Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. EASTMAN CHEMICAL CO (915389) 10-K published on Feb 27, 2019 at 5:08 pm
Reporting Period: Dec 30, 2018
In the first years as a stand-alone company, Eastman was diversified between commodity and more specialty chemical businesses. Beginning in 2004, the Company refocused its strategy and changed its businesses and portfolio of products, first by the divestiture and discontinuance of under-performing assets and commodity businesses and initiatives (including divestiture in 2004 of resins, inks, and monomers product lines, divestiture in 2006 of the polyethylene business, and divestiture from 2007 to 2010 of the polyethylene terephthalate assets and business). The Company then pursued growth through the development and acquisition of more specialty businesses and product lines by inorganic acquisition and integration (including the acquisition of Solutia, Inc. ("Solutia"), a global leader in performance materials and specialty chemicals, in 2012, and Taminco Corporation, a global specialty chemical company, in 2014) and organic development and commercialization of new and enhanced technologies and products.
In 2018, the Company reported sales revenue of $10.2 billion, earnings before interest and taxes ("EBIT") of $1.6 billion, and net earnings attributable to Eastman of $1.1 billion. Diluted earnings per share attributable to Eastman were $7.56. Cash provided by operating activities was $1.5 billion. Excluding non-core and unusual items, adjusted EBIT was $1.6 billion and adjusted diluted earnings per share attributable to Eastman were $8.20. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K (this "Annual Report") for reconciliation of accounting principles generally accepted in the United States ("GAAP") to non-GAAP measures, description of excluded items, and related information. For Company sales revenue by end-market, see Exhibit 99.01 "2018 Company and Segment Revenue by End-Use Market" of this Annual Report. Approximately 60 percent of 2018 sales revenue was generated from outside the United States and Canada region. For additional information regarding sales by customer location and by segment, see Note 19, "Segment Information", to the Company's Consolidated Financial Statements in Part II, Item 8, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary by Operating Segment", "Sales by Customer Location", and "Risk Factors" in Part II, Item 7 of this Annual Report.
The Company reduced operating rates of the olefin cracking units at the Longview, Texas manufacturing facility to reduce the amount of excess ethylene produced and sold at lower spot prices in the merchant ethylene market over the second half of 2018. The Company took further action through completion of modifications to the site's olefin cracking units, which will allow for the introduction of refinery-grade propylene ("RGP") into the feedstock mix while also reducing the amount of other purchased feedstocks in 2019. This feedstock shift is expected to result in a significant decrease in ethylene production and excess ethylene sales, while maintaining historical levels of propylene production. Consequently, the RGP project provides the flexibility to largely remove the Company from participation in the merchant ethylene market, while retaining a cost-advantaged integrated propylene position to support specialty derivatives throughout the Company.
As a result of the goodwill impairment testing performed during fourth quarter 2018, fair values were determined to substantially exceed the carrying values for each reporting unit tested with the exception of crop protection (part of the Additives & Functional Products operating segment as described in Part I, Item 1, "Business", of this Annual Report). The Company reduced the carrying value of the crop protection reporting unit to its estimated fair value through recognition of a $38 million goodwill impairment. The impairment was primarily driven by an increase in the WACC applied to the impairment analysis and the estimated impact of future regulatory changes. Two of the most critical assumptions used in the calculation of the fair value of the crop protection reporting unit are the target market long-term growth rate and the WACC. The Company performed a sensitivity analysis of both of those assumptions, assuming a one percent decrease in the expected long-term growth rate or a one percent increase in the WACC, and both scenarios independently yielded an estimated fair value for the crop protection reporting unit below carrying value. The crop protection reporting unit's goodwill after the reduction for impairment was $235 million as of December 31, 2018.
As of December 31, 2017, management estimated a $339 million net tax benefit, primarily resulting from the Tax Reform Act and a related tax loss from outside-U.S. entity reorganizations as part of the formation of an international treasury services center. In 2018, the Company recognized an adjustment to the 2017 net tax benefit which decreased earnings by $20 million. As of December 31, 2018, the Company considers the accounting for the impacts of the Tax Reform Act under SAB 118 to be complete. As of December 31, 2018, the U.S. Department of Treasury has issued a number of proposed regulations related to implementation of the provisions of the Tax Reform Act and certain states may issue clarifying guidance regarding state income tax conformity to the current federal tax code. Finalization of these regulations in 2019 or future periods may result in changes in the period of enactment to the amounts currently reported in the Consolidated Statements of Financial Position. Any future changes in U.S. tax law may have a significant impact on the provision for income taxes in the period the change occurs. For further information, see Note 7, "Income Taxes", to the Company's consolidated financial statements in Part II, Item 8 of this Annual Report.