UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One) | |
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014 | |
OR | |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________ | |
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 62-1539359 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification no.) |
200 South Wilcox Drive | |
Kingsport, Tennessee | 37662 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________________________________________
PAGE 1 OF 150 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 147
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Yes | No | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | [X] | |
Yes | No | |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. | [X] | |
Yes | No | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | [X] | |
Yes | No | |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | [X] | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | [X] | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company) | ||
Yes | No | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | [X] | |
The aggregate market value (based upon the $87.35 closing price on the New York Stock Exchange on June 30, 2014) of the 148,065,837 shares of common equity held by non-affiliates as of December 31, 2014 was $12,933,550,862 using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude common stock that may be deemed beneficially owned as of December 31, 2014 by Eastman Chemical Company's ("Eastman" or the "Company") directors and executive officers and charitable foundation, some of whom might not be held to be affiliates upon judicial determination. A total of 148,647,456 shares of common stock of the registrant were outstanding at December 31, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2015 Annual Meeting of Stockholders (the "2015 Proxy Statement"), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10 to 14 of this Annual Report on Form 10-K (this "Annual Report") as indicated herein.
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FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements are all statements, other than statements of historical fact, that may be made by the Company from time to time. In some cases, you can identify forward-looking statements by terminology such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would," and similar expressions or expressions of the negative of these terms. Forward-looking statements may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; pending and future legal proceedings; exposure to, and effects of hedging of, raw material and energy costs, foreign currencies and interest rates; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin and sales; earnings, cash flow, dividends and other expected financial results and conditions; expectations, strategies, and plans for individual assets and products, businesses, and segments, as well as for the whole of Eastman; cash requirements and uses of available cash; financing plans and activities; pension expenses and funding; credit ratings; anticipated and other future restructuring, acquisition, divestiture, and consolidation activities; cost reduction and control efforts and targets; the timing and costs of, and benefits from, the integration of, and expected business and financial performance of, acquired businesses; strategic initiatives and development, production, commercialization and acceptance of new products, services and technologies and related costs; asset, business, and product portfolio changes; and expected tax rates and net interest costs.
Forward-looking statements are based upon certain underlying assumptions as of the date such statements were made. Such assumptions are based upon internal estimates and other analyses of current market conditions and trends, management expectations, plans, and strategies, economic conditions, and other factors. Forward-looking statements and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. The most significant known factors, risks, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements are identified and discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations- Risk Factors" in Part II, Item 7 of this Annual Report.
The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual 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.
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TABLE OF CONTENTS
ITEM | PAGE | |
PART I
PART II
5. | ||
6. | ||
7. | ||
7A. | ||
8. | ||
9. | ||
9A. | ||
9B. | ||
PART III
10. | ||
11. | ||
12. | ||
13. | ||
14. | ||
PART IV
SIGNATURES
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PART I
ITEM 1. BUSINESS |
Page | |
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CORPORATE OVERVIEW |
Eastman Chemical Company ("Eastman" or the "Company") is a global specialty chemical company that produces a broad range of advanced materials, chemicals, and fibers that are found in products people use every day. Eastman began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company's photographic business and became a public company, incorporated in Delaware, on December 31, 1993. Eastman has 51 manufacturing sites and equity interests in four manufacturing joint ventures in 15 countries that supply products to customers throughout the world. The Company's headquarters and largest manufacturing site are located in Kingsport, Tennessee.
The Company completed four acquisitions in 2014. On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business (the "aviation turbine oil business"). On August 6, 2014, the Company acquired Knowlton Technologies, LLC ("Knowlton"), a leader in the design, accelerated prototyping, and manufacture of wet-laid nonwovens in filtration, friction, and custom designed composite webs. On December 5, 2014, Eastman acquired Taminco Corporation (”Taminco”), a global specialty chemical company. On December 11, 2014 Eastman acquired Commonwealth Laminating & Coating, Inc. (“Commonwealth”), a specialty films business. As of the date of acquisitions, results of the acquired businesses are included in Eastman results. For additional information on these acquisitions see Note 2 "Acquisitions" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K (this "Annual Report"). As required by Securities and Exchange Commission ("SEC") rules, certain pro forma combined financial information giving effect to the acquisition of Taminco is presented in the Company’s Current Report on Form 8-K/A filed with the SEC on February 19, 2015.
On July 2, 2012, the Company acquired Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. In order to provide the most meaningful comparison of results, some of the corporate and segment information in this Annual Report on Form 10-K (this "Annual Report") includes certain results on a pro forma combined basis, giving effect to the acquisition of Solutia as if it had been completed at the beginning of 2012. For additional information on the assumptions and related matters considered in connection with the presentation of information on a pro forma combined basis, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP and Pro Forma Combined Financial Measures" in Part II, Item 7 of this Annual Report.
Eastman's businesses are managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). Taminco’s former specialty amines and crop protection businesses are managed and reported in the AFP segment. The acquired Commonwealth business is managed and reported in the AM segment. Taminco's former functional amines business and the acquired aviation turbine oil business are managed and reported in the SFI segment. Eastman management believes that the Company's end-market diversity is a source of strength, and that many of the markets into which the Company’s products are sold are benefiting from longer-term global trends such as energy efficiency, a rising middle class in emerging economies, and an increased focus on health and wellness. Management believes that these trends, combined with the diversity of the Company's end markets, facilitate more consistent demand for the Company's products over time. The businesses acquired from Taminco are expected to provide additional opportunities for growth in agriculture, personal care, coatings, and oil and gas markets. Eastman is focused on consistent earnings growth through a market-driven approach that takes advantage of the Company's existing technology platforms, global market and manufacturing presence, and leading positions in key end markets.
In 2014, the Company reported sales revenue of $9.5 billion, operating earnings of $1.2 billion, and earnings from continuing operations of $749 million. Earnings per diluted share from continuing operations were $4.95. Asset impairments and restructuring charges and acquisition-related costs included in operating earnings were $77 million and $70 million, respectively. Additionally, operating earnings included a mark-to-market ("MTM") pension and other postretirement benefits plans actuarial net loss of $304 million.
Business Strategy
Eastman's objective is to be an outperforming specialty chemical company with consistent earnings growth and strong cash flow. The Company sells differentiated products into diverse markets and geographic regions. Eastman works with customers to meet their needs in existing and new markets through development of innovative products and technologies. Management believes that the Company can deliver consistent financial results by leveraging the Company's world class technology platforms, improving product mix through innovation, sustaining and expanding advantaged market positions and leveraging advantaged cost positions. Consistently increasing earnings are expected to result from both organic (internal) growth initiatives and inorganic (external growth through joint ventures and acquisitions) initiatives.
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In 2014, the Company progressed on both organic and inorganic growth initiatives, including:
• | completing the acquisition of Taminco, which is expected to: |
• | strengthen Eastman's presence in attractive niche markets benefiting from megatrends; |
• | leverage a world-class technology platform underpinned by a business model similar to Eastman's; |
• | provide synergy opportunities; and |
• | accelerate revenue and earnings growth prospects; |
• | completing the integration of Solutia; |
• | in the AFP segment: |
• | proceeding with a 40,000 metric ton expansion of the Crystex® insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in the first half of 2017, and retrofitting an existing manufacturing facility in Germany expected to be operational in the second half of 2015. These actions are expected to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and enhancing product characteristics; and |
• | adding Taminco's former specialty amines and crop protection businesses; |
• | in the A&P segment, completing a capacity expansion of Eastman 168™ non-phthalate plasticizers at the manufacturing facility in Texas City, Texas in second quarter 2014; |
• | in the AM segment: |
• | completing an expansion of Eastman Tritan™ copolyester capacity and beginning an additional 60,000 metric ton expansion of Eastman Tritan™ copolyester capacity at the Kingsport, Tennessee manufacturing facility in fourth quarter 2014 which is expected to be operational in early 2017 to meet expected demand for Eastman Tritan™ copolyester; and |
• | completing the acquisition of Commonwealth to strengthen the window film product portfolio, add industry leading protective film technology, and increase scale cost efficiencies; |
• | in the SFI segment: |
• | completing the acquisition of the aviation turbine oil business to broaden Eastman product offerings to better supply the global aviation industry; |
• | continuing a Therminol® heat transfer fluid capacity expansion in Newport, Wales, which is expected to be operational in the second half of 2015 to support expected long-term demand growth in the industrial chemicals and processing market; and |
• | adding Taminco's former functional amines business; and |
• | completing the acquisition of Knowlton Technologies, a leader in wet-laid nonwovens, to accelerate the innovation cycle for the Eastman™ microfibers technology platform. |
The Company benefits from proprietary technologies and advantaged feedstocks, and is focusing on sustainability as a competitive strength for growth. Eastman has developed new products and technologies that enable customers' development and sales of sustainable products. Examples of Eastman’s leading position in providing sustainable solutions are Eastman Tritan™ copolyester, Saflex® acoustic and acoustic heads up display (“HUD”), Eastman Omnia™ high performance solvent, and Eastman 168™ non-phthalate plasticizers.
Management is actively pursuing additional opportunities to leverage world class technology platforms for continued near- and long-term growth both sustaining our leadership in existing markets and expanding into new markets. Examples of these technologies include cellulose esters for tires and packaging and Eastman™ Microfibers technology.
Financial Strategy
In addition to managing its businesses and growth initiatives, the Company remains committed to maintaining a strong financial position with appropriate financial flexibility and liquidity. Eastman management believes maintaining a financial profile that supports an investment grade credit rating is important to its long term strategic and financial flexibility. The Company employs a disciplined and balanced approach to capital allocation and deployment of cash. As described above, the Company pursues a variety of organic growth opportunities and also considers inorganic growth opportunities, including joint ventures and acquisitions. The Company also returns cash to stockholders through dividends and, from time to time, share repurchases. The Company manages its debt based upon its capital structure objectives, funding requirements, and public and private debt market conditions. Management expects that the combination of strong cash flow generation and liquidity and a solid balance sheet will continue to provide flexibility to pursue growth.
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BUSINESS SEGMENTS |
The Company's products and operations are managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). This organizational structure is based on the management of the strategies, operating models, and sales channels that the various businesses employ. Sales revenue and research and development ("R&D") costs, certain components of pension and other postretirement benefits gains, losses, and costs, and other expenses and income not identifiable to an operating segment are not included in segment operating results for any of the periods presented and are shown as "other" sales revenue and "other" operating earnings (loss). For identification of manufacturing sites see Item 2 "Properties" in Part II, Item 8 of this Annual Report. For additional information concerning the Company's operating segments, see Note 20, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
ADDITIVES & FUNCTIONAL PRODUCTS SEGMENT
• | Overview |
In the AFP segment, the Company manufactures chemicals for products in the coatings and tires industries in transportation, building and construction, durable goods, and consumables markets. The recently acquired specialty amines and crop protection products are primarily for personal care and agriculture markets. In 2014, the AFP segment had sales revenue of $1.8 billion, 19 percent of Eastman's total sales. Key technology platforms in this segment are propylene derivatives, alkylamine derivatives, insoluble sulfur, cellulose esters, polyester polymers, and hydrocarbon resins.
AFP sales growth is typically similar to general economic growth due to the wide variety of end uses such as tires, coatings, consumables, and feed additives. The segment is focused on high-value additives that provide critical functionality but which comprise a small percentage of total customer product cost. The segment principally competes on the unique performance characteristics of its products and through leveraging its strong customer base and long-standing customer relationships to promote substantial recurring business and product development. Some competitors may commit greater financial and other resources than Eastman to products in markets in which the AFP segment competes. Additionally, within each segment product market, the Company may compete with other smaller, regionally focused companies that may have advantages based upon location, local market knowledge, manufacturing strength in a specific product, or other similar factors.
• | Principal Products |
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Coatings Industry and Other Formulated Products | ||||
Solvents • Texanol™• ketones• esters• glycol ethers• alcohol solvents | specialty coalescents, specialty solvents, and commodity solvents | BASF SE The Dow Chemical Company | propane propylene ethane | Coatings Industry Building and construction (architectural coatings) Transportation (OEM) and refinish coatings Durable goods (industrial coatings applications) Other Formulated Products Distribution solvents (olefin derived solvents sold through distribution) Consumables (graphic arts, cleaners, packaging) Industrial chemicals (process solvents and intermediates) |
Polymers • cellulosics• polyesters• polyolefins | paint additives and specialty polymers | Alternative technologies | wood pulp propylene propane | Coatings Industry Transportation (OEM and refinish coatings) Durable goods (wood and industrial coatings applications) Other Formulated Products Consumables (graphic arts and inks) Health and wellness (pharmaceutical and personal care) |
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Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Tires Industry | ||||
Crystex® | insoluble sulfur rubber additive | Oriental Carbon & Chemicals Limited Shikoku Chemicals Corporation | naphthenic process oil sulfur | Transportation (tire manufacturing) Other rubber products (such as hoses, belts, seals, and footwear) |
Santoflex® | antidegradant rubber additive | Jiangsu Sinorgchem Technology Co, Ltd. Korea Kumho Petrochemical Co. Ltd. Lanxess AG | nitrobenzene aniline methyl isobutyl ketone | Transportation (tire manufacturing) Other rubber products (such as hoses, belts, seals, and footwear) |
Piccotac® Kristalex® | hydrocarbon resins | Cray Valley Hydrocarbon Specialty Chemicals Exxon Mobil Corporation Kolon Industries Incorporated | alpha methylstyrene piperylene styrene | Transportation (tire manufacturing) |
Specialty Amines | ||||
Specialty intermediates Performance products Formic acid solutions | amine-derivative-based building blocks branded amine based products for niche applications formic-acid based solutions | BASF BASF The Dow Chemical Company Huntsman Corporation BASF Perstorp Luxi Chemical Group Feicheng Acid Chemicals | ethylene oxide ammonia alcohols ethyl oxide butylamines sulfuric acid formic acid | Personal care Water treatment Coatings Animal nutrition Oil and gas Metal working fluids Animal nutrition De-icing |
Crop Protection | ||||
Alkylamine derivatives | metam based soil fumigants thiram and ziram based fungicides plant growth regulator | The Dow Chemical Company Argo-Kanesho Co Ltd Bayer BASF | alkylamines CS2 caustic soda | Agriculture Crop protection |
Percentage of Total Segment Sales | ||||
Product Lines | 2014 | 2013 | 2012 Pro Forma Combined (1) | 2012 |
Coatings Industry and Other Formulated Products | 66% | 66% | 66% | 80% |
Tires Industry | 31% | 34% | 34% | 20% |
Specialty Amines and Crop Protection | 3% | - | - | - |
(1) | "2012 Pro Forma Combined" gives effect to the acquisition of Solutia as if it had been completed at January 1, 2012. |
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• | Strategy |
A key element of the AFP segment's strategy is to leverage proprietary technologies for the continued development of innovative product offerings and to focus growth efforts on expanding end markets such as coatings, tires, and consumables. Eastman management believes that the ability to leverage the AFP segment's research, application development, and production capabilities across multiple markets makes the segment uniquely positioned to meet evolving needs to improve the quality and performance of its customers' products. For example, new government regulatory requirements are causing tire manufacturers to value innovative materials to help improve fuel efficiency. Eastman’s tire additives technology allows tire manufacturers to enhance fuel efficiency performance without compromising other critical properties like handling and wet traction. In order to address identified market needs, the Company is also developing new technologies such as polyesters for coatings, sustainable solvents, and hydrocarbon resins for tires.
In addition, the acquired Taminco specialty amines and crop protection businesses are expected to enhance Eastman’s presence and provide additional opportunities for AFP growth in attractive niche markets including personal care, coatings, oil and gas, and feed and animal nutrition markets.
The Company is proceeding with a 40,000 metric ton expansion of the Crystex® insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in the first half of 2017, and retrofitting an existing manufacturing facility in Germany expected to be operational in the second half of 2015. These actions are expected to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and enhancing product characteristics.
The Company's global manufacturing presence is a key element of the AFP segment's growth strategy. For example, the segment expects to capitalize on industrial growth in China and other parts of Asia from its planned manufacturing capacity expansion in Malaysia and cellulose ester products sourced from our low cost acetyl manufacturing stream in North America.
ADHESIVES & PLASTICIZERS SEGMENT
• | Overview |
The A&P segment focuses on producing intermediate chemicals rather than finished products and developing long-term, strategic relationships to enable customers' growth in their end markets. In 2014, the A&P segment had sales revenue of $1.4 billion, 15 percent of Eastman's total sales. Key technology platforms in this segment are the integrated olefins and polyesters platforms as well as the hydrocarbon resins platform.
In the A&P segment, Eastman manufactures adhesives resins and plasticizers which are used in the manufacture of products sold into consumables, building and construction, health and wellness, industrial chemicals and processing, and durable goods markets. Market growth for adhesives resins in emerging markets such as China, Eastern Europe, and Latin America continues to be higher than regional economic growth, mainly due to growing use of consumables in these emerging economies. Use of non-phthalate plasticizers in the United States, Canada, and Europe continues to increase more than general economic growth due to increasing regulatory requirements and consumer preferences. In addition, the segment is expected to benefit from recovery in the North American building and construction industry and the shift of vinyl flooring production to the United States from Asia Pacific. Some of the segment's products are sensitive to periods of supply and demand imbalance, either when incremental capacity additions are not offset by corresponding increases in demand or when demand exceeds existing supply. Industry supply of some adhesives resins products is affected by changes in the availability of key raw materials. In addition to leveraging integrated manufacturing facilities and scale of production, the segment is well positioned to capitalize on meeting evolving market needs and supporting adoption of Eastman products in new or existing customer formulations. Major competitors in this segment include large, multinational companies. The segment competes primarily based on the breadth of its product portfolio, performance, and price.
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• | Principal Products |
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Adhesives Resins | ||||
Piccotac™ Regalite™ Eastotac™ Eastoflex™ | hydrocarbon resins and rosin resins mainly for hot-melt and pressure sensitive adhesives | Exxon Mobil Corporation Kolon Industries, Inc. | piperylene C9 resin oil gum rosin | Consumables (resins used in hygiene and packaging adhesives) Building and construction (resins for construction adhesives and interior flooring) |
Plasticizers | ||||
Eastman 168™ Eastman™ DOP Benzoflex™ Eastman TXIB™ | primary non- phthalate and phthalate plasticizers and a range of niche non- phthalate plasticizers | BASF SE Exxon Mobil Corporation LG Chem, Ltd. Emerald Performance Materials | propane propylene paraxylene | Building and construction (non-phthalate plasticizers used in interior surfaces) Consumables (food packaging, packaging adhesives, and glove applications) Health and wellness (medical devices) |
Percentage of Total Segment Sales | |||
Product Lines | 2014 | 2013 | 2012 |
Adhesives Resins | 53% | 52% | 55% |
Plasticizers | 47% | 48% | 45% |
• | Strategy |
A key element of the A&P segment's strategy for growth is to leverage Eastman's leading positions and market insights in high-growth hygiene, consumables, durables, and non-phthalate plasticizer applications. The A&P segment focuses on developing and accessing markets with high-growth potential for the Company's products. Key growth markets for the A&P segment are consumables such as hygiene and packaging and flexible plastic products used in sensitive applications. For hygiene and packaging applications, the segment's strategy is to enhance customer options for hot-melt packaging adhesives and to enable customers to meet changing and growing needs in hygiene products. For flexible plastic products used in sensitive applications, the segment's strategy is to develop and provide sustainable alternatives to ortho-phthalate plasticizers traditionally used in toys, child care articles, medical packaging and devices, and food contact items. The segment's regional focus is mainly to leverage its leading cost position in North America and Europe for plasticizers and to serve global markets for adhesives.
Eastman management believes that the ability to leverage the A&P segment's strong technical capabilities across multiple markets makes the segment uniquely positioned to meet evolving market needs and support adoption of Eastman products in new or additional customer formulations. Innovation efforts are focused on improving process efficiency and feedstock flexibility enabling low cost capacity additions, developing products addressing increasing customer quality needs for adhesives, and further enabling customer switching to non-phthalate plasticizers.
In 2014 the Company completed an expansion of its Eastman 168™ non-phthalate plasticizers manufacturing capacity at its Texas City, Texas site.
In addition, the Company and Sinopec Yangzi Petrochemical Company Limited continue to evaluate the timing of a joint project to build a 50,000 metric ton hydrogenated hydrocarbons resin plant in Nanjing, China which will support expected demand growth for its products in hygiene and packaging applications in that region.
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ADVANCED MATERIALS SEGMENT
• | Overview |
In the AM segment, the Company produces and markets specialty copolyesters, cellulose esters, interlayers, and aftermarket window film products that possess differentiated performance properties for value-added end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. In 2014, the AM segment had sales revenue of $2.4 billion, 25 percent of Eastman's total sales.
Eastman has strong technical and market development capabilities that enable the segment to modify its polymers, films, and plastics to control and customize their final properties for new application development to deliver more functionality. Examples include providing a balance of performance attributes, practical processing, and Bisphenol A (“BPA”) free and sustainability solutions with Tritan™ copolyester in the specialty plastics product line, and sound reduction and heat control in the interlayers product line. Additionally, these capabilities allow the Company to maintain what management believes is its leading solar control technology position in the window film market through the use of high performance sputter coatings which enhance solar heat rejection while maintaining superior optical properties. The segment principally competes on differentiated technology and application development capabilities. Management believes the AM segment's competitive advantages also include long-term customer relationships, vertical integration and scale in manufacturing, and leading market positions.
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• | Principal Products |
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Specialty Plastics | ||||
Eastar™ copolyesters Eastman Tritan™ copolyester Eastman Visualize™ Material Eastman Embrace™ copolyester Eastman Spectar™ copolyester Eastman Aspira™ family of resins Flexvue® | specialty copolyesters and cellulose esters | Bayer AG Styron LLC Evonik Industries AG Saudi Basic Industries Corporation Mitsubishi Chemical Corporation S.K. Chemical Industries Sichuan Push Acetati Company Limited Daicel Chemical Industries Ltd | paraxylene ethylene glycol cellulose | Consumables (Specialty copolyesters used in consumer packaging, personal care and cosmetics packaging, in-store fixtures and displays) Durable goods (consumer housewares and appliances) Health and wellness (medical) Electronics (displays) |
Interlayers | ||||
Saflex® Saflex® Q Series | polyvinyl butyral ("PVB") sheet specialty PVB intermediates | Sekisui Chemical Co., Ltd. Kuraray Co., Ltd | polyvinyl alcohol vinyl acetate monomer butyraldehyde 2-ethyl hexanol ethanol | Transportation (automotive safety glass, automotive acoustic glass, and HUD) Building and construction (PVB for architectural interlayers) |
Performance Films | ||||
LLumar® SunTek® V-KOOL® Gila® | window film and protective film products for aftermarket applied films | 3M Company Saint-Gobain S.A. Garware Chemicals Limited | polyethylene terephthalate film | Transportation (automotive after-market window film) Building and construction (residential and commercial window films) |
Percentage of Total Segment Sales | ||||
Product Lines | 2014 | 2013 | 2012 Pro Forma Combined (1) | 2012 |
Specialty Plastics | 54% | 53% | 52% | 69% |
Interlayers | 34% | 34% | 34% | 23% |
Performance Films | 12% | 13% | 14% | 8% |
(1) | "2012 Pro Forma Combined" gives effect to the acquisition of Solutia as if it had been completed at January 1, 2012. |
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• | Strategy |
Management believes that the segment has significant opportunities to leverage technology platforms into new products and applications, accelerate its growth, and further leverage its manufacturing capacity. The segment is working to expand its portfolio of higher margin products in attractive end markets. Through Eastman's advantaged asset position and expertise in applications development, management believes that the AM segment is well positioned for future growth. An example is Eastman Tritan™ copolyester used in small appliance applications where the combination of toughness, durability and design flexibility provides clear advantages over glass or lower performance polymer materials. The interlayers product lines, including HUD and acoustic PVB sheet, leverage Eastman's global presence to deliver industry leading innovations to automotive and architectural end markets by collaborating with global and large regional customers. In the automotive end market, the performance films product line has industry leading technologies, recognized brands, and what management believes is one of the largest distribution and dealer networks which, when combined, position Eastman for further growth, particularly in leading automotive markets such as North America and Asia. The segment’s product portfolio is aligned with underlying trends toward energy efficiency in both automotive and architectural markets. Additionally, increased demand for BPA-free products has created new opportunities for various applications of copolyesters.
The AM segment expects to continue to improve product mix from increased sales of premium products, including Eastman Tritan™ copolyester, Eastman Visualize™ Material, interlayers with acoustic properties, and LLumar®, V-KOOL®, and SunTek® window films and protective films.
The acquisition of Commonwealth further expands the AM segment's product portfolio and channel network in the diverse window film markets. In addition, the acquisition is expected to enable further manufacturing and distribution efficiencies and adds industry leading paint protection film technology to expand AM segment offerings in after-market automotive and protective film markets.
The Company completed an expansion of Eastman Tritan™ copolyester capacity at the Kingsport, Tennessee manufacturing facility in fourth quarter 2014, and began an additional 60,000 metric ton expansion of Eastman Tritan™ copolyester capacity at the Kingsport, Tennessee manufacturing facility which is expected to be operational in early 2017 to meet expected demand for Eastman Tritan™ copolyester.
During 2014, the Company also progressed on enhancements and innovations to improve its cost position in its PVB resin technology, supporting growth in the AM segment's transportation and building and construction markets in the Asia Pacific region. The construction of a manufacturing facility at the Kuantan, Malaysia site incorporating these improvements is expected to be operational in mid-2017.
FIBERS SEGMENT
• | Overview |
In the Fibers segment, Eastman manufactures and sells Estron™ acetate tow and Estrobond™ triacetin plasticizers for use primarily in the manufacture of cigarette filters; Estron™ natural (undyed) and Chromspun™ solution-dyed acetate yarns for use in apparel, home furnishings, and industrial fabrics; and cellulose acetate flake and acetyl raw materials for other acetate fiber producers. Eastman is one of the world's two largest suppliers of acetate tow and has been a market leader in the manufacture and sale of acetate tow since it began production in the early 1950s. The Company is the world's largest producer of acetate yarn and has been in this business for over 75 years. In 2014, the Fibers segment had sales revenue of $1.5 billion, 15 percent of Eastman's total sales. The Fibers segment has been and is expected to continue to be a stable source of cash flow and earnings.
Eastman's Fibers segment customers are located in all regions of the world, with Asia Pacific approximately 55 percent of 2014 revenues. The largest 13 Fibers segment customers include multinational as well as regional cigarette producers, fabric manufacturers, and other acetate fiber producers which account for approximately 80 percent of the segment's total sales revenue in 2014. Sales prices for a significant portion of the Fibers segment's products are typically negotiated on an annual basis.
The Company's long history and experience in the fibers markets are reflected in the Fibers segment's operating expertise, both within the Company and in support of its customers' processes. The Fibers segment's knowledge of the industry and of customers' processes allows it to assist its customers in maximizing their processing efficiencies, promoting repeat sales, and mutually beneficial, long-term customer relationships.
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The Company's fully integrated fiber manufacturing process employs unique technology that allows it to use a broad range of high-purity wood pulps for which the Company has dependable sources of supply.
Contributing to profitability in the Fibers segment is the limited number of competitors, high industry capacity utilization, and significant barriers to entry. These barriers include, but are not limited to, high capital costs for integrated manufacturing facilities.
The Fibers segment's competitive strengths include a reputation for high-quality products, technical expertise, large scale vertically-integrated processes, reliability of supply, acetate flake supply in excess of internal needs, a reputation for customer service excellence, and a customer base characterized by strategic long-term customer relationships. The Company intends to continue to capitalize and build on these strengths to improve the strategic position of its Fibers segment. The principal methods of competition include maintaining the Company's large-scale vertically integrated manufacturing process from acetyl raw materials, reliability of supply, product quality, and sustaining long-term customer relationships.
• | Principal Products |
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Acetate Tow | ||||
Estron™ | cellulose acetate tow | Celanese Corporation Solvay S.A. Daicel Corporation Mitsubishi Rayon Co. Ltd. | wood pulp methanol high sulfur coal | Tobacco (manufacture of cigarette filters) |
Acetate Yarn | ||||
Estron™ Chromspun™ Cosilva™ | natural (undyed) acetate yarn solution dyed acetate yarn | UAB Dirbtinis Pluostas Industrias del Acetato de Celulosa S.A. Mitsubishi Rayon Co. Ltd. | wood pulp methanol high sulfur coal | Consumables (apparel, home furnishings, and industrial fabrics) Health and wellness (medical tape) |
Acetyl Chemical Products | ||||
Estrobond™ | triacetin cellulose diacetate flake acetic acid acetic anhydride | Jiangsu Ruijia Chemistry Co., Ltd. Polynt SPA Daicel Corporation Celanese Corporation Solvay S.A. | wood pulp methanol high sulfur coal | Tobacco (manufacture of cigarette filters) |
Percentage of Total Segment Sales | |||
Product Lines | 2014 | 2013 | 2012 |
Acetate Tow | 79% | 83% | 86% |
Acetate Yarn and Acetyl Chemical Products | 21% | 17% | 14% |
• | Strategy |
In the Fibers segment, Eastman continues to leverage its strong customer relationships and industry knowledge to maintain a leading industry position in the global market. Eastman’s Fibers segment benefits from a state-of-the-art, world class, acetate flake production facility at the Kingsport, Tennessee site. In 2013, the Company completed construction of a 30,000 metric ton acetate tow manufacturing facility in Hefei, China, in a joint venture with China National Tobacco Corporation. Eastman's total global acetate tow capacity is approximately 210,000 metric tons, not including the Company’s participation in the Eastman China tow joint venture. The Company supplies 100 percent of the acetate flake raw material to the joint venture from the Company’s manufacturing facility in Kingsport, which the Company recognizes in sales revenue. The Company recognizes earnings in the joint venture through its equity investment, reported in "Other (income) charges, net" in the Consolidated Statement of Earnings.
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The Company intends to continue to make use of its capabilities in fibers technology to maintain a strong focus on incremental product and process improvements, with the goals of meeting customers' evolving needs and improving the segment's manufacturing process efficiencies.
The Company's Fibers segment research and development efforts focus on process and product improvements, as well as cost reduction, with the objectives of increasing sales and reducing costs. The Fibers segment also conducts research to assist acetate tow customers in the effective use of the segment's products and in the customers' product development efforts.
As a result of recent acetate tow market conditions, including additional industry capacity, the Company is evaluating actions to reduce Fibers segment costs. On February 3, 2015, Eastman announced it will begin a consultation period regarding a proposal to close its Workington, U.K., acetate tow 24,000 metric ton capacity manufacturing facility. The proposed consultation process is, and the closure would be, subject to local legal and regulatory requirements.
SPECIALTY FLUIDS & INTERMEDIATES SEGMENT
• | Overview |
The SFI segment leverages large scale and vertical integration from the acetyl and olefins streams and the recently acquired alkylamine stream and proprietary manufacturing technology for specialty fluids to manufacture diversified products that are sold externally for use in markets such as industrial chemicals and processing, building and construction, health and wellness, and agrochemicals. Certain SFI products are also used internally by other segments of the Company. The SFI segment has leading market positions in many of its core products, and management believes it is well-positioned in key markets for most of its major products including acetyl chemical intermediates, olefin derivatives, specialty fluids, and alkylamines due to its competitive cost position, scale, technology, and reliability of supply. In 2014, the SFI segment had sales revenue of $2.5 billion, 26 percent of the Company's total sales. Technology platforms for this segment include acetyls, oxo, benzene and derivatives, polyester and alkylamines.
Historically, the intermediates product line's competitive cost position has been primarily due to use of and access to lower cost raw materials, including natural gas, which are used in the production of acetyl stream products, and olefin feedstocks which are used in the production of olefin derivative products. Some of the product line’s products are affected by the olefins cycle. See "Eastman Chemical Company General Information - Manufacturing Streams" in this "Part I - Item 1. Business." This cyclicality is caused by periods of supply and demand imbalance, either when incremental capacity additions are not offset by corresponding increases in demand or when demand exceeds existing supply. While management continues to take steps to reduce the impact of the trough of the olefins cycle, future SFI segment results are expected to continue to fluctuate from time to time due both to general economic conditions and olefins supply and demand.
The specialty fluids product line includes heat transfer and aviation fluids products. The heat transfer fluids product line offers a portfolio of high temperature synthetic aromatic fluids used primarily for indirect heat transfer in many chemical and manufacturing processes. Due to timing of customer project completions, heat transfer fluids product line revenues and earnings fluctuate from time to time. The aviation fluids product line includes brands that sell into critical applications in the airline industry. Aviation fluids product revenues have historically been stable and influenced by general consumer demand and product performance in global fleet engines.
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• | Principal Products |
Product | Description | Principal Competitors | Key Raw Materials | End-Use Applications |
Chemical Intermediates | ||||
oxo alcohols and derivatives acetic acid and derivatives acetic anhydride | chemical intermediates | BASF SE The Dow Chemical Company Oxea BP plc Celanese Corporation Lonza | propane ethane propylene coal acetic acid natural gas | Industrial chemicals and processing Building and construction (paint/coating applications, construction chemicals, building materials) Pharmaceuticals and agriculture Health and wellness |
Other Intermediates | ||||
ethylene oxo alcohols polymer intermediates acetic acid | olefin, chemical intermediates, and polymer intermediates | LyondellBasell Industries Celanese Corporation BP plc BASF SE Flint Hill Resources | propane ethane propylene coal natural gas paraxylene metaxylene | Building and construction (paint/coating applications, construction chemicals, building materials) Industrial chemicals and processing Packaging |
Specialty Fluids | ||||
Therminol® Skydrol® Eastman Turbo Oils | heat transfer and aviation fluids | The Dow Chemical Company Exxon Mobil Corporation | benzene phosphorous neo-polyol esters | Industrial chemicals and processing (heat transfer fluids for chemical processes) Renewable energy Commercial aviation |
Functional Amines | ||||
alkylamines | methylamines and salts higher amines and solvents | DuPont U.S. Amines Oxea | methanol ammonia acetone ethanol butanol | Agrochemicals and various industrial intermediates Energy Personal care Water treatment Animal nutrition |
Percentage of Total Segment Sales | ||||
Product Lines | 2014 | 2013 | 2012 Pro Forma Combined (1) | 2012 |
Chemical Intermediates | 50% | 48% | 48% | 51% |
Other Intermediates | 35% | 39% | 39% | 42% |
Specialty Fluids | 14% | 13% | 13% | 7% |
Functional Amines | 1% | —% | —% | —% |
(1) | "2012 Pro Forma Combined" gives effect to the acquisition of Solutia as if it had been completed at January 1, 2012. |
• | Strategy |
A key focus for the segment is to continue to develop and access markets with high-growth potential for the Company's specialty fluids products. A major long-term goal is to expand volumes in growth markets for Therminol® heat transfer fluids through market development efforts. In second quarter 2014, the Company acquired the aviation turbine oil business. Added to Eastman’s Skydrol® aviation hydraulic fluids products, the acquired aviation turbine oil product line enables Eastman to better supply the global aviation industry.
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To maintain and enhance its status as a low cost producer, the SFI segment continuously focuses on cost control, operational efficiency, and capacity utilization to maximize earnings in the chemical intermediates and other intermediates product lines. Through the SFI segment, the Company leverages the advantage of its highly integrated and world-scale manufacturing facilities. For example, the Kingsport, Tennessee manufacturing facility allows the SFI segment to produce acetic anhydride and other acetyl derivatives from coal rather than natural gas or other petroleum feedstocks. At the Longview, Texas manufacturing facility, Eastman's SFI segment uses its proprietary oxo-technology in the world's largest single-site, oxo butyraldehyde manufacturing facility to produce a wide range of alcohols and other derivative products utilizing local propane and ethane supplies, as well as purchased propylene. At the Pace, Florida manufacturing facility acquired from Taminco, a recent expansion solidifies the Company’s position as the largest methylamine producer in North America. These integrated facilities, combined with large scale production processes and a continuous focus on additional process improvements, allow the chemical intermediates and other intermediates product lines to remain cost competitive with, and for some products cost-advantaged over, competitors.
The newly-acquired functional amines product line is expected to provide additional opportunities for SFI segment growth in attractive niche markets such as agriculture and personal care.
The Therminol® heat transfer fluid capacity expansion in Newport, Wales, is expected to be operational in the second half of 2015 to support expected long-term demand in the industrial chemicals and processing market for SFI products.
In 2012, the Company entered into an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant expected to be operational in 2016, which is expected to further improve the Company's competitive cost position compared to purchasing olefins in the North American market. Prior to completion of the plant, the Company continues to benefit from a propylene market contract with an advantaged cost position for purchased propylene. The Company continues to optimize the ethane content in its olefin cracking units feedstock mix based on relative market prices of olefins and olefins feedstocks.
The Company continues to evaluate long-term options for monetizing the Company's excess ethylene capacity while retaining its cost-advantaged integrated position to propylene which supports derivatives throughout the Company.
The Company is also actively pursuing licensing opportunities for acetyls, oxo derivatives, and mono ethylene glycol.
CORPORATE INITIATIVES |
In addition to its business segments, the Company manages certain growth initiatives and costs at the corporate level, including certain research and development costs not allocated to any one operating segment. The Company uses a stage-gating process, which is a disciplined decision making framework for evaluating targeted opportunities, with a number of projects at various stages of development. As projects meet milestones, additional investment is committed to those projects. The Company continues to explore and invest in research and development initiatives that are aligned with macro trends in sustainability, consumerism, and energy efficiency such as high performance materials, advanced cellulosics, and reduced environmental impact. An example of such an initiative is the Eastman™ microfiber technology platform which leverages the Company's core competency in polymers chemistry, spinning capability, and in-house application expertise, for use in high purity air filtration, liquid filtration, and energy storage media, with opportunities for future growth in nonwoven and textile applications. The acquisition of Knowlton Technologies is expected to accelerate the Eastman™ microfiber technology platform innovation.
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REGIONAL BUSINESS OVERVIEW |
Eastman operates as a global business with approximately 55 percent of its sales generated from outside the United States and Canada region in 2014. As the Company continues to focus on growth in emerging markets, the percentage of sales from outside the United States and Canada is expected to increase. The Company has expanded its international manufacturing presence, and the Company is also able to transport products globally to meet demand. While all regions continue to be affected by the uncertainty in the global economy, the degree of the impact on the various regions is dependent on the mix of the Company's segments and products in each region. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in Part II, Item 7 of this Annual Report.
In 2014, the regional revenue by segment was as follows:
United States and Canada | Asia Pacific | Europe, Middle East, and Africa | Latin America | |
Additives & Functional Products | 18% | 20% | 19% | 29% |
Adhesives & Plasticizers | 17% | 5% | 19% | 16% |
Advanced Materials | 20% | 28% | 32% | 26% |
Fibers | 6% | 30% | 17% | 10% |
Specialty Fluids & Intermediates | 39% | 17% | 13% | 19% |
TOTAL | 100% | 100% | 100% | 100% |
In 2014, the segment revenue by region was as follows:
Additives & Functional Products | Adhesives & Plasticizers | Advanced Materials | Fibers | Specialty Fluids & Intermediates | Combined | |
United States and Canada | 42% | 56% | 36% | 19% | 68% | 46% |
Asia Pacific | 28% | 9% | 30% | 53% | 17% | 27% |
Europe, Middle East, and Africa | 22% | 29% | 28% | 24% | 11% | 22% |
Latin America | 8% | 6% | 6% | 4% | 4% | 5% |
TOTAL | 100% | 100% | 100% | 100% | 100% | 100% |
The United States and Canada region contains the highest concentration of the Company's long-lived assets with approximately 75 percent located in the United States. Management believes that the location of these manufacturing facilities provides the Company with an advantaged cost position for the Company's domestic customers, particularly for commodity and bulk products. The SFI segment accounted for 39 percent of the region's revenue, as the segment is well-positioned in this region's market for most of its major products, including acetic acid and acetic anhydride, although revenues in the region can be volatile due to the dependence of this segment's selling prices on key raw material and energy costs. Recently a larger portion of worldwide building and construction end market products like those of the A&P segment are manufactured in North America rather than Asia Pacific.
Eastman's focus for the Asia Pacific region is on specialty products that benefit from both the emerging middle class in the region and a shift in China from government infrastructure spending to a consumer driven economy. The Company is responding to this growth by strengthening its position through joint ventures and acquisitions. These include an equity joint venture with China National Tobacco Corporation for a 30,000 metric ton acetate tow manufacturing facility in Hefei, China completed in 2013. In the AFP segment, the Company is proceeding with a Crystex® capacity expansion at the Kuantan, Malaysia manufacturing facility to capitalize on expected high industrial growth rates in the Asia Pacific region. This expansion is expected to be operational in the first half of 2017. In the AM segment, the Company is proceeding with the construction of a PVB resin manufacturing facility at the Kuantan, Malaysia site which is expected to be operational mid-2017. The Fibers segment is 30 percent of revenue in the region, primarily from acetate tow products.
Company revenues in the Europe, Middle East, and Africa region continue to be negatively affected by ongoing economic weakness in Europe, although sales of certain of the Company's products in the region have increased more than general economic growth in recent periods due to regulatory requirements and consumer preferences in Europe. Additionally, growth in the emerging economies of Eastern Europe for certain products has been higher than global economic growth in recent periods because of higher growth in gross domestic product and per capita income. The AM segment accounted for 32 percent of the region's revenue, with a high concentration of interlayers product sales in this region.
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The Company is focused on market trends in the Latin America region that include the growing use of adhesives for consumables and performance films for automotive end-market applications. Revenue in the region has been volatile due to product availability and the dependence of selling prices on key raw material and energy costs for the chemical intermediates products in the SFI segment. The AFP segment accounted for 29 percent of the region's revenue due to strong sales revenue in both coatings and tires markets.
Financial Information About Geographic Areas
For sales revenue and long-lived assets by geographic areas, see Note 20, "Segment Information", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
EASTMAN CHEMICAL COMPANY GENERAL INFORMATION |
Competitive Positions
Eastman has a strong portfolio of businesses that hold leading positions and manufacture products that enhance performance in a variety of end markets, sometimes classified as "specialty", "special position", or "commodity" products depending on product feature, product market, and competitive characteristics. Management considers “specialty” products those with leading competitive positions that enhance the performance of the end-use products through unique or differentiated product features. Examples of “specialty” products are Eastman Tritan™ copolyester, Texanol™, and Crystex®. “Special position” products are products that are also offered by competitors, but for which Eastman’s market position, regional cost advantage, and customer service provides a competitive advantage that enables consistent profit margins. Examples of “special position” products are Eastman 168™ plasticizer and acetic anhydride. The acquisition of the Taminco businesses adds additional "specialty" and "special position" products to the Company's portfolio. A relatively small portion (less than 15 percent of 2014 operating earnings) of Eastman’s products are considered “commodity” products, primarily excess chemical intermediates produced by Eastman’s large scale vertically integrated manufacturing assets that are sold externally to maintain high manufacturing capacity utilization. Examples of “commodity” products are bulk ethylene and polymer intermediates.
Seasonality and Cyclicality
The Company's earnings are typically greater in second and third quarters, and cash flows from operations are typically highest in the second half of the year due to seasonal demand based on general economic activity in the Company's key markets as described in "Business Segments". Results in the A&P and the AM segments are typically weaker in fourth quarter due to seasonal downturns in key markets.
The intermediates product lines of the SFI segment and the coatings product lines of the AFP segment are impacted by the cyclicality of key end products and markets, while other segments are more sensitive to global economic conditions. Supply and demand dynamics determine profitability at different stages of business cycles and global economic conditions affect the length of each cycle.
Despite sensitivity to global economic conditions, many of the products of each segment are expected to continue to provide an overall stable foundation for earnings.
Sales, Marketing, and Distribution
The Company markets and sells products primarily through a global marketing and sales organization which has a presence in the United States and in 39 other countries selling into approximately 135 countries around the world. Eastman has a marketing and sales strategy targeting industries and applications where Eastman products and services provide differentiated value. Market, customer, application, and technical expertise are critical capabilities. Through a highly skilled and specialized sales force that is capable of providing differentiated product solutions, Eastman strives to be the preferred supplier in the Company's targeted markets.
The Company's products are also marketed through indirect channels, which include distributors and contract representatives. Sales outside the United States tend to be made more frequently through distributors and contract representatives than sales in the United States. The combination of direct and indirect sales channels, including sales online through its Customer Center website, allows Eastman to reliably serve customers throughout the world.
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The Company's products are shipped to customers directly from Eastman's manufacturing plants and from distribution centers worldwide.
Sources and Availability of Raw Material and Energy
Eastman purchases a substantial portion, estimated to be approximately 70 percent, of its key raw materials and energy through different contract mechanisms, generally of two to five years in initial duration with renewal or cancellation options for each party. Most of these agreements do not require the Company to purchase materials or energy if its operations are reduced or idle. The cost of raw materials and energy is generally based on market price at the time of purchase, and Eastman uses derivative financial instruments to mitigate the impact of market price fluctuations. Key raw materials include propane, paraxylene, cellulose, propylene, methanol, natural gas, coal, ethane, and a wide variety of precursors for specialty organic chemicals. Key purchased energy sources include natural gas, steam, coal, and electricity. The Company has multiple suppliers for most key raw materials and energy and uses quality management principles, such as the establishment of long-term relationships with suppliers and on-going performance assessment and benchmarking, as part of its supplier selection process. When appropriate, the Company purchases raw materials from a single source supplier to maximize quality and cost improvements, and has developed contingency plans designed to minimize the potential impact of any supply disruptions from single source suppliers.
While temporary shortages of raw materials and energy may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuous availability and cost are subject to unscheduled plant interruptions occurring during periods of high demand, domestic and world market conditions, changes in government regulation, natural disasters, war or other outbreak of hostilities or terrorism or other political factors, or breakdown or degradation of transportation infrastructure. Eastman's operations or products have in the past, and may in the future, be adversely affected by these factors. The Company's raw material and energy costs as a percent of total cost of operations were approximately 55 percent, 60 percent, and 55 percent in 2014, 2013, and 2012, respectively.
For additional information about raw materials, see exhibit 99.01 "Product and Raw Material Information" of this Annual Report on Form 10-K.
Manufacturing Streams
Integral to Eastman's strategy for growth is leveraging its heritage of expertise and innovation in acetyl, olefins, and polyester chemistries in key markets, including building and construction, consumables, transportation, and tobacco. The Taminco acquisition adds a leading position in alkylamine chemistry. For each of these chemistries, Eastman has developed and acquired a combination of assets and technologies that are operated within four manufacturing "streams".
• | In the acetyl stream, the Company begins with coal and oxygen which are then gasified in its coal gasification facility. The resulting synthesis gas is converted into a number of chemicals including methanol, methyl acetate, acetic acid, and acetic anhydride. These chemicals are used in manufacturing products throughout the Company including, but not limited to, cellulose fibers, plastics, and esters. The Company's ability to use coal is considered to be a raw material cost advantage. The major end uses for products from the acetyl stream include coatings, displays, and tobacco. |
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• | In the olefins stream, the Company begins primarily with propane and ethane, which are cracked into the "olefin" chemicals ethylene and propylene at its facility in Longview, Texas. "Cracking" is a chemical process in which liquefied petroleum gases are converted into the more reactive olefin molecules which can then be used in the manufacture of other chemicals. Eastman operates three cracking units in Longview, Texas. The company continues to optimize the ethane content in its olefins cracking units feedstock mix based on relative market prices of olefins and olefins feedstocks. The Company also purchases additional propylene for use at its Longview facility and its facilities outside the United States and has an agreement with Enterprise Products Partners L.P. to purchase propylene from a planned propane dehydrogenation plant expected to be operational in 2016, which is expected to further improve the Company's competitive cost position compared to purchasing propylene in the North American market. Prior to completion of the plant, the Company benefits from a propylene market contract which improves its cost position for purchased propylene. Propylene is used in chemical intermediates, which are used to produce a variety of items such as paints and coatings, automotive safety glass, and non-phthalate plasticizers. The ethylene is used to produce chemicals that Eastman's customers ultimately convert for end uses in the food industry, health and beauty products, detergents, and automotive products. Petrochemical business cycles are influenced by periods of over- and under-capacity. Capacity additions to steam cracking units around the world, combined with demand for light olefins, determine the operating rate and thus profitability of producing olefins. Historically, periodic additions of large blocks of capacity have caused profit margins of light olefins to expand and contract, resulting in "ethylene" or "olefins" cycles. The Company believes it is positioned to be less impacted by these cycles than it has been historically due to actions it has taken to leverage its diverse derivatives products to take advantage of regulatory trends and focus on more durable markets. |
• | In the polyester stream, the Company begins with purchased paraxylene and produces purified terephthalic acid ("PTA") and dimethyl terephthalate ("DMT") for polyesters and copolyesters. PTA or DMT is then reacted with various glycols, which the Company either makes or purchases, along with other raw materials (some of which the Company makes and are proprietary) to produce copolyesters. The Company believes that this backward integration of polyester manufacturing is a competitive advantage, giving Eastman a low cost position, as well as a more reliable intermediate supply. In addition, Eastman can add specialty monomers to copolyesters to provide clear, tough, chemically resistant product characteristics. As a result, the Company's copolyesters effectively compete with materials such as polycarbonate and acrylic. |
• | In the alkylamine stream, the Company begins with ammonia and alcohols (C1 - C6) to produce methyl amines and higher alkylamines, which can then be further reacted with other chemicals to produce alkylamine derivatives. The Company’s alkylamine products are primarily used in agriculture, water treatment, personal care, animal nutrition and oil and gas end markets. The Company is recognized as a leader in alkylamine technology. Methylamines are manufactured by reacting methanol with ammonia in a catalytic reactor. Three different methylamines are produced: mono methylamine (“MMA”), di methylamine (“DMA”) and tri methylamine (“TMA”). The reaction circumstances (pressure, temperature, catalysts, etc.) and reactant ratios determine the ratio of the three products which are purified by distillation and used as building blocks to produce downstream derivatives or sold externally to merchant customers. The term 'higher alkylamines' refers to amines produced with C2-C6 alcohols (ethyl, n butyl, n propyl, isopropyl and cyclohexyl amines). The manufacturing process for higher alkylamines is similar to that for methylamines, as ammonia is combined with various alcohols in catalytic reactors and subsequently distilled. The use of different alcohols results in the creation of different higher alkylamines which are used both internally to produce derivatives or sold externally to the merchant market. |
In addition to stream integration, the Company also derives value from Eastman's cellulosics expertise. These cellulosics are natural polymers, sourced from managed forests, which, when combined with the acetyl and olefin streams, provide differentiated product lines and an advantaged raw material position for Eastman.
The Company leverages its expertise and innovation in acetyl, olefins, polyester and alkylamine chemistries, and technologies, as well as its use of cellulosics, to meet demand and create new uses and opportunities for the Company's products in key markets. Through integration and optimization across these streams, the Company is able to create unique and differentiated products that have a performance advantage over competitive materials.
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Capital Expenditures
Capital expenditures were $593 million, $483 million, and $465 million in 2014, 2013, and 2012, respectively. Capital expenditures in 2014 were primarily for organic growth initiatives particularly in the SFI and AM segments, including improvements to plants, purchases of equipment, and manufacturing and administrative facility additions and enhancements. The Company expects that 2015 capital spending will be between $700 million and $725 million including the costs of modernization and expansion of the Kingsport, Tennessee site, the expansion and construction at the Kuantan, Malaysia manufacturing site in the AFP and AM segments, additional expansion of Eastman Tritan™ copolyester capacity in Kingsport, and a Therminol® heat transfer fluid capacity expansion in Newport, Wales. Capital spending in 2015 is expected to include approximately $80 million for the recently acquired Taminco businesses.
Employees
Eastman employs approximately 15,000 men and women worldwide. Approximately 10 percent of the total worldwide labor force is represented by unions, mostly outside the United States.
Customers
Eastman has an extensive customer base and, while it is not dependent on any one customer, loss of certain top customers could adversely affect the Company until such business is replaced. The top 100 customers accounted for approximately 60 percent of the Company's 2014 sales revenue. No single customer accounted for 10 percent or more of the Company's consolidated sales revenue during 2014.
Intellectual Property and Trademarks
While the Company's intellectual property portfolio is an important Company asset which it expands and vigorously protects globally through a combination of patents that expire at various times, trademarks, copyrights, and trade secrets, neither its business as a whole nor any particular segment is materially dependent upon any one particular patent, trademark, copyright, or trade secret. As a producer of a broad range of advanced materials, chemicals, and fibers, Eastman owns over 700 active United States patents and more than 1,900 active foreign patents, expiring at various times over several years, and also owns over 5,500 active worldwide trademark applications and registrations. Eastman continues to actively protect its intellectual property. As the laws of many countries do not protect intellectual property to the same extent as the laws of the United States, Eastman cannot ensure that it will be able to adequately protect its intellectual property assets outside the United States.
The Company pursues opportunities to license proprietary technology to third parties in areas where it has determined competitive impact to its businesses will be minimal. These arrangements typically are structured to require payments at significant project milestones such as signing, completion of design, and start-up. To date, efforts have been focused on acetyls technology in the SFI segment. The Company is also actively pursuing licensing opportunities for acetyls, oxo derivatives, and mono ethylene glycol in the SFI segment.
Research and Development
For 2014, 2013, and 2012, Eastman's R&D expenses totaled $227 million, $193 million, and $198 million, respectively.
Environmental
Eastman is subject to significant and complex laws, regulations, and legal requirements relating to the use, storage, handling, generation, transportation, emission, discharge, disposal, and remediation of, and exposure to, hazardous and non-hazardous substances and wastes in all of the countries in which it does business. These health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Health, Safety, Environmental and Security Committee of Eastman's Board of Directors oversees the Company's policies and practices concerning health, safety, and the environment and its processes for complying with related laws and regulations, and monitors related matters.
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The Company's policy is to operate its plants and facilities in compliance with all applicable laws and regulations such that it protects the environment and the health and safety of its employees and the public. The Company intends to continue to make expenditures for environmental protection and improvements in a timely manner consistent with its policies and with the technology available. In some cases, applicable environmental regulations such as those adopted under the Clean Air Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation, and Liability Act, and related actions of regulatory agencies, determine the timing and amount of environmental costs incurred by the Company. Likewise, any new legislation or regulations related to greenhouse gas emissions and energy could impact the timing and amount of environmental costs incurred by the Company. The Company has reduced its greenhouse gas emissions and energy consumption on a unit basis over the last five years.
The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. In some instances, the amount cannot be reasonably estimated due to insufficient information, particularly as to the nature and timing of future expenditures. In these cases, the liability is monitored until such time that sufficient information exists. With respect to a contaminated site, the amount accrued reflects liabilities expected to be paid out within 30 years and the Company's assumptions about remediation requirements at the site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations, and testing requirements could result in higher or lower costs. The Company's cash expenditures related to environmental protection and improvement were $319 million, $285 million, and $262 million, in 2014, 2013, and 2012, respectively. These amounts were primarily for operating costs associated with environmental protection equipment and facilities, but also included $79 million and $53 million in expenditures for engineering and construction in 2014 and 2013, respectively.
Management anticipates that capital expenditures associated with boiler air emissions regulations will modestly increase average annual environmental capital expenditures over the next four to five years compared to recent historical levels. However, the Company has decided to convert 50 percent of its steam and electric generation capacity at the Kingsport, Tennessee facility to natural gas over that period which the Company believes is more cost-efficient. Management does not believe that these expenditures will have a material effect on the Company's consolidated financial position or cash flows. Other than these planned capital expenditures at the Company's Kingsport, Tennessee facility, the Company does not currently expect near term environmental capital expenditures arising from requirements of recently promulgated environmental laws and regulations to materially increase the Company's planned level of annual capital expenditures for environmental control facilities.
Other matters concerning health, safety, and the environment are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 and in Notes 1, "Significant Accounting Policies"; 14, "Environmental Matters"; and 23, "Reserve Rollforwards" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Backlog
On January 1, 2015 and 2014, Eastman's backlog of firm sales orders represented less than 10 percent of the Company's total consolidated revenue for the previous year. These orders are primarily short-term and all orders are expected to be filled in the following year. The Company manages its inventory levels to control the backlog of products depending on customers' needs. In areas where the Company is the single source of supply, or competitive forces or customers' needs dictate, the Company may carry additional inventory to meet customer requirements.
Available Information - SEC Filings
The Company makes available free of charge, through the "Investors - SEC Information" section of its Internet website (www.eastman.com), its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.
The Company is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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ITEM 1A. RISK FACTORS |
For identification and discussion of the most significant risks applicable to the Company and its business, see Part II – Item 7 – "Management's Discussion and Analysis of Financial Condition and Results of Operations – Risk Factors" of this Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS |
None.
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EXECUTIVE OFFICERS OF THE COMPANY |
Certain information about the Company's executive officers is provided below:
Mark J. Costa, age 48, is Chief Executive Officer and Chairman of the Eastman Chemical Company Board of Directors. Mr. Costa joined the Company in June 2006 as Senior Vice President, Corporate Strategy & Marketing; was appointed Executive Vice President, Polymers Business Group Head and Chief Marketing Officer in August 2008; was appointed Executive Vice President, Specialty Polymers, Coatings and Adhesives, and Chief Marketing Officer in May 2009; and became President and a Director of the Company in May 2013. Prior to joining Eastman, Mr. Costa was a senior partner with Monitor Group ("Monitor"). He joined Monitor, a global management consulting firm, in 1988 and his experience included corporate and business unit strategies, asset portfolio strategies, innovation and marketing, and channel strategies across a wide range of industries. Mr. Costa was appointed Chief Executive Officer in January 2014 and was named Chairman effective July 2014.
Curtis E. Espeland, age 50, is Executive Vice President and Chief Financial Officer. Mr. Espeland joined Eastman in 1996, and has served in various financial management positions of increasing responsibility, including Director of Internal Auditing; Director of Finance, Asia Pacific; Director of Corporate Planning and Forecasting; Vice President and Controller; Vice President, Finance, Eastman Division; Vice President, Finance, Polymers; and Senior Vice President and Chief Financial Officer from 2008 until December 2013. He served as the Company's Chief Accounting Officer from December 2002 to 2008. Prior to joining Eastman, Mr. Espeland was an audit and business advisory manager with Arthur Andersen LLP in the United States, Eastern Europe, and Australia. Mr. Espeland was appointed to his current position effective January 2014.
Ronald C. Lindsay, age 56, is Chief Operating Officer. Mr. Lindsay joined Eastman in 1980 and has held a number of positions in various manufacturing and business organizations. In 2003, Mr. Lindsay was appointed Vice President and General Manager of Intermediates; in 2005 became Vice President, Performance Chemicals and Intermediates; in 2006 was appointed Senior Vice President and Chief Technology Officer; in 2008 was appointed Senior Vice President, Corporate Strategy and Regional Leadership; in May 2009 was appointed Executive Vice President, Performance Polymers and Chemical Intermediates; and in January 2011 was appointed Executive Vice President, Performance Chemicals and Intermediates, Fibers, Engineering and Construction, and Manufacturing Support. In July 2012 he was appointed Executive Vice President, Adhesives &Plasticizers, Fibers, Specialty Fluids & Intermediates, Engineering and Construction, and Manufacturing Support. He was appointed to his current position effective January 2014.
Brad A. Lich, age 47, is Executive Vice President, with responsibility for the Additives and Functional Products and Advanced Materials segments and the marketing, sales, and pricing organizations. Mr. Lich joined Eastman in 2001 as Director of Global Product Management and Marketing for Coatings. Other positions of increasing responsibility followed, including General Manager of Emerging Markets for the former Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI"). In 2006, Mr. Lich became Vice President of Global Marketing with direct responsibility for company-wide global marketing functions. In 2008, Mr. Lich was appointed Vice President and General Manager of the CASPI segment, and in 2012 was appointed Vice President and General Manager of the AFP segment. Mr. Lich was appointed to his current position effective January 2014.
Michael H.K. Chung, age 61, is Senior Vice President and Chief International Ventures Officer. Mr. Chung joined Eastman in 1976, and since that time has held various management positions, primarily in the Company's chemicals and fibers businesses. He was appointed Vice President, Fibers International Business in 2006 and in 2009, he was appointed Vice President and Managing Director, Asia Pacific Region. Mr. Chung was appointed to his current position effective January 2011.
Mark K. Cox, age 49, is Senior Vice President and Chief Manufacturing and Engineering Officer. Mr. Cox joined Eastman in 1986 and has served in a variety of management positions, including leadership roles within the Business Management, Manufacturing, and Technology areas. Additionally, he has held responsibility for Eastman’s Corporate Six Sigma program. In August 2008, Mr. Cox was appointed Vice President, Chemicals and Fibers Technology. Beginning in May 2009, Mr. Cox served as Vice President, Chemicals, Fibers, and Performance Polymers Technology. He was appointed Vice President, Worldwide Engineering and Construction in August 2010 and to his current position effective January 2014.
Stephen G. Crawford, age 50, is Senior Vice President and Chief Technology Officer, including responsibility for corporate innovation. Mr. Crawford joined Eastman in 1987. Since then, he has held several leadership positions of increasing responsibility in the manufacturing and technology organizations, including Vice President, Specialty Polymers and Coatings Technology. In February 2013, Mr. Crawford was appointed Vice President, Functional Products Technology. In that position he had responsibility for Coatings, Adhesives and Plasticizers, Fibers and Rubber Additives Technology development. Mr. Crawford was appointed to his current position effective January 2014.
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David A. Golden, age 49, is Senior Vice President, Chief Legal Officer, and Corporate Secretary. Mr. Golden has responsibility for Eastman's Legal, Corporate HSES, and Global Public Affairs and Policy organizations. He also has overall responsibility for Eastman's Ethics & Corporate Compliance program. Immediately prior to this position, he was Vice President, Associate General Counsel, and Corporate Secretary with overall responsibility for Eastman’s Legal Department. Mr. Golden joined Eastman in 1995 as an attorney and has held positions of increasing responsibility, including serving as the Company’s Director of Internal Audit from October 2005 to October 2007 and Vice President and Assistant General Counsel responsible for the Company’s Commercial and International Law groups from 2007 to 2010. Mr. Golden assumed his current role in January 2013. Prior to joining Eastman, he worked as an attorney in the Atlanta office of the law firm of Hunton & Williams.
Godefroy A.F.E. Motte, age 56, is Senior Vice President, Integrated Supply Chain and Chief Regional and Sustainability Officer. Since joining Eastman in 1985, Mr. Motte has held leadership positions in various organizations, including sales, supply chain, and manufacturing and in both the Company's chemicals and polymers businesses. He was appointed Vice President for the Europe, Middle East, and Asia ("EMEA") region for the Chemicals Division in 2001 and for the EMEA Polymers Business Group in April 2006. In January 2011, Mr. Motte was appointed Senior Vice President, Chief Regional and Sustainability Officer and was appointed to his current position effective July 2012.
Perry Stuckey, III, age 55, is Senior Vice President, Chief Human Resources Officer. Mr. Stuckey joined Eastman in 2011, as Vice President, Global Human Resources, and was responsible for Eastman's human resources strategy and services worldwide. Mr. Stuckey's work experience spans more than 25 years, including a variety of global human resource management positions in manufacturing, industrial automation, and bio-technology organizations, including Hill-Rom Company, Rockwell Automation, and Monsanto Company. Mr. Stuckey was appointed to his current position in January 2013.
Scott V. King, age 46, is Vice President, Finance and Chief Accounting Officer. Since joining Eastman in 1999 as Manager, Corporate Consolidations and External Reporting, Mr. King has held various positions of increasing responsibility in the financial organization, and was appointed Vice President and Controller in August 2007 and Chief Accounting Officer in September 2008. Prior to joining Eastman, Mr. King was an audit and business advisory manager with PricewaterhouseCoopers LLP. Mr. King was appointed to his current position in June 2014.
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ITEM 2. | PROPERTIES |
At December 31, 2014, Eastman Chemical Company ("Eastman" or the "Company") owned or operated 51 manufacturing sites and has equity interests in four manufacturing joint ventures in a total of 15 countries. Utilization of these sites may vary with product mix and economic, seasonal, and other business conditions; however, none of the principal plants is substantially idle. The Company's plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth. These plants are generally well maintained, in good operating condition, and suitable and adequate for their use. Unless otherwise indicated, all of the properties are owned. The locations and general character of the Company's manufacturing sites are:
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Segment using manufacturing location | |||||
Location | Additives & Functional Products | Adhesives & Plasticizers | Advanced Materials | Fibers | Specialty Fluids & Intermediates |
USA | |||||
Alvin, Texas(1) | x | ||||
Anniston, Alabama | x | ||||
Axton, Virginia | x | ||||
Canoga Park, California(2) | x | ||||
Cartersville, Georgia(1) | x | ||||
Chestertown, Maryland | x | ||||
Chicago, Illinois(2) | x | ||||
Columbia, South Carolina(1)(3) | x | ||||
Franklin, Virginia(1) | x | ||||
Indianapolis, Indiana | x | ||||
Jefferson, Pennsylvania | x | x | |||
Kingsport, Tennessee | x | x | x | x | x |
Lemoyne, Alabama(1) | x | ||||
Linden, New Jersey | x | ||||
Longview, Texas | x | x | x | x | |
Martinsville, Virginia (4) | x | ||||
Monongahela, Pennsylvania | x | ||||
Pace, Florida | x | x | |||
Sauget, Illinois | x | ||||
Springfield, Massachusetts | x | ||||
St. Gabriel, Louisiana | x | x | |||
Sun Prairie, Wisconsin | x | ||||
Texas City, Texas | x | x | |||
Trenton, Michigan | x | ||||
Watertown, New York (5) | |||||
Europe | |||||
Antwerp, Belgium(1) | x | x | |||
Ghent, Belgium (4) | x | x | x | ||
Workington, England | x | ||||
Kohtla-Järve, Estonia | x | x | |||
Oulu, Finland | x | ||||
Dresden, Germany | x | ||||
Leuna, Germany | x | x | |||
Nienburg, Germany | x | ||||
Middelburg, the Netherlands | x | ||||
Newport, Wales | x | x | |||
(1) | Eastman is a guest under an operating agreement with a third party, which operates its manufacturing facilities at the site. |
(2) | Eastman leases from a third party and Eastman operates the site. |
(3) | Although nearly the entire manufacturing site was included in the first quarter 2011 divestiture of the Company's polyethylene terephthalate ("PET") business and related assets, a portion has been retained subsequent to the sale. |
(4) | Eastman has more than one manufacturing site at this location. |
(5) | This location supports developing businesses of the Eastman™ microfiber technology platform, the financial results of which are not identifiable to an operating segment and are shown as "other" operating earnings (loss). |
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Segment using manufacturing location | |||||
Location | Additives & Functional Products | Adhesives & Plasticizers | Advanced Materials | Fibers | Specialty Fluids & Intermediates |
Asia Pacific | |||||
Fengxian, China | x | ||||
Suzhou, China(1)(2)(3) | x | x | |||
Wuhan, China(4) | x | ||||
Yixing, China | x | ||||
Zibo, China(5) | x | x | |||
Kashima, Japan | x | ||||
Ulsan, Korea | x | ||||
Kuantan, Malaysia(1) | x | x | |||
Jurong Island, Singapore(1) | x | x | x | ||
Latin America | |||||
Itupeva, Brazil(6) | x | ||||
Mauá, Brazil | x | ||||
Santo Toribio, Mexico | x | ||||
Uruapan, Mexico | x | ||||
(1) | Eastman leases from a third party and Eastman operates the site. |
(2) | Eastman has more than one manufacturing site at this location. |
(3) | Eastman holds a 60 percent share in the joint venture Solutia Therminol Co., Ltd., Suzhou in the Specialty Fluids & Intermediates segment. |
(4) | Eastman holds a 51 percent share in the joint venture Eastman Specialties Wuhan Youji Chemical Co., Ltd. |
(5) | Eastman holds a 51 percent share in the joint venture Qilu Eastman Specialty Chemical Ltd. |
(6) | Eastman is a guest under an operating agreement with a third party, which operates its manufacturing facilities at the site. |
Eastman has 50 percent or less ownership in joint ventures at the following manufacturing sites:
Segment using manufacturing location | |||||
Location | Additives & Functional Products | Adhesives & Plasticizers | Advanced Materials | Fibers | Specialty Fluids & Intermediates |
Asia Pacific | |||||
Hefei, China | x | ||||
Nanjing, China (1) | x | x | |||
Shenzhen, China | x | ||||
(1) | Eastman has more than one manufacturing site at this location. |
Eastman has distribution facilities at all of its plant sites. In addition, the Company owns or leases approximately 200 stand-alone distribution facilities in the United States and 30 other countries. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Merelbeke, Belgium; Shanghai, China; Miami, Florida; Capelle aan den IJssel, the Netherlands; Allentown, Pennsylvania; Zug, Switzerland; Singapore; and Kingsport, Tennessee. Technical service is provided to the Company's customers from technical service centers in Kingsport, Tennessee; Palo Alto, California; Canoga Park, California; Naperville, Florida; Springfield, Massachusetts; Akron, Ohio; Martinsville, Virginia; Ghent, Belgium; Kirkby, England; Middelburg, the Netherlands; Shanghai, China; and Singapore. In addition to Eastman's regional customer service centers located in Kingsport, Tennessee; St. Louis, Missouri; Miami, Florida (Latin America); Capelle aan den IJssel, the Netherlands; Zaventem, Belgium; Koeln, Germany; Shanghai, China; and Singapore, the Company also has customer service offices located in 15 other countries around the world.
A summary of properties, classified by type, is included in Note 4, "Properties and Accumulated Depreciation", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K (this "Annual Report").
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ITEM 3. | LEGAL PROCEEDINGS |
General
From time to time, Eastman Chemical Company ("Eastman" or the "Company") 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 being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
Solutia Legacy Torts Claims Litigation
Pursuant to an Amended and Restated Settlement Agreement effective February 28, 2008 between Solutia Inc. ("Solutia") and Monsanto Company ("Monsanto") in connection with Solutia's emergence from Chapter 11 bankruptcy proceedings (the "Monsanto Settlement Agreement"), Monsanto is responsible to defend and indemnify Solutia against any Legacy Tort Claims (as defined in the Monsanto Settlement Agreement) and Solutia agreed to retain responsibility for certain tort claims, if any, that may arise from Solutia's conduct after its spinoff from Pharmacia Corporation (f/k/a Monsanto), which occurred on September 1, 1997. Solutia, which became a wholly owned subsidiary of Eastman on July 2, 2012, has been named as a defendant in several such proceedings, and has submitted the matters to Monsanto as Legacy Tort Claims. To the extent these matters are not within the meaning of Legacy Tort Claims, Solutia could potentially be liable thereunder. In connection with the completion of its acquisition of Solutia, Eastman guaranteed the obligations of Solutia and Eastman was added as an indemnified party under the Monsanto Settlement Agreement.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a)Eastman Chemical Company's ("Eastman" or the "Company") common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN". The following table presents the high and low sales prices of the common stock on the NYSE and the cash dividends per share declared by the Company's Board of Directors for each quarterly period of 2014 and 2013.
High | Low | Cash Dividends Declared | ||||||||||
2014 | First Quarter | $ | 88.90 | $ | 73.00 | $ | 0.35 | |||||
Second Quarter | 90.55 | 82.49 | 0.35 | |||||||||
Third Quarter | 89.02 | 78.21 | 0.35 | |||||||||
Fourth Quarter | 88.93 | 70.38 | 0.40 | |||||||||
2013 | First Quarter | $ | 75.18 | $ | 67.27 | $ | 0.30 | |||||
Second Quarter | 74.62 | 63.48 | 0.30 | |||||||||
Third Quarter | 82.91 | 69.75 | 0.30 | |||||||||
Fourth Quarter | 82.96 | 72.62 | 0.35 | |||||||||
As of December 31, 2014, there were 148,647,456 shares of the Company's common stock issued and outstanding, which shares were held by 19,438 stockholders of record. These shares include 50,798 shares held by the Company's charitable foundation. The Company's Board of Directors has declared a cash dividend of $0.40 per share during the first quarter of 2015, payable on April 1, 2015 to stockholders of record on March 16, 2015. Quarterly dividends on common stock, if declared by the Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. The payment of dividends is a business decision made by the Board of Directors from time to time based on the Company's earnings, financial position and prospects, and such other considerations as the Board considers relevant. Accordingly, while management currently expects that the Company will continue to pay a quarterly cash dividend, its dividend practice may change at any time.
See Part III, Item 12 — "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Securities Authorized for Issuance Under Equity Compensation Plans" of this Annual Report for the information required by Item 201(d) of Regulation S-K.
(b)Not applicable.
.
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ITEM 6. | SELECTED FINANCIAL DATA |
Operating Data | Year Ended December 31, | ||||||||||||||||||
(Dollars in millions, except per share amounts) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Sales | $ | 9,527 | $ | 9,350 | $ | 8,102 | $ | 7,178 | $ | 5,842 | |||||||||
Operating earnings | 1,162 | 1,862 | 800 | 937 | 844 | ||||||||||||||
Earnings from continuing operations | 755 | 1,172 | 443 | 607 | 418 | ||||||||||||||
Earnings from discontinued operations | 2 | — | — | 9 | 9 | ||||||||||||||
Gain from disposal of discontinued operations | — | — | 1 | 31 | — | ||||||||||||||
Net earnings | 757 | 1,172 | 444 | 647 | 427 | ||||||||||||||
Less: Net earnings attributable to noncontrolling interest | 6 | 7 | 7 | 1 | 2 | ||||||||||||||
Net earnings attributable to Eastman | $ | 751 | $ | 1,165 | $ | 437 | $ | 646 | $ | 425 | |||||||||
Amounts attributable to Eastman stockholders | |||||||||||||||||||
Earnings from continuing operations, net of tax | $ | 749 | $ | 1,165 | $ | 436 | $ | 606 | $ | 416 | |||||||||
Earnings from discontinued operations, net of tax | 2 | — | 1 | 40 | 9 | ||||||||||||||
Net earnings attributable to Eastman stockholders | $ | 751 | $ | 1,165 | $ | 437 | $ | 646 | $ | 425 | |||||||||
Basic earnings per share attributable to Eastman | |||||||||||||||||||
Earnings from continuing operations | $ | 5.01 | $ | 7.57 | $ | 2.99 | $ | 4.34 | $ | 2.88 | |||||||||
Earnings from discontinued operations | 0.02 | — | 0.01 | 0.29 | 0.07 | ||||||||||||||
Net earnings | $ | 5.03 | $ | 7.57 | $ | 3.00 | $ | 4.63 | $ | 2.95 | |||||||||
Diluted earnings per share attributable to Eastman | |||||||||||||||||||
Earnings from continuing operations | $ | 4.95 | $ | 7.44 | $ | 2.92 | $ | 4.24 | $ | 2.81 | |||||||||
Earnings from discontinued operations | 0.02 | — | 0.01 | 0.28 | 0.07 | ||||||||||||||
Net earnings | $ | 4.97 | $ | 7.44 | $ | 2.93 | $ | 4.52 | $ | 2.88 | |||||||||
Statement of Financial Position Data | |||||||||||||||||||
Current assets | $ | 3,173 | $ | 2,840 | $ | 2,699 | $ | 2,302 | $ | 2,047 | |||||||||
Net properties | 5,087 | 4,290 | 4,181 | 3,107 | 3,219 | ||||||||||||||
Goodwill | 4,486 | 2,637 | 2,644 | 406 | 375 | ||||||||||||||
Other intangibles | 2,905 | 1,781 | 1,870 | 101 | 92 | ||||||||||||||
Total assets | 16,072 | 11,845 | 11,710 | 6,184 | 5,986 | ||||||||||||||
Current liabilities | 2,022 | 1,470 | 1,364 | 1,114 | 1,070 | ||||||||||||||
Long-term borrowings | 7,248 | 4,254 | 4,779 | 1,445 | 1,598 | ||||||||||||||
Total liabilities | 12,482 | 7,970 | 8,682 | 4,283 | 4,327 | ||||||||||||||
Total Eastman stockholders' equity | 3,510 | 3,796 | 2,943 | 1,870 | 1,627 | ||||||||||||||
Dividends declared per share | 1.450 | 1.250 | 1.080 | 0.990 | 0.895 | ||||||||||||||
On December 5, 2014, Eastman Chemical Company ("Eastman" or the "Company") completed its acquisition of Taminco, a global specialty chemical company. The fair value of total consideration transferred was $2.8 billion, consisting of cash of $1.7 billion, net of cash acquired, and repayment of Taminco's debt of $1.1 billion. The acquisition was accounted for as a business combination. Taminco’s former specialty amines and crop protection businesses are managed and reported as part of the Additives & Functional Products ("AFP") segment and its former functional amines business are managed and reported as part of the Specialty Fluids & Intermediates ("SFI") segment.
On December 11, 2014, the Company acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") for a total purchase price of $438 million including the repayment of debt. The acquisition was accounted for as a business combination and the acquired Commonwealth business is managed and reported in the Advanced Materials segment.
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On June 2, 2014, the Company acquired BP plc's global aviation turbine engine oil business ("aviation turbine oil business") for a total cash purchase price of $283 million. The acquisition was accounted for as a business combination and the acquired aviation turbine oil business is managed and reported in the SFI segment.
On August 6, 2014, the Company acquired Knowlton Technologies, LLC ("Knowlton"), for a total cash purchase price of $42 million. The acquisition was accounted for as a business combination. The acquired Knowlton business is a developing business of the Eastman™ microfiber technology platform, the financial results of which are not identifiable to an operating segment and are shown as "other" operating earnings (loss).
On July 2, 2012, the Company completed its acquisition of Solutia Inc. ("Solutia"), a global leader in performance materials and specialty chemicals. The fair value of total consideration transferred was $4.8 billion, consisting of cash of $2.6 billion, net of cash acquired; equity in the form of Eastman stock of approximately $700 million; and the assumption and subsequent repayment of Solutia's debt at fair value of $1.5 billion.
For additional information about the above acquired businesses see Note 2, "Acquisitions", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. As of the date of acquisition, results of the acquired businesses are included in Eastman results.
In third quarter 2011, the Company completed three acquisitions, each accounted for as a business combination: Sterling Chemicals, Inc., a single site North American petrochemical producer, to produce non-phthalate plasticizers in the Adhesives & Plasticizers (A&P) segment, including Eastman 168™ non-phthalate plasticizers, and acetic acid in the SFI segment; Scandiflex do Brasil S.A. Indústrias Químicas, a manufacturer of plasticizers located in São Paulo, Brazil, which is reported in the A&P segment; and Dynaloy, LLC, a producer of formulated solvents, which is reported in the AFP segment.
In 2011, the Company completed the sale of the polyethylene terephthalate ("PET") business, related assets at the Columbia, South Carolina site, and technology of its former Performance Polymers segment. The PET business, assets, and technology sold were substantially all of the Performance Polymers segment. Performance Polymers segment operating results are presented as discontinued operations for all periods presented and are therefore not included in results from continuing operations in accordance with accounting principles generally accepted ("GAAP") in the United States.
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Page | |
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon the consolidated financial statements of Eastman Chemical Company ("Eastman" or the "Company"), which have been prepared in accordance with accounting principles generally accepted ("GAAP") in the United States, and should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this 2014 Annual Report on Form 10-K (this "Annual Report"). All references to earnings per share ("EPS") contained in this report are to diluted earnings per share unless otherwise noted.
CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with GAAP, the Company's management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, sales revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impairment of long-lived assets, environmental costs, pension and other postretirement benefits, litigation and contingent liabilities, income taxes, and purchase accounting. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company's management believes the critical accounting estimates described below are the most important to the fair presentation of the Company's financial condition and results. These estimates require management's most significant judgments in the preparation of the Company's consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company believes, based on historical results, the likelihood of actual write-offs having a material impact on financial results is low. However, if one of the Company's key customers was to file for bankruptcy, or otherwise be unwilling or unable to make its required payments, or there was a significant slow-down in the economy, the Company could increase its allowances. This could result in a material charge to earnings. The Company's allowance for doubtful accounts was $10 million and $12 million at December 31, 2014 and 2013, respectively.
Impairment of Long-Lived Assets
As a result of the 2014 acquisitions, the Company recorded $1.9 billion of goodwill and $1.3 billion of definite-lived intangible assets. As required by purchase accounting guidance, the Company performed a determination of the fair value of assets and liabilities acquired. Therefore, the goodwill and intangible assets resulting from the acquisitions were excluded from the current year's annual testing of goodwill and indefinite-lived intangible assets. See Note 2, "Acquisitions" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Definite-lived Assets
Properties and equipment and definite-lived intangible assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of these long-lived assets is performed at the asset group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If the carrying amount is not considered to be recoverable, an analysis of fair value is triggered. An impairment is recognized for the excess of the carrying amount of the asset over the fair value.
The Company conducts testing of goodwill and indefinite-lived intangible assets annually in third quarter of each year or when impairment indicators arise, whichever comes first.
Goodwill
The testing of goodwill is performed at the "reporting unit" level which the Company has determined to be its "components". Components are defined as one level below an operating segment, and in order to be a reporting unit, the component must 1) be a "business" as defined by applicable accounting standards (an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to the investors or other owners, member, or participants); 2) have discrete financial information available; and 3) be reviewed regularly by Company operating segment management. The Company aggregates certain components into reporting units based on economic similarities.
The Company uses an income approach and applies a fair value methodology based on discounted cash flows in testing the carrying value of goodwill for each reporting unit. The key assumptions and estimates used in the Company's 2014 goodwill impairment testing included a long-term projection of revenues, expenses, and cash flows, the estimated discount rate, and the estimated tax rate. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company's estimates. In addition, the use of different estimates or assumptions could result in materially different determinations. If the estimated fair value of a reporting unit is determined to be less than the carrying value of the net assets of the reporting unit including goodwill, additional steps, including an allocation of the estimated fair value to the assets and liabilities of the reporting unit, would be necessary to determine the amount, if any, of goodwill impairment.
As a result of the tests performed during third quarter 2014, there was no impairment of the Company's goodwill. Fair values substantially exceeded the carrying values for each reporting unit tested, except for the specialty fluids reporting unit (a part of the Specialty Fluids and Intermediates ("SFI") operating segment) acquired from Solutia Inc. ("Solutia").
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Goodwill of $545 million is allocated to the specialty fluids reporting unit. As of December 31, 2014 the fair value of the specialty fluids reporting unit approximates the carrying value. Two of the most critical assumptions used in the calculation of the fair value of the specialty fluids reporting unit are the long-term growth rate and the discount rate. The Company performed a sensitivity analysis on both of those assumptions. The fair value was 13 percent less than the carrying value with a one percent decrease in the long-term growth rate and 16 percent less than the carrying value with a one percent increase in the discount rate.
In order to determine the discount rate, the Company uses a market perspective weighted average cost of capital ("WACC") approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value.
Indefinite-lived Intangible Assets
The carrying value of indefinite-lived intangible assets is considered to be impaired when the fair value, as established by appraisal or based on discounted future cash flows of certain related products, is less than the respective carrying values.
Indefinite-lived intangible assets, consisting of various tradenames, are tested for potential impairment by comparing the estimated fair value to the carrying amount. The Company uses an income approach, specifically the relief from royalty method, to test indefinite-lived intangible assets. The estimated fair value of the tradenames is determined based on an assumed royalty rate savings, discounted by the calculated market participant WACC plus a one percent risk premium. The carrying value of indefinite-lived intangible assets is considered to be impaired when the estimated fair value is less than the carrying value of the trademarks.
As of July 1, 2014, the testing date, the Company had $567 million in indefinite-lived intangible assets. In third quarter 2014, the Company recognized an impairment of $22 million in the Additives & Functional Products segment to adjust the carrying value of the Crystex® tradename to $135 million as a result of the decrease in projected revenues since the tradename was acquired from Solutia in 2012.
The Company will continue to monitor both goodwill and indefinite-lived intangible assets for any indication of triggering events which might require additional testing before the next required annual impairment test.
Changes in indefinite-lived asset valuation assumptions may result in future indefinite-lived asset impairments. If estimates of fair value less costs to sell are revised, the carrying amount of the related asset would be adjusted, resulting in a charge to earnings.
Environmental Costs
The Company accrues environmental remediation costs when it is probable that the Company has incurred a liability at a contaminated site and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. This undiscounted accrued amount reflects liabilities expected to be paid out within 30 years and the Company's assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, and chemical control regulations and testing requirements could result in higher or lower costs. Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $324 million to the maximum of $548 million at December 31, 2014. The maximum estimated future costs are considered to be reasonably possible and are inclusive of the amounts accrued at December 31, 2014.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with GAAP, the Company also establishes reserves for closure and postclosure costs associated with the environmental and other assets it maintains. Environmental assets, as defined by GAAP, include but are not limited to waste management units, such as landfills, water treatment facilities, and surface impoundments. When these types of assets are constructed or installed, a loss contingency reserve is established for the future costs anticipated to be associated with the retirement or closure of the asset based on an expected life of the environmental assets and the applicable regulatory closure requirements. These future estimated costs are charged against earnings over the estimated useful life of the assets. Currently, the Company estimates the useful life of each individual asset is up to 50 years. If the Company changes its estimate of the environmental asset retirement obligation costs or its estimate of the useful lives of these assets, expenses charged against earnings could increase or decrease.
In accordance with GAAP, the Company also monitors conditional obligations and recognizes loss contingency associated with them when and to the extent that more detailed information becomes available concerning applicable retirement costs.
The Company's environmental loss contingency reserve, including the above remediation, was $345 million at December 31, 2014 and $368 million at December 31, 2013, representing the minimum or best estimate for remediation costs and the best estimate of the amount accrued to date over the regulated assets' estimated useful lives for asset retirement obligation costs. Amounts at December 31, 2014 included the amount of environmental loss contingencies of the acquired Taminco Corporation businesses. See Note 2, "Acquisitions" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pension and Other Postretirement Benefits
The Company maintains defined benefit pension plans that provide eligible employees with retirement benefits. Additionally, Eastman subsidizes life insurance, health care, and dental benefits for eligible retirees, and health care and dental benefits for retirees' eligible survivors. The costs and obligations related to these benefits reflect the Company's assumptions related to general economic conditions (particularly interest rates) and expected return on plan assets. In July 2012, as part of its acquisition of Solutia, the Company assumed Solutia's U.S. and non-U.S. defined benefit pension and other postretirement benefit plans. Prior to the acquisition, the Solutia U.S. pension plans had been closed to new participants and were no longer accruing additional benefits. For valuing the obligations and assets of the Company's U.S. and non-U.S. defined benefit pension plans, the Company assumed weighted average discount rates of 3.80 percent and 3.10 percent, respectively, and a weighted average expected return on plan assets of 7.78 percent and 5.50 percent, respectively, at December 31, 2014. The Company assumed a weighted average discount rate of 3.91 percent for its other postretirement benefit plans and an expected return on plan assets of 3.75 percent for its voluntary employees' beneficiary association retiree trust at December 31, 2014. The cost of providing plan benefits also depends on demographic assumptions including retirements, mortality, turnover, and plan participation.
The Company performed a five year experience study of the assumptions for the U.S. plans in 2014 which included a review of the mortality tables. The Company uses the RP-2000 table with scale AA static improvement scale and no collar adjustment. As a result of the experience study, the Company did not change to the recently published RP-2014 table as the current RP-2000 table with scale AA more closely aligns with the Company's experience.
The projected benefit obligation as of December 31, 2014 and 2015 expense are affected by year-end 2014 assumptions. The following table illustrates the sensitivity to changes in the Company's long-term assumptions in the expected return on assets and assumed discount rate for all pension plans and other postretirement benefit plans. The sensitivities below are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Assumption | Impact on 2015 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Pension Plans | Impact on December 31, 2014 Projected Benefit Obligation for Pension Plans | Impact on 2015 Pre-tax Benefits Expense (Excludes mark-to-market impact) for Other Postretirement Benefit Plans | Impact on December 31, 2014 Benefit Obligation for Other Postretirement Benefit Plans | |
U.S. | Non-U.S. | ||||
25 basis point decrease in discount rate | -$2 Million | +$60 Million | +$52 Million | -$1 Million | +$27 Million |
25 basis point increase in discount rate | +$2 Million | -$59 Million | -$48 Million | +$1 Million | -$27 Million |
25 basis point decrease in expected return on assets | +$6 Million | No Impact | No Impact | < +$0.5 Million | No Impact |
25 basis point increase in expected return on assets | -$6 Million | No Impact | No Impact | < -$0.5 Million | No Impact |
The expected return on assets and assumed discount rate used to calculate the Company's pension and other postretirement benefit obligations are established each December 31. The expected return on assets is based upon prior performance and the long-term expected returns in the markets in which the trusts invest their funds, primarily in the following markets: U.S. and non-U.S. fixed income, U.S. and non-U.S. public equity, private equity, and real estate markets. Moreover, the expected return on plan assets is a long-term assumption and on average is expected to approximate the actual return on assets. Actual returns will be subject to year-to-year variances. The assumed discount rate is based upon a portfolio of high-grade corporate bonds, which are used to develop a yield curve. This yield curve is applied to the expected durations of the pension and other postretirement benefit obligations. As future health care benefits under the U.S. benefit plan have been fixed at a certain contribution amount, changes in the health care cost trend assumptions do not have a material impact on the results of operations.
The Company uses fair value accounting for plan assets. If actual experience differs from long-term assumptions for asset returns and discount rates which were used in determining the current year expense, the difference is recognized immediately as part of the mark-to-market ("MTM") net gain or loss in the fourth quarter of each year, and any other quarter in which an interim remeasurement is triggered. The MTM net gain or loss applied to earnings from continuing operations in 2014, 2013, and 2012 due to the actual experience versus assumptions of returns on plan assets and discount rates for the defined benefit pension and other postretirement benefit plans were a net loss of $304 million, net gain of $383 million, and net loss of $276 million, respectively. At December 31, 2014, the Company's weighted-average assumed discount rate was 3.68 percent, down significantly from the prior year, resulting in an actuarial loss of approximately $375 million. Overall pension asset values increased approximately $70 million due to asset values appreciating in excess of the assumed weighted-average rate of return. The actual return was approximately $255 million, or approximately 9 percent, which was in excess of the expected return of approximately $185 million, or 7.08 percent, and resulted in the approximately $70 million increase.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company does not anticipate that a change in pension and other postretirement benefit obligations caused by a change in the assumed discount rate during 2015 will impact the cash contributions to be made to the pension plans during 2015. While the amount of the change in these obligations does not correspond directly to cash funding requirements, it is an indication of the amount the Company will be required to contribute to the plans in future years. The amount and timing of such cash contributions is dependent upon interest rates, actual returns on plan assets, retirement, attrition rates of employees, and other factors. For further information regarding pension and other postretirement benefit obligations, see Note 11, "Retirement Plans", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Litigation and Contingent Liabilities
From time to time, the Company and its operations are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount. The Company expenses legal costs, including those expected to be incurred in connection with a loss contingency, as incurred. Based upon facts and information currently available, the Company believes the amounts reserved are adequate for such pending matters; however, results of operations could be affected by monetary damages, costs or expenses, and charges against earnings in particular periods.
Income Taxes
Amounts of deferred tax assets and liabilities on the Company's balance sheet are based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. The ability to realize deferred tax assets is evaluated through the forecasting of taxable income, and domestic and foreign taxes, using historical and projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In the event that the actual outcome from future tax consequences differs from management estimates and assumptions, the resulting change to the provision for income taxes could have a material adverse impact on the consolidated results of operations and statement of financial position. As of December 31, 2014, a valuation allowance of $264 million has been provided against the deferred tax assets.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions, which is included as a component of the income tax provision on the balance sheet.
Purchase Accounting
In general, the acquisition method of accounting requires recognition of assets acquired and liabilities assumed at their respective fair values at the date of acquisition. For assets and liabilities other than intangible assets and property, plant, and equipment, the Company estimates fair value using the exit price approach which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly market. An exit price is determined from the viewpoint of unrelated market participants as a whole, in the principal or most advantageous market, and may result in the Company valuing assets or liabilities at a fair value that is not reflective of the Company's intended use of the assets or liabilities. Any amount of the purchase price paid that is in excess of the estimated fair values of net assets acquired or liabilities assumed is recognized in the line item goodwill on the Company's balance sheet.
For intangible assets, the Company uses the income, market, or cost approach (or a combination thereof) for the valuation as appropriate, and uses valuation inputs in these models and analyses that are based on market participant assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data which includes consideration of obsolescence. Management's judgment is used to determine the estimated fair values assigned to assets acquired and liabilities assumed, and asset lives for property, plant and equipment and amortization periods for intangible assets, and subsequent adjustments to such initial valuations can materially affect the Company's results of operations.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-GAAP AND PRO FORMA COMBINED FINANCIAL MEASURES
Non-GAAP and pro forma combined financial measures, and the accompanying reconciliations of the non-GAAP financial measures to the most comparable GAAP measures, are presented in "2014 Overview", "Results of Operations", and "Summary by Operating Segment" in this MD&A.
Company Use of Non-GAAP Financial Measures
In addition to evaluating the Company's financial condition, results of operations, liquidity, and cash flows as reported in accordance with GAAP, Eastman management also evaluates Company and operating segment performance, and makes resource allocation and performance evaluation decisions, excluding the effect of transactions, costs, and losses or gains that do not directly arise from Eastman's normal, or "core", business and operations, or are otherwise of an unusual or non-recurring nature. These transactions, costs, and losses or gains relate to, among other things, cost reduction, growth and profitability improvement initiatives, and other events outside of core business operations (such as MTM losses or gains for pension and other postretirement benefit plans, typically in the fourth quarter of each year and any other quarters in which an interim remeasurement is triggered). Because non-core or non-recurring transactions, costs, and losses or gains may materially affect the Company's, or any particular operating segment's, financial condition or results in a specific period in which they are recognized, Eastman believes it is appropriate to evaluate both the financial measures prepared and calculated in accordance with GAAP and the related non-GAAP financial measures excluding the effect on our results of these non-core or non-recurring items. In addition to using such measures to evaluate results in a specific period, management evaluates such non-GAAP measures, and believes that investors may also evaluate such measures, because such measures may provide more complete and consistent comparisons of the Company's, and its segments', operational performance on a period-over-period historical basis and, as a result, provide a better indication of expected future trends. Management discloses these non-GAAP measures, and the related reconciliations to the most comparable GAAP financial measures, because it believes investors use these metrics in evaluating longer term period-over-period performance, and to allow investors to better understand and evaluate the information used by management to assess the Company's, and its operating segments', performance, make resource allocation decisions and evaluate organizational and individual performance in determining certain performance-based compensation. Non-GAAP measures do not have definitions under GAAP, and may be defined differently by, and not be comparable to, similarly titled measures used by other companies. As a result, management cautions investors not to place undue reliance on any non-GAAP measure, but to consider such measures with the most directly comparable GAAP measure.
Non-GAAP Measures in this Annual Report
The non-core or non-recurring items excluded by management in its evaluation of certain results in this Annual Report are:
• | MTM pension and other postretirement benefit plans gains and losses, net, which are actuarial gains and losses measured as the changes in discount rates and other actuarial assumptions and the difference between actual and expected returns on plan assets during the period. These actuarial gains and losses were primarily due to changes in discount rates reflective of changes in global market conditions and interest rates on high-grade corporate bonds and changes in other postretirement benefit plan obligations resulting from a plan amendment, and did not directly arise from Eastman's core business and operations; |
• | Asset impairments and restructuring charges, net, which, other than severance costs, are not cash transactions impacting profitability; |
• | Costs resulting from the sale of acquired inventories at fair value, net of the last-in, first-out ("LIFO") impact for certain of these inventories (as required by purchase accounting, these inventories were marked to fair value); and |
• | Acquisition transaction, pre-close financing, and integration costs of the acquired Solutia, Taminco Corporation ("Taminco"), Commonwealth Laminating & Coating, Inc. ("Commonwealth"), BP plc global aviation turbine engine oil business (the "aviation turbine oil business"), and Knowlton Technologies, LLC ("Knowlton") businesses, which are non-core costs, |
in each case for the periods and in the amounts in the table below.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-GAAP Financial Measures -- Excluded Non-Core or Non-Recurring Items
(Dollars in millions) | 2014 | 2013 | 2012 | ||||||||
Non-core or non-recurring items impacting operating earnings: | |||||||||||
Mark-to-market pension and other postretirement benefits (gain) loss, net | $ | 304 | $ | (383 | ) | $ | 276 | ||||
Asset impairments and restructuring charges, net | 77 | 76 | 120 | ||||||||
Additional costs of acquired inventories | 24 | — | 79 | ||||||||
Acquisition integration costs | 24 | 36 | 16 | ||||||||
Acquisition transaction costs | 22 | — | 28 | ||||||||
Non-core or non-recurring items impacting earnings before income taxes: | |||||||||||
Acquisition pre-close financing costs | $ | 13 | $ | — | $ | 32 | |||||
This MD&A includes the effect of the foregoing on the following financial measures:
• | Gross profit, |
• | Selling, general, and administrative ("SG&A") expenses, |
• | Research and development ("R&D") expenses, |
• | Operating earnings, |
• | Net interest expense, |
• | Other (income) charges, net, |
• | Earnings from continuing operations, and |
• | Diluted earnings per share. |
For more detail about MTM pension and other postretirement benefit plans gains and losses, net, including actual and expected return on plan assets and the components of the net gain or loss, see "CRITICAL ACCOUNTING ESTIMATES -- Pension and Other Postretirement Benefits" above and Note 11, "Retirement Plans - Summary of Changes and - Summary of Benefit Costs and Other Amounts Recognized in Other Comprehensive Income" to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.
Pro Forma Combined Financial Information
In order to provide more meaningful comparison of results, some of the following corporate and segment discussion and analysis includes both actual results for all periods presented and results on a "pro forma combined" basis. The unaudited pro forma combined information is based on the historical consolidated financial statements of both Eastman and Solutia and has been prepared to illustrate the effects of the Company's acquisition of Solutia, assuming the acquisition of Solutia had been consummated January 1, 2012, the beginning of the earliest period presented. The unaudited pro forma combined information reflects only the combination of Eastman and Solutia and does not give pro forma effect to any other transactions or events. For 2012, pro forma combined results reflect actual results for third and fourth quarter 2012 plus pro forma combined results for the first six months 2012.
The unaudited pro forma combined information is not necessarily indicative of the results of operations, or the financial position, that would have actually occurred had the acquisition been completed as of the dates indicated, nor is it indicative of the future operating results, or financial position, of Eastman. The unaudited pro forma combined information did not reflect future events that may have occurred or may still occur after the acquisition of Solutia, including the potential realization of any future operating cost savings (synergies) or restructuring activities or other costs related to the integration of Solutia and yet to be incurred, and did not consider potential impacts of then current market conditions on revenues or expense efficiencies.
The unaudited pro forma combined information includes certain adjustments for additional depreciation and amortization expense based upon the fair value step-up and estimated useful lives of Solutia depreciable fixed assets and limited-life amortizable assets acquired in the transaction. Additionally, in the preparation of unaudited pro forma combined sales and earnings from continuing operations, Solutia's historical consolidated results have been retrospectively adjusted for the change in accounting methodology for pension and other postretirement benefit plans actuarial losses and gains adopted by Eastman during first quarter 2012. The information also includes adjustments to Solutia exclusions from operating earnings in order to be consistent with Eastman's non-GAAP presentation.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition, certain pro forma combined financial information for the acquisition of Taminco is presented in the Company's Current Report on Form 8-K/A filed February 19, 2015.
Other Non-GAAP Financial Measures
Alternative Non-GAAP Cash Flow Measures
In addition to the non-GAAP measures presented in this Annual Report and other periodic reports, from time to time management evaluates and discloses to investors and securities analysts the non-GAAP measure cash provided by operating activities excluding certain non-core or non-recurring items ("cash provided by operating activities, as adjusted") when analyzing, among other things, business performance, liquidity and financial position, and performance-based compensation. Eastman management uses this non-GAAP measure in conjunction with the GAAP measure cash provided by operating activities because it believes it is a more appropriate metric to evaluate the cash flows from Eastman's core operations that are available to grow the business and create stockholder value, and because it allows for a more consistent period-over-period presentation of such amounts. In its evaluation, Eastman management generally excludes the impact of certain non-core activities and decisions of management because such activities and decisions are not considered core, ongoing components of operations and the decisions to undertake or not to undertake such activities may be made irrespective of the cash generated from operations. From time to time, management discloses this non-GAAP measure and the related reconciliation to investors and securities analysts to allow them to better understand and evaluate the information used by management in its decision making processes and because management believes investors and securities analysts use similar measures to assess Company performance, liquidity, and financial position over multiple periods and to compare these with other companies.
Similarly, from time to time, Eastman may disclose to investors and securities analysts one or both of the alternative non-GAAP measures of "free cash flow", which management defines as (i) cash provided by operating activities, as adjusted, described above, less the amounts of capital expenditures and dividends, and (ii) cash provided by operating activities, as adjusted, described above, less the amount of capital expenditures. Management believes such items are generally funded from available cash and, as such, should be considered in determining free cash flow. Eastman management believes these are appropriate metrics to use to evaluate the Company's overall ability to generate cash to fund future operations, inorganic growth opportunities, and to meet the Company's debt repayment obligations. Management believes these metrics are useful to investors and securities analysts in order to provide them with information similar to that used by management in evaluating potential future cash available for various initiatives and because management believes investors and securities analysts often use a similar measure of free cash flow to compare the results, and value, of comparable companies.
Alternative Non-GAAP Earnings Measures
From time to time, Eastman may disclose to investors and securities analysts the non-GAAP earnings measures "Adjusted EBITDA" and "Return on Invested Capital" (or "ROIC"). Management defines "Adjusted EBITDA" as "EBITDA" (net earnings or net earnings per share before interest, taxes, depreciation and amortization) adjusted to exclude the same non-core and non-recurring items as are excluded from the Company's other non-GAAP earnings measures for the same periods. "EBITDA Margin" is Adjusted EBITDA divided by the GAAP measure sales revenue in the Company's income statement for the same periods. Management defines "ROIC" as net income plus interest expense after tax divided by average total borrowings plus average stockholders' equity for the periods presented, each derived from the GAAP measures in the Company's financial statements for the periods presented. Management believes that Adjusted EBITDA and ROIC are useful as supplemental measures in evaluating the performance of and returns from Eastman's operating businesses, and from time to time uses such measures in internal performance calculations. Further, management understands that investors and securities analysts often use similar measures of Adjusted EBITDA and ROIC to compare the results, returns, and value, of the Company with those of other companies.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2014 OVERVIEW
Eastman's businesses are managed and reported in five reporting segments: Additives & Functional Products ("AFP"), Adhesives & Plasticizers ("A&P"), Advanced Materials ("AM"), Fibers, and Specialty Fluids & Intermediates ("SFI"). Taminco's former specialty amines and crop protection businesses are managed and reported in the AFP segment. The acquired Commonwealth business is managed and reported in the AM segment. Taminco's former functional amines business and the acquired aviation turbine oil business are managed and reported in the SFI segment. Eastman management believes that the Company's end-market diversity is a source of strength, and that many of the markets into which the Company’s products are sold are benefiting from longer-term global trends such as energy efficiency, a rising middle class in emerging economies, and an increased focus on health and wellness. Management believes that these trends, combined with the diversity of the Company's end markets, facilitate more consistent demand for the Company's products over time. The businesses acquired from Taminco are expected to provide additional opportunities for growth in agriculture, personal care, coatings, and oil and gas markets. Eastman is focused on consistent earnings growth through a market-driven approach that takes advantage of the Company's existing technology platforms, global market and manufacturing presence, and leading positions in key end markets.
The Company generated sales revenue of $9.5 billion and $9.4 billion for 2014 and 2013, respectively. The sales revenue increase of $177 million in 2014 was primarily due to higher AFP, A&P, and AM segment sales volume and higher Fibers segment selling prices, partially offset by lower Fibers segment sales volume.
Operating earnings were $1.2 billion in 2014 compared to $1.9 billion in 2013. Excluding the non-core or non-recurring items referenced in "Non-GAAP and Pro Forma Combined Financial Measures", operating earnings were $1.61 billion in 2014 and $1.59 billion in 2013. Operating earnings in 2014 increased slightly as higher sales volume and improved product mix, particularly in the AM segment, higher selling prices, primarily in the Fibers segment, more than offset higher raw material and energy costs particularly for propane in the first half of the year, primarily in the SFI segment, and the cost of manufacturing capacity shutdowns.
As described in more detail in "Results of Operations", earnings from continuing operations and diluted earnings per share attributable to Eastman were as follows:
2014 | 2013 | ||||||||||||||
(Dollars in millions, except diluted EPS) | $ | EPS | $ | EPS | |||||||||||
Earnings from continuing operations, net of tax | $ | 749 | $ | 4.95 | $ | 1,165 | $ | 7.44 | |||||||
MTM pension and other postretirement benefit plans (gain) loss, net of tax | 202 | 1.34 | (233 | ) | (1.49 | ) | |||||||||
Asset impairments and restructuring charges, net of tax | 63 | 0.42 | 53 | 0.34 | |||||||||||
Acquisition transaction and integration costs, net of tax | 39 | 0.26 | 23 | 0.15 | |||||||||||
Additional costs of acquired inventories, net of tax | 15 | 0.10 | — | — | |||||||||||
Earnings from continuing operations excluding non-core or non-recurring items, net of tax | $ | 1,068 | $ | 7.07 | $ | 1,008 | $ | 6.44 | |||||||
The Company generated $1.4 billion in cash from operating activities in 2014, compared to $1.3 billion cash generated from operating activities during 2013. The increase in cash from operating activities was primarily due to higher cash earnings and lower income tax payments partially offset by higher variable compensation payouts and increased working capital requirements.
In 2014, the Company progressed on both organic (internal) and inorganic (external growth through joint ventures and acquisitions) growth initiatives, including:
• | completing the acquisition of Taminco, which is expected to: |
• | strengthen Eastman's presence in attractive niche markets benefiting from megatrends; |
• | leverage a world-class technology platform underpinned by a business model similar to Eastman's; |
• | provide synergy opportunities; and |
• | accelerate revenue and earnings growth prospects; |
• | completing the integration of Solutia; |
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
• | in the AFP segment: |
• | proceeding with a 40,000 metric ton expansion of the Crystex® insoluble sulfur rubber additives manufacturing facility in Kuantan, Malaysia, expected to be operational in the first half of 2017, and retrofitting an existing manufacturing facility in Germany expected to be operational in the second half of 2015. These actions are expected to capitalize on recent enhancements of technology for the manufacture of Crystex® insoluble sulfur by improving the Company's cost position and enhancing product characteristics; and |
• | adding Taminco's former specialty amines and crop protection businesses; |
• | in the A&P segment, completing a capacity expansion of Eastman 168™ non-phthalate plasticizers at the manufacturing facility in Texas City, Texas in second quarter 2014; |
• | in the AM segment: |
• | completing an expansion of Eastman Tritan™ copolyester capacity and beginning an additional 60,000 metric ton expansion of Eastman Tritan™ copolyester capacity at the Kingsport, Tennessee manufacturing facility in fourth quarter 2014 which is expected to be operational in early 2017 to meet expected demand for Eastman Tritan™ copolyester; and |
• | completing the acquisition of Commonwealth to strengthen the window film product portfolio, add industry leading protective film technology, and increase scale cost efficiencies; |
• | in the SFI segment: |
• | completing the acquisition of the aviation turbine oil business to broaden Eastman product offerings to better supply the global aviation industry; |
• | continuing a Therminol® heat transfer fluid capacity expansion in Newport, Wales, which is expected to be operational in the second half of 2015 to support expected long-term demand growth in the industrial chemicals and processing market; and |
• | adding Taminco's former functional amines business; and |
• | completing the acquisition of Knowlton Technologies, a leader in wet-laid nonwovens, to accelerate the innovation cycle for the Eastman™ microfibers technology platform. |
RESULTS OF OPERATIONS
The Company's results of operations as presented in the Company's consolidated financial statements in Part II, Item 8 of this Annual Report are summarized and analyzed below.
SUMMARY OF CONSOLIDATED RESULTS
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | % | 2013 | 2012 | % | |||||||||||||||
Sales | $ | 9,527 | $ | 9,350 | 2 | % | $ | 9,350 | $ | 8,102 | 15 | % | |||||||||
Volume effect | 1 | % | 15 | % | |||||||||||||||||
Price effect | 1 | % | — | % | |||||||||||||||||
Exchange rate effect | — | — | |||||||||||||||||||
Pro Forma Combined Sales | $ | 9,350 | $ | 9,120 | 3 | % | |||||||||||||||
Volume effect | 3 | % | |||||||||||||||||||
Price effect | — | % | |||||||||||||||||||
Exchange rate effect | — | % | |||||||||||||||||||
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2014 Compared to 2013
Sales revenue increased $177 million in 2014 compared to 2013 primarily due to higher AFP, A&P, and AM segments sales volume and higher Fibers segment selling prices, partially offset by lower Fibers segment sales volume. The higher AFP segment sales volume was primarily due to sales of products of the acquired Taminco specialty amines and crop protection product lines and higher coatings products sales volume. The higher A&P segment sales volume was primarily attributed to stronger adhesives resins products end-market demand and the continued substitution of phthalate plasticizers with Eastman non-phthalate plasticizers. The higher AM segment sales volume was primarily due to higher premium product sales, including Eastman Tritan™ copolyester and interlayers with acoustic properties. The lower Fibers segment sales volume was primarily due to lower acetate tow volume attributed to additional industry capacity.
2013 Compared to 2012
Sales revenue increased $1,248 million in 2013 compared to 2012. Sales revenue increased primarily due to volume in first six months 2013 from the acquired Solutia product lines in the AM, AFP, and SFI segments. Sales volume also increased as a result of higher solvents products sales volume in the AFP segment and higher Eastman TritanTM copolyester sales volume in the AM segment partially offset by weakened demand for adhesives resins in the A&P segment.
On a pro forma combined basis, sales revenue increased slightly in 2013 compared to 2012 primarily due to higher sales volume in all other operating segments more than offsetting lower A&P segment sales volume.
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | Change | 2013 | 2012 | Change | |||||||||||||||
Gross Profit | $ | 2,221 | $ | 2,776 | (20 | )% | $ | 2,776 | $ | 1,762 | 58 | % | |||||||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | 240 | (297 | ) | (297 | ) | 208 | |||||||||||||||
Additional costs of acquired inventories | 24 | — | — | 79 | |||||||||||||||||
Gross Profit excluding non-core or non-recurring items | $ | 2,485 | $ | 2,479 | — | % | $ | 2,479 | $ | 2,049 | 21 | % | |||||||||
2014 Compared to 2013
Gross profit decreased $555 million in 2014 compared with 2013 primarily due to the $240 million MTM pension and other postretirement benefit adjustment loss in 2014 and a $297 million MTM pension and other postretirement benefit adjustment gain in 2013. The $297 million MTM gain included a $68 million MTM gain triggered by an other postretirement benefit plan amendment. Excluding non-core or non-recurring items, gross profit increased slightly as higher gross profit in the AM, Fibers, and A&P segments was partially offset by lower gross profit in the SFI segment. The lower SFI segment gross profit was primarily due to higher raw material and energy costs, particularly for propane in the first half of the year, exceeding higher selling prices, primarily for intermediates, by $33 million and due to $27 million of manufacturing capacity shutdown costs.
2013 Compared to 2012
Gross profit increased $1.0 billion in 2013 compared with 2012 with increases in all segments except the A&P segment. Gross
profit in 2013 included a $297 million MTM pension and other postretirement benefit adjustment gain. The $297 million MTM gain included a $68 million MTM gain triggered by an other postretirement benefit plan amendment. Gross profit in 2012 included a $208 million MTM pension and other postretirement benefit adjustment loss and $79 million of additional costs of acquired Solutia inventories. Excluding these non-core or non-recurring items, higher gross profit was primarily due to gross profit of the acquired Solutia businesses during first six months 2013 of $284 million and higher sales volume of $83 million in all segments except the A&P segment which had lower sales volume of $25 million. Gross profit also increased due to higher selling prices more than offsetting higher raw material and energy costs by $69 million in the Fibers segment and lower raw material and energy costs more than offsetting lower selling prices by $22 million in the AM segment partially offset by lower A&P segment selling prices and higher raw material and energy costs of $49 million. Gross profit also benefited from decreased "Other" loss primarily for lower Perennial Wood™ growth initiative operating costs.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | Change | 2013 | 2012 | Change | |||||||||||||||
Selling, General & Administrative Expenses | $ | 755 | $ | 645 | 17 | % | $ | 645 | $ | 644 | — | % | |||||||||
Mark-to-market pension and other postretirement benefit gain (loss), net | (57 | ) | 76 | 76 | (58 | ) | |||||||||||||||
Acquisition integration costs | (24 | ) | (36 | ) | (36 | ) | (16 | ) | |||||||||||||
Acquisition transaction costs | (22 | ) | — | — | (28 | ) | |||||||||||||||
Selling, General, and Administrative Expenses excluding non-core or non-recurring items | $ | 652 | $ | 685 | (5 | )% | $ | 685 | $ | 542 | 26 | % | |||||||||
2014 Compared to 2013
SG&A expenses in 2014 were higher compared to 2013. SG&A expenses in 2014 included a $57 million MTM pension and other postretirement benefit adjustment loss. SG&A expenses in 2013 were reduced by a $76 million MTM pension and other postretirement benefit adjustment gain.
Excluding non-core or non-recurring items, SG&A expenses in 2014 were lower compared to 2013 primarily due to Solutia acquisition cost reduction synergies and lower share-based compensation expense.
2013 Compared to 2012
SG&A expenses in 2013 were higher compared to 2012. SG&A expenses in 2013 were reduced by a $76 million MTM pension and other postretirement benefit adjustment gain. SG&A expenses in 2012 included a $58 million MTM pension and other postretirement benefit adjustment loss due to pension and other postretirement benefit adjustments. SG&A expenses also increased due to SG&A costs of the acquired Solutia businesses during first six months 2013 of $101 million, and higher expense for employee compensation, primarily annual performance-based compensation, higher expense for share-based compensation, and higher costs of growth initiatives for existing businesses and the related supporting functions partially offset by Solutia acquisition cost reduction synergies.
Excluding non-core or non-recurring items, SG&A expenses in 2013 were higher compared to 2012 primarily due to SG&A expenses of the acquired Solutia businesses during first six months 2013 of $101 million, higher expense for employee compensation, primarily annual performance-based compensation, higher expense for share-based compensation, and higher costs of growth initiatives for existing businesses and the related supporting functions partially offset by Solutia acquisition cost reduction synergies.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | Change | 2013 | 2012 | Change | |||||||||||||||
Research & Development Expenses | $ | 227 | $ | 193 | 18 | % | $ | 193 | $ | 198 | (3 | )% | |||||||||
Mark-to-market pension and other postretirement benefit gain (loss), net | (7 | ) | 10 | 10 | (10 | ) | |||||||||||||||
Research & Development Expenses excluding non-core or non-recurring items | $ | 220 | $ | 203 | 8 | % | $ | 203 | $ | 188 | 8 | % | |||||||||
2014 Compared to 2013
R&D expenses were higher for 2014 compared to 2013. R&D expenses in 2014 included a $7 million MTM pension and other postretirement benefit adjustment loss. R&D expenses in 2013 were reduced by a $10 million MTM pension and other postretirement benefit adjustment gain. Excluding non-core and non-recurring items, R&D expenses were higher in 2014 compared to 2013 primarily due to increased R&D for growth initiatives in the AFP and AM segments.
2013 Compared to 2012
R&D expenses were slightly higher for 2013 compared to 2012. R&D expenses in 2013 were reduced by a $10 million MTM pension and other postretirement benefit adjustment gain. R&D expenses in 2012 included a $10 million MTM pension and other postretirement benefit adjustment loss. R&D expenses also increased due to R&D costs of the acquired Solutia businesses of $26 million during first six months 2013.
Asset Impairments and Restructuring Charges, Net
2014
In 2014, there were net asset impairments and restructuring charges of $77 million.
In 2014, asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for the closure of a Crystex® R&D facility in France.
As a result of the annual impairment testing of indefinite-lived intangible assets in 2014, the Company recognized an intangible asset impairment of $22 million in the AFP segment to adjust the carrying value of the Crystex® tradename to $135 million. This impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia in 2012. The estimated fair value was determined using an income approach, specifically the relief from royalty method.
In addition, during 2014, a change in estimate of certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a $5 million restructuring charge in addition to previously recognized asset impairments and restructuring charges.
During 2014, the Company recognized gains from the sales of previously impaired assets at the former Photovoltaics production facility in Germany and a former polymers production facility in China of $5 million and $2 million, respectively.
In 2014, charges in the AM segment included $10 million of asset impairments, including intangible assets, and $2 million of restructuring charges primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. In addition, there were $5 million of restructuring charges for severance associated with the continued integration of the acquired Solutia businesses.
2013
In 2013, there were $76 million of net asset impairments and restructuring charges, including $23 million of restructuring charges primarily for severance associated with the continued integration of Solutia.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 2013, management decided not to continue its Perennial Wood™ growth initiative. This resulted in asset impairment charges of $16 million and restructuring charges of $14 million primarily for inventory and contract termination costs. Also during fourth quarter 2013, management decided to terminate efforts to develop a continuous resin process in Kuantan, Malaysia and Antwerp, Belgium. This resulted in asset impairment charges of $4 million.
During 2013, management decided to shut-down the Photovoltaics product line, including the primary production facility in Germany. This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $6 million including charges for severance.
During 2013, management also approved a voluntary separation plan for certain employees, resulting in recognition of severance charges of $6 million.
In addition, during 2013, a change in estimate for certain costs for the fourth quarter 2012 termination of the operating agreement for the São Jose dos Campos, Brazil site resulted in a $4 million reduction of previously recognized asset impairments and restructuring charges.
2012
In 2012, there were $120 million in asset impairments and restructuring charges and gains, net.
During 2012, the Company terminated an operating agreement at the acquired Solutia facility in São Jose dos Campos, Brazil. This resulted in asset impairments and restructuring charges of $35 million. Restructuring charges for the shutdown of manufacturing activities at this site included contract termination costs for severance and other required costs under the operating agreement and impairment of the long-lived assets at the site.
During 2012, management approved the closure of a production facility in China. Based on business analyses, management concluded that production of the related product lines would be more efficiently performed at the Kingsport, Tennessee facility. This resulted in asset impairment and restructuring charges of $6 million.
During 2012, acquisition related restructuring charges of $32 million were recognized primarily for severance costs associated with the acquisition and integration of Solutia.
During 2012, the Company ceased research and development activities for renewable chemicals at a site it acquired in 2011, resulting in asset impairments and restructuring charges of $4 million.
During 2012, the Company recognized asset impairments of $17 million due to a change in approach to address recently finalized boiler air emissions regulations. The Company had incurred engineering costs associated with required modifications for its existing steam and electric generation capacity. However, based on the current availability of natural gas and the lower cost of operation, management determined that conversion to natural gas fueled boilers was more cost efficient. The Company entered into long-term natural gas supply agreements with a third party in fourth quarter 2012, triggering the impairment of the project.
During 2012, management decided to cease production of certain products in its Perennial Wood™ growth initiative. As a result, a restructuring charge of $17 million was recognized in fourth quarter for inventory costs in excess of recoverable value of these product lines and to accrue for losses on take-or-pay contracts with third parties. An analysis was performed to determine what, if any, impairment may be required for the associated fixed assets. Based on the expected life of the assets and intended uses within the Company's continuing acetylation initiatives, there was no impairment.
During 2012, the Company also recognized asset impairments related to land retained from the previously discontinued industrial gasification project. Based on fair value indicators, the carrying value of the Beaumont land was reduced by $6 million.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Earnings
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | Change | 2013 | 2012 | Change | |||||||||||||||
Operating earnings | $ | 1,162 | $ | 1,862 | (38 | )% | $ | 1,862 | $ | 800 | 133 | % | |||||||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | 304 | (383 | ) | (383 | ) | 276 | |||||||||||||||
Asset impairments and restructuring charges, net | 77 | 76 | 76 | 120 | |||||||||||||||||
Additional costs of acquired inventories | 24 | — | — | 79 | |||||||||||||||||
Acquisition integration costs | 24 | 36 | 36 | 16 | |||||||||||||||||
Acquisition transaction costs | 22 | — | — | 28 | |||||||||||||||||
Operating earnings excluding non-core or non-recurring items | $ | 1,613 | $ | 1,591 | 1 | % | $ | 1,591 | $ | 1,319 | 21 | % | |||||||||
Pro Forma Combined Operating Earnings
2013 Compared to 2012 | |||||||||||
(Dollars in millions) | 2013 | 2012 | Change | ||||||||
Operating earnings | $ | 1,862 | $ | 940 | 98 | % | |||||
Mark-to-market pension and other postretirement benefit (gain) loss, net | (383 | ) | 276 | ||||||||
Asset impairments and restructuring charges, net (1) | 76 | 125 | |||||||||
Acquisition transaction costs | — | 53 | |||||||||
Acquisition integration costs | 36 | 16 | |||||||||
Additional costs of acquired inventories | — | 79 | |||||||||
Operating earnings excluding non-core or non-recurring items | $ | 1,591 | $ | 1,489 | 7 | % | |||||
(1) 2012 included acquisition related expenses of $5 million for the Solutia Southwall acquisition.
On a pro forma combined basis, operating earnings increased in 2013 compared to 2012. Excluding non-core or non-recurring
items, operating earnings increased primarily due to higher sales volume and higher capacity utilization of approximately $96
million and lower raw material and energy costs more than offsetting lower selling prices by approximately $16 million. Pro
forma combined operating earnings also increased due to lower costs for "Other", including lower Perennial Wood™ growth initiative operating costs.
Net Interest Expense
2014 Compared to 2013 | 2013 Compared to 2012 | ||||||||||||||||||||
(Dollars in millions) | 2014 | 2013 | Change | 2013 | 2012 | Change | |||||||||||||||
Gross interest costs | $ | 210 | $ | 190 | $ | 190 | $ | 152 | |||||||||||||
Less: Capitalized interest | 7 | 4 | 4 | 4 | |||||||||||||||||
Interest expense | 203 | 186 | 9 | % | 186 | 148 | 26 | % | |||||||||||||
Interest income | 16 | 6 | |||||||||||||||||||