||||
| 2024 Term Loan | 300 | — | |||||||||
| 2027 Term Loan | 499 | 499 | |||||||||
| Commercial paper and short-term borrowings | — | 326 | |||||||||
| Total borrowings | 5,650 | 5,151 | |||||||||
| Less: Borrowings due within one year | 1,014 | 1,126 | |||||||||
| Long-term borrowings | $ | 4,636 | $ | 4,025 | |||||||
(1)The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 will fluctuate with changes in the euro to U.S. dollar exchange rate. The carrying value of these euro-denominated borrowings have been designated as non-derivative net investment hedges of a portion of the Company's net investments in euro functional-currency denominated subsidiaries to offset foreign currency fluctuations.
(2)Net proceeds from the bond issuance will be used to finance or refinance existing and future eligible green investment initiatives which contribute to Eastman's environmental sustainability strategy (a green bond).
In March 2023, the Company issued $500 million aggregate principal amount of 5.75% notes due March 2033 in a registered public offering (the "2023 Notes"). Net proceeds from the 2023 Notes will be allocated to eligible projects to advance Eastman's sustainability goals of mitigating climate change, mainstreaming circular economy, and caring for society. Proceeds from the sale of the notes, net of original issue discounts, and issuance costs were $496 million.
Credit Facility, Term Loans, and Commercial Paper Borrowings
In first quarter 2023, the Company borrowed $300 million under a delayed draw two-year term loan (the "2024 Term Loan"), which was executed in fourth quarter 2022. As of March 31, 2023, the 2024 Term Loan balance outstanding was $300 million with a variable interest rate of 6.07%. In 2022, the Company borrowed $500 million under a five-year term loan agreement (the "2027 Term Loan"). The 2027 Term Loan balance outstanding was $499 million at both March 31, 2023 and December 31, 2022, with variable interest rates of 5.92% and 5.55%, respectively. Borrowings under the 2024 Term Loan and 2027 Term Loan are subject to interest at varying spreads above quoted market rates.
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring December 2026 that was amended in March 2023. The amendment replaced the London Interbank Offered Rate-based ("LIBOR") reference interest rate option with a reference interest rate option based upon Term Secured Overnight Financing Rate ("SOFR") (as defined in the Credit Facility). All other material terms of the Credit Facility remain unchanged. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility includes sustainability-linked pricing terms, provides available liquidity for general corporate purposes, and supports commercial paper borrowings. Commercial paper borrowings are classified as short-term. At March 31, 2023 and December 31, 2022, the Company had no outstanding borrowings under the Credit Facility. At March 31, 2023, the Company had no outstanding commercial paper borrowings. At December 31, 2022, the Company's commercial paper borrowings were $326 million with a weighted average interest rate of 4.85%.
11
The Credit Facility, the 2024 Term Loan, and the 2027 Term Loan contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all applicable covenants at both March 31, 2023 and December 31, 2022.
Fair Value of Borrowings
Eastman has classified its total borrowings at March 31, 2023 and December 31, 2022 under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K. The fair value for fixed-rate debt securities is based on quoted market prices for the same or similar debt instruments and is classified as Level 2. The fair value for the Company's other borrowings, under the Term Loans and commercial paper, equals the carrying value and is classified as Level 2. At March 31, 2023 and December 31, 2022, the fair values of total borrowings were $5.5 billion and $4.9 billion, respectively. The Company had no borrowings classified as Level 1 and Level 3 as of March 31, 2023 and December 31, 2022.
6.DERIVATIVE AND NON-DERIVATIVE FINANCIAL INSTRUMENTS
Overview of Hedging Programs
Eastman is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transactions and investments in foreign subsidiaries, the Company uses various derivative and non-derivative financial instruments, when appropriate, in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The Company does not enter into derivative transactions for speculative purposes.
For further information on hedging programs, see Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K.
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that are attributable to a particular risk. The derivative instruments that are designated and qualify as a cash flow hedge are reported on the balance sheet at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The change in the hedge instrument is reported as a component of "Accumulated other comprehensive income (loss)" ("AOCI") on the Unaudited Consolidated Statements of Financial Position and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from cash flow hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. The derivative instruments that are designated and qualify as fair value hedges are reported as "Long-term borrowings" on the Unaudited Consolidated Statements of Financial Position at fair value and the changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated fair value of the underlying exposures being hedged. The net of the change in the hedge instrument and item being hedged for qualifying fair value hedges is recognized in earnings in the same period or periods during which the hedged transaction affects earnings. Cash flows from fair value hedges are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.
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Net Investment Hedges
Net investment hedges are defined as derivative or non-derivative instruments designated as and used to hedge the foreign currency exposure of the net investments in certain foreign operations. The net of the change in the hedge instrument and item being hedged for qualifying net investment hedges is reported as a component of the "Cumulative Translation Adjustment" ("CTA") within AOCI on the Unaudited Consolidated Statements of Financial Position. Cash flows from the CTA component are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows. Recognition in earnings of amounts previously recognized in CTA is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. In the event of a complete or substantially complete liquidation of the net investment, cash flows from net investment hedges are classified as investing activities in the Unaudited Consolidated Statements of Cash Flows.
For derivative cross-currency interest rate swap net investment hedges, gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in CTA within AOCI and recognized in earnings through the periodic swap interest accruals. The cross-currency interest rate swaps designated as net investment hedges are included as part of "Other long-term liabilities", "Other noncurrent assets", "Payables and other current liabilities", or "Other current assets" on the Unaudited Consolidated Statements of Financial Position. Cash flows from excluded components are classified as operating activities in the Unaudited Consolidated Statements of Cash Flows.
In February 2023, Eastman entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swap includes €283 million ($300 million) maturing March 2033.
In February 2023, the Company also entered into a fixed-to-fixed cross-currency swap and designated the swap to hedge a portion of its net investment in a Japanese yen functional currency denominated subsidiary against foreign currency fluctuations. This contract involves the exchange of fixed U.S. dollars with fixed Japanese yen interest payments over the life of the contract and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include ¥6.7 billion ($50 million) maturing March 2025.
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Summary of Financial Position and Financial Performance of Hedging Instruments
The following table presents the notional amounts outstanding at March 31, 2023 and December 31, 2022 associated with Eastman's hedging programs.
| Notional Outstanding | March 31, 2023 | December 31, 2022 | |||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Foreign Exchange Forward and Option Contracts (in millions) | |||||||||||||||||
| EUR/USD (in EUR) | €515 | €573 | |||||||||||||||
| Commodity Forward and Collar Contracts | |||||||||||||||||
| Energy (in million british thermal units) | 8 | 3 | |||||||||||||||
| Derivatives designated as fair value hedges: | |||||||||||||||||
| Fixed-for-floating interest rate swaps (in millions) | $75 | $75 | |||||||||||||||
| Derivatives designated as net investment hedges: | |||||||||||||||||
| Cross-currency interest rate swaps (in millions) | |||||||||||||||||
| EUR/USD (in EUR) | €870 | €587 | |||||||||||||||
| JPY/USD (in JPY) | ¥6,723 | — | |||||||||||||||
| Non-derivatives designated as net investment hedges: | |||||||||||||||||
| Foreign Currency Net Investment Hedges (in millions) | |||||||||||||||||
| EUR/USD (in EUR) | €1,247 | €1,247 | |||||||||||||||
Fair Value Measurements
All the Company's derivative assets and liabilities are currently classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs that are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company compares a subset of its valuations against valuations received from counterparties to validate the accuracy of its standard pricing models. The Company had no derivatives classified as Level 3 as of March 31, 2023 and December 31, 2022. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance, and the Company diversifies its positions among such counterparties to reduce its exposure to counterparty risk and credit losses. The Company monitors the creditworthiness of its counterparties on an ongoing basis. The Company did not recognize a credit loss during first quarter 2023 or 2022.
All the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company does not have any cash collateral due under such agreements.
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The Company has elected to present derivative contracts on a gross basis on the Unaudited Consolidated Statements of Financial Position. The following table presents the financial assets and liabilities valued on a recurring and gross basis and includes where the financial assets and liabilities are on the Unaudited Consolidated Statements of Financial Position as of March 31, 2023 and December 31, 2022.
| The Financial Position and Fair Value Measurements of Hedging Instruments on a Gross Basis | ||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Derivative Type | Statements of Financial Position Classification | Level 2 | ||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||
| Commodity contracts | Other current assets | $ | — | $ | 3 | |||||||||||||||
| Derivatives designated as fair value hedges: | ||||||||||||||||||||
| Fixed-for-floating interest rate swap | Other current assets | — | 1 | |||||||||||||||||
| Derivatives designated as net investment hedges: | ||||||||||||||||||||
| Cross-currency interest rate swaps | Other noncurrent assets | 64 | 72 | |||||||||||||||||
| Total Derivative Assets | $ | 64 | $ | 76 | ||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||
| Commodity contracts | Payables and other current liabilities | $ | 2 | $ | 3 | |||||||||||||||
| Foreign exchange contracts | Payables and other current liabilities | 10 | 8 | |||||||||||||||||
| Foreign exchange contracts | Other long-term liabilities | 4 | 4 | |||||||||||||||||
| Derivatives designated as fair value hedges: | ||||||||||||||||||||
| Fixed-for-floating interest rate swap | Long-term borrowings | 4 | 5 | |||||||||||||||||
| Derivatives designated as net investment hedges: | ||||||||||||||||||||
| Cross-currency interest rate swaps | Other long-term liabilities | 8 | — | |||||||||||||||||
| Total Derivative Liabilities | $ | 28 | $ | 20 | ||||||||||||||||
| Total Net Derivative Assets (Liabilities) | $ | 36 | $ | 56 | ||||||||||||||||
In addition to the fair value associated with derivative instruments designated as cash flow hedges, fair value hedges, and net investment hedges, the Company had non-derivative instruments designated as foreign currency net investment hedges with a carrying value of $1.4 billion at March 31, 2023 and $1.3 billion at December 31, 2022. The designated foreign currency-denominated borrowings are included as part of "Borrowings due within one year" and "Long-term borrowings" on the Unaudited Consolidated Statements of Financial Position.
For additional fair value measurement information, see Note 1, "Significant Accounting Policies", and Note 10, "Derivative and Non-Derivative Financial Instruments", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K.
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As of March 31, 2023 and December 31, 2022, the following amounts were included on the Unaudited Consolidated Statements of Financial Position related to cumulative basis adjustments for fair value hedges.
| (Dollars in millions) | Carrying amount of the hedged liabilities | Cumulative amount of fair value hedging loss adjustment included in the carrying amount of the hedged liability | ||||||||||||||||||||||||
| Line item on the Unaudited Consolidated Statements of Financial Position in which the hedged item is included | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Long-term borrowings | $ | 71 | $ | 70 | $ | (4) | $ | (5) | ||||||||||||||||||
The following table presents the effect of the Company's hedging instruments on "Other comprehensive income (loss), net of tax" ("OCI") and financial performance for first quarter 2023 and 2022.
| Change in amount of after tax gain (loss) recognized in OCI on derivatives | Pre-tax amount of gain (loss) reclassified from AOCI into earnings | |||||||||||||||||||||||||
| (Dollars in millions) | First Quarter | First Quarter | ||||||||||||||||||||||||
| Hedging Relationships | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | ||||||||||||||||||||||||||
| Commodity contracts | $ | (3) | $ | 24 | $ | $ | ||||||||||||||||||||
| Foreign exchange contracts | (7) | 6 | ||||||||||||||||||||||||
| Forward starting interest rate and treasury lock swap contracts | 1 | 5 | ||||||||||||||||||||||||
| Non-derivatives in net investment hedging relationships (pre-tax): | ||||||||||||||||||||||||||
| Net investment hedges | (27) | 61 | — | — | ||||||||||||||||||||||
| Derivatives in net investment hedging relationships (pre-tax): | ||||||||||||||||||||||||||
| Cross-currency interest rate swaps | (17) | 23 | — | — | ||||||||||||||||||||||
| Cross-currency interest rate swaps excluded component | 1 | (10) | — | — | ||||||||||||||||||||||
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The following table presents the effect of fair value and cash flow hedge accounting in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for first quarter 2023 and 2022.
| Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships | ||||||||||||||||||||||||||||||||||||||
| First Quarter | ||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Sales | Cost of Sales | Net Interest Expense | Sales | Cost of Sales | Net Interest Expense | ||||||||||||||||||||||||||||||||
| Total amounts of income and expense line items presented in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in which the effects of fair value or cash flow hedges are recognized | $ | 2,412 | $ | 1,883 | $ | 52 | $ | 2,714 | $ | 2,164 | $ | 46 | ||||||||||||||||||||||||||
| The effects of fair value and cash flow hedging: | ||||||||||||||||||||||||||||||||||||||
| Gain or (loss) on fair value hedging relationships: | ||||||||||||||||||||||||||||||||||||||
| Interest contracts (fixed-for-floating interest rate swaps): | ||||||||||||||||||||||||||||||||||||||
| Hedged items | 1 | 1 | ||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | (1) | (1) | ||||||||||||||||||||||||||||||||||||
| Gain or (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||||||||||||||
| Interest contracts (forward starting interest rate and treasury lock swap contracts): | ||||||||||||||||||||||||||||||||||||||
| Amount reclassified from AOCI into earnings | ||||||||||||||||||||||||||||||||||||||
| Commodity Contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount reclassified from AOCI into earnings | ||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts: | ||||||||||||||||||||||||||||||||||||||
| Amount reclassified from AOCI into earnings | ||||||||||||||||||||||||||||||||||||||
The Company enters into foreign exchange derivatives denominated in multiple currencies which are transacted and settled in the same quarter. These derivatives are not designated as hedges due to the short-term nature and the gains or losses on these derivatives are marked-to-market in line item "Other (income) charges, net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. As a result of these derivatives, the Company recognized a net loss of $5 million during first quarter 2023, and did not recognize a gain or loss during first quarter 2022.
Pre-tax monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included net gains of $79 million and $134 million at March 31, 2023 and December 31, 2022, respectively. Gains in AOCI decreased between December 31, 2022 and March 31, 2023 primarily as a result of an increase in euro to U.S. dollar exchange rates. If recognized, approximately $1 million in pre-tax losses, as of March 31, 2023, would be reclassified into earnings during the next 12 months, including foreign exchange contracts prospectively dedesignated and monetized in fourth quarter 2022.
7.RETIREMENT PLANS
Defined Benefit Pension Plans and Other Postretirement Benefit Plans
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. In addition, Eastman provides life insurance for eligible retirees hired prior to January 1, 2007. Company funding is provided for eligible Medicare retirees hired prior to January 1, 2007 with a health reimbursement arrangement. Costs recognized for these benefits are estimated amounts, which may change as actual costs for the year are determined.
For additional information regarding retirement plans, see Note 11, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K.
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Components of net periodic benefit (credit) cost were as follows:
| First Quarter | |||||||||||||||||||||||||||||||||||
| Pension Plans | Other Postretirement Benefit Plans | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||||||||||||||
| Service cost | $ | 6 | $ | 2 | $ | 6 | $ | 4 | $ | — | $ | — | |||||||||||||||||||||||
| Interest cost | 19 | 7 | 11 | 4 | 7 | 4 | |||||||||||||||||||||||||||||
| Expected return on assets | (22) | (6) | (32) | (9) | (1) | (1) | |||||||||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||||||||||||||
| Prior service credit, net | — | — | — | — | (7) | (8) | |||||||||||||||||||||||||||||
| Net periodic benefit (credit) cost | $ | 3 | $ | 3 | $ | (15) | $ | (1) | $ | (1) | $ | (5) | |||||||||||||||||||||||
The estimated future benefit payments, reflecting expected future service, as appropriate, are as follows:
| Pension Plans | Postretirement Benefit Plans | ||||||||||||||||
| (Dollars in millions) | U.S. | Non-U.S. | |||||||||||||||
| Remainder of 2023 | $ | 100 | $ | 21 | $ | 35 | |||||||||||
| 2024 | 135 | 26 | 47 | ||||||||||||||
| 2025 | 134 | 28 | 47 | ||||||||||||||
| 2026 | 131 | 31 | 46 | ||||||||||||||
| 2027 | 136 | 35 | 45 | ||||||||||||||
| 2028-2032 | 644 | 187 | 208 | ||||||||||||||
8.ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS
Certain Eastman manufacturing facilities generate hazardous and nonhazardous wastes, of which the treatment, storage, transportation, and disposal are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for certain cleanup costs. In addition, the Company will incur costs for environmental remediation and closure and post-closure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K. The resolution of uncertainties related to environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized. However, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and the extended period of time that the obligations are expected to be satisfied, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will have a material adverse effect on the Company's future overall financial position, results of operations, or cash flows.
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Environmental Remediation and Environmental Asset Retirement Obligations
The Company's net environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is included as part of "Other noncurrent assets", "Payables and other current liabilities", and "Other long-term liabilities" on the Unaudited Consolidated Statements of Financial Position as follows:
| (Dollars in millions) | March 31, 2023 | December 31, 2022 | |||||||||
| Environmental contingencies, current | $ | 15 | $ | 10 | |||||||
| Environmental contingencies, long-term | 260 | 264 | |||||||||
| Total | $ | 275 | $ | 274 | |||||||
Environmental Remediation
Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $243 million to the maximum of $455 million and from the best estimate or minimum of $245 million to the maximum of $457 million at March 31, 2023 and December 31, 2022, respectively. The best estimate or minimum estimated future environmental expenditures are considered to be probable and reasonably estimable.
Reserves for environmental remediation include liabilities expected to be paid within approximately 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are recognized in "Cost of sales" and "Other (income) charges, net" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Changes in the reserves for environmental remediation liabilities during first three months 2023 and full year 2022 are summarized below:
| (Dollars in millions) | Environmental Remediation Liabilities | ||||
| Balance at December 31, 2021 | $ | 253 | |||
| Changes in estimates recognized in earnings and other | 6 | ||||
| Cash reductions | (14) | ||||
| Balance at December 31, 2022 | 245 | ||||
| Changes in estimates recognized in earnings and other | 1 | ||||
| Cash reductions | (3) | ||||
| Balance at March 31, 2023 | $ | 243 | |||
Environmental Asset Retirement Obligations
An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. Environmental asset retirement obligations primarily consist of closure and post-closure costs. For sites that have environmental asset retirement obligations, the best estimate recognized to date for these environmental asset retirement obligation costs were $32 million and $29 million at March 31, 2023 and December 31, 2022, respectively.
Non-Environmental Asset Retirement Obligations
The Company has contractual asset retirement obligations not associated with environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily associated with the future closure of leased manufacturing assets in Pace, Florida and Oulu, Finland. These non-environmental asset retirement obligations were $52 million and $51 million at March 31, 2023 and December 31, 2022, respectively, and are included in "Other long-term liabilities" on the Unaudited Consolidated Statements of Financial Position.
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9.LEGAL MATTERS
From time to time, Eastman and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial position, results of operations, or cash flows.
10.STOCKHOLDERS' EQUITY
Reconciliations of the changes in stockholders' equity for first quarter 2023 and 2022 are provided below:
| (Dollars in millions, except per share amount) | Common Stock at Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock at Cost | Total Eastman Stockholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 2 | $ | 2,315 | $ | 8,973 | $ | (205) | $ | (5,932) | $ | 5,153 | $ | 83 | $ | 5,236 | |||||||||||||||||||||||||||||||
| Net Earnings | — | — | 134 | — | — | 134 | — | 134 | |||||||||||||||||||||||||||||||||||||||
Cash Dividends Declared (1) ($0.79 per share) | — | — | (94) | — | — | (94) | — | (94) | |||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | — | — | — | (15) | — | (15) | — | (15) | |||||||||||||||||||||||||||||||||||||||
Share-Based Compensation Expense (2) | — | 22 | — | — | — | 22 | — | 22 | |||||||||||||||||||||||||||||||||||||||
| Stock Option Exercises | — | 2 | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
Other (3) | — | (14) | — | — | — | (14) | 3 | (11) | |||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | (12) | (12) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 2 | $ | 2,325 | $ | 9,013 | $ | (220) | $ | (5,932) | $ | 5,188 | $ | 74 | $ | 5,262 | |||||||||||||||||||||||||||||||
| (Dollars in millions, except per share amount) | Common Stock at Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock at Cost | Total Eastman Stockholders' Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 2 | $ | 2,187 | $ | 8,557 | $ | (182) | $ | (4,860) | $ | 5,704 | $ | 84 | $ | 5,788 | |||||||||||||||||||||||||||||||
| Net Earnings | — | — | 235 | — | — | 235 | 1 | 236 | |||||||||||||||||||||||||||||||||||||||
Cash Dividends Declared (1) ($0.76 per share) | — | — | (98) | — | — | (98) | — | (98) | |||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | — | — | — | 37 | — | 37 | — | 37 | |||||||||||||||||||||||||||||||||||||||
Share-Based Compensation Expense (2) | — | 25 | — | — | — | 25 | — | 25 | |||||||||||||||||||||||||||||||||||||||
| Stock Option Exercises | — | 8 | — | — | — | 8 | — | 8 | |||||||||||||||||||||||||||||||||||||||
Other (3) | — | (18) | — | — | — | (18) | (1) | (19) | |||||||||||||||||||||||||||||||||||||||
Share Repurchase (4) | — | 60 | — | — | (60) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 2 | $ | 2,262 | $ | 8,694 | $ | (145) | $ | (4,920) | $ | 5,893 | $ | 84 | $ | 5,977 | |||||||||||||||||||||||||||||||
(1)Cash dividends declared consists of cash dividends paid and dividends declared but unpaid.
(2)Share-based compensation expense is based on the fair value of share-based awards.
(3)Additional paid-in capital includes value of shares withheld for employees' taxes on vesting of share-based compensation awards.
(4)Treasury shares delivered pursuant to final settlement of the December 2021 accelerated share repurchase program ("2021 ASR") accounted for as a reduction of Additional paid-in capital prior to settlement.
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Accumulated Other Comprehensive Income (Loss), Net of Tax
| (Dollars in millions) | Cumulative Translation Adjustment | Benefit Plans Unrecognized Prior Service Credits | Unrealized Gains (Losses) on Derivative Instruments | Unrealized Losses on Investments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | (237) | $ | 59 | $ | (3) | $ | (1) | $ | (182) | |||||||||||||||||||
| Period change | 7 | (27) | (3) | — | (23) | ||||||||||||||||||||||||
| Balance at December 31, 2022 | (230) | 32 | (6) | (1) | (205) | ||||||||||||||||||||||||
| Period change | (1) | (5) | (9) | — | (15) | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | (231) | $ | 27 | $ | (15) | $ | (1) | $ | (220) | |||||||||||||||||||
Amounts of other comprehensive income (loss) are presented net of applicable taxes. Eastman recognizes deferred income taxes on the CTA related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are recognized on the CTA of other subsidiaries outside the United States because the CTA is considered to be a component of indefinitely invested, unremitted earnings of these foreign subsidiaries.
Components of other comprehensive income recognized in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
| First Quarter | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (Dollars in millions) | Before Tax | Net of Tax | Before Tax | Net of Tax | |||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Change in cumulative translation adjustment | $ | (1) | $ | (1) | $ | 7 | $ | 7 | |||||||||||||||
| Defined benefit pension and other postretirement benefit plans: | |||||||||||||||||||||||
| Amortization of unrecognized prior service credits | (7) | (5) | (8) | (6) | |||||||||||||||||||
| Derivatives and hedging: | |||||||||||||||||||||||
| Unrealized gain (loss) during period | (9) | (7) | 53 | 40 | |||||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income, net | (3) | (2) | (5) | (4) | |||||||||||||||||||
| Total other comprehensive income (loss) | $ | (20) | $ | (15) | $ | 47 | $ | 37 | |||||||||||||||
21
11.EARNINGS AND DIVIDENDS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share ("EPS") which are calculated using the treasury stock method:
| First Quarter | |||||||||||
| (In millions, except per share amounts) | 2023 | 2022 | |||||||||
| Numerator | |||||||||||
| Earnings attributable to Eastman, net of tax | $ | 134 | $ | 235 | |||||||
| Denominator | |||||||||||
| Weighted average shares used for basic EPS | 118.9 | 129.0 | |||||||||
| Dilutive effect of stock options and other awards | 0.8 | 1.7 | |||||||||
| Weighted average shares used for diluted EPS | 119.7 | 130.7 | |||||||||
| (Calculated using whole dollars and shares) | |||||||||||
| EPS | |||||||||||
| Basic | $ | 1.13 | $ | 1.82 | |||||||
| Diluted | $ | 1.12 | $ | 1.80 | |||||||
Shares underlying stock options of 1,879,459 and 507,692 for first quarter 2023 and 2022, respectively, were excluded from calculations of diluted EPS because the grant date exercise price of these options was greater than the average market price of the Company's common stock and the effect of including them in the calculation of diluted EPS would have been antidilutive. The Company did not repurchase shares in first quarter 2023. First quarter 2022 reflects 548,035 shares delivered as part of the accelerated share repurchase program the Company entered into in fourth quarter 2021 (the "2021 ASR").
The Company declared cash dividends of $0.79 and $0.76 per share for first quarter 2023 and 2022, respectively.
22
12.ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
| (Dollars in millions) | First Quarter | ||||||||||
| 2023 | 2022 | ||||||||||
Severance charges (1) | $ | 16 | $ | — | |||||||
Site closure and other restructuring charges (2) (3) | 6 | 2 | |||||||||
| Total | $ | 22 | $ | 2 | |||||||
(1)Severance charges as part of fourth quarter 2022 cost reduction initiatives reported in "Other".
(2)First quarter 2023 site closure costs are for the closure of an acetate yarn manufacturing facility in Europe in the Fibers segment. In addition, accelerated depreciation of $23 million was recognized in "Cost of sales" in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in first quarter 2023 related to the closure of this facility.
(3)First quarter 2022 site closure costs of $1 million in the CI segment for the previously reported closure of a Singapore manufacturing site, and $1 million in the AM segment for the closure of an advanced interlayers manufacturing facility in North America.
Changes in Reserves
The following table summarizes the changes in asset impairments and restructuring reserves in first three months 2023 and full year 2022:
| (Dollars in millions) | Balance at January 1, 2023 | Provision/ Adjustments | Non-cash Reductions/ Additions | Cash Reductions | Balance at March 31, 2023 | ||||||||||||||||||||||||
| Severance costs | $ | 34 | $ | 16 | $ | — | $ | (20) | $ | 30 | |||||||||||||||||||
| Other restructuring costs | 18 | 6 | — | (22) | 2 | ||||||||||||||||||||||||
| Total | $ | 52 | $ | 22 | $ | — | $ | (42) | $ | 32 | |||||||||||||||||||
(Dollars in millions) | Balance at January 1, 2022 | Provision/ Adjustments | Non-cash Reductions/ Additions | Cash Reductions | Balance at December 31, 2022 | ||||||||||||||||||||||||
| Severance costs | $ | 12 | $ | 31 | $ | — | $ | (9) | $ | 34 | |||||||||||||||||||
| Other restructuring costs | 5 | 21 | 1 | (9) | 18 | ||||||||||||||||||||||||
| Total | $ | 17 | $ | 52 | $ | 1 | $ | (18) | $ | 52 | |||||||||||||||||||
Substantially all severance costs remaining are expected to be applied to the reserves within one year.
13.SHARE-BASED COMPENSATION AWARDS
The Company utilizes share-based awards under employee and non-employee director compensation programs. These share-based awards have included restricted and unrestricted stock, restricted stock units, stock options, and long-term performance shares. In first quarter 2023 and 2022, $22 million and $25 million, respectively, of compensation expense before tax were recognized in "Selling, general and administrative expenses" ("SG&A") in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings for all share-based awards of which $7 million and $8 million, respectively, was for stock options. The compensation expense is recognized over the substantive vesting period, which may be a shorter time period than the stated vesting period for qualifying termination eligible employees as defined in the award notices. For first quarter 2023 and 2022, $6 million and $7 million, respectively, of stock option compensation expense was recognized due to qualifying termination eligibility preceding the requisite service period. The impact on first quarter 2023 and 2022 net earnings of $16 million and $19 million, respectively, is net of deferred tax expense related to share-based award compensation for each period.
23
Stock Option Grants
In first quarter 2023 and 2022, the number of stock options granted under the 2021 Omnibus Stock Compensation Plan was approximately 399 thousand and 362 thousand, respectively. Options have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is 10 years with vesting periods that vary up to three years. Vesting usually occurs ratably over the vesting period or at the end of the vesting period. The Company utilizes the Black Scholes Merton option valuation model which relies on certain assumptions to estimate an option's fair value.
The assumptions used in the determination of fair value for stock options granted in first quarter 2023 and 2022 are provided in the table below:
| First Quarter | ||||||||||||||
| Assumptions | 2023 | 2022 | ||||||||||||
| Expected volatility rate | 30.55% | 28.69% | ||||||||||||
| Expected dividend yield | 3.31% | 2.46% | ||||||||||||
| Average risk-free interest rate | 4.13% | 1.93% | ||||||||||||
| Expected term years | 6.4 | 6.4 | ||||||||||||
The grant date exercise price and fair value of options granted during first quarter 2023 were $83.84 and $21.67, respectively, and first quarter 2022 were $120.80 and $28.07, respectively.
For options unvested at March 31, 2023, $4 million in compensation expense will be recognized over the next three years.
Other Share-Based Compensation Awards
In addition to stock option grants, the Company has awarded long-term performance shares, restricted stock and restricted stock units, and stock appreciation rights. The long-term performance share awards are based upon actual return on capital compared to a target return on capital and total stockholder return compared to a peer group ranking by total stockholder return over a three year performance period and pay out in unrestricted shares of common stock at the end of the performance period. The awards are valued using a Monte Carlo Simulation based model and vest pro-ratably over the three year performance period. The number of long-term performance share target awards during first quarter 2023 and 2022 for the 2023-2025 and 2022-2024 periods was approximately 407 thousand and 288 thousand, respectively. The target shares awarded are assumed to vest at 100 percent of the established target. At the end of the three-year performance period, the actual number of shares awarded can range from zero to 250 percent of the target shares based on the award notice. The number of restricted stock unit awards, which pay out in unrestricted shares of common stock at the end of the vesting and performance (if any) period, during first quarter 2023 and 2022 were approximately 108 thousand and 71 thousand, respectively. The fair value of a restricted stock unit award is equal to the closing stock price of the Company's stock on the award date and normally vests over a period of three years. In first quarter 2023 and 2022, $15 million and $17 million, respectively, was recognized as compensation expense before tax for these other share-based awards and was included in the total compensation expense noted above for all share-based awards. The unrecognized compensation expense before tax for these same type awards at March 31, 2023 was approximately $117 million and will be recognized primarily over a period of three years.
24
For additional information regarding share-based compensation plans and awards, see Note 18, "Share-Based Compensation Plans and Awards", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K.
14.SEGMENT INFORMATION
Eastman's products and operations are managed and reported in four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Chemical Intermediates ("CI"), and Fibers. The economic factors that impact the nature, amount, timing, and uncertainty of revenue and cash flows vary among the Company's business operating segments and the geographical regions in which they operate. For disaggregation of revenue by major product lines and regions for each business operating segment, see Note 20, "Segment and Regional Sales Information", to the consolidated financial statements in Part II, Item 8 of the Company's 2022 Annual Report on Form 10-K. For additional financial information for each segment, see Part I, Item 1, "Business - Business Segments", in the Company's 2022 Annual Report on Form 10-K.
In first quarter 2023, the Company moved the functional amines product line into the AFP segment. In addition, certain organic acid products and olefin-based products moved from the AFP segment to the CI segment. These product moves are expected to increase efficiency of the Company's assets and commercial teams, and to increase portfolio transparency. The information presented below has been recast for all periods presented.
| (Dollars in millions) | First Quarter | ||||||||||
| Sales by Segment | 2023 | 2022 | |||||||||
| Advanced Materials | $ | 742 | $ | 737 | |||||||
Additives & Functional Products (1) | 777 | 889 | |||||||||
Chemical Intermediates (1) | 589 | 715 | |||||||||
| Fibers | 303 | 213 | |||||||||
| Total Sales by Operating Segment | 2,411 | 2,554 | |||||||||
Other (2) | 1 | 160 | |||||||||
| Total Sales | $ | 2,412 | $ | 2,714 | |||||||
(1)2022 is reclassified to conform to current period presentation.
(2)"Other" in first quarter 2022 is sales revenue from the previously divested business.
25
| (Dollars in millions) | First Quarter | ||||||||||
| Earnings (Loss) Before Interest and Taxes by Segment | 2023 | 2022 | |||||||||
| Advanced Materials | $ | 86 | $ | 61 | |||||||
Additives & Functional Products (1) | 124 | 167 | |||||||||
Chemical Intermediates (1) | 42 | 112 | |||||||||
| Fibers | 65 | 24 | |||||||||
| Total Earnings Before Interest and Taxes by Operating Segment | 317 | 364 | |||||||||
Other (2) | |||||||||||
| Growth initiatives and businesses not allocated to operating segments | (51) | (32) | |||||||||
| Pension and other postretirement benefits income (expense), net not allocated to operating segments | (4) | 23 | |||||||||
| Asset impairments and restructuring charges, net | (16) | — | |||||||||
| Transaction costs, net of gain on divested business | — | (6) | |||||||||
| Net steam line incident (costs), insurance proceeds | 8 | (25) | |||||||||
| Other income (charges), net not allocated to operating segments | (8) | 9 | |||||||||
| Total Earnings Before Interest and Taxes | $ | 246 | $ | 333 | |||||||
(1)2022 is reclassified to conform to current period presentation.
(2)"Other" in first quarter 2022 includes EBIT of $6 million from the previously divested business.
26
ITEM 2.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 in the United States ("GAAP"), and should be read in conjunction with the Company's audited consolidated financial statements, including related notes, and MD&A contained in the Company's 2022 Annual Report on Form 10-K, and the unaudited consolidated financial statements, including related notes, included elsewhere in this Quarterly Report. All references to earnings per share ("EPS") contained in this report are diluted EPS unless otherwise noted.
27
 | ||||||||
CONDITION AND RESULTS OF OPERATIONS
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented below in this section and in "Overview", "Results of Operations", "Summary by Operating Segment", and "Liquidity and Other Financial Information - Cash Flows" 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 evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly result from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature.
•Non-core transactions, costs, and losses or gains relate to, among other things, cost reductions, growth and profitability improvement initiatives, changes in businesses and assets, and other events outside of core business operations, and have included asset impairments and restructuring charges and gains, costs of and related to acquisitions, gains and losses from and costs related to dispositions, closure, or shutdowns of businesses or assets, financing transaction costs, environmental costs related to previously divested businesses or non-operational sites and product lines, and mark-to-market losses or gains for pension and other postretirement benefit plans.
•In first quarter 2023, the Company increased the provision for state income taxes due to an adjustment of the amount recognized in prior years resulting from recently issued state guidance related to the 2017 Tax Cuts and Jobs Act ("Tax Reform Act"). As with the prior years, management considers this increase unusual because of the infrequent nature of the underlying change in tax law and resulting impacts on earnings.
•In first quarter 2023, the Company recognized unusual insurance proceeds, net of costs, and in first quarter 2022, unusual costs, net of insurance proceeds, from the previously reported January 31, 2022 operational incident at its Kingsport site as a result of a steam line failure (the "steam line incident"). Management considered the operational incident unusual because of the Company's operational and safety history and the magnitude of the unplanned disruption.
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.
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| ||||||||
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 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 Quarterly Report
The following non-core items are excluded by management in its evaluation of certain earnings results in this Quarterly Report:
•Asset impairments and restructuring charges, net;
•Accelerated depreciation resulting from the closure of a manufacturing facility; and
•Transaction costs, net of gain on divested business.
The following unusual items are excluded by management in its evaluation of certain earnings results in this Quarterly Report:
•Net steam line incident costs (insurance proceeds); and
•Increase to the provision for state income taxes due to adjustment of amounts recognized in prior years as a result of recently issued state guidance related to the Tax Reform Act.
As described above, the alternative non-GAAP measure of debt, "net debt", is also presented in this Quarterly Report.
29
| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures - Non-Core and Unusual Items Excluded from Earnings and Adjustments to Provision for Income Taxes
| First Quarter | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Non-core items impacting earnings before interest and taxes: | |||||||||||
| Asset impairments and restructuring charges, net | $ | 22 | $ | 2 | |||||||
| Accelerated depreciation | 23 | — | |||||||||
| Transaction costs, net of gain on divested business | — | 6 | |||||||||
| Unusual item impacting earnings before interest and taxes: | |||||||||||
| Net steam line incident costs (insurance proceeds) | (8) | 25 | |||||||||
| Total non-core and unusual items impacting earnings before interest and taxes | 37 | 33 | |||||||||
| Less: Items impacting provision for income taxes: | |||||||||||
| Tax effect of non-core and unusual items | 5 | 5 | |||||||||
| Adjustment from tax law changes | (23) | — | |||||||||
| Interim adjustment to tax provision | (6) | (6) | |||||||||
| Total items impacting provision for income taxes | (24) | (1) | |||||||||
| Total items impacting net earnings attributable to Eastman | $ | 61 | $ | 34 | |||||||
This MD&A includes an analysis of the effect of the foregoing on the following GAAP financial measures:
•Gross profit,
•Selling, general and administrative expenses ("SG&A"),
•Earnings before interest and taxes ("EBIT"),
•Provision for income taxes,
•Net earnings attributable to Eastman,
•Diluted EPS, and
•Total borrowings.
30
| ||||||||
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Eastman's products and operations are managed and reported in four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Chemical Intermediates ("CI"), and Fibers. Eastman uses an innovation-driven growth model which consists of leveraging world class scalable technology platforms, delivering differentiated application development capabilities, and relentlessly engaging the market. The Company's world class technology platforms form the foundation of sustainable growth by differentiated products through significant scale advantages in research and development ("R&D") and advantaged global market access. Molecular recycling technologies continue to be an area of investment focus for the Company and extends the level of differentiation afforded by our world class technology platforms. Differentiated application development converts market complexity into opportunities for growth and accelerates innovation by enabling a deeper understanding of the value of Eastman's products and how they perform within customers' and end-user products. Key areas of application development include thermoplastic conversion, functional films, coatings formulations, textiles and nonwovens, animal nutrition, and personal and home care formulations. The Company engages the market by working directly with customers and downstream users, targeting attractive niche markets, and leveraging disruptive macro trends. Management believes that these elements of the Company's innovation-driven growth model, combined with disciplined portfolio management and balanced capital deployment, will result in consistent, sustainable earnings growth and strong cash flow from operations.
The Company generated sales revenue of $2.4 billion and $2.7 billion in first quarter 2023 and 2022, respectively. EBIT was $246 million and $333 million in first quarter 2023 and 2022, respectively. Excluding the non-core and unusual items identified in "Non-GAAP Financial Measures", adjusted EBIT was $283 million and $366 million in first quarter 2023 and 2022, respectively.
Sales revenue in first quarter 2023 compared to first quarter 2022 decreased primarily due to lower sales volume, including an unfavorable impact from divested business, partially offset by higher selling prices. Adjusted EBIT decreased in first quarter 2023 compared to first quarter 2022 primarily due to lower sales volume, higher pension expense, an unfavorable shift in foreign currency exchanges rates, and continued investment in growth. These factors were partially offset by higher selling prices, net of higher raw material and energy costs, and higher distribution costs and lower manufacturing costs, primarily due to the unplanned outage in first quarter 2022.
Discussion of sales revenue and EBIT changes is presented in "Results of Operations" and "Summary by Operating Segment" in this MD&A.
Net earnings and EPS and adjusted net earnings and EPS were as follows:
| First Quarter | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (Dollars in millions, except EPS) | $ | EPS | $ | EPS | |||||||||||||||||||
| Net earnings attributable to Eastman | $ | 134 | $ | 1.12 | $ | 235 | $ | 1.80 | |||||||||||||||
| Total non-core and unusual items, net of tax | 55 | 0.45 | 28 | 0.21 | |||||||||||||||||||
| Interim adjustment to tax provision | 6 | 0.06 | 6 | 0.05 | |||||||||||||||||||
| Adjusted net earnings | $ | 195 | $ | 1.63 | $ | 269 | $ | 2.06 | |||||||||||||||
Cash used in operating activities was $2 million in first three months 2023 and cash provided by operating activities was $17 million in first three months 2022.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | $ | % | |||||||||||||||||||
| Sales | $ | 2,412 | $ | 2,714 | $ | (302) | (11) | % | |||||||||||||||
| Volume / product mix effect | (247) | (9) | % | ||||||||||||||||||||
| Price effect | 149 | 6 | % | ||||||||||||||||||||
| Exchange rate effect | (44) | (2) | % | ||||||||||||||||||||
| Divested business effect | (160) | (6) | % | ||||||||||||||||||||
Sales revenue decreased in first quarter 2023 compared to first quarter 2022 as a result of the impact from divested business and decreases in the CI and AFP segments, partially offset by increases in the Fibers and AM segments. Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A.
Gross Profit
| First Quarter | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Gross profit | $ | 529 | $ | 550 | (4) | % | |||||||||||
| Accelerated depreciation | 23 | — | |||||||||||||||
| Net steam line incident costs (insurance proceeds) | (8) | 25 | |||||||||||||||
| Gross profit excluding non-core and unusual items | $ | 544 | $ | 575 | (5) | % | |||||||||||
Gross profit in first quarter 2023 and 2022 included incremental costs and insurance proceeds, from the steam line incident, and first quarter 2023 included accelerated depreciation resulting from the previously reported closure of an acetate yarn manufacturing facility in Europe in the Fibers segment. Excluding these non-core and unusual items, gross profit decreased in first quarter 2023 compared to first quarter 2022 as a result of decreases in the CI and AFP segments, partially offset by increases in the Fibers and AM segments. Further discussion of sales revenue and EBIT changes is presented in "Summary by Operating Segment" in this MD&A.
Selling, General and Administrative Expenses
| First Quarter | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Selling, general and administrative expenses | $ | 191 | $ | 196 | (3) | % | |||||||||||
| Transaction costs | — | (9) | |||||||||||||||
| Selling, general and administrative expenses excluding non-core item | $ | 191 | $ | 187 | 2 | % | |||||||||||
First quarter 2022 SG&A expenses included transaction costs for divested businesses. Excluding this non-core item, SG&A expenses were higher in first quarter 2023 compared to first quarter 2022 primarily as a result of higher variable compensation costs.
Research and Development Expenses
| First Quarter | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Research and development expenses | $ | 62 | $ | 65 | (5) | % | |||||||||||
R&D expenses decreased in first quarter 2023 compared to first quarter 2022 primarily due to the cost reduction initiatives.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Asset Impairments and Restructuring Charges, Net
| (Dollars in millions) | First Quarter | ||||||||||
| 2023 | 2022 | ||||||||||
| Severance charges | $ | 16 | $ | — | |||||||
| Site closure and other restructuring charges | 6 | 2 | |||||||||
| Total | $ | 22 | $ | 2 | |||||||
For detailed information regarding asset impairments and restructuring charges, net see Note 12, "Asset Impairments and Restructuring Charges, Net", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Other Components of Post-employment (Benefit) Cost, Net
| First Quarter | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Other components of post-employment (benefit) cost, net | $ | (3) | $ | (31) | |||||||
Other components of post-employment (benefit) cost, net decreased in first quarter 2023 compared to first quarter 2022 as a result of higher interest expense, attributable to higher discount rates, and lower expected return on assets, attributable to unfavorable asset returns on a lower beginning asset basis for 2023. For more information regarding other components of post-employment (benefit) cost, net see Note 7, "Retirement Plans", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Other (Income) Charges, Net
| First Quarter | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Foreign exchange transaction (gains) losses, net | $ | 2 | $ | 1 | |||||||
| (Income) loss from equity investments and other investment (gains) losses, net | 6 | (12) | |||||||||
| Other, net | 3 | (1) | |||||||||
| Other (income) charges, net | $ | 11 | $ | (12) | |||||||
Other (income) charges, net increased in first quarter 2023 compared to first quarter 2022 primarily due to valuation adjustments in equity investments. For more information regarding components of foreign exchange transaction losses, see Note 6, "Derivative and Non-Derivative Financial Instruments", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Earnings Before Interest and Taxes
| First Quarter | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Earnings before interest and taxes | $ | 246 | $ | 333 | (26) | % | |||||||||||
| Asset impairments and restructuring charges, net | 22 | 2 | |||||||||||||||
| Transaction costs, net of gain on divested business | — | 6 | |||||||||||||||
| Accelerated depreciation | 23 | — | |||||||||||||||
| Net steam line incident costs (insurance proceeds) | (8) | 25 | |||||||||||||||
| Earnings before interest and taxes excluding non-core and unusual items | $ | 283 | $ | 366 | (23) | % | |||||||||||
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Net Interest Expense
| First Quarter | |||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | Change | ||||||||||||||
| Gross interest costs | $ | 58 | $ | 49 | 18 | % | |||||||||||
| Less: Capitalized interest | 3 | 2 | |||||||||||||||
| Interest expense | 55 | 47 | |||||||||||||||
| Less: Interest income | 3 | 1 | |||||||||||||||
| Net interest expense | $ | 52 | $ | 46 | 13 | % | |||||||||||
Net interest expense increased in first quarter 2023 compared to first quarter 2022 primarily as a result of higher interest rates and higher total borrowings.
Provision for Income Taxes
| First Quarter | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||
| Provision for income taxes and effective tax rate | $ | 60 | 31 | % | $ | 51 | 18 | % | |||||||||||||||
Tax provision for non-core and unusual items (1) | 5 | 5 | |||||||||||||||||||||
Adjustment from tax law changes (2) | (23) | — | |||||||||||||||||||||
Interim adjustment to tax provision (3) | (6) | (6) | |||||||||||||||||||||
| Adjusted provision for income taxes and effective tax rate | $ | 36 | 16 | % | $ | 50 | 16 | % | |||||||||||||||
(1)Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
(2)Increase to the provision for state income taxes due to adjustment of amounts recognized in prior years as a result of recently issued state guidance related to the Tax Reform Act.
(3)First quarter 2023 provision for income taxes was adjusted to reflect the current forecasted full year effective tax rate. First quarter 2022 provision for income taxes was adjusted to reflect the then current forecasted full year effective tax rate. The adjusted provision for income taxes for first three months 2023 and 2022 are calculated applying the forecasted full year effective tax rates as shown below.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
First Three Months (1) | |||||||||||
| 2023 | 2022 | ||||||||||
| Effective tax rate | 31 | % | 18 | % | |||||||
Discrete tax items (2) | — | % | 1 | % | |||||||
Tax impact of current year non-core and unusual items (3) | (8) | % | 1 | % | |||||||
| Changes in tax contingencies and valuation allowances | (1) | % | (1) | % | |||||||
| Forecasted full year impact of expected tax events | (6) | % | (3) | % | |||||||
| Forecasted full year adjusted effective tax rate | 16 | % | 16 | % | |||||||
(1)Effective tax rate percentages are rounded to the nearest whole percent. The forecasted full year effective tax rates are 15.5 percent in both first three months 2023 and 2022.
(2)"Discrete tax items" are items that are excluded from a company's estimated annual effective tax rate and recognized entirely in the quarter in which the item occurs. Discrete tax items for first three months 2022 are for share based compensation expense and adjustments to certain prior year tax returns.
(3)Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
Net Earnings Attributable to Eastman and Diluted Earnings per Share
| First Quarter | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| (Dollars in millions, except EPS) | $ | EPS | $ | EPS | |||||||||||||||||||
| Net earnings and diluted earnings per share attributable to Eastman | $ | 134 | $ | 1.12 | $ | 235 | $ | 1.80 | |||||||||||||||
Non-core items, net of tax: (1) | |||||||||||||||||||||||
| Asset impairments and restructuring charges, net | 18 | 0.14 | 1 | — | |||||||||||||||||||
| Accelerated depreciation | 20 | 0.17 | — | — | |||||||||||||||||||
| Transaction costs, net of gain on divested business | — | — | 8 | 0.07 | |||||||||||||||||||
Unusual items, net of tax: (1) | |||||||||||||||||||||||
| Net steam line incident costs (insurance proceeds) | (6) | (0.05) | 19 | 0.14 | |||||||||||||||||||
| Adjustment from tax law changes | 23 | 0.19 | — | — | |||||||||||||||||||
| Interim adjustment to tax provision | 6 | 0.06 | 6 | 0.05 | |||||||||||||||||||
| Adjusted net earnings and diluted earnings per share attributable to Eastman | $ | 195 | $ | 1.63 | $ | 269 | $ | 2.06 | |||||||||||||||
(1)Provision for income taxes for non-core and unusual items is calculated using the tax rate for the jurisdiction where the gains are taxable and the expenses are deductible.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
SUMMARY BY OPERATING SEGMENT
Eastman's products and operations are managed and reported in four operating segments: Advanced Materials ("AM"), Additives & Functional Products ("AFP"), Chemical Intermediates ("CI"), and Fibers. For additional financial and product information for each operating segment, see Part I, Item 1, "Business - Business Segments" and Part II, Item 8, Note 20, "Segment and Regional Sales Information", in the Company's 2022 Annual Report on Form 10-K.
In first quarter 2023, the Company moved the functional amines product line into the AFP segment. In addition, certain organic acid products and olefin-based products moved from the AFP segment to the CI segment. These product moves are expected to increase efficiency of the Company's assets and commercial teams, and to increase portfolio transparency. To maintain comparability of segment financial statement information, the Company has recast the segment financial information for the AFP and the CI segments for each quarter from first quarter 2019 through fourth quarter 2022. The information presented below is the recast information for all periods presented. For more information, refer to the Current Report on Form 8-K dated April 27, 2023.
Advanced Materials Segment
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Sales | $ | 742 | $ | 737 | $ | 5 | 1 | % | |||||||||||||||
| Volume / product mix effect | (41) | (6) | % | ||||||||||||||||||||
| Price effect | 67 | 10 | % | ||||||||||||||||||||
| Exchange rate effect | (21) | (3) | % | ||||||||||||||||||||
| Earnings before interest and taxes | $ | 86 | $ | 61 | $ | 25 | 41 | % | |||||||||||||||
| Asset impairments and restructuring charges, net | — | 1 | (1) | ||||||||||||||||||||
| Earnings before interest and taxes excluding non-core item | 86 | 62 | 24 | 39 | % | ||||||||||||||||||
Sales revenue in first quarter 2023 increased compared to first quarter 2022 due to higher selling prices mostly offset by lower sales volume and an unfavorable shift in foreign currency exchange rates. Higher selling prices, particularly for advanced interlayers and specialty plastics product lines, were due to higher raw material, energy, and distribution prices. Lower sales volume was primarily driven by the specialty plastics product line due to significant destocking attributed to global economic uncertainty in the durables and electronics and consumables end-markets, partially offset by higher sales volume of premium products in the performance films and advanced interlayers product lines due to increase in automotive end-market demand.
EBIT excluding non-core items increased in first quarter 2023 compared to first quarter 2022 primarily due to: $33 million lower manufacturing costs, primarily as a result of an unplanned outage in first quarter 2022; $18 million higher selling prices, net of higher raw materials and energy costs and distribution costs; $15 million unfavorable shift in foreign currency exchange rates; and $9 million lower sales volume.
In February 2023, the Company completed the acquisition of Ai-Red Technology (Dalian) Co., Ltd. ("Dalian"), a manufacturer and supplier of paint protection and window film for auto and architectural markets in the Asia Pacific region for a preliminary purchase price of approximately $75 million, net of cash acquired. The acquisition of Dalian is expected to enhance continued global growth of the AM segment performance films product lines.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Additives & Functional Products Segment
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Sales | $ | 777 | $ | 889 | $ | (112) | (13) | % | |||||||||||||||
| Volume / product mix effect | (130) | (15) | % | ||||||||||||||||||||
| Price effect | 34 | 4 | % | ||||||||||||||||||||
| Exchange rate effect | (16) | (2) | % | ||||||||||||||||||||
| Earnings before interest and taxes | $ | 124 | $ | 167 | $ | (43) | (26) | % | |||||||||||||||
Sales revenue in first quarter 2023 decreased compared to first quarter 2022 primarily due to lower sales volume, partially offset by higher selling prices. Lower sales volume was primarily attributable to deceleration of demand and customer destocking in the building and construction, water treatment, and personal care end-markets. Higher selling prices, particularly in functional amines and care additives product lines, were primarily due to higher raw material, energy, and distribution prices.
EBIT decreased in first quarter 2023 compared to first quarter 2022 primarily due to $41 million lower sales volume.
Chemical Intermediates Segment
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Sales | $ | 589 | $ | 715 | $ | (126) | (18) | % | |||||||||||||||
| Volume / product mix effect | (83) | (12) | % | ||||||||||||||||||||
| Price effect | (38) | (5) | % | ||||||||||||||||||||
| Exchange rate effect | (5) | (1) | % | ||||||||||||||||||||
| Earnings before interest and taxes | $ | 42 | $ | 112 | $ | (70) | (63) | % | |||||||||||||||
| Asset impairments and restructuring charges, net | — | 1 | (1) | ||||||||||||||||||||
| Earnings before interest and taxes excluding non-core item | 42 | 113 | (71) | (63) | % | ||||||||||||||||||
Sales revenue in first quarter 2023 decreased compared to first quarter 2022 primarily due to lower sales volume and lower selling prices across most product lines. Lower sales volume in the plasticizers and olefins product lines was primarily attributed to deceleration of demand and competitive pressures in the building and construction, consumer durables, and industrial chemical end-markets. Lower selling prices were attributable to lower raw material prices.
EBIT excluding non-core items decreased in first quarter 2023 compared to first quarter 2022 primarily due to $34 million lower selling prices, net of lower raw material and energy costs and $21 million lower sales volume.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Fibers Segment
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2023 | 2022 | $ | % | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| Sales | $ | 303 | $ | 213 | $ | 90 | 42 | % | |||||||||||||||
| Volume / product mix effect | 6 | 3 | % | ||||||||||||||||||||
| Price effect | 86 | 40 | % | ||||||||||||||||||||
| Exchange rate effect | (2) | (1) | % | ||||||||||||||||||||
| Earnings before interest and taxes | $ | 65 | $ | 24 | $ | 41 | 171 | % | |||||||||||||||
| Asset impairments and restructuring charges, net | 6 | — | 6 | ||||||||||||||||||||
| Accelerated depreciation | 23 | — | 23 | ||||||||||||||||||||
| Earnings before interest and taxes excluding non-core items | 94 | 24 | 70 | 292 | % | ||||||||||||||||||
Sales revenue in first quarter 2023 increased compared to first quarter 2022 primarily due to higher selling prices in acetate tow, driven by an increase in industry capacity utilization and higher raw material, energy, and distribution prices throughout 2022.
EBIT in first quarter 2023 included asset impairments and restructuring charges and accelerated depreciation from a manufacturing facility closure. For more information regarding asset impairments and restructuring charges see Note 12, "Asset Impairments and Restructuring Charges, Net", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
EBIT excluding non-core items increased in first quarter 2023 compared to first quarter 2022 primarily due to $74 million higher selling prices, net of higher raw material and energy costs.
Other
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Sales | $ | 1 | $ | 160 | |||||||
| Loss before interest and taxes | |||||||||||
| Growth initiatives and businesses not allocated to operating segments | $ | (51) | $ | (32) | |||||||
| Pension and other postretirement benefits income (expense), net not allocated to operating segments | (4) | 23 | |||||||||
| Asset impairments and restructuring charges, net | (16) | — | |||||||||
| Transaction costs, net of gain on divested business | — | (6) | |||||||||
| Net steam line incident costs (insurance proceeds) | 8 | (25) | |||||||||
| Other income (charges), net not allocated to operating segments | (8) | 9 | |||||||||
| Loss before interest and taxes | $ | (71) | $ | (31) | |||||||
| Asset impairments and restructuring charges, net | 16 | — | |||||||||
| Transaction costs, net of gain on divested business | — | 6 | |||||||||
| Net steam line incident costs (insurance proceeds) | (8) | 25 | |||||||||
| Loss before interest and taxes excluding non-core and unusual items | (63) | — | |||||||||
Sales and costs related to growth initiatives, R&D expenses, 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". First quarter 2022 includes sales revenue and EBIT of a previously divested business.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
First quarter 2023 and 2022 EBIT included steam line incident costs and insurance proceeds. For more information, see "Non-GAAP Financial Measures" in this MD&A. In first quarter 2023, the Company recognized severance primarily in accordance with foreign regulatory requirements as a result of cost reduction initiatives in fourth quarter 2022. For more information regarding asset impairments and restructuring charges see Note 12, "Asset Impairments and Restructuring Charges, Net", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
SALES BY CUSTOMER LOCATION
| Sales Revenue | |||||||||||||||||||||||
| First Quarter | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| (Dollars in millions) | 2023 | 2022 | $ | % | |||||||||||||||||||
| United States and Canada | $ | 1,065 | $ | 1,198 | $ | (133) | (11) | % | |||||||||||||||
| Europe, Middle East, and Africa | 709 | 745 | (36) | (5) | % | ||||||||||||||||||
| Asia Pacific | 521 | 612 | (91) | (15) | % | ||||||||||||||||||
| Latin America | 117 | 159 | (42) | (26) | % | ||||||||||||||||||
| Total Eastman Chemical Company | $ | 2,412 | $ | 2,714 | $ | (302) | (11) | % | |||||||||||||||
Sales revenue decreased in first quarter 2023 compared to first quarter 2022 due to lower sales volume in all regions (down 15 percent, including the impact from a divested business) and an unfavorable shift in foreign currency exchange rates in Europe, Middle East and Africa and Asia Pacific (down 2 percent) being partially offset by higher selling prices in all regions (up 6 percent).
Further discussion by operating segment is presented in "Summary by Operating Segment" in this MD&A.
LIQUIDITY AND OTHER FINANCIAL INFORMATION
Cash Flows
Cash flows from operations, cash and cash equivalents, and the other sources of liquidity are expected to be available and sufficient to meet known short and long-term 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 Part II, Item 1A of this Quarterly Report. Management believes maintaining a financial profile that supports an investment grade credit rating is important to its long-term strategy and financial flexibility.
| First Three Months | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Net cash provided by (used in) | |||||||||||
| Operating activities | $ | (2) | $ | 17 | |||||||
| Investing activities | (252) | (117) | |||||||||
| Financing activities | 357 | 129 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3 | (1) | |||||||||
| Net change in cash and cash equivalents | 106 | 28 | |||||||||
| Cash and cash equivalents at beginning of period | 493 | 459 | |||||||||
| Cash and cash equivalents at end of period | $ | 599 | $ | 487 | |||||||
Cash used in operating activities was $2 million in first three months 2023 compared with cash provided by operating activities of $17 million in first three months 2022 due to higher working capital driven by a decrease in trade payables and lower net earnings partially offset by lower variable compensation payout.
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| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Cash used in investing activities increased $135 million in first three months 2023 compared with first three months 2022 primarily due to an acquisition in the AM segment in 2023 and higher capital expenditures.
Cash provided by financing activities increased $228 million in first three months 2023 compared with first three months 2022, primarily due to proceeds from borrowings partially offset with net repayment of commercial paper borrowings. For additional information, see "Liquidity and Other Financial Information - Debt and Other Commitments" in this MD&A for additional information.
Working Capital Management and Off Balance Sheet Arrangements
Eastman applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable a full range of capital allocation options in support of the Company's strategy. Eastman expects to continue utilizing the programs described below to support operating cash flow consistent with 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 amounts sold in first quarter 2023 and 2022 were $677 million and $502 million, respectively. Based on the original terms of receivables sold for certain agreements and actual outstanding balance of receivables under servicing agreements, the Company estimates that $401 million and $402 million of these receivables would have been outstanding as of March 31, 2023 and December 31, 2022, respectively, had they not been sold under these factoring agreements.
The Company works with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. Under a supplier finance program, the Company's suppliers may voluntarily sell receivables due from Eastman to a participating financial institution. The supplier invoices that have been confirmed as valid under the program require payment in full on the invoice due date. For additional information, see Note 1, "Significant Accounting Policies", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Debt and Other Commitments
At March 31, 2023, the Company's borrowings totaled $5.7 billion with various maturities. The Company expects to use a combination of available cash and debt proceeds to repay the $816 million principal amount of 1.50% notes due May 2023.
In first quarter 2023, the Company borrowed $300 million under a delayed draw two-year term loan (the "2024 Term Loan"), which was executed in fourth quarter 2022. As of March 31, 2023, the 2024 Term Loan balance outstanding was $300 million with a variable interest rate of 6.07%. In March 2023, the Company issued $500 million aggregate principal amount of 5.75% notes due March 2033 in a registered public offering (the "2023 Notes"). Net proceeds from the 2023 Notes will be allocated to eligible projects to advance Eastman’s sustainability goals of mitigating climate change, mainstreaming circular economy, and caring for society. The Company expects attractive returns on invested capital from the sustainability projects. Proceeds from the sale of the notes, net of original issue discounts, and issuance costs were $496 million.
See Note 5, "Borrowings", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Other Financial Information - Debt and Other Commitments" in Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K for information on other commitments.
40
| ||||||||
CONDITION AND RESULTS OF OPERATIONS
Credit Facility and Commercial Paper Borrowings
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring December 2026 that was amended in March 2023. The amendment replaced the London Interbank Offered Rate-based ("LIBOR") reference interest rate option with a reference interest rate option based upon Term Secured Overnight Financing Rate ("SOFR") (as defined in the Credit Facility). All other material terms of the Credit Facility remain unchanged. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. The Credit Facility includes sustainability-linked pricing terms, provides available liquidity for general corporate purposes, and supports commercial paper borrowings. At March 31, 2023 and December 31, 2022, the Company had no outstanding borrowings under the Credit Facility. At March 31, 2023, the Company had no outstanding commercial paper borrowings. At December 31, 2022, the Company's commercial paper borrowings were $326 million with a weighted average interest rate of 4.85%.
The Credit Facility, the 2024 Term Loan, and the 2027 Term Loan contain customary covenants, including requirements to maintain certain financial ratios, that determine the events of default, amounts available, and terms of borrowings. The Company was in compliance with all applicable covenants at both March 31, 2023 and December 31, 2022. The total amount of available borrowings under the Credit Facility was $1.50 billion as of March 31, 2023. For additional information, see Section 5.03 of the Credit Facility at Exhibit 10.01 to this Quarterly Report.
See Note 5, "Borrowings", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report for additional information.
Net Debt
| March 31, | December 31, | |||||||||||||
| (Dollars in millions) | 2023 | 2022 | ||||||||||||
| Total borrowings | $ | 5,650 | $ | 5,151 | ||||||||||
| Less: Cash and cash equivalents | 599 | 493 | ||||||||||||
Net debt (1) | $ | 5,051 | $ | 4,658 | ||||||||||
(1)Includes non-cash increase of $28 million in 2023 and non-cash decrease of $85 million in 2022 resulting from foreign currency exchange rates.
Capital Expenditures
Capital expenditures were $174 million and $112 million in first three months 2023 and 2022, respectively. Capital expenditures in first three months 2023 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 2023 capital expenditures will be approximately $800 million.
Stock Repurchases
In December 2021, the Company's Board of Directors authorized the repurchase of up to $2.5 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders (the "2021 authorization"). During first three months 2023, the Company did not repurchase shares of common stock. As of March 31, 2023, a total of 6,743,883 shares have been repurchased under the 2021 authorization for $635 million. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders.
41
| ||||||||
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, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the critical accounting estimates described in Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information regarding the impact of recently issued accounting standards, see Note 1, "Significant Accounting Policies", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
42
ITEM 3.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. For more information regarding exposures, refer to Part II, Item 7A of the Company's 2022 Annual Report on Form 10-K.
At March 31, 2023, a 10 percent fluctuation in the euro currency rate would have had a $230 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 Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings in Part I, Item 1 of this Quarterly 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.
Other than the foreign currency risk discussed above, there have been no material changes to the Company's market risks from those disclosed in Part II, Item 7A of the Company's 2022 Annual Report on Form 10-K.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Eastman maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of March 31, 2023, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed was accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial reporting that occurred during the first quarter of 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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. Even though the Company sold the Jefferson Hills facility on April 1, 2022 as part of its previously reported sale of the adhesives resins business, it retained responsibility for any civil penalty assessed by EPA and PADEP in this matter. Following receipt of the proposed Consent Decree, ECRI and Company representatives met on multiple occasions with EPA and PADEP representatives and vigorously defended against these allegations. The parties have now reached a tentative settlement of this matter. The ultimate resolution of this proceeding is not expected to have a material impact on the Company's financial condition, results of operations, or cash flows.
Solutia Legacy Torts Claims Litigation
Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia, Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible for the defense and indemnification of Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia has agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly-owned subsidiary of Eastman upon Eastman's acquisition of Solutia in July 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto, which was acquired by Bayer AG in June 2018, as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
ITEM 1A.RISK FACTORS
For information regarding the Company's material known risk factors which could materially adversely affect the Company, its business, financial condition, or results of operations, see "Risk Factors" in Part I, Item 1A of the Company's 2022 Annual Report on Form 10-K.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer
In December 2021, the Company's Board of Directors authorized the repurchase of up to $2.5 billion of the Company's outstanding common stock at such times, in such amounts, and on such terms, as determined by management to be in the best interest of the Company and its stockholders (the "2021 authorization"). As of March 31, 2023, a total of 6,743,883 shares have been repurchased under the 2021 authorization for $635 million. Both dividends and share repurchases are key strategies employed by the Company to return value to its stockholders. During first three months 2023, the Company did not repurchase shares of common stock. For additional information, see Note 10, "Stockholders' Equity", to the unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report.
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ITEM 6.EXHIBITS
Exhibits filed as part of this report are listed in the Exhibit Index.
| EXHIBIT INDEX | ||||||||
| Exhibit Number | Description | |||||||
| 3.01 | ||||||||
| 3.02 | ||||||||
| 4.01 | ||||||||
| 10.01 * | ||||||||
| 31.01 * | ||||||||
| 31.02 * | ||||||||
| 32.01 * | ||||||||
| 32.02 * | ||||||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |||||||
| 101.SCH * | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL * | Inline XBRL Taxonomy Calculation Linkbase Document | |||||||
| 101.DEF * | Inline XBRL Definition Linkbase Document | |||||||
| 101.LAB * | Inline XBRL Taxonomy Label Linkbase Document | |||||||
| 101.PRE * | Inline XBRL Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
* Denotes exhibit filed or furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Eastman Chemical Company | |||||||||||
| Date: | April 28, 2023 | By: | /s/ William T. McLain, Jr. | ||||||||
| William T. McLain, Jr. | |||||||||||
| Senior Vice President and Chief Financial Officer | |||||||||||
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