Eastman(EMN) - 2022 Q4 - Annual Report

Part I Item 1. Business Eastman is a global specialty materials company with four segments, driven by an innovation-focused strategy and sustainability initiatives - Eastman operates as a global specialty materials company across four segments: Advanced Materials, Additives & Functional Products, Chemical Intermediates, and Fibers[16] 2022 Key Financial Metrics | Metric | Value (in millions) | | :--- | :--- | | Sales Revenue | $10,600 | | Earnings Before Interest and Taxes (EBIT) | $1,200 | | Net Earnings Attributable to Eastman | $793 | | Net Cash Provided by Operating Activities | $975 | | Adjusted EBIT | $1,300 | - The company's strategy emphasizes an innovation-driven growth model, leveraging technology platforms and molecular recycling for sustainability[18][20] Corporate Overview Eastman, founded in 1920, is a global specialty materials company with 35 manufacturing facilities, strategically evolving through divestitures and acquisitions - Eastman operates 35 manufacturing facilities and two joint ventures across 12 countries, with its largest facility in Kingsport, Tennessee[16] - The company strategically transformed into a specialty materials company by divesting commodity businesses and acquiring specialty product lines[17] - Approximately 60% of 2022 sales revenue originated from outside the United States and Canada[19] Business Strategy Eastman's strategy focuses on innovation-driven growth, leveraging its chemical expertise, with sustainability and molecular recycling as central pillars for value creation - The company's strategy leverages an innovation-driven growth model to exceed end-market growth by expanding into new markets and sustaining leadership[21] - Sustainability and the circular economy are central to the strategy, utilizing advanced molecular recycling technologies to reduce greenhouse gas emissions[23] - Eastman committed to reducing absolute scope 1 and 2 emissions by one-third by 2030, aiming for carbon neutrality by 2050[24] - Key circular economy projects include a methanolysis plant in Kingsport, TN, a molecular recycling facility in France, and plans for a third U.S. facility[25] Financial Strategy Eastman's financial strategy prioritizes a strong financial position, liquidity, and investment-grade rating, with disciplined capital allocation for dividends, growth, and debt management - The company prioritizes maintaining a strong financial position and an investment-grade credit rating for long-term flexibility[26] - Cash use priorities include paying dividends, funding growth, repurchasing shares, and repaying debt[26] Business Segments Eastman manages operations across four segments: Advanced Materials, Additives & Functional Products, Chemical Intermediates, and Fibers, aligning with its specialty materials strategy - The company operates through four segments: Advanced Materials, Additives & Functional Products, Chemical Intermediates, and Fibers[27] Advanced Materials Segment The Advanced Materials segment produces high-performance polymers, films, and plastics, focusing on innovation, higher-margin products, and molecular recycling technologies - The AM segment produces polymers, films, and plastics for diverse end-markets including transportation, durables, and medical[28] AM Segment Principal Products | Product Line | Principal Products | Key End-Use Applications | | :--- | :--- | :--- | | Advanced Interlayers | Saflex™ PVB sheet | Transportation (automotive safety/acoustic glass), Building and construction (architectural interlayers) | | Performance Films | LLumar™, SunTek™ window and protective films | Transportation (automotive aftermarket films), Building and construction (residential/commercial window films) | | Specialty Plastics | Tritan™, Eastar™ copolyesters, Treva™ cellulosic biopolymers | Consumables (packaging), Durable goods (housewares), Health and wellness (medical), Electronics (displays) | - The segment's strategy emphasizes innovation, expanding higher-margin products like Tritan™ Renew, and leveraging molecular recycling for sustainability[31][32] - Key 2022 achievements included advancing molecular recycling plans, increasing 'Renew' product adoption, and expanding window and protective films[36] Additives & Functional Products Segment The Additives & Functional Products segment manufactures high-value materials for diverse end-markets, leveraging proprietary technologies and divesting its adhesives resins business in 2022 - The AFP segment manufactures high-value additives for diverse end-markets including transportation, personal care, and agriculture[33][34] AFP Segment Principal Products | Product Line | Description | Key End-Use Applications | | :--- | :--- | :--- | | Animal Nutrition | Organic acid-based solutions | Gut health, preservation, hygiene | | Care Additives | Alkylamine derivatives, organic acids | Water treatment, personal care, pharmaceuticals, agriculture | | Coatings Additives | Specialty solvents, polymers, resins | Architectural coatings, automotive coatings, inks, packaging | | Specialty Fluids & Energy | Heat transfer and aviation fluids | Industrial processing, renewable energy, commercial aviation | - In 2022, the AFP segment expanded Eastapure™ electronic solvents capacity and launched Fluid Genius™ for heat transfer fluid management[38] - The company divested its adhesives resins business in 2022[38] Chemical Intermediates Segment The Chemical Intermediates segment leverages vertically integrated manufacturing and low-cost raw materials to support other segments and external markets, focusing on cost control and efficiency - The CI segment leverages vertically integrated manufacturing to support other Eastman segments and sell excess intermediates to external markets[39] - Competitive advantage is driven by low-cost raw materials (coal, propane, ethane), scale, and proprietary technology at key sites[40][43] CI Segment Principal Products | Product Line | Description | Key End-Use Applications | | :--- | :--- | :--- | | Functional Amines | Methylamines, higher amines, solvents | Agrochemicals, energy, water treatment, animal nutrition | | Intermediates | Oxo alcohols, acetic acid/anhydride, ethylene | Industrial chemicals, building & construction, pharmaceuticals | | Plasticizers | Non-phthalate and phthalate plasticizers | Building & construction, consumables (food packaging), medical devices | Fibers Segment The Fibers segment produces acetate tow and cellulosic fibers, leveraging vertical integration and carbon renewal technology for sustainable products, and expanded Naia™ textile fiber adoptions in 2022 - The Fibers segment is the world's largest producer of acetate yarn, primarily manufacturing acetate tow for cigarette filters and Naia™ cellulosic fibers[44] - The 10 largest customers accounted for approximately 60% of the segment's 2022 sales revenue[46] - The segment's strategy leverages its integrated Kingsport facility and carbon renewal technology to produce sustainable 'Renew' products[50] - In 2022, the segment implemented variable pricing for acetate tow and secured major brand adoptions for Naia™ textile fibers[52] Eastman Chemical Company General Information This section covers Eastman's general corporate information, including seasonal earnings, global sales, R&D, manufacturing streams, cost management, intellectual property, human capital, customer concentration, and regulatory compliance - Earnings are typically higher in Q2 and Q3, with weaker results in Q4 due to seasonal market downturns[54] - Manufacturing is organized into four streams: polyester, cellulosic biopolymers and acetyl, alkylamines, and olefins, providing competitive advantages[61][62] - Raw material and energy costs comprised approximately 55% of total cost of operations in 2022[64] - The company has approximately 14,500 global employees, with goals to achieve gender parity and industry leadership in racial/ethnic diversity by 2030[73][74][75] - No single customer accounted for 10% or more of consolidated sales revenue in 2022, with the top 100 customers representing about 55%[78] Environmental Protection Expenditures | Year | Cash Expenditures (in millions) | Capital Expenditures (in millions) | | :--- | :--- | :--- | | 2022 | $300 | $60 | | 2021 | $281 | $38 | | 2020 | $265 | $42 | Item 1A. Risk Factors This section refers to the detailed discussion of material risk factors and uncertainties that could adversely affect the company, located in Part II, Item 7 - A detailed discussion of risk factors is provided in Part II, Item 7, under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors"[87] Information about our Executive Officers This section provides biographical information for Eastman's executive officers, including their age, position, and career history within the company - Mark J. Costa, age 56, serves as Chair of the Board and Chief Executive Officer, appointed CEO in January 2014[89] - William T. McLain, Jr., age 50, is the Senior Vice President and Chief Financial Officer, appointed in February 2020[90] - Other key executives include Stephen G. Crawford, Brad A. Lich, Kellye L. Walker, Christopher M. Killian, Julie A. McAlindon, Travis Smith, and Michelle R. Stewart[91][92][93][94][95][96][97] Item 2. Properties As of December 31, 2022, Eastman owned or operated 35 manufacturing facilities and two joint ventures across 12 countries, with headquarters in Kingsport, Tennessee - At year-end 2022, Eastman operated 35 manufacturing facilities and equity in two joint ventures across 12 countries[99] - The company's largest manufacturing sites are in Kingsport, Tennessee, and Longview, Texas[100] - Eastman also owns or leases approximately 200 stand-alone distribution facilities in about 30 countries[101] Item 3. Legal Proceedings Eastman is involved in various legal proceedings, including environmental and commercial matters, none of which are expected to have a material adverse effect on its financial condition - The company is party to various legal proceedings, but their resolution is not expected to have a material adverse effect on financial condition or results[103] - A tentative settlement for environmental violations at the Jefferson Hills, PA facility (sold in 2022) is not expected to be material[104] - Eastman is indemnified by Monsanto (Bayer AG) for legacy tort claims related to the Solutia acquisition[105] Part II Item 5. Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Eastman's common stock trades on the NYSE, and the company actively repurchased 10.7 million shares for $1.1 billion in 2022 under its ongoing $2.5 billion authorization - Eastman's common stock (EMN) is traded on the New York Stock Exchange[108] - In December 2021, the Board authorized a $2.5 billion share repurchase program, with $1.865 billion remaining available as of December 31, 2022[113][117] 2022 Share Repurchases | Metric | Value | | :--- | :--- | | Shares Repurchased | 10,710,259 | | Total Cost (in millions) | $1,102 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Eastman's 2022 financial performance, noting relatively flat sales, decreased adjusted EBIT, strategic divestitures, and reduced cash from operations, along with critical accounting estimates and non-GAAP measures Financial Performance Comparison (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Sales Revenue (in billions) | $10.6 | $10.5 | | EBIT (in billions) | $1.2 | $1.3 | | Adjusted EBIT (in billions) | $1.3 | $1.6 | | Diluted EPS | $6.35 | $6.25 | | Adjusted Diluted EPS | $7.88 | $8.85 | - 2022 sales revenue remained relatively unchanged from 2021, as higher prices were offset by lower volumes due to divestitures, outages, and Q4 destocking[167] - The company completed the sale of its rubber additives business in late 2021 and its adhesives resins business in April 2022[169][170] - Cash from operating activities decreased from $1.6 billion in 2021 to $975 million in 2022, driven by lower net earnings and increased working capital[173][223] Critical Accounting Estimates Management identifies critical accounting estimates including impairment of long-lived assets, environmental costs, pension benefits, and income taxes, all requiring significant judgment - Goodwill impairment testing in Q4 2022 showed fair values exceeded carrying values for all reporting units, with $3.7 billion of goodwill as of December 31, 2022[124][125] - Estimated future environmental remediation costs ranged from a minimum of $245 million to a maximum of $457 million at year-end 2022[130] - Pension and postretirement benefit calculations are highly sensitive to discount rates and asset returns; a 25 basis point decrease in discount rate would increase U.S. pension obligation by $32 million[134][135] - As of December 31, 2022, $258 million in valuation allowances were provided against deferred tax assets due to realization uncertainty[141] Non-GAAP Financial Measures Management uses non-GAAP financial measures like adjusted EBIT, adjusted EPS, and net debt to evaluate performance, excluding non-core or unusual items for consistent period-over-period comparisons - Management uses non-GAAP measures such as adjusted EBIT, adjusted EPS, and net debt to evaluate performance, excluding non-core items[145][148][151] Reconciliation of Non-Core and Unusual Items Impacting EBIT (2022) | Item (in millions) | 2022 Impact | | :--- | :--- | | Mark-to-market pension/postretirement loss | $19 | | Asset impairments and restructuring charges, net | $52 | | Loss on divested businesses and transaction costs | $61 | | Steam line incident costs, net | $39 | | Other | $9 | | Total non-core and unusual items impacting EBIT | $180 | Results of Operations In 2022, sales increased 1% to $10.58 billion driven by price, while gross profit decreased 15%, and adjusted EBIT fell 18% to $1.34 billion, impacting net earnings Sales Revenue Change (2022 vs 2021) | Component | Percentage Change | | :--- | :--- | | Volume / product mix | (3)% | | Price | 14% | | Exchange rate | (2)% | | Divested business | (8)% | | Total Change | 1% | - Gross profit decreased 15% from $2.5 billion in 2021 to $2.1 billion in 2022, with a 13% decrease excluding non-core items[176][177] - SG&A expenses decreased 9% year-over-year, primarily due to lower variable compensation costs[178][179] Net Earnings and EPS (2022 vs 2021) | Metric (in millions, except EPS) | 2022 | 2021 | | :--- | :--- | :--- | | Net Earnings Attributable to Eastman | $793 | $857 | | Diluted EPS | $6.35 | $6.25 | | Adjusted Net Earnings | $984 | $1,213 | | Adjusted Diluted EPS | $7.88 | $8.85 | Summary by Operating Segment This section details 2022 segment performance: Advanced Materials sales rose but adjusted EBIT fell, Additives & Functional Products sales and EBIT grew, Chemical Intermediates sales rose but adjusted EBIT declined, and Fibers sales increased with flat adjusted EBIT Advanced Materials Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $3,207 | $3,027 | 6% | | EBIT (Adjusted) | $395 | $532 | (26)% | Additives & Functional Products Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $3,165 | $2,708 | 17% | | EBIT (Adjusted) | $483 | $452 | 7% | Chemical Intermediates Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $3,026 | $2,849 | 6% | | EBIT (Adjusted) | $412 | $461 | (11)% | Fibers Segment Performance (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales | $1,022 | $900 | 14% | | EBIT (Adjusted) | $140 | $142 | (1)% | Liquidity and Other Financial Information Eastman ended 2022 with $493 million in cash, with cash from operations decreasing to $975 million, and net debt slightly decreasing to $4.66 billion, while capital expenditures are projected to increase in 2023 Cash Flow Summary (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $975 | $1,619 | | Net cash provided by (used in) investing activities | $392 | $(29) | | Net cash used in financing activities | $(1,321) | $(1,690) | | Cash and cash equivalents at end of period | $493 | $459 | - The company utilized an off-balance sheet accounts receivable factoring program, selling $2.5 billion of receivables in 2022[228] - Total borrowings were approximately $5.2 billion at year-end 2022, with net debt at $4.66 billion, a slight decrease from 2021[231][242] - Capital expenditures are projected to be approximately $700 million to $800 million in 2023, primarily for growth initiatives like molecular recycling[245] Risk Factors This section details key risks including global economic uncertainty, raw material and supply chain volatility, global operational risks, business-specific hazards, and increasing regulatory compliance costs - Global Economy: Uncertain economic conditions, inflation, and rising interest rates could negatively impact demand, costs, and capital access[253][254] - Raw Materials & Supply Chain: Volatility in raw material and energy costs, along with supply and transportation disruptions, could adversely impact financial results[255][257][258] - Global Operations: Over half of sales outside North America expose the company to foreign exchange, trade policy, and regulatory risks[260][261] - Operating & Strategic Risks: The business faces manufacturing disruptions, cybersecurity threats, and risks that growth initiatives or M&A activities may not achieve goals[263][264][267] - Regulatory Risks: The company faces complex and costly health, safety, and environmental regulations, with potential for increased costs from climate change legislation[268] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Eastman manages market risks from foreign currency, commodity prices, and interest rates using derivatives, with sensitivity analyses indicating potential impacts from adverse movements - The company manages market risks from foreign currency, commodity prices, and interest rates through hedging strategies[270] - Foreign Currency Risk: A hypothetical 10% adverse U.S. dollar move would result in a $50 million loss in fair value on derivative instruments[273] - Commodity Risk: A hypothetical 10% adverse price shift in hedged commodities would result in a $3 million loss in fair value on derivative contracts[275] - Interest Rate Risk: The company had $825 million in variable interest rate borrowings as of December 31, 2022, managed with interest rate swaps[276] Item 8. Financial Statements and Supplementary Data This section presents Eastman's audited consolidated financial statements for 2022, including statements of earnings, financial position, and cash flows, along with detailed notes and the independent auditor's report - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting[287] - The auditor identified the goodwill impairment assessment for an Additives & Functional Products reporting unit as a critical audit matter due to significant judgment[294][295] Consolidated Financial Statement Summary (Year-End 2022) | Metric (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $14,667 | $15,519 | | Total Liabilities | $9,431 | $9,731 | | Total Stockholders' Equity | $5,236 | $5,788 | | Net Earnings | $796 | $867 | | Cash from Operations | $975 | $1,619 | Item 9A. Controls and Procedures Management concluded that Eastman's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[535] - Management assessed internal control over financial reporting using the COSO framework and found it effective as of December 31, 2022[539] - PricewaterhouseCoopers LLP's audit confirmed the effectiveness of internal control over financial reporting as of December 31, 2022[540] Part III Part III incorporates information by reference from the 2023 Proxy Statement, covering directors, executive officers, compensation, security ownership, related transactions, and principal accountant fees - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2023 Proxy Statement[546] - Details on Executive Compensation are incorporated by reference from the 2023 Proxy Statement[548] - Information on Security Ownership and Principal Accountant Fees is incorporated by reference from the 2023 Proxy Statement[549][556] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, including outstanding options and securities available for future issuance under stockholder-approved plans Equity Compensation Plan Information (as of Dec 31, 2022) | Category | Securities to be Issued Upon Exercise of Outstanding Options | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 3,479,200 | $88 | 8,355,640 | - All future share-based awards are made from the 2021 Omnibus Stock Compensation Plan[550] Part IV Part IV lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements, auditor consent, and required certifications - This part contains the list of all financial statements, schedules, and exhibits filed with the annual report[559] - Key exhibits include the company's bylaws, debt agreements, executive compensation plans, and Sarbanes-Oxley Act certifications[563][565][567]