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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 | September 30, 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 |
1.875% 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 September 30, 2023 |
Common Stock, par value $0.01 per share | 118,564,013 |
--------------------------------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
SIGNATURES
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 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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions, except per share amounts) | 2023 | | 2022 | | 2023 | | 2022 |
Sales | $ | 2,267 | | | $ | 2,709 | | | $ | 7,003 | | | $ | 8,207 | |
Cost of sales | 1,783 | | | 2,168 | | | 5,406 | | | 6,446 | |
Gross profit | 484 | | | 541 | | | 1,597 | | | 1,761 | |
Selling, general and administrative expenses | 160 | | | 173 | | | 536 | | | 554 | |
Research and development expenses | 60 | | | 68 | | | 182 | | | 200 | |
Asset impairments and restructuring charges, net | — | | | 2 | | | 22 | | | 23 | |
Other components of post-employment (benefit) cost, net | (2) | | | (30) | | | (8) | | | (95) | |
Other (income) charges, net | 10 | | | 1 | | | 40 | | | 3 | |
Net (gain) loss on divested business | — | | | 3 | | | — | | | (7) | |
Earnings before interest and taxes | 256 | | | 324 | | | 825 | | | 1,083 | |
Net interest expense | 57 | | | 43 | | | 163 | | | 134 | |
| | | | | | | |
Earnings before income taxes | 199 | | | 281 | | | 662 | | | 949 | |
Provision for (benefit from) income taxes | 20 | | | (20) | | | 77 | | | 155 | |
Net earnings | 179 | | | 301 | | | 585 | | | 794 | |
Less: Net earnings attributable to noncontrolling interest | 1 | | | — | | | 1 | | | 2 | |
Net earnings attributable to Eastman | $ | 178 | | | $ | 301 | | | $ | 584 | | | $ | 792 | |
| | | | | | | |
Basic earnings per share attributable to Eastman | $ | 1.50 | | | $ | 2.48 | | | $ | 4.92 | | | $ | 6.34 | |
Diluted earnings per share attributable to Eastman | $ | 1.49 | | | $ | 2.46 | | | $ | 4.89 | | | $ | 6.26 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | |
Comprehensive Income | | | | | | | |
Net earnings including noncontrolling interest | $ | 179 | | | $ | 301 | | | $ | 585 | | | $ | 794 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Change in cumulative translation adjustment | (24) | | | (19) | | | (67) | | | 4 | |
Defined benefit pension and other postretirement benefit plans: | | | | | | | |
| | | | | | | |
Amortization of unrecognized prior service credits | (6) | | | (6) | | | (16) | | | (21) | |
Derivatives and hedging: | | | | | | | |
Unrealized gain (loss) during period | 9 | | | 30 | | | (3) | | | 97 | |
Reclassification adjustment for (gains) losses included in net income, net | (2) | | | (14) | | | (3) | | | (50) | |
Total other comprehensive income (loss), net of tax | (23) | | | (9) | | | (89) | | | 30 | |
Comprehensive income including noncontrolling interest | 156 | | | 292 | | | 496 | | | 824 | |
Less: Comprehensive income attributable to noncontrolling interest | 1 | | | — | | | 1 | | | 2 | |
Comprehensive income attributable to Eastman | $ | 155 | | | $ | 292 | | | $ | 495 | | | $ | 822 | |
Retained Earnings | | | | | | | |
Retained earnings at beginning of period | $ | 9,190 | | | $ | 8,857 | | | $ | 8,973 | | | $ | 8,557 | |
| | | | | | | |
Net earnings attributable to Eastman | 178 | | | 301 | | | 584 | | | 792 | |
Cash dividends declared | (94) | | | (93) | | | (283) | | | (284) | |
Retained earnings at end of period | $ | 9,274 | | | $ | 9,065 | | | $ | 9,274 | | | $ | 9,065 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION | | | | | | | | | | | |
| September 30, | | December 31, |
(Dollars in millions, except per share amounts) | 2023 | | 2022 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 439 | | | $ | 493 | |
Trade receivables, net of allowance for credit losses | 880 | | | 957 | |
Miscellaneous receivables | 269 | | | 320 | |
Inventories | 1,721 | | | 1,894 | |
Other current assets | 72 | | | 114 | |
Assets held for sale | 186 | | | — | |
Total current assets | 3,567 | | | 3,778 | |
Properties | | | |
Properties and equipment at cost | 13,382 | | | 12,942 | |
Less: Accumulated depreciation | 7,956 | | | 7,782 | |
Net properties | 5,426 | | | 5,160 | |
Goodwill | 3,643 | | | 3,664 | |
Intangible assets, net of accumulated amortization | 1,148 | | | 1,210 | |
Other noncurrent assets | 810 | | | 855 | |
Total assets | $ | 14,594 | | | $ | 14,667 | |
| | | |
Liabilities and Stockholders' Equity | | | |
Current liabilities | | | |
Payables and other current liabilities | $ | 1,940 | | | $ | 2,125 | |
Borrowings due within one year | 640 | | | 1,126 | |
Liabilities held for sale | 35 | | | — | |
Total current liabilities | 2,615 | | | 3,251 | |
Long-term borrowings | 4,580 | | | 4,025 | |
Deferred income tax liabilities | 549 | | | 671 | |
Post-employment obligations | 611 | | | 628 | |
Other long-term liabilities | 815 | | | 856 | |
Total liabilities | 9,170 | | | 9,431 | |
Stockholders' equity | | | |
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 222,737,414 and 222,348,557 as of September 30, 2023 and December 31, 2022, respectively) | 2 | | | 2 | |
Additional paid-in capital | 2,352 | | | 2,315 | |
Retained earnings | 9,274 | | | 8,973 | |
Accumulated other comprehensive income (loss) | (294) | | | (205) | |
| 11,334 | | | 11,085 | |
Less: Treasury stock at cost (104,224,199 and 103,602,488 shares as of September 30, 2023 and December 31, 2022, respectively) | 5,982 | | | 5,932 | |
Total Eastman stockholders' equity | 5,352 | | | 5,153 | |
Noncontrolling interest | 72 | | | 83 | |
Total equity | 5,424 | | | 5,236 | |
Total liabilities and stockholders' equity | $ | 14,594 | | | $ | 14,667 | |
The accompanying notes are an integral part of these consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | |
| First Nine Months |
(Dollars in millions) | 2023 | | 2022 |
Operating activities | | | |
Net earnings | $ | 585 | | | $ | 794 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 380 | | | 360 | |
Mark-to-market pension and other postretirement benefit plans (gain), net | — | | | (3) | |
| | | |
| | | |
Loss on sale of assets | — | | | 15 | |
Gain on divested business | — | | | (7) | |
Benefit from deferred income taxes | (156) | | | (54) | |
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | | | |
(Increase) decrease in trade receivables | 68 | | | (111) | |
(Increase) decrease in inventories | 147 | | | (549) | |
Increase (decrease) in trade payables | (363) | | | 187 | |
Pension and other postretirement contributions (in excess of) less than expenses | (39) | | | (115) | |
Variable compensation payments (in excess of) less than expenses | 73 | | | (117) | |
Other items, net | 227 | | | 118 | |
Net cash provided by operating activities | 922 | | | 518 | |
Investing activities | | | |
Additions to properties and equipment | (649) | | | (408) | |
| | | |
| | | |
Proceeds from sale of businesses | 38 | | | 998 | |
Acquisition, net of cash acquired | (74) | | | (1) | |
| | | |
Additions to capitalized software | (4) | | | (10) | |
Other items, net | 9 | | | 19 | |
Net cash (used in) provided by investing activities | (680) | | | 598 | |
Financing activities | | | |
Net increase (decrease) in commercial paper and other borrowings | 73 | | | 355 | |
Proceeds from borrowings | 796 | | | 500 | |
Repayment of borrowings | (808) | | | (750) | |
Dividends paid to stockholders | (282) | | | (290) | |
Treasury stock purchases | (50) | | | (902) | |
| | | |
Other items, net | (24) | | | (11) | |
Net cash used in financing activities | (295) | | | (1,098) | |
Effect of exchange rate changes on cash and cash equivalents | (1) | | | (16) | |
Net change in cash and cash equivalents | (54) | | | 2 | |
Cash and cash equivalents at beginning of period | 493 | | | 459 | |
Cash and cash equivalents at end of period | $ | 439 | | | $ | 461 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 4, "Goodwill", and Note 15, "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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Issued But Not Adopted as of September 30, 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.
ASU 2023-05 Business Combination - Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement: The FASB issued this update in August 2023, which states that a joint venture must initially measure all contributions received upon its formation at fair value, largely consistent with Topic 805, Business Combinations. The guidance is intended to reduce diversity in practice and provide users of joint venture financial statements with more decision-useful information. This ASU should be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025. Early adoption is permitted, and joint ventures formed prior to the adoption date may elect to apply the new guidance retrospectively back to their original formation date. Management is currently evaluating the impact on the Company's financial statements and related disclosures.
Working Capital Management and Off Balance Sheet Arrangements
The Company has off balance sheet, uncommitted accounts receivable factoring programs under which entire invoices may be sold to third-party financial institutions. The vast majority of these programs are without recourse. Under these programs, 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 programs, 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 programs 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 third quarter 2023 and 2022 were $692 million and $700 million, respectively, and $2.1 billion and $1.8 billion in first nine months 2023 and 2022, 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 $61 million and $98 million at September 30, 2023 and December 31, 2022, respectively, are included in "Payables and other current liabilities" on the Unaudited Consolidated Statements of Financial Position.
2.ASSETS HELD FOR SALE
On September 27, 2023, Eastman entered into a definitive agreement to sell its operations located in Texas City, Texas, which are reported in the Chemical Intermediates ("CI") segment ("Texas City Operations"). The sale excludes the plasticizer operations. The Company will provide certain transition and post-closing services on agreed terms.
The total sales price includes $413 million in cash at closing and an additional $38.5 million to be paid on each of the first and second anniversaries of the closing date of the transaction. The final purchase price is subject to working capital and other adjustments at closing. The entity being sold is not reported as a discontinued operation because the sale will not have a major effect on the Company's operations and financial results.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The sale, subject to regulatory approvals and satisfaction of other customary closing conditions, is expected to be completed in fourth quarter 2023. The agreement contains customary representations, warranties, and covenants of both parties including, among other things, that Eastman conduct the site's operations in the ordinary course consistent with past practice through the date of closing.
As of the definitive agreement date and until sale, the Texas City Operations disposal group is classified as held for sale. At September 30, 2023, the carrying value was less than the estimated fair value less costs to sell, which is expected to result in a gain upon disposition.
The major classes of assets and liabilities of the Texas City Operations classified as held for sale as of September 30, 2023 were as follows:
| | | | | |
| September 30, |
(Dollars in millions) | 2023 |
Assets held for sale | |
Trade receivables, net of allowance for doubtful accounts | $ | 4 | |
Inventories | 7 | |
Other assets | 14 | |
Properties, net of accumulated depreciation | 108 | |
Goodwill | 50 | |
Intangible assets, net of accumulated amortization | 3 | |
Assets held for sale | 186 | |
Liabilities held for sale | |
Payables and other current liabilities | 11 | |
| |
Other liabilities | 24 | |
Liabilities held for sale | 35 | |
Disposal group, net | $ | 151 | |
Long-lived assets and definite-lived intangible assets are not depreciated or amortized while classified as held for sale.
3.INVENTORIES | | | | | | | | | | | |
| September 30, | | December 31, |
(Dollars in millions) | 2023 | | 2022 |
Finished goods | $ | 1,244 | | | $ | 1,347 | |
Work in process | 282 | | | 297 | |
Raw materials and supplies | 658 | | | 743 | |
Total inventories at FIFO or average cost | 2,184 | | | 2,387 | |
Less: LIFO reserve | 463 | | | 493 | |
Total inventories | $ | 1,721 | | | $ | 1,894 | |
Inventories valued on the last-in, first-out ("LIFO") method were approximately 50 percent of total inventories at both September 30, 2023 and December 31, 2022.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4.GOODWILL
As a result of product moves between the Additives & Functional Products ("AFP") segment and the 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 15, "Segment Information".
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 | 33 | | | — | | | — | | | — | | | 33 | |
Held for sale | — | | | — | | | (50) | | | — | | | (50) | |
Currency translation adjustments | (3) | | | (1) | | | — | | | — | | | (4) | |
Balance at September 30, 2023 | $ | 1,326 | | | $ | 2,169 | | | $ | 138 | | | $ | 10 | | | $ | 3,643 | |
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 segments, respectively, at both September 30, 2023 and December 31, 2022.
5.INCOME TAXES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
(Dollars in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| $ | | % | | $ | | % | | $ | | % | | $ | | % |
Provision for (benefit from) income taxes and tax rate | $ | 20 | | | 10 | % | | $ | (20) | | | (7) | % | | $ | 77 | | | 12 | % | | $ | 155 | | | 16 | % |
First nine months 2023 provision for income taxes includes a $51 million decrease due to state tax law changes that were enacted in second quarter 2023 that extend the carryforward period to utilize existing state tax credits and a $23 million increase as a result of state guidance issued in first quarter 2023 interpreting certain provisions of the 2017 Tax Cuts and Jobs Act (the "Tax Reform Act"). Third quarter and first nine months 2022 provision for income taxes included a $32 million decrease related to the release of a state valuation allowance and a $16 million decrease from the finalization of prior year's income tax returns. Provision for income taxes was adjusted in third quarter 2022 to reflect finalization of the tax implications of the adhesives resins business divestiture, which, for first nine months 2022, was an increase of $38 million to the provision for income taxes.
At September 30, 2023 and December 31, 2022, Eastman had $241 million and $235 million, respectively, in unrecognized tax benefits. At September 30, 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6.BORROWINGS | | | | | | | | | | | |
| September 30, | | December 31, |
(Dollars in millions) | 2023 | | 2022 |
Borrowings consisted of: | | | |
1.50% notes due May 2023 (1) | $ | — | | | $ | 800 | |
7.25% debentures due January 2024 | 198 | | | 198 | |
7.625% debentures due June 2024 | 43 | | | 43 | |
3.80% notes due March 2025 | 695 | | | 693 | |
1.875% notes due November 2026 (1) | 528 | | | 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 | 399 | | | 326 | |
| | | |
Total borrowings | 5,220 | | | 5,151 | |
Less: Borrowings due within one year | 640 | | | 1,126 | |
Long-term borrowings | $ | 4,580 | | | $ | 4,025 | |
(1)The carrying value of the euro-denominated 1.50% notes due May 2023 and 1.875% notes due November 2026 fluctuates 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 second quarter 2023, the Company repaid the 1.50% notes due May 2023, of which $808 million, including the foreign currency impact, was repaid from a combination of available cash and debt proceeds. There were no debt extinguishment costs associated with the repayment of this debt. Total consideration for this redemption is reported under financing activities on the Unaudited Consolidated Statements of Cash Flows.
In first quarter 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 September 30, 2023, the 2024 Term Loan balance outstanding was $300 million with a variable interest rate of 6.56%. 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 September 30, 2023 and December 31, 2022, with variable interest rates of 6.55% 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has access to a $1.50 billion revolving credit agreement (the "Credit Facility") expiring December 2026 that was amended in first quarter 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 September 30, 2023 and December 31, 2022, the Company had no outstanding borrowings under the Credit Facility. At September 30, 2023, the Company's commercial paper borrowings were $399 million with a weighted average interest rate of 5.55%. 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 September 30, 2023 and December 31, 2022.
Fair Value of Borrowings
Eastman has classified its total borrowings at September 30, 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. The Company's fair value of total borrowings was $4.9 billion at both September 30, 2023 and December 31, 2022. The Company had no borrowings classified as Level 1 and Level 3 as of September 30, 2023 and December 31, 2022.
7.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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
Eastman enters into fixed-to-fixed cross-currency swaps and designates these swaps to hedge a portion of its net investment in a non-U.S. dollar functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed foreign currency interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity.
In first quarter 2023, Eastman entered into fixed-to-fixed cross-currency swaps of $300 million (€283 million) maturing March 2033 and $50 million (¥6.7 billion) maturing March 2025.
In third quarter 2023, Eastman entered into fixed-to-fixed cross-currency swaps of $375 million (€340 million) maturing March 2025 and $125 million (€113 million) maturing December 2028. Additionally, Eastman voluntarily terminated and reentered into fixed-to-fixed cross-currency swaps of $375 million (€340 million terminated; €351 million reentered) maturing March 2025, $305 million (€265 million terminated; €285 million reentered) maturing December 2028, and $50 million (¥6.7 billion terminated; ¥7.4 billion reentered) maturing March 2025.
The termination of cross-currency swaps in third quarter 2023 resulted in a $34 million gain recognized in CTA. The related cash flows were classified as investing activities in the Unaudited Consolidated Statements of Cash Flows.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary of Financial Position and Financial Performance of Hedging Instruments
The following table presents the notional amounts outstanding at September 30, 2023 and December 31, 2022 associated with Eastman's hedging programs. | | | | | | | | | | | | | | | | | |
Notional Outstanding | | September 30, 2023 | | December 31, 2022 |
| | | | | |
Derivatives designated as cash flow hedges: | | | | |
Foreign Exchange Forward and Option Contracts (in millions) | | | | |
| EUR/USD (in EUR) | | €440 | | €573 |
| | | | | |
| | | | | |
| | | | | |
Commodity Forward and Collar Contracts | | | | |
| | | | | |
| Energy (in million british thermal units) | | 17 | | | 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) | | €1,354 | | €587 |
| JPY/USD (in JPY) | | ¥7,385 | | — | |
| | | | |
Non-derivatives designated as net investment hedges: | | | | |
Foreign Currency Net Investment Hedges (in millions) | | | | |
| EUR/USD (in EUR) | | €498 | | €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 September 30, 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 third quarter and first nine months 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 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 |
| | September 30, 2023 | | December 31, 2022 |
Derivatives designated as cash flow hedges: | | | | | | |
Commodity contracts | | Other current assets | | $ | — | | | $ | 3 | |
| | | | | | |
Foreign exchange contracts | | Other current assets | | 6 | | | — | |
Foreign exchange contracts | | Other noncurrent assets | | 2 | | | — | |
| | | | | | |
| | | | | | |
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 current assets | | 16 | | | — | |
Cross-currency interest rate swaps | | Other noncurrent assets | | 46 | | | 72 | |
Total Derivative Assets | | | | $ | 70 | | | $ | 76 | |
| | | | | | |
Derivatives designated as cash flow hedges: | | | | | | |
Commodity contracts | | Payables and other current liabilities | | $ | 13 | | | $ | 3 | |
| | | | | | |
Foreign exchange contracts | | Payables and other current liabilities | | 2 | | | 8 | |
Foreign exchange contracts | | Other long-term liabilities | | — | | | 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 | | 25 | | | — | |
Total Derivative Liabilities | | | | $ | 44 | | | $ | 20 | |
Total Net Derivative Assets (Liabilities) | | | | $ | 26 | | | $ | 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 $528 million at September 30, 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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 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 | | September 30, 2023 | | December 31, 2022 | | September 30, 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 third quarter and first nine months 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) | | Third Quarter | | First Nine Months | | Third Quarter | | First Nine Months |
Hedging Relationships | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | |
Commodity contracts | | $ | (5) | | | $ | (4) | | | $ | (9) | | | $ | (5) | | | $ | — | | | $ | 1 | | | $ | (3) | | | $ | 38 | |
Foreign exchange contracts | | 11 | | | 22 | | | 1 | | | 43 | | | 3 | | | 18 | | | 10 | | | 33 | |
Forward starting interest rate and treasury lock swap contracts | | 1 | | | (1) | | | 2 | | | 9 | | | — | | | — | | | (2) | | | (5) | |
Non-derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | | | | | | | |
Net investment hedges | | 15 | | | 80 | | | (8) | | | 199 | | | — | | | — | | | — | | | — | |
Derivatives in net investment hedging relationships (pre-tax): | | | | | | | | | | | | | | | | |
Cross-currency interest rate swaps | | 51 | | | 39 | | | 31 | | | 114 | | | — | | | — | | | — | | | — | |
Cross-currency interest rate swaps excluded component | | (16) | | | (1) | | | (33) | | | (6) | | | — | | | — | | | — | | | — | |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 third quarter and first nine months 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships |
| | Third 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 | | $ | 2,267 | | | $ | 1,783 | | | $ | 57 | | | $ | 2,709 | | | $ | 2,168 | | | $ | 43 | |
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 | |
Derivatives designated as hedging instruments | | | | | | — | | | | | | | (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 | | | | — | | | | | | | 1 | | | |
Foreign Exchange Contracts: | | | | | | | | | | | | |
Amount reclassified from AOCI into earnings | | 3 | | | | | | | 18 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Location and Amount of Gain or (Loss) Recognized in Earnings from Fair Value and Cash Flow Hedging Relationships |
| | First Nine Months |
| | 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 | | $ | 7,003 | | | $ | 5,406 | | | $ | 163 | | | $ | 8,207 | | | $ | 6,446 | | | $ | 134 | |
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 | | | | | | 2 | | | | | | | 2 | |
Derivatives designated as hedging instruments | | | | | | (2) | | | | | | | (2) | |
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 | | | | | | (2) | | | | | | | (5) | |
Commodity Contracts: | | | | | | | | | | | | |
Amount reclassified from AOCI into earnings | | | | (3) | | | | | | | 38 | | | |
Foreign Exchange Contracts: | | | | | | | | | | | | |
Amount reclassified from AOCI into earnings | | 10 | | | | | | | 33 | | | | | |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 $1 million and $7 million during third quarter and first nine months 2023, respectively, and recognized a net loss of $5 million and $11 million during third quarter and first nine months 2022.
Pre-tax monetized positions and mark-to-market ("MTM") gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in AOCI included net gains of $116 million and $134 million at September 30, 2023 and December 31, 2022, respectively. Gains in AOCI decreased between December 31, 2022 and September 30, 2023 primarily as a result of an increase in euro to U.S. dollar exchange rates. If recognized, approximately $2 million in pre-tax losses, as of September 30, 2023, would be reclassified into earnings during the next 12 months, including foreign exchange contracts prospectively dedesignated and monetized in fourth quarter 2022.
8.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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Components of net periodic benefit (credit) cost were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third 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 | | | $ | 7 | | | $ | 2 | | | $ | — | | | $ | — | |
Interest cost | 19 | | | 8 | | | 11 | | | 3 | | | 7 | | | 4 | |
Expected return on assets | (22) | | | (6) | | | (32) | | | (7) | | | (1) | | | (1) | |
| | | | | | | | | | | |
Amortization of: | | | | | | | | | | | |
Prior service credit, net | — | | | — | | | — | | | — | | | (7) | | | (8) | |
| | | | | | | | | | | |
Net periodic benefit (credit) cost | $ | 3 | | | $ | 4 | | | $ | (14) | | | $ | (2) | | | $ | (1) | | | $ | (5) | |
| | | | | | | | | | | |
| First Nine Months |
| 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 | $ | 17 | | | $ | 6 | | | $ | 19 | | | $ | 9 | | | $ | — | | | $ | — | |
Interest cost | 58 | | | 22 | | | 33 | | | 11 | | | 20 | | | 11 | |
Expected return on assets | (66) | | | (19) | | | (96) | | | (24) | | | (3) | | | (3) | |
| | | | | | | | | | | |
Amortization of: | | | | | | | | | | | |
Prior service credit, net | — | | | — | | | — | | | — | | | (20) | | | (24) | |
Mark-to-market pension and other postretirement benefits (gain) loss, net (1) | — | | | — | | | 7 | | | (10) | | | — | | | — | |
Net periodic benefit (credit) cost | $ | 9 | | | $ | 9 | | | $ | (37) | | | $ | (14) | | | $ | (3) | | | $ | (16) | |
(1) Also includes curtailment triggered by the 2022 sale of the adhesives resins business which is included in "Other components of post-employment (benefit) cost, net" on the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
In 2022, subsequent to the adhesives resins divestiture, the Company retained pension liabilities of certain plan participants. As such, the status of those participants changed in a Non-U.S. pension plan which triggered a curtailment and an interim MTM remeasurement of the impacted Non-U.S. pension plan's assets and liabilities. First nine months 2022 included a curtailment gain of $7 million, including $3 million reduction in the pension benefit obligation and $4 million of prior service credits recognized immediately, and a MTM gain of $3 million.
Settlements are triggered in a plan when distributions exceed the sum of service cost and interest cost of the respective plan. Lump sum payments from a U.S. pension plan resulted in a plan settlement in first nine months 2022. The settlement itself was not material, but it triggered an interim MTM remeasurement of the impacted U.S. pension plan's assets and liabilities resulting in a MTM loss of $7 million in first nine months 2022.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9.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.
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) | September 30, 2023 | | December 31, 2022 |
Environmental contingencies, current | $ | 10 | | | $ | 10 | |
Environmental contingencies, long-term | 276 | | | 264 | |
Total | $ | 286 | | | $ | 274 | |
Environmental Remediation
Estimated future environmental expenditures for undiscounted remediation costs ranged from the best estimate or minimum of $255 million to the maximum of $499 million and from the best estimate or minimum of $245 million to the maximum of $457 million at September 30, 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 nine 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 | 19 | |
Cash reductions | (9) | |
Balance at September 30, 2023 | $ | 255 | |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 $31 million and $29 million at September 30, 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 $51 million at both September 30, 2023 and December 31, 2022, and are included in "Other long-term liabilities" on the Unaudited Consolidated Statements of Financial Position.
10.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.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11.STOCKHOLDERS' EQUITY
Reconciliations of the changes in stockholders' equity for third quarter and first nine months 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 June 30, 2023 | $ | 2 | | | $ | 2,342 | | | $ | 9,190 | | | $ | (271) | | | $ | (5,982) | | | $ | 5,281 | | | $ | 71 | | | $ | 5,352 | |
| | | | | | | | | | | | | | | |
Net Earnings | — | | | — | | | 178 | | | — | | | — | | | 178 | | | 1 | | | 179 | |
Cash Dividends Declared (1) ($0.79 per share) | — | | | — | | | (94) | | | — | | | — | | | (94) | | | — | | | (94) | |
Other Comprehensive Income (Loss) | — | | | — | | | — | | | (23) | | | — | | | (23) | | | — | | | (23) | |
Share-Based Compensation Expense (2) | — | | | 10 | | | — | | | — | | | — | | | 10 | | | — | | | 10 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2023 | $ | 2 | | | $ | 2,352 | | | $ | 9,274 | | | $ | (294) | | | $ | (5,982) | | | $ | 5,352 | | | $ | 72 | | | $ | 5,424 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 June 30, 2022 | $ | 2 | | | $ | 2,179 | | | $ | 8,857 | | | $ | (143) | | | $ | (5,572) | | | $ | 5,323 | | | $ | 84 | | | $ | 5,407 | |
| | | | | | | | | | | | | | | |
Net Earnings | — | | | — | | | 301 | | | — | | | — | | | 301 | | | — | | | 301 | |
Cash Dividends Declared (1) ($0.76 per share) | — | | | — | | | (93) | | | — | | | — | | | (93) | | | — | | | (93) | |
Other Comprehensive Income (Loss) | — | | | — | | | — | | | (9) | | | — | | | (9) | | | — | | | (9) | |
Share-Based Compensation Expense (2) | — | | | 12 | | | — | | | — | | | — | | | 12 | | | — | | | 12 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Share Repurchases (3) | — | | | 110 | | | — | | | — | | | (260) | | | (150) | | | — | | | (150) | |
| | | | | | | | | | | | | | | |
Balance at September 30, 2022 | $ | 2 | | | $ | 2,301 | | | $ | 9,065 | | | $ | (152) | | | $ | (5,832) | | | $ | 5,384 | | | $ | 83 | | | $ | 5,467 | |
| | | | | | | | | | | | | | | |
(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 settlement of shares repurchased under the second quarter 2022 accelerated share repurchase program ("2022 ASR").
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(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 | — | | | — | | | 584 | | | — | | | — | | | 584 | | | 1 | | | 585 | |
Cash Dividends Declared (1) ($2.37 per share) | — | | | — | | | (283) | | | — | | | — | | | (283) | | | — | | | (283) | |
Other Comprehensive Income (Loss) | — | | | — | | | — | | | (89) | | | — | | | (89) | | | — | | | (89) | |
Share-Based Compensation Expense |