UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One) | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015 | |
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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] 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).
YES [X] NO [ ]
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 the definitions 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 | [ ] | (Do not check if a smaller reporting company) | Smaller reporting company | [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class | Number of Shares Outstanding at September 30, 2015 |
Common Stock, par value $0.01 per share | 148,607,527 |
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TABLE OF CONTENTS
ITEM | PAGE | |
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX
2
FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward-looking statements are all statements, other than statements of historical fact, that may be made by Eastman Chemical Company (the "Company" or "Eastman") 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, events, 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 Item 2 of this Quarterly Report.
The Company cautions you not to place undue reliance on forward-looking statements, which speak only as of the date such statements are made. Except as may be required by law, the Company undertakes no obligation to update or alter these forward-looking statements, whether as a result of new information, future events, or otherwise.
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UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE INCOME AND RETAINED EARNINGS
Third Quarter | First Nine Months | ||||||||||||||
(Dollars in millions, except per share amounts) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Sales | $ | 2,447 | $ | 2,413 | $ | 7,423 | $ | 7,178 | |||||||
Cost of sales | 1,752 | 1,777 | 5,352 | 5,290 | |||||||||||
Gross profit | 695 | 636 | 2,071 | 1,888 | |||||||||||
Selling, general and administrative expenses | 178 | 171 | 552 | 511 | |||||||||||
Research and development expenses | 64 | 56 | 177 | 165 | |||||||||||
Asset impairments and restructuring charges, net | 21 | 71 | 130 | 77 | |||||||||||
Operating earnings | 432 | 338 | 1,212 | 1,135 | |||||||||||
Net interest expense | 66 | 45 | 198 | 132 | |||||||||||
Other (income) charges, net | 13 | (5 | ) | 2 | (16 | ) | |||||||||
Earnings from continuing operations before income taxes | 353 | 298 | 1,012 | 1,019 | |||||||||||
Provision for income taxes from continuing operations | 95 | 86 | 283 | 281 | |||||||||||
Earnings from continuing operations | 258 | 212 | 729 | 738 | |||||||||||
Earnings from discontinued operations, net of tax | — | — | — | 2 | |||||||||||
Net earnings | $ | 258 | $ | 212 | $ | 729 | $ | 740 | |||||||
Less: Net earnings attributable to noncontrolling interest | 2 | 2 | 5 | 5 | |||||||||||
Net earnings attributable to Eastman | $ | 256 | $ | 210 | $ | 724 | $ | 735 | |||||||
Amounts attributable to Eastman stockholders | |||||||||||||||
Earnings from continuing operations, net of tax | $ | 256 | $ | 210 | $ | 724 | $ | 733 | |||||||
Earnings from discontinued operations, net of tax | — | — | — | 2 | |||||||||||
Net earnings attributable to Eastman stockholders | $ | 256 | $ | 210 | $ | 724 | $ | 735 | |||||||
Basic earnings per share attributable to Eastman | |||||||||||||||
Earnings from continuing operations | $ | 1.73 | $ | 1.41 | $ | 4.87 | $ | 4.89 | |||||||
Earnings from discontinued operations | — | — | — | 0.01 | |||||||||||
Basic earnings per share attributable to Eastman | $ | 1.73 | $ | 1.41 | $ | 4.87 | $ | 4.90 | |||||||
Diluted earnings per share attributable to Eastman | |||||||||||||||
Earnings from continuing operations | $ | 1.71 | $ | 1.39 | $ | 4.83 | $ | 4.83 | |||||||
Earnings from discontinued operations | — | — | — | 0.02 | |||||||||||
Diluted earnings per share attributable to Eastman | $ | 1.71 | $ | 1.39 | $ | 4.83 | $ | 4.85 | |||||||
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Third Quarter | First Nine Months | ||||||||||||||
(Dollars in millions, except per share amounts) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Comprehensive Income | |||||||||||||||
Net earnings including noncontrolling interest | $ | 258 | $ | 212 | $ | 729 | $ | 740 | |||||||
Other comprehensive income (loss), net of tax | |||||||||||||||
Change in cumulative translation adjustment | (47 | ) | (127 | ) | (183 | ) | (114 | ) | |||||||
Defined benefit pension and other postretirement benefit plans: | |||||||||||||||
Amortization of unrecognized prior service credits included in net periodic costs | (4 | ) | (4 | ) | (15 | ) | (12 | ) | |||||||
Derivatives and hedging: | |||||||||||||||
Unrealized gain (loss) during period | (66 | ) | 36 | (27 | ) | 42 | |||||||||
Reclassification adjustment for (gain) loss included in net income | 34 | — | 56 | (9 | ) | ||||||||||
Total other comprehensive income (loss), net of tax | (83 | ) | (95 | ) | (169 | ) | (93 | ) | |||||||
Comprehensive income including noncontrolling interest | 175 | 117 | 560 | 647 | |||||||||||
Comprehensive income attributable to noncontrolling interest | 2 | 2 | 5 | 5 | |||||||||||
Comprehensive income attributable to Eastman | $ | 173 | $ | 115 | $ | 555 | $ | 642 | |||||||
Retained Earnings | |||||||||||||||
Retained earnings at beginning of period | $ | 4,893 | $ | 4,431 | $ | 4,545 | $ | 4,012 | |||||||
Net earnings attributable to Eastman | 256 | 210 | 724 | 735 | |||||||||||
Cash dividends declared | (59 | ) | (53 | ) | (179 | ) | (159 | ) | |||||||
Retained earnings at end of period | $ | 5,090 | $ | 4,588 | $ | 5,090 | $ | 4,588 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, | December 31, | ||||||
(Dollars in millions, except per share amounts) | 2015 | 2014 | |||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 309 | $ | 214 | |||
Trade receivables, net | 968 | 936 | |||||
Miscellaneous receivables | 152 | 264 | |||||
Inventories | 1,484 | 1,509 | |||||
Other current assets | 269 | 250 | |||||
Total current assets | 3,182 | 3,173 | |||||
Properties | |||||||
Properties and equipment at cost | 11,052 | 11,026 | |||||
Less: Accumulated depreciation | 6,007 | 5,939 | |||||
Net properties | 5,045 | 5,087 | |||||
Goodwill | 4,482 | 4,486 | |||||
Intangible assets, net of accumulated amortization | 2,718 | 2,905 | |||||
Other noncurrent assets | 453 | 421 | |||||
Total assets | $ | 15,880 | $ | 16,072 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities | |||||||
Payables and other current liabilities | $ | 1,549 | $ | 1,721 | |||
Borrowings due within one year | 251 | 301 | |||||
Total current liabilities | 1,800 | 2,022 | |||||
Long-term borrowings | 7,029 | 7,248 | |||||
Deferred income tax liabilities | 1,004 | 946 | |||||
Post-employment obligations | 1,380 | 1,498 | |||||
Other long-term liabilities | 711 | 768 | |||||
Total liabilities | 11,924 | 12,482 | |||||
Stockholders' equity | |||||||
Common stock ($0.01 par value – 350,000,000 shares authorized; shares issued – 216,873,620 and 216,256,971 for 2015 and 2014, respectively) | 2 | 2 | |||||
Additional paid-in capital | 1,856 | 1,817 | |||||
Retained earnings | 5,090 | 4,545 | |||||
Accumulated other comprehensive loss | (446 | ) | (277 | ) | |||
6,502 | 6,087 | ||||||
Less: Treasury stock at cost (68,316,891 shares for 2015 and 67,660,313 shares for 2014) | 2,625 | 2,577 | |||||
Total Eastman stockholders' equity | 3,877 | 3,510 | |||||
Noncontrolling interest | 79 | 80 | |||||
Total equity | 3,956 | 3,590 | |||||
Total liabilities and stockholders' equity | $ | 15,880 | $ | 16,072 | |||
The accompanying notes are an integral part of these consolidated financial statements.
6
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
First Nine Months | |||||||
(Dollars in millions) | 2015 | 2014 | |||||
Operating activities | |||||||
Net earnings | $ | 729 | $ | 740 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||
Depreciation and amortization | 429 | 328 | |||||
Asset impairment charges | 107 | 50 | |||||
Gain on sale of assets | — | (5 | ) | ||||
Provision for deferred income taxes | 29 | 58 | |||||
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | |||||||
(Increase) decrease in trade receivables | (54 | ) | (118 | ) | |||
(Increase) decrease in inventories | (23 | ) | (76 | ) | |||
Increase (decrease) in trade payables | (139 | ) | (12 | ) | |||
Pension and other postretirement contributions (in excess of) less than expenses | (147 | ) | (76 | ) | |||
Variable compensation (in excess of) less than expenses | 20 | (8 | ) | ||||
Other items, net | 99 | 68 | |||||
Net cash provided by operating activities | 1,050 | 949 | |||||
Investing activities | |||||||
Additions to properties and equipment | (426 | ) | (406 | ) | |||
Proceeds from sale of assets | 4 | 13 | |||||
Acquisitions, net of cash acquired | (45 | ) | (325 | ) | |||
Additions to capitalized software | (2 | ) | (2 | ) | |||
Other items, net | 2 | 2 | |||||
Net cash used in investing activities | (467 | ) | (718 | ) | |||
Financing activities | |||||||
Net increase (decrease) in commercial paper borrowings | 157 | (185 | ) | ||||
Proceeds from borrowings | 250 | 615 | |||||
Repayment of borrowings | (675 | ) | (125 | ) | |||
Dividends paid to stockholders | (179 | ) | (159 | ) | |||
Treasury stock purchases | (48 | ) | (410 | ) | |||
Dividends paid to noncontrolling interest | (6 | ) | (9 | ) | |||
Proceeds from stock option exercises and other items, net | 20 | 22 | |||||
Net cash used in financing activities | (481 | ) | (251 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (7 | ) | (5 | ) | |||
Net change in cash and cash equivalents | 95 | (25 | ) | ||||
Cash and cash equivalents at beginning of period | 214 | 237 | |||||
Cash and cash equivalents at end of period | $ | 309 | $ | 212 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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ITEM | Page | |
Environmental Matters and Asset Retirement Obligations | ||
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1. | BASIS OF PRESENTATION |
The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2014 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K. The December 31, 2014 financial position data included herein was derived from the audited consolidated financial statements included in the 2014 Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States ("GAAP"). The unaudited consolidated financial statements are prepared in conformity with GAAP and of necessity include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, sales revenue, and expenses of all majority-owned subsidiaries and joint ventures in which a controlling interest is maintained. Eastman accounts for other joint ventures and investments where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation.
Off Balance Sheet Financing Arrangements
The Company assumed the rights and obligations under non-recourse factoring facilities as part of the acquisition of Taminco Corporation ("Taminco"). The non-recourse factoring facilities have a combined limit of $177 million (the U.S. Dollar equivalent of the €158 million limit amount as of September 30, 2015) and are committed until December 2017. These arrangements include receivables in the United States, Belgium, Germany, and Finland, and are subject to various eligibility requirements. The Company sells the receivables at face value but receives funding (approximately 85 percent) net of a deposit amount until collections are received from customers for the receivables sold. The total amounts of cumulative receivables sold in third quarter and first nine months 2015, were approximately $245 million and $780 million, respectively. The total amount of cumulative receivables sold during the year ended December 31, 2014, since the acquisition of Taminco on December 5, 2014, was $70 million. As part of the program, the Company continues to service the sold receivables at market rates with no servicing assets or liabilities recognized. The amounts of sold receivables outstanding under the non-recourse factoring facilities were $117 million and $105 million at September 30, 2015 and December 31, 2014, respectively. The fair value of the receivables sold equals the carrying value at the time of the sale, and no gain or loss is recognized. The Company is exposed to a credit loss of up to 10 percent on sold receivables.
2. | ACQUISITIONS |
Taminco Corporation
On December 5, 2014, 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. Taminco's former specialty amines and crop protection businesses are now operated as part of the Additives & Functional Products ("AFP") segment and its former functional amines business are now operated as part of the Specialty Fluids & Intermediates ("SFI") segment. For the preliminary purchase price allocation see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K. During third quarter 2015, the Company continued to refine its preliminary purchase price allocation with no adjustments to goodwill. As of September 30, 2015, the purchase price allocation remains preliminary as management completes its assessment of certain items, primarily environmental, legal, and tax. The purchase price allocation will be finalized in fourth quarter 2015. The following table summarizes the preliminary purchase price allocation for the Taminco acquisition. Any subsequent adjustments are not expected to have a material impact on the Company's results of operations.
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Assets acquired and liabilities assumed | |||||||||||
(Dollars in millions) | December 31, 2014 | 2015 Net Adjustments to Fair Value | September 30, 2015 | ||||||||
Current assets | $ | 266 | $ | (3 | ) | $ | 263 | ||||
Properties and equipment | 658 | (3 | ) | 655 | |||||||
Intangible assets | 1,002 | (13 | ) | 989 | |||||||
Other noncurrent assets | 37 | 1 | 38 | ||||||||
Goodwill | 1,509 | 32 | 1,541 | ||||||||
Current liabilities | (161 | ) | 1 | (160 | ) | ||||||
Long-term liabilities | (546 | ) | (15 | ) | (561 | ) | |||||
Total purchase price, net of cash acquired | $ | 2,765 | $ | — | $ | 2,765 | |||||
Acquired intangible assets are definite-lived assets and consist primarily of customer relationships, developed technologies, and contracts.
Intangible Assets acquired | |||||
(Dollars in millions) | Fair Value | Weighted-Average Amortization Period (Years) | |||
Amortizable intangible assets | |||||
Customer relationships | $ | 604 | 24 | ||
Developed technologies | 205 | 17 | |||
Contracts | 180 | 5 | |||
Total | $ | 989 | |||
Goodwill from the Taminco acquisition has been preliminarily allocated to certain of the Company's reportable segments as set out in the table below. None of the goodwill is deductible for tax purposes.
Goodwill | Goodwill by Segment | ||
(Dollars in millions) | |||
Additives & Functional Products | $ | 918 | |
Specialty Fluids & Intermediates | 623 | ||
Total | $ | 1,541 | |
In third quarter and first nine months 2015, the Company recognized $4 million and $15 million, respectively in integration and transaction costs related to the acquisition. In 2014, the Company recognized $15 million in pre-close transaction and integration costs, and $13 million in pre-close financing costs related to the acquisition. Integration and transaction costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item and pre-close financing costs are included in the "Other (income) charges, net" and "Net interest expense" line items in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings.
Commonwealth Laminating & Coating, Inc.
On December 11, 2014, the Company acquired Commonwealth Laminating & Coating, Inc. ("Commonwealth") for a total cash purchase price of $438 million. The acquisition was accounted for as a business combination and is reported in the Advanced Materials ("AM") segment. There was no change to the final purchase price allocation from the preliminary allocation in the Company's 2014 Annual Report on Form 10-K, see Note 2, "Acquisitions", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
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The following table summarizes the final purchase price allocation for the Commonwealth acquisition:
Assets acquired and liabilities assumed | |||
(Dollars in millions) | As of December 11, 2014 | ||
Current assets | $ | 51 | |
Machinery and equipment | 38 | ||
Goodwill | 274 | ||
Intangible assets | 125 | ||
Long-term liabilities | (50 | ) | |
Total purchase price | $ | 438 | |
Current assets consist primarily of inventory acquired. Machinery and equipment acquired included a manufacturing operation in Martinsville, Virginia. Management valued machinery and equipment using the cost approach supported by published industry sources.
Acquired intangible assets included customer relationships and developed technologies in the window film industry. Also acquired was the SunTek® brand name that is business-to-business in nature. Management valued intangible assets using the relief from royalty and multi-period excess earnings methods, both forms of the income approach supported by observable market data for peer chemical companies.
Intangible Assets acquired | |||||
(Dollars in millions) | Fair Value | Weighted-Average Amortization Period (Years) | |||
Amortizable intangible assets | |||||
Customer relationships | $ | 72 | 14 | ||
Developed technologies | 41 | 18 | |||
Indefinite-lived intangible asset | |||||
Brand name | 12 | ||||
Total | $ | 125 | |||
In connection with this acquisition, the Company recognized goodwill equal to the excess of the purchase price over the estimated fair value of net tangible and intangible assets acquired and liabilities assumed. None of the goodwill is deductible for tax purposes.
In third quarter and first nine months 2015, the Company recognized $1 million and $5 million, respectively in integration costs related to the acquisition. In 2014, the Company recognized $7 million in pre-close transaction and integration costs related to the acquisition. Integration and transaction costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings. As required by purchase accounting, acquired inventories were marked to fair value. In first six months 2015, the remaining portion of these inventories was sold resulting in an increase in cost of sales of $7 million.
Beginning in December 2014, the Company's consolidated results of operations included the results of Commonwealth. Based on applicable accounting and reporting guidance, the acquisition is not material to the Company's consolidated financial statements; therefore, pro forma financial information has not been presented.
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3. | INVENTORIES |
September 30, | December 31, | ||||||
(Dollars in millions) | 2015 | 2014 | |||||
At FIFO or average cost (approximates current cost) | |||||||
Finished goods | $ | 1,116 | $ | 1,130 | |||
Work in process | 214 | 288 | |||||
Raw materials and supplies | 510 | 553 | |||||
Total inventories | 1,840 | 1,971 | |||||
LIFO Reserve | (356 | ) | (462 | ) | |||
Total inventories | $ | 1,484 | $ | 1,509 | |||
Inventories valued on the last-in, first-out ("LIFO") method were approximately 55 percent at both September 30, 2015 and December 31, 2014.
4. | PAYABLES AND OTHER CURRENT LIABILITIES |
September 30, | December 31, | ||||||
(Dollars in millions) | 2015 | 2014 | |||||
Trade creditors | $ | 685 | $ | 827 | |||
Derivative hedging liability | 209 | 227 | |||||
Accrued payrolls, vacation, and variable-incentive compensation | 180 | 191 | |||||
Accrued taxes | 97 | 66 | |||||
Other | 378 | 410 | |||||
Total payables and other current liabilities | $ | 1,549 | $ | 1,721 | |||
"Other" consists primarily of accruals for interest payable, dividends payable, post-employment obligations, payroll deductions and employee benefits, accrued taxes, and the current portion of environmental liabilities.
5. | PROVISION FOR INCOME TAXES |
Third Quarter | First Nine Months | ||||||||||||||
(Dollars in millions) | 2015 | 2014 | 2015 | 2014 | |||||||||||
Provision for income taxes from continuing operations | $ | 95 | $ | 86 | $ | 283 | $ | 281 | |||||||
Effective tax rate | 27 | % | 29 | % | 28 | % | 28 | % | |||||||
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6. | BORROWINGS |
September 30, | December 31, | ||||||
(Dollars in millions) | 2015 | 2014 | |||||
Borrowings consisted of: | |||||||
3% notes due 2015 | $ | 250 | $ | 250 | |||
2.4% notes due 2017 | 999 | 998 | |||||
6.30% notes due 2018 | 167 | 169 | |||||
5.5% notes due 2019 | 250 | 250 | |||||
2.7% notes due 2020 | 799 | 798 | |||||
4.5% notes due 2021 | 250 | 250 | |||||
3.6% notes due 2022 | 903 | 903 | |||||
7 1/4% debentures due 2024 | 244 | 244 | |||||
7 5/8% debentures due 2024 | 54 | 54 | |||||
3.8% notes due 2025 | 796 | 796 | |||||
7.60% debentures due 2027 | 222 | 222 | |||||
4.8% notes due 2042 | 497 | 497 | |||||
4.65% notes due 2044 | 877 | 877 | |||||
Credit facilities and commercial paper borrowings | 967 | 1,235 | |||||
Capital leases | 5 | 6 | |||||
Total borrowings | 7,280 | 7,549 | |||||
Borrowings due within one year | 251 | 301 | |||||
Long-term borrowings | $ | 7,029 | $ | 7,248 | |||
Credit Facility and Commercial Paper Borrowings
In connection with the acquisition of Taminco, Eastman entered into a $1.0 billion five-year Term Loan Agreement. As of September 30, 2015, the Term Loan Agreement balance outstanding was $350 million with an interest rate of 1.44 percent. In third quarter 2015, $25 million of the Term Loan Agreement balance was repaid using available cash. As of December 31, 2014, the Term Loan Agreement balance outstanding was $1.0 billion with an interest rate of 1.41 percent. Borrowings under the Term Loan Agreement are subject to interest at varying spreads above quoted market rates.
The Company has access to a $1.25 billion revolving credit agreement (the "Credit Facility") that was amended in October 2015 to extend the maturity to October 2020. Borrowings under the Credit Facility are subject to interest at varying spreads above quoted market rates and a commitment fee is paid on the total unused commitment. At September 30, 2015 and December 31, 2014, the Company had no outstanding borrowings under the Credit Facility.
The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce capacity for borrowings available under the Credit Facility. Given the expiration date of the Credit Facility, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis and intends, at least over the next twelve months, to maintain commercial paper borrowings at current levels. At September 30, 2015, the Company's commercial paper borrowings were $392 million with a weighted average interest rate of 0.50 percent. At December 31, 2014, the Company's commercial paper borrowings were $235 million with a weighted average interest rate of 0.47 percent.
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In July 2015, the Company amended its $250 million accounts receivable securitization agreement (the "A/R Facility") to extend the maturity to April 2018. Borrowings under the A/R Facility are subject to interest rates based on a spread over the lender's borrowing costs, and the Company pays a fee to maintain availability of the A/R Facility. At September 30, 2015, the Company's borrowings under the A/R Facility were $225 million secured by trade receivables with an interest rate of 0.95 percent. In third quarter 2015, $25 million of the Company's borrowings under the A/R Facility were repaid using available cash. At December 31, 2014, the Company had no outstanding borrowings under the A/R Facility. During first quarter 2014, $125 million of the available amount under the A/R Facility was borrowed and then repaid during second quarter 2014.
The Term Loan Agreement, Credit Facility, and the A/R Facility contain a number of customary covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. Total available borrowings under the Credit Facility and A/R Facility were $883 million and $1.265 billion as of September 30, 2015 and December 31, 2014, respectively. The Company would not have violated applicable covenants for these periods if the total available amounts of the facilities had been borrowed.
Fair Value of Borrowings
The Company has classified its long-term borrowings at September 30, 2015, and December 31, 2014, under the fair value hierarchy as defined in the accounting policies in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K. The fair value for fixed-rate debt securities is based on current market prices and is classified as Level 1. The fair value for the Company's other borrowings, which include the Term Loan Agreement, A/R Facility, commercial paper, and capital leases equals the carrying value and is classified as Level 2.
Fair Value Measurements at September 30, 2015 | ||||||||||||||||||||
(Dollars in millions) | Recorded Amount September 30, 2015 | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
Long-term borrowings | $ | 7,029 | $ | 7,146 | $ | 6,176 | $ | 970 | $ | — | ||||||||||
Fair Value Measurements at December 31, 2014 | ||||||||||||||||||||
(Dollars in millions) | Recorded Amount December 31, 2014 | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
Long-term borrowings | $ | 7,248 | $ | 7,557 | $ | 6,366 | $ | 1,191 | $ | — | ||||||||||
7. | DERIVATIVES |
Hedging Programs
The Company is exposed to market risks, such as changes in foreign currency exchange rates, commodity prices, and interest rates. To mitigate these market risks and their effects on the cash flows of the underlying transaction, the Company uses various derivative financial instruments when appropriate in accordance with the Company's hedging strategy and policies. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the anticipated cash flows of the underlying exposures being hedged. The Company does not enter into derivative transactions for speculative purposes.
For further information on hedging programs, see Note 10, "Derivatives", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
14
Fair Value Hedges
Fair value hedges are defined as derivative or non-derivative instruments designated as and used to hedge the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. In 2014, the Company entered into interest rate swaps to hedge the interest rate risk on the 3.6% notes due 2022. As of September 30, 2015 and December 31, 2014, the total notional amount of the Company's interest rate swaps was $275 million.
Fair Value Measurement of Derivatives Designated as Fair Value Hedging Instruments
(Dollars in millions) | Fair Value Measurement | |||||||||
Derivative Assets | Statement of Financial Position Location | September 30, 2015 | December 31, 2014 | |||||||
Interest rate swap | Other noncurrent assets | $ | 12 | $ | 5 | |||||
Derivatives' Fair Value Hedging Relationships
Third quarter | ||||||||||
(Dollars in millions) | Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives | Amount of Gain/ (Loss) Recognized in Income on Derivatives | ||||||||
Derivatives in Fair Value Hedging Relationships | September 30, 2015 | September 30, 2014 | ||||||||
Interest rate swaps | Net interest expense | $ | 3 | $ | 2 | |||||
Nine Months Ended | ||||||||||
(Dollars in millions) | Consolidated Statement of Earnings Location of Gain/(Loss) Recognized in Income on Derivatives | Amount of Gain/ (Loss) Recognized in Income on Derivatives | ||||||||
Derivatives in Fair Value Hedging Relationships | September 30, 2015 | September 30, 2014 | ||||||||
Interest rate swaps | Net interest expense | $ | 10 | $ | 3 | |||||
Cash Flow Hedges
Cash flow hedges are derivative instruments designated as and used to hedge the exposure to variability in expected future cash flows that is attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income, net of income taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
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Total notional amounts | September 30, 2015 | December 31, 2014 | |||||
Foreign Exchange Forward and Option Contracts (in millions) | |||||||
EUR/USD (in EUR) | €696 | €810 | |||||
EUR/USD (in approximate USD equivalent) | $795 | $1,000 | |||||
JPY/USD (in JPY) | ¥3,000 | ¥4,800 | |||||
JPY/USD (in approximate USD equivalent) | $25 | $40 | |||||
Commodity Forward and Collar Contracts | |||||||
Contract ethylene sales (in thousand metric tons) | 0 | 14 | |||||
Feedstock (in million barrels) | 25 | 33 | |||||
Feedstock (in thousand metric tons) | 8 | 30 | |||||
Energy (in million million british thermal units) | 28 | 25 | |||||
Interest rate swaps for the future issuance of debt (in millions) | $500 | $500 | |||||
Fair Value Measurement of Derivatives Designated as Cash Flow Hedging Instruments
(Dollars in millions) | Fair Value Measurements Significant Other Observable Inputs | |||||||||
Derivative Assets | Statement of Financial Position Location | September 30, 2015 | December 31, 2014 | |||||||
Cash Flow Hedges | ||||||||||
Commodity contracts | Other current assets | $ | — | $ | 2 | |||||
Foreign exchange contracts | Other current assets | 66 | 61 | |||||||
Foreign exchange contracts | Other noncurrent assets | 84 | 71 | |||||||
$ | 150 | $ | 134 | |||||||
(Dollars in millions) | Fair Value Measurements Significant Other Observable Inputs | |||||||||
Derivative Liabilities | Statement of Financial Position Location | September 30, 2015 | December 31, 2014 | |||||||
Cash Flow Hedges | ||||||||||
Commodity contracts | Payables and other current liabilities | $ | 177 | $ | 193 | |||||
Commodity contracts | Other long-term liabilities | 250 | 289 | |||||||
Foreign exchange contracts | Payables and other current liabilities | 2 | 10 | |||||||
Forward starting interest rate swap contracts | Other long-term liabilities | 34 | 16 | |||||||
$ | 463 | $ | 508 | |||||||
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Derivatives' Hedging Relationships
Third Quarter | ||||||||||||||||||
(Dollars in millions) | Change in amount after tax of gain/(loss) recognized in Other Comprehensive Income on derivatives (effective portion) | Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) | Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) | |||||||||||||||
Derivatives' Cash Flow Hedging Relationships | September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | ||||||||||||||
Commodity contracts | $ | (6 | ) | $ | (22 | ) | Sales | $ | 1 | $ | — | |||||||
Cost of Sales | (74 | ) | (1 | ) | ||||||||||||||
Foreign exchange contracts | (11 | ) | 57 | Sales | 20 | 4 | ||||||||||||
Forward starting interest rate swap contracts | (15 | ) | 1 | Net interest expense | (1 | ) | (2 | ) | ||||||||||
$ | (32 | ) | $ | 36 | $ | (54 | ) | $ | 1 | |||||||||
First Nine Months | ||||||||||||||||||
(Dollars in millions) | Change in amount after tax of gain/(loss) recognized in Other Comprehensive Income on derivatives (effective portion) | Location of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) | Pre-tax amount of gain/(loss) reclassified from Accumulated Other Comprehensive Income into income (effective portion) | |||||||||||||||
Derivatives' Cash Flow Hedging Relationships | September 30, 2015 | September 30, 2014 | September 30, 2015 | September 30, 2014 | ||||||||||||||
Commodity contracts | $ | 21 | $ | (27 | ) | Sales | $ | 4 | $ | — | ||||||||
Cost of sales | (152 | ) | 18 | |||||||||||||||
Foreign exchange contracts | 16 | 59 | Sales | 63 | 3 | |||||||||||||
Forward starting interest rate swap contracts | (8 | ) | 1 | Net interest expense | (5 | ) | (6 | ) | ||||||||||
$ | 29 | $ | 33 | $ | (90 | ) | $ | 15 | ||||||||||
Hedging Summary
Monetized positions and mark-to-market gains and losses from raw materials and energy, currency, and certain interest rate hedges that were included in accumulated other comprehensive income before taxes totaled losses of $386 million at September 30, 2015 and $8 million at September 30, 2014. Losses reclassified from Accumulated Other Comprehensive Income increased in 2015 compared to 2014 as a result of a sharp decline in commodity prices, particularly propane, partially offset by increased gains resulting from a weaker Euro and Japanese Yen relative to the U.S. Dollar. If realized, $142 million net losses as of September 30, 2015 will be reclassified into earnings during the next 12 months. Ineffective portions of hedges are immediately recognized in cost of sales or other charges (income), net.
The gains or losses on nonqualifying derivatives or derivatives that are not designated as hedges are marked to market and reported in the line item "Other (income) charges, net" of the Unaudited Consolidated Statements of Earnings, and, in all periods presented, represent foreign exchange derivatives denominated in multiple currencies and are transacted and settled in the same quarter. The Company recognized $11 million net losses during third quarter 2015 and $1 million net gains during third quarter 2014 on nonqualifying derivatives. The Company recognized approximately $23 million net losses and $4 million net gains on nonqualifying derivatives during the first nine months of 2015 and 2014, respectively.
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Fair Value Measurements
For additional information on fair value measurement, see Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
The following chart shows the gross financial assets and liabilities valued on a recurring basis.
(Dollars in millions) | Fair Value Measurements at September 30, 2015 | |||||||||||||||
Description | September 30, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Derivative Assets | $ | 162 | $ | — | $ | 162 | $ | — | ||||||||
Derivative Liabilities | (463 | ) | — | (463 | ) | — | ||||||||||
$ | (301 | ) | $ | — | $ | (301 | ) | $ | — | |||||||
(Dollars in millions) | Fair Value Measurements at December 31, 2014 | |||||||||||||||
Description | December 31, 2014 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Derivative Assets | $ | 139 | $ | — | $ | 137 | $ | 2 | ||||||||
Derivative Liabilities | (508 | ) | — | (508 | ) | — | ||||||||||
$ | (369 | ) | $ | — | $ | (371 | ) | $ | 2 | |||||||
The majority of the Company's derivative assets are classified as Level 2. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves and currency spot and forward rates. The fair value of commodity contracts is derived using forward curves supplied by an industry recognized and unrelated third party. In addition, on an ongoing basis, the Company tests a subset of its valuations against valuations received from the transaction's counterparty to validate the accuracy of its standard pricing models. Counterparties to these derivative contracts are highly rated financial institutions which the Company believes carry minimal risk of nonperformance.
All of the Company's derivative contracts are subject to master netting arrangements, or similar agreements, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. Management has elected to present the derivative contracts on a gross basis in the Unaudited Consolidated Statements of Financial Position. Had it chosen to present the derivatives contracts on a net basis, it would have a derivative in a net asset position of $160 million and a derivative in a net liability position of $461 million as of September 30, 2015. The Company does not have any cash collateral due under such agreements.
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8. | RETIREMENT PLANS |
Defined Benefit Pension Plans and Other Postretirement Benefit Plans
Eastman maintains defined benefit pension plans that provide eligible employees with retirement benefits. In addition, Eastman provides a subsidy for life insurance, health care, and dental benefits to eligible retirees hired prior to January 1, 2007, and a subsidy for health care and dental benefits to retirees' eligible survivors. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.
For additional information regarding retirement plans, see Note 11, "Retirement Plans", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K.
Components of net periodic benefit (credit) cost were as follows:
Third Quarter | |||||||||||||||||||||||
Pension Plans | Other Postretirement Benefit Plans | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||
(Dollars in millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Components of net periodic benefit (credit) cost: | |||||||||||||||||||||||
Service cost | $ | 10 | $ | 3 | $ | 11 | $ | 4 | $ | 2 | $ | 2 | |||||||||||
Interest cost | 21 | 7 | 24 | 7 | 9 | 11 | |||||||||||||||||
Expected return on assets | (38 | ) | (9 | ) | (36 | ) | (9 | ) | (1 | ) | (2 | ) | |||||||||||
Amortization of: | |||||||||||||||||||||||
Prior service (credit) cost | (1 | ) | — | (1 | ) | — | (6 | ) | (6 | ) | |||||||||||||
Net periodic benefit (credit) cost | $ | (8 | ) | $ | 1 | $ | (2 | ) | $ | 2 | $ | 4 | $ | 5 | |||||||||
First Nine Months | |||||||||||||||||||||||
Pension Plans | Other Postretirement Benefit Plans | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||||||||||
(Dollars in millions) | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
Components of net periodic benefit (credit) cost: | |||||||||||||||||||||||
Service cost | $ | 29 | $ | 11 | $ | 31 | $ | 11 | $ | 6 | $ | 6 | |||||||||||
Interest cost | 65 | 20 | 74 | 23 | 29 | 33 | |||||||||||||||||
Expected return on assets | (111 | ) | (28 | ) | (107 | ) | (28 | ) | (4 | ) | (5 | ) | |||||||||||
Curtailment gain(1) | — | (7 | ) | — | — | — | — | ||||||||||||||||
Amortization of: | |||||||||||||||||||||||
Prior service (credit) cost | (3 | ) | — | (3 | ) | — | (18 | ) | (18 | ) | |||||||||||||
Mark-to-market pension and other postretirement benefits loss(2) | — | 2 | — | — | — | — | |||||||||||||||||
Net periodic benefit (credit) cost | $ | (20 | ) | $ | (2 | ) | $ | (5 | ) | $ | 6 | $ | 13 | $ | 16 | ||||||||
(1) | Gain in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing facility. |
(2) | Mark-to-market loss due to the interim remeasurement of the Workington, UK pension plan, triggered by the closure of the Workington, UK acetate tow manufacturing facility. |
First nine months 2015 includes pension curtailment gains related to the remeasurement of the Workington, UK pension plan triggered by the closure of the Workington, UK acetate tow manufacturing facility. The remeasurement of the plan also resulted in a mark-to-market ("MTM") loss which was primarily due to asset returns being lower than expected returns.
19
The Company contributed $90 million and $47 million to its U.S. defined benefit pension plans in first nine months 2015 and 2014, respectively.
9. | COMMITMENTS |
Purchase Obligations and Lease Commitments
The Company had various purchase obligations at September 30, 2015, totaling $1.6 billion over a period of approximately 30 years for materials, supplies, and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, noncancelable, and month-to-month operating leases totaling $272 million over a period of approximately 45 years. Of the total lease commitments, approximately 50 percent relate to real property, including office space, storage facilities, and land; approximately 45 percent relate to railcars; and approximately 5 percent relate to machinery and equipment, including computer and communications equipment and production equipment.
Guarantees
The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease as well as other guarantees. Disclosures about each group of similar guarantees are provided below.
Residual Value Guarantees
The Company has operating leases with terms that require the Company to guarantee a portion of the residual value of the leased assets upon termination of the lease. These residual value guarantees at September 30, 2015, totaled $121 million and consisted primarily of leases for railcars and company aircraft and will expire beginning in 2016. Management's current expectation is that the likelihood of material residual guarantee payments is remote.
Other Guarantees
Guarantees and claims also arise during the ordinary course of business from relationships with customers, suppliers, joint venture partners, and other parties when the Company undertakes an obligation to guarantee the performance of others, if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. The Company's current other guarantees include guarantees relating primarily to intellectual property, environmental matters, and other indemnifications and have arisen through the normal course of business. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims, if they were to occur. These other guarantees have terms up to 30 years with maximum potential future payments of $29 million in the aggregate, with none of these guarantees being individually significant to the Company's operating results, financial position, or liquidity. Management's current expectation is that future payment or performance related to non-performance under other guarantees is remote.
10. | ENVIRONMENTAL MATTERS AND ASSET RETIREMENT OBLIGATIONS |
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman's policies described in Note 1, "Significant Accounting Policies", to the consolidated financial statements in Part II, Item 8 of the Company's 2014 Annual Report on Form 10-K. The Company's total reserve for environmental contingencies was $339 million and $345 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, this reserve included $8 million and $10 million, respectively, related to sites previously closed and impaired by Eastman and sites that have been divested by Eastman but for which the Company retains the environmental liability related to these sites.
20
Estimated future environmental expenditures for remediation costs ranged from the minimum or best estimate of $315 million to the maximum of $526 million and from the minimum or best estimate of $324 million to the maximum of $548 million at September 30, 2015 and December 31, 2014, respectively. The maximum estimated future costs are considered to be reasonably possible and include the minimum or best estimate amounts accrued at both September 30, 2015 and December 31, 2014. Although the resolution of uncertainties related to these environmental matters may have a material adverse effect on the Company's consolidated results of operations in the period recognized, because of the availability of legal defenses, the Company's preliminary assessment of actions that may be required, and if applicable, the expected sharing of costs, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company's consolidated financial position or cash flows.
Reserves for environmental remediation that management believes to be probable and estimable are recognized as current and long-term liabilities in the Unaudited Consolidated Statements of Financial Position. These reserves include liabilities expected to be paid within 30 years. The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of sales and other charges (income), net, and are summarized below:
(Dollars in millions) | Environmental Remediation Liabilities | ||
Balance at December 31, 2014 | $ | 324 | |
Changes in estimates recognized in earnings | 11 | ||
Cash reductions | (20 | ) | |
Balance at September 30, 2015 | $ | 315 | |
An asset retirement obligation is an obligation for the retirement of a tangible long-lived asset that is incurred upon the acquisition, construction, development, or normal operation of that long-lived asset. The Company recognizes asset retirement obligations in the period in which they are incurred if a reasonable estimate of fair value can be made. The asset retirement obligation is subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying value of the long-lived assets and depreciated over their useful life. Environmental asset retirement obligations consist primarily of closure and post-closure costs. For facilities that have environmental asset retirement obligations, the best estimate accrued to date over the facilities' estimated useful lives for these environmental asset retirement obligation costs was $24 million and $21 million at September 30, 2015 and December 31, 2014, respectively.
The Company's total environmental reserve for environmental contingencies, including remediation costs and asset retirement obligations, is recognized in the Unaudited Consolidated Statements of Financial Position as follows:
(Dollars in millions) | September 30, 2015 | December 31, 2014 | |||||
Environmental contingent liabilities, current | $ | 35 | $ | 35 | |||
Environmental contingent liabilities, long-term | 304 | 310 | |||||
Total | $ | 339 | $ | 345 | |||
The Company also has contractual asset retirement obligations other than for environmental liabilities. Eastman's non-environmental asset retirement obligations are primarily for the future closure of leased manufacturing assets at Pace, Florida and Oulu, Finland acquired from Taminco. These accrued non-environmental asset retirement obligations were $43 million and $44 million at September 30, 2015 and December 31, 2014, respectively.
11. | LEGAL MATTERS |
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 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.
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12. | STOCKHOLDERS' EQUITY |
A reconciliation of the changes in stockholders' equity for first nine months 2015 is provided below:
(Dollars in millions) | Common Stock at Par Value $ | Paid-in Capital $ | Retained Earnings $ | Accumulated Other Comprehensive Income (Loss) $ | Treasury Stock at Cost $ | Total Stockholders' Equity Attributed to Eastman $ | Noncontrolling Interest $ | Total Stockholders' Equity $ | |||||||||||||||
Balance at December 31, 2014 | 2 | 1,817 | 4,545 | (277 | ) | (2,577 | ) | 3,510 | 80 | 3,590 | |||||||||||||
Net Earnings | — | — | 724 | — | — | 724 | 5 | 729 | |||||||||||||||
Cash Dividends Declared (1) ($1.20 per share) | — | — | (179 | ) | — | — | (179 | ) | — | (179 | ) | ||||||||||||
Other Comprehensive Income | — | — | — | (169 | ) | — | (169 | ) | — | (169 | ) | ||||||||||||
Share-Based Compensation Expense (2) | — | 30 | — | — | — | 30 | — | 30 | |||||||||||||||
Stock Option Exercises | — | 7 | — | — | — | 7 | — | 7 | |||||||||||||||
Other (3) | — | 2 | — | — | — | 2 | — | 2 | |||||||||||||||
Share Repurchase | — | — | — | — | (48 | ) | (48 | ) | — | (48 | ) | ||||||||||||
Distributions to Noncontrolling Interest | — | — | — | — | — | — | (6 | ) | (6 | ) | |||||||||||||
Balance at September 30, 2015 | 2 | 1,856 | 5,090 | (446 | ) | (2,625 | ) | 3,877 | 79 | 3,956 | |||||||||||||
(1) | Includes cash dividends paid and dividends declared, but unpaid. |
(2) | Fair value of share-based awards. |
(3) | Paid in capital includes tax benefits/charges relating to the differences between the amounts deductible for federal income taxes over the amounts charged to income for book value purposes and other items. Equity attributable to noncontrolling interest includes adjustments for currency revaluation. |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
(Dollars in millions) | Cumulative Translation Adjustment | Benefit Plans Unrecognized Prior Service Credits | Unrealized Gains (Losses) on Derivative Instruments | Unrealized Losses on Investments | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||
Balance at December 31, 2013 | $ | 133 | $ | 78 | $ | (39 | ) | $ | (1 | ) | $ | 171 | |||||||
Period change | (201 | ) | (17 | ) | (230 | ) | — | (448 | ) | ||||||||||
Balance at December 31, 2014 | (68 | ) | 61 | (269 | ) | (1 | ) | (277 | ) | ||||||||||
Period change | (183 | ) | (15 | ) | 29 | — | (169 | ) | |||||||||||
Balance at September 30, 2015 | $ | (251 | ) | $ | 46 | $ | (240 | ) | $ | (1 | ) | $ | (446 | ) | |||||
Amounts of other comprehensive income (loss) are presented net of applicable taxes. The Company recognizes deferred income taxes on the cumulative translation adjustment related to branch operations and income from other entities included in the Company's consolidated U.S. tax return. No deferred income taxes are provided on the cumulative translation adjustment of other subsidiaries outside the United States, as such cumulative translation adjustment is considered to be a component of indefinitely invested, unremitted earnings of these foreign subsidiaries.
22
Components of other comprehensive income recognized in the Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings are presented below, before tax and net of tax effects:
Third Quarter | |||||||||||||||
2015 | 2014 | ||||||||||||||
(Dollars in millions) | Before Tax | Net of Tax | Before Tax | Net of Tax | |||||||||||
Other comprehensive income (loss) | |||||||||||||||
Change in cumulative translation adjustment | $ | (47 | ) | $ | (47 | ) | $ | (127 | ) | $ | (127 | ) | |||
Defined benefit pension and other postretirement benefit plans: | |||||||||||||||
Amortization of unrecognized prior service credits included in net periodic costs (1) | (7 | ) | (4 | ) | (7 | ) | (4 | ) | |||||||
Derivatives and hedging: (2) | |||||||||||||||
Unrealized gain (loss) | (107 | ) | (66 | ) | 58 | 36 | |||||||||
Reclassification adjustment for (gain) loss included in net income | 55 | 34 | — | — | |||||||||||
Change in derivatives and hedging | (52 | ) | (32 | ) | 58 | 36 | |||||||||
Total other comprehensive income (loss) | $ | (106 | ) | $ | (83 | ) | $ | (76 | ) | $ | (95 | ) | |||
First Nine Months | |||||||||||||||
2015 | 2014 | ||||||||||||||
(Dollars in millions) | Before Tax | Net of Tax | Before Tax | Net of Tax | |||||||||||
Other comprehensive income (loss) | |||||||||||||||
Change in cumulative translation adjustment | $ | (183 | ) | $ | (183 | ) | $ | (115 | ) | $ | (114 | ) | |||
Defined benefit pension and other postretirement benefit plans: | |||||||||||||||
Amortization of unrecognized prior service credits included in net periodic costs (1) | (21 | ) | (15 | ) | (21 | ) | (12 | ) | |||||||
Derivatives and hedging:(2) | |||||||||||||||
Unrealized gain (loss) | (44 | ) | (27 | ) | 67 | 42 | |||||||||
Reclassification adjustment for (gain) loss included in net income | 90 | 56 | (14 | ) | (9 | ) | |||||||||
Change in derivatives and hedging | 46 | 29 | 53 | 33 | |||||||||||
Total other comprehensive income (loss) | $ | (158 | ) | $ | (169 | ) | $ | (83 | ) | $ | (93 | ) | |||
(1) | Included in the calculation of net periodic benefit costs for pension and other postretirement benefit plans. See Note 8, "Retirement Plans". |
(2) | For additional information regarding the impact of reclassifications into earnings, refer to Note 7, "Derivatives". |
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13. | EARNINGS AND DIVIDENDS PER SHARE |
The following table sets forth the computation of basic and diluted earnings per share ("EPS") from continuing operations:
Third Quarter | First Nine Months | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||
Numerator | |||||||||||||||
Earnings attributable to Eastman: | |||||||||||||||
Earnings from continuing operations, net of tax | $ | 256 | $ | 210 | $ | 724 | $ | 733 | |||||||
Denominator | |||||||||||||||
Weighted average shares used for basic EPS | 148.6 | 148.7 | 148.6 | 149.8 | |||||||||||
Dilutive effect of stock options and other awards | 1.2 | 1.6 | 1.2 | 1.7 | |||||||||||
Weighted average shares used for diluted EPS | 149.8 | 150.3 | 149.8 | 151.5 | |||||||||||
EPS from continuing operations (1) | |||||||||||||||
Basic | $ | 1.73 | $ | 1.41 | $ | 4.87 | $ | 4.89 | |||||||
Diluted | $ | 1.71 | $ | 1.39 | $ | 4.83 | $ | 4.83 | |||||||
(1) | Earnings per share are calculated using whole dollars and shares. |
In third quarter and first nine months 2015, common shares underlying options to purchase 773,643 and 264,043 shares, respectively, of common stock were excluded from the shares treated as outstanding for computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total cash proceeds that would be received for these exercises. Third quarter and first nine months 2015 reflect the impact of share repurchases of 221,578 and 656,578, respectively.
In both third quarter and first nine months 2014, common shares underlying options to purchase 210,143 shares of common stock were excluded from the shares treated as outstanding for computation of diluted earnings per share because the total market value of option exercises for these awards was less than the total cash proceeds that would be received for these exercises. Third quarter and first nine months 2014 reflect the impact of share repurchases of 618,896 and 4,945,452 shares, respectively.
The Company declared cash dividends of $0.40 and $0.35 per share in third quarter 2015 and 2014, respectively, and $1.20 and $1.05 per share in first nine months 2015 and 2014, respectively.
14. | ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET |
2015
In third quarter and first nine months 2015 there were net asset impairments and restructuring charges of $21 million and $130 million, respectively.
As a result of the annual impairment testing of indefinite-lived intangible assets, in third quarter and first nine months 2015 the Company recognized intangible asset impairments of $18 million in the AM segment primarily to reduce the carrying value of the V-Kool® window films products trade name to the estimated fair value. The estimated fair value was determined using an income approach, specifically, the relief from royalty method. The impairment resulted from a decrease in projected revenues since the tradename was acquired from Solutia Inc. ("Solutia") in 2012. The decrease in projected revenues was primarily due to the Asian economic downturn impacting car sales growth in those geographic markets.
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In first nine months 2015, net asset impairments and restructuring charges included $81 million of asset impairments and $14 million of restructuring charges, including severance, in the Fibers segment due to the closure of the Workington, UK acetate tow manufacturing facility which is expected to be substantially completed in 2015. Additionally, in first nine months 2015, management decided not to continue a growth initiative that was reported in "Other". This resulted in the Company recognizing asset impairments of $8 million and restructuring charges of $4 million.
Additionally, during first nine months 2015, net asset impairments and restructuring charges included $4 million of restructuring charges primarily for severance associated with the integration of Taminco.
2014
In third quarter and first nine months 2014 there were net asset impairments and restructuring charges of $71 million and $77 million, respectively.
During third quarter and first nine months 2014, net asset impairments of $18 million and restructuring charges, including severance, of $24 million were recognized in the AFP segment for costs of the closure of a Crystex® research and development facility in France.
As a result of the annual impairment testing of indefinite-lived intangible assets, in third quarter and first nine months 2014 the Company recognized an intangible asset impairment of $22 million in the AFP segment to reduce the carrying value of the Crystex® tradename to the estimated fair value. The impairment resulted from a decrease in projected revenue since the tradename was acquired from Solutia in 2012.
In addition, during third quarter and first nine months 2014, a change in estimate of certain costs for the fourth quarter 2012 termination of the operation agreement for the São Jose dos Campos, Brazil site resulted in a restructuring charge of $5 million in addition to previously recognized asset impairments and restructuring charges.
During first nine months 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 first nine months 2014, charges included $8 million of asset impairments, including intangible assets, and $2 million of restructuring charges in the AM segment primarily due to the closure of a production facility in Taiwan for the Flexvue® product line. First nine months 2014 also included $5 million of restructuring charges for severance associated with the continued integration of the acquired Solutia businesses.
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Changes in Reserves for Asset Impairments, Restructuring Charges, Net, and Severance Charges
The following table summarizes the changes in asset impairments and restructuring charges and gains, the non-cash reductions attributable to asset impairments, and the cash reductions in restructuring reserves for severance costs and site closure costs paid in first nine months 2015 and full year 2014:
(Dollars in millions) | Balance at January 1, 2015 | Provision/ Adjustments | Non-cash Reductions | Cash Reductions | Balance at September 30, 2015 | ||||||||||||||
Non-cash charges | $ | — | $ | 107 | $ | (107 | ) | $ | — | $ | — | ||||||||
Severance costs | 13 | 15 | 2 | (22 | ) | 8 | |||||||||||||
Site closure and restructuring costs | 15 | 8 | 2 | (13 | ) | 12 | |||||||||||||
Total | $ | 28 | $ | 130 | $ | (103 | ) | $ | (35 | ) | $ | 20 | |||||||
(Dollars in millions) | Balance at January 1, 2014 | Provision/ Adjustments | Non-cash Reductions | Cash Reductions | Balance at December 31, 2014 | ||||||||||||||
Non-cash charges | $ | — | $ | 52 | $ | (52 | ) | $ | — | $ | — | ||||||||
Severance costs | 22 | 13 | — | (22 | ) | 13 | |||||||||||||
Site closure and restructuring costs | |||||||||||||||||||