Eastman Chemical Company — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. Eastman is a global specialty materials and chemicals company operating through Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. The COVID-19 pandemic weakened demand in several end markets. Approximately 60% of sales came from outside the United States and Canada.
Financial performance and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Sales | $8.473 billion | $9.273 billion | Down 9%; lower volume/product mix (5%) and pricing (4%) |
| Gross profit | $1.975 billion | $2.234 billion | Down 12%; gross margin approximately 23.3%, versus 24.1% |
| EBIT | $741 million | $1.120 billion | Down 34%; reported EBIT margin approximately 8.7% |
| Adjusted EBIT | $1.216 billion | $1.389 billion | Down 12%; adjusted EBIT margin approximately 14.4% |
| Net earnings attributable to Eastman | $478 million | $759 million | Diluted EPS $3.50 versus $5.48 |
| Adjusted net earnings attributable to Eastman | $839 million | $988 million | Adjusted diluted EPS $6.15 versus $7.13 |
| Cash from operating activities | $1.455 billion | $1.504 billion | Free cash flow was $1.072 billion versus $1.079 billion |
| Capital expenditures | $383 million | $425 million | Primarily targeted growth and modernization projects |
| Total borrowings | $5.618 billion | $5.782 billion | Cash was $564 million; net debt was $5.054 billion |
Current assets were $3.541 billion and current liabilities $2.038 billion at year-end. The company had $1.50 billion available under its revolving credit facility, with no facility borrowings outstanding; commercial paper borrowings were $50 million. Management reported compliance with debt covenants. Dividends declared were $2.67 per share, up from $2.52.
Operating segments
| Segment | 2020 sales | 2020 EBIT | Key year-over-year context |
|---|---|---|---|
| AFP | $3.022 billion | $312 million | Sales down 8%; adjusted EBIT $448 million, down 19% |
| AM | $2.524 billion | $427 million | Sales down 6%; adjusted EBIT $448 million, down 14% |
| CI | $2.090 billion | $166 million | Sales down 14%; adjusted EBIT $171 million, down 11% |
| Fibers | $837 million | $180 million | Sales down 4%; EBIT down 7% |
Material changes and unusual items
- Sales declined across all four segments, primarily from COVID-related weakness in transportation, building and construction, consumer durables, and textiles, plus lower selling prices largely reflecting lower raw-material costs.
- Adjusted EBIT fell due to lower volume, reduced capacity utilization, and less favorable product mix. Cost reductions and, in CI, technology-licensing earnings partly offset the pressure. Management said pandemic-related capacity utilization and inventory actions reduced EBIT by approximately $200 million; cost actions totaled approximately $150 million.
- GAAP EBIT included $475 million of non-core and unusual items, principally a $240 million mark-to-market pension and postretirement loss and $227 million of impairment and restructuring charges. The latter included $123 million of AFP tire-additives tradename impairments. The filing adds these items back in its adjusted measures.
- AFP tire-additives goodwill was $725 million and its estimated fair value continued to approximate carrying value. The filing identifies further market deterioration or weaker forecasts as potential triggers for impairment.
- The company closed or planned closures of facilities and operations, including tire-additives and animal-nutrition sites in Asia Pacific, North American performance-films and advanced-interlayers facilities, and Singapore production. Singapore-related charges could reach $50 million through 2021; advanced-interlayers closure charges could reach $30 million through 2021.
- The reported 2020 effective tax rate was 8%, including favorable tax adjustments; the adjusted effective tax rate was 15.6%.
Outlook, risks, and contingencies
- For 2021, management forecast adjusted EPS growth of 20%–30% versus 2020, free cash flow above $1 billion, and net debt reduction of approximately $300 million. It expected capital spending of $500–$525 million, interest expense of approximately $200 million, and an adjusted effective tax rate of 15%–16%.
- The outlook assumes economic recovery from COVID-19, higher sales volume and improved product mix, and approximately $100 million of lower costs from improved capacity utilization. Higher raw-material, energy, and logistics costs, pricing timing, and continued competitive pressure in tire additives and adhesives resins were identified as offsets.
- Growth investment includes the announced Kingsport methanolysis plastic-to-plastic recycling facility. Eastman also announced a goal to reduce greenhouse-gas emissions by one-third by 2030 and achieve carbon neutrality by 2050.
- Key risks include pandemic and global economic uncertainty; volatile or disrupted raw-material and energy supply; cyclical and competitive markets; foreign-exchange and trade exposure; manufacturing interruptions, safety and cybersecurity events; execution and returns on growth projects; and rising environmental, climate, health, and safety compliance costs.
- Environmental loss-contingency reserves were $285 million at year-end; estimated future remediation expenditures ranged from a probable minimum of $257 million to a maximum of $501 million. Management did not believe environmental liabilities would materially affect consolidated financial position, results, or cash flows, but noted resolution could materially affect results in the period recognized.
- Management did not expect pending legal matters, based on currently available facts, to have a material adverse effect on overall financial condition, results, or cash flows. The company reported effective internal control over financial reporting; the auditor issued an unqualified opinion and identified tire-additives goodwill and tradename impairment assessments as critical audit matters.
Important facts for investors to verify
- Whether 2021 adjusted EPS and free-cash-flow targets were achieved, and how results reconcile to GAAP outcomes.
- Recovery in end-market volumes and utilization, and whether cost savings offset raw-material, energy, logistics, and competitive pricing pressures.
- Updated fair-value headroom and forecasts for the tire-additives reporting unit, given $725 million of allocated goodwill and 2020 tradename impairments.
- Closure costs, site-shutdown timing, and execution and funding of the planned recycling facility and other capital projects.
- Debt maturities, liquidity and covenant headroom, and the sustainability of dividend and capital-allocation plans.
- Changes in environmental remediation estimates, tax positions, and other material contingencies.