UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
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(Mark
One)
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ______________ to
______________
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Commission
file number 1-12626
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EASTMAN
CHEMICAL COMPANY
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(Exact
name of registrant as specified in its
charter)
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Delaware
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62-1539359
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
no.)
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200
South Wilcox Drive
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Kingsport,
Tennessee
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37662
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (423)
229-2000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
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____________________________________________________________________________________________
PAGE 1 OF
139 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 135
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Yes
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No
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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[X]
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Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act.
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[X]
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Yes
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No
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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.
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[X]
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Yes
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No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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.
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[X]
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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)
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Yes
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No
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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[X]
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The
aggregate market value (based upon the closing price on the New York Stock
Exchange on June 29, 2007) of the 79,245,773 shares of common equity held by
non-affiliates as of December 31, 2007 was approximately $5,097,880,577, using
beneficial ownership rules adopted pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended, to exclude common stock that may be deemed
beneficially owned as of December 31, 2007 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 79,753,015 shares of common stock of the
registrant were outstanding at December 31, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2008 Annual
Meeting of Stockholders (the "2008 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 (the "Annual Report") as
indicated herein.
FORWARD-LOOKING
STATEMENTS
Certain
statements in this Annual Report are forward-looking in nature as defined in the
Private Securities Litigation Reform Act of 1995. These statements, and other
written and oral forward-looking statements made by the Company from time to
time, 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; legal proceedings;
exposure to, and effects of hedging of, raw material and energy costs and
foreign currencies; 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 Chemical Company; cash requirements and uses of available cash;
financing plans; pension expenses and funding; credit ratings; anticipated
restructuring, divestiture, and consolidation activities; cost reduction and
control efforts and targets; integration of any 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.
2
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are in turn based
upon internal and other estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions, and other factors.
These plans and expectations 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. Certain important factors
that could cause actual results to differ materially from those in the
forward-looking statements are included with such forward-looking statements and
in Part II—Item 7—"Management's Discussion and Analysis of Financial Condition
and Results of Operations—Forward-Looking Statements and Risk Factors" of this
Annual Report on Form 10-K.
3
TABLE OF
CONTENTS
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ITEM
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PAGE
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PART
I
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1.
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5
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1A.
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22
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1B.
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23
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2.
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25
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3.
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26
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4.
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27
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PART II
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5.
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28
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6.
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30
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7.
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32
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7A.
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75
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8.
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76
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9.
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130
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9A.
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130
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9B.
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130
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PART
III
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10.
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131
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11.
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131
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12.
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131
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13.
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132
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14.
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132
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PART
IV
SIGNATURES
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134
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4
PART
I
ITEM
1. BUSINESS
CORPORATE
OVERVIEW
Eastman
Chemical Company ("Eastman" or the "Company") is a global chemical company which
manufactures and sells a broad portfolio of chemicals, plastics, and
fibers. 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, as of December 31, 1993. Eastman
has thirteen manufacturing sites in eight countries that supply chemicals,
plastics, and fibers products to customers throughout the world. The
Company's headquarters and largest manufacturing site are located in Kingsport,
Tennessee.
In 2007,
the Company had sales revenue of $6.8 billion, operating earnings of $504
million, and earnings from continuing operations of $321
million. Earnings per diluted share from continuing operations were
$3.84 in 2007. Included in 2007 operating earnings were accelerated
depreciation costs related to restructuring decisions of $49 million and asset
impairments and restructuring charges of $112 million.
The
Company’s products and operations are managed and reported in five operating
segments: the Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI")
segment, the Fibers segment, the Performance Chemicals and Intermediates ("PCI")
segment, the Performance Polymers segment and the Specialty Plastics ("SP")
segment. A segment is determined primarily by the customer markets to
which it sells its products and services. For additional information
related to the Company’s operating segments, see Note 23 "Segment Information"
to the Company’s consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K.
In
addition to the segments, the Company manages certain costs and initiatives at
the corporate level including certain research and development costs not
allocated to any one operating segment. Industrial gasification,
including chemicals from coal, is the most significant of these corporate
initiatives.
Eastman's
objective is to leverage its heritage of expertise and innovation in acetyl,
polyester, and olefins chemistries to drive growth, meet increasing demand and
create new opportunities for the Company's products in key markets. The Company
has implemented a number of corporate actions to reposition the Company in key
markets and geographies and management believes the Company is well-positioned
for sustained success.
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In
the CASPI segment, Eastman has completed a 25 percent expansion of its
hydrogenated hydrocarbon resins manufacturing capacity in Middelburg, the
Netherlands and has begun an additional 30 percent expansion which is
expected to be complete in early
2009.
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In
the Fibers segment, the Company is expanding its acetate tow plant in
Workington, England, which will serve existing customers in Western Europe
and the growing demand in Eastern Europe. This expansion is
expected to be complete in the second half of
2008.
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In
the SP segment, in 2007, Eastman commercialized new high-temperature
copolyester products, based on Eastman TritanTM
copolyester. The segment also had continued sales revenue
growth from cellulosic and copolyester products sold in the liquid crystal
displays market.
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The
PCI segment has been restructured to improve long term profitability.
Eastman divested its Batesville, Arkansas manufacturing facility and
related assets and its specialty organic chemicals product lines in 2006
and is implementing a staged phase-out of its three older cracking units
in Longview, Texas. Eastman shut down the first of these
cracking units in fourth quarter
2007.
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The
Performance Polymers segment is being restructured and the Company expects
substantially to improve the segment's profitability, in part enabled by
IntegRexTM
technology. In 2007, the Company began transforming the
Columbia, South Carolina polyethylene terephthalate ("PET") facility
through a planned shutdown of higher cost PET assets; divested its PET
manufacturing facilities in San Roque, Spain; Cosoleacaque, Mexico and
Zarate, Argentina; and entered into definitive agreements to sell its PET
polymers and purified terephthalic acid ("PTA") facility in the
Netherlands and the PET facility in the United Kingdom and related
businesses. Eastman divested its polyethylene ("PE")
business and related assets in
2006.
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As a
result of these and other actions, the Company expects continued strong cash
flow and less cyclical financial performance with a sustainable corporate
operating margin of 10 percent or greater.
5
In
addition, by leveraging its expertise in industrial gasification, Eastman
expects over time to increase the volume of products derived from gasification,
further driving long-term growth in overall profitability and sales
revenue.
Manufacturing
Streams
As stated
above, Eastman's objective is to leverage its heritage of expertise and
innovation in acetyl, polyester, and olefins chemistries to drive growth in key
markets including packaging, tobacco, durable goods, building and construction,
and others. For each of these chemistries, Eastman has developed a
combination of assets and technologies that are operated within three
manufacturing "streams".
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In
the acetyl stream, the Company begins with high sulfur coal which is 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 products throughout the Company including acetate
tow, acetate yarn, and cellulose esters. The Company's ability
to use coal is a competitive advantage in both raw materials and
energy. Therefore, the Company is pursuing opportunities
further to leverage its coal-based process know-how in a corporate
initiative referred to as "chemicals from coal". Expanding the
products derived from industrial gasification-based raw materials rather
than natural gas and crude oil are expected to enable Eastman to
achieve lower, more stable costs.
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In
the polyester stream, the Company begins with purchased paraxylene and
produces PTA for PET and copolyesters and dimethyl terephthalate ("DMT")
for copolyesters. PTA or DMT is then reacted with ethylene
glycol, which the Company both makes and purchases, along with other raw
materials (some of which the Company makes and are proprietary) to produce
PET and copolyesters. This backward integration of its
polyester manufacturing is a competitive advantage, giving Eastman
a low cost position, as well as surety of intermediate
supply. In addition, Eastman adds specialty monomers for
copolyesters to provide clear, tough, chemically resistant product
characteristics. As a result, the Company's copolyesters can
compete with materials such as polycarbonate and
acrylic.
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In
the olefins stream, the Company begins primarily with propane and ethane,
which are then cracked at its facility in Longview, Texas into propylene
and ethylene. The Company also purchases propylene for use at
its Longview facility and its facilities outside the
U.S. The propylene is used in oxo derivative products, while
the ethylene is used in oxo derivatives, acetaldehyde and ethylene glycol
production and also sold. Petrochemical business cycles are
influenced by periods of over- and under-capacity. Capacity
additions to steam cracker 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 be
very volatile, resulting in "ethylene" or "olefins"
cycles.
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The
following chart shows the Company's sites at which the streams are primarily
employed.
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SITE
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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Kingsport,
Tennessee
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X
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X
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X
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Longview,
Texas
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X
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X
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Columbia,
South Carolina
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X
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Rotterdam,
the Netherlands *
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X
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Workington,
England *
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X
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X
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Kuantan,
Malaysia
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X
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Singapore
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X
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*
Rotterdam, the Netherlands and the Performance Polymers portion of the
Workington, England site are included in assets held for sale at December 31,
2007.
6
The
following chart shows significant Eastman products, markets, and end
uses by segment and manufacturing stream.
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SEGMENT
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ACETYL
STREAM
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POLYESTER
STREAM
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OLEFINS
STREAM
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KEY
PRODUCTS, MARKETS AND
END
USES
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CASPI
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X
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X
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Adhesives
ingredients (tape, label, nonwovens), paint and coatings (architectural,
automotive, industrial, and original equipment manufacturing
("OEM"))
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Fibers
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X
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Acetate
fibers for filter products and textiles
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PCI
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X
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X
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X
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Intermediate
chemicals for agrochemical, automotive, beverages, nutrition,
pharmaceuticals, coatings, medical devices, toys, photographic and
imaging, household products, polymers, textiles, and consumer and
industrial products and uses
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Performance
Polymers
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X
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X
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PET
for beverage and food packaging, custom-care and cosmetic packaging,
health care and pharmaceutical uses, household products, and industrial
packaging applications
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SP
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X
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X
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X
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Copolyesters
and cellulosics for appliances, store fixtures and displays, building and
construction, electronic packaging, medical devices and packaging, graphic
arts, general purpose packaging, personal care and cosmetics, food and
beverage packaging, performance films, tape and labels, fibers/nonwovens,
photographic and optical films, and liquid crystal displays
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Cyclicality
and Seasonality
Certain
segments, particularly the PCI and Performance Polymers segments, are impacted
by the cyclicality of key products and markets, while other segments are more
sensitive to global economic conditions. Supply and demand dynamics
determine profitability at different stages of cycles and global economic
conditions affect the length of each cycle. Despite some sensitivity
to global economic conditions, many of the products in the Fibers, CASPI, and SP
segments provide a stable foundation of earnings.
The
Company's earnings and cash flows also typically have some seasonal
characteristics. The Company's earnings are typically greater in the
second and third quarters, while cash from operations is usually greatest in the
fourth quarter.
Demand
for CASPI segment products is typically stronger in the second and third
quarters due to the increased use of coatings products in the building and
construction industries, while demand is typically weaker during the winter
months because of seasonal construction downturns. The PCI segment
typically has a weaker fourth quarter, due in part to a seasonal downturn in
demand for products used in certain building and construction and agricultural
markets. The Performance Polymers segment typically has stronger
demand for its PET polymers for beverage container plastics during the second
and early third quarters due to higher consumption of beverages in the Northern
hemisphere, while demand typically weakens during the late third and fourth
quarters.
7
CASPI
SEGMENT
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·
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Overview
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In the
CASPI segment, the Company manufactures liquid vehicles, additives, specialty
polymers, and other raw materials which are integral to the production of paints
and coatings, inks, adhesives, and other formulated products. Growth
in these markets in North America (Canada and the U.S.) and Europe typically
approximates general economic growth, due to the wide variety of end uses for
these applications and dependence on the economic conditions of the markets for
durable goods, packaged goods, automobiles, and housing. Growth in Asia,
Eastern Europe, and Latin America is substantially higher than general economic
growth, driven by regional growth in these emerging economies. The CASPI
segment focuses on producing raw materials rather than finished products and
developing long-term, strategic relationships to achieve preferred supplier
status with its customers. Eastman expects that the CASPI segment
will continue to have operating margins in the range of 15 percent to 20
percent. In 2007, the CASPI segment had sales revenue of $1.5
billion, 21 percent of Eastman’s total sales.
The
profitability of the CASPI segment is sensitive to the global economy, foreign
currency exchange rates, market trends, and broader chemical cycles,
particularly the olefins cycle. The CASPI segment's specialty
products, which include coatings additives, coalescents, and selected
hydrocarbon resins, are less sensitive to the olefins cycle due to their
functional performance attributes. The commodity products, which
include commodity solvents and polymers, are impacted by the olefins
cycle. The Company seeks to leverage its proprietary technologies,
competitive cost structure, and integrated manufacturing facilities to maintain
a strong competitive position throughout such cycles.
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·
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Products
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Ø
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Coatings
Additives, Coalescents, and
Solvents
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The
additives product lines consist of differentiated and proprietary products,
including cellulose-based specialty polymers which enhance the aesthetic appeal
and improve the performance of industrial and automotive original equipment and
refinish coatings and inks. Coalescents include products such as
TexanolTM
ester alcohol which improves film formation and durability
in architectural latex paints, and chlorinated polyolefins which promote the
adherence of paints and coatings to plastic substrates. Solvents,
which consist of ester, ketone, glycol ether, and alcohol solvents, are used in
both paints and inks to maintain the formulation in liquid form for ease of
application. Environmental regulations that impose limits on the
emission of volatile organic compounds ("VOCs") and hazardous air pollutants
continue to impact coatings formulations requiring compliant coatings raw
materials. The coatings industry is responding by promoting products
and technologies designed to enable customers and end users to reduce air
emissions of VOCs in compliance with state and regional
regulations. A significant portion of Eastman’s coatings additives,
coalescents, and solvents are currently used in compliant
coatings. Additional products are under development to meet the
growing demand for low VOC coatings. Coatings additives, coalescents,
and solvents comprised 60 percent of the CASPI segment’s total sales for
2007.
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Ø
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Adhesives
Raw Materials
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The
adhesives product lines consist of hydrocarbon resins, rosin resins, resin
dispersions, and polymers. These products are sold to adhesive
formulators and tape and label manufacturers for use as raw materials essential
in hot melt and pressure sensitive adhesives and as binders in nonwoven products
such as disposable diapers, feminine products, and pre-saturated
wipes. Eastman is one of the largest manufacturers of hydrogenated
gum rosins used in adhesive and chewing gum applications. Eastman
offers a very broad product portfolio of essential ingredients for the adhesives
industry, and ranks as the second largest global tackifier
supplier. Demand for many adhesives products is growing faster than
general economic growth, driven by use in consumable markets and substitution of
other fasteners such as nails and screws with formulated
adhesives. Adhesives raw materials comprised 40 percent of the CASPI
segment’s total sales for 2007.
8
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·
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Strategy
and Innovation
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A key
element of the CASPI segment growth strategy is the continued development of
innovative product offerings, building on proprietary technologies in
high-growth markets and regions that meet customers’ evolving needs and improve
the quality and performance of customers’ end products. Management
believes that its ability to leverage the CASPI segment's broad product line and
Eastman's research and development capabilities makes it uniquely capable of
offering a broad array of solutions for new and emerging markets. The
Company is making, and plans to make, high value, incremental expansions of
existing CASPI manufacturing assets in an effort to ensure adequate capacity to
meet growing demand for the segment's differentiated products.
The CASPI
segment is focused on the expansion of the coatings additives and specialty
solvents product offerings into adjacent markets and emerging
economies. The Company's global manufacturing presence positions the
CASPI segment to take advantage of areas of high industrial growth, particularly
in Asia from its facility in Singapore and joint venture operations in
China.
The CASPI
segment is also focused on the expansion of the adhesives raw materials product
offerings into high-growth markets and regions by leveraging applications
technology and increasing production capacity. The segment is
capturing growth in demand for specialty hydrocarbon resins through a 25 percent
expansion of the Company's hydrogenated hydrocarbon resins manufacturing
capacity in Middelburg, the Netherlands completed in 2006. A second
expansion, adding 30 percent more capacity, is expected to be complete in early
2009. Additionally, the CASPI segment has increased profitability
within this group of product lines through cost reduction initiatives,
leveraging of best manufacturing practices, and improved product
mix.
The
Company intends to continue to leverage its resources to strengthen the CASPI
segment's innovation pipeline through improved market connect and the expanded
use of proprietary products and technologies. Although CASPI segment
sales and application development are often specialized by end-use markets,
developments in technology may be successfully shared across multiple end-uses
and markets.
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·
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Customers
and Markets
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As a
result of the variety of end uses for its products, the customer base for the
CASPI segment is broad and diverse. This segment has over 1,000 customers around
the world, and approximately 80 percent of its sales revenue in 2007 was
attributable to approximately 80 customers. The CASPI segment focuses
on establishing long-term, customer service-oriented relationships with its
strategic customers in order to become their preferred supplier and to leverage
these relationships to pursue sales opportunities in previously underserved
markets and expand the scope of its value-added services. Growth in
North American and European markets typically coincides with economic growth in
general, due to the wide variety of end uses for these applications and their
dependence on the economic conditions of the markets for durable goods, packaged
goods, automobiles, and housing.
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·
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Competition
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Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. Because of the depth and breadth of its
product offerings, Eastman does not believe any one of its competitors presently
offers all the products it manufactures within the CASPI segment. The
Company’s major competitors in the CASPI segment's markets include larger
companies such as Dow Chemical Company ("Dow"), BASF SE ("BASF"), and Exxon
Mobil Corporation, which may have greater financial and other resources than
Eastman. Additionally, within each CASPI segment product market
the Company competes 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. However,
Eastman does not believe that any of its competitors has a dominant position
within the CASPI segment's markets. The Company believes its
competitive advantages include its level of vertical integration, breadth of
product and technology offerings, low-cost manufacturing position, consistent
product quality, and process and market knowledge. In addition,
Eastman attempts to leverage its strong customer base and long-standing customer
relationships to promote substantial recurring business, further strengthening
its competitive position.
9
FIBERS
SEGMENT
|
·
|
Overview
|
In the
Fibers segment, Eastman manufactures and sells EstronTM acetate tow and
EstrobondTM
triacetin plasticizers for use primarily in the manufacture of cigarette
filters; EstronTM natural
and ChromspunTM
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 producing the product 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. The Fibers segment's manufacturing operations are primarily
located at the Kingsport, Tennessee site, and also include a smaller acetate tow
production plant in Workington, England which is currently being
expanded. In 2007, the Fibers segment had sales revenue of $999
million, 14 percent of Eastman's total sales. The segment remains a
strong and relatively stable cash generator for the Company. Eastman
expects that the Fibers segment will continue to have operating margins of 20 to
25 percent.
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 expertise in internal
operating processes allows it to achieve a consistently high level of product
quality, a differentiating factor in the industry. 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.
The
Company's fully integrated fiber manufacturing processes from coal-based acetyl
raw materials through acetate tow and yarn provide a competitive advantage over
companies whose processes are dependent on petrochemicals. In addition,
management believes the Fibers segment employs unique technology that uses
multiple sources of wood pulp as raw material. As a result, the
segment has qualified all major high-purity wood pulp suppliers that make pulp
suitable for acetate fibers. Despite consolidation in the fiber-grade
pulp market in recent years, the Fibers segment believes it has dependable
sources of pulp supply. The Fibers segment management believes that
these factors combine to make it an industry leader in reliability of supply and
cost position. In addition to the cost advantage of being coal-based,
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 strong customer base
characterized by long-term customer relationships. The Company
intends to continue to capitalize and build on the strengths to improve the
strategic position of its Fibers segment.
Profitability
in the Fibers segment is largely driven by industry structure with relatively
limited numbers of customers and suppliers. While the Fibers segment is affected
by customer buying patterns on a quarter to quarter basis, the segment has
generated and is expected to continue to generate consistently strong annual
cash flow and operating earnings.
|
·
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Products
|
|
Ø
|
Acetate
Tow
|
Eastman
manufactures acetate tow under the EstronTM
trademark according to a wide variety of customer specifications, primarily for
use in the manufacture of cigarette filters. Acetate tow is the
largest sales product of the Fibers segment. Worldwide demand for
acetate tow is expected to continue to increase by approximately 3 percent per
year through 2010, with higher growth rates in Asia and Eastern Europe, further
contributing to the already high capacity utilization rates in the
industry.
Ø
Acetate
Yarn
The
Company manufactures acetate filament yarn under the EstronTM and
ChromspunTM
trademarks in a wide variety of specifications. Consisting of pure
cellulose acetate, EstronTM acetate
yarn is available in bright and dull luster and is suitable for subsequent
dyeing in the fabric form. ChromspunTM acetate
yarn is solution-dyed in the manufacturing process and is available in more than
20 colors. These products are used in fabrics for apparel, home
furnishings, and industrial applications. From a retail customer’s perspective,
garments containing acetate yarn are noted for their rich colors, silky feel,
supple drape, breathability, and comfort.
10
|
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products sold primarily to other acetate fiber
producers include cellulose diacetate flake, acetylation-grade acetic acid, and
acetic anhydride. Each is used as a raw material for the production
of cellulose acetate fibers. The Fibers segment also markets
acetyl-based triacetin plasticizers under the EstrobondTM trademark, generally
for use by cigarette manufacturers as a bonding agent in cigarette
filters.
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·
|
Strategy and
Innovation
|
|
|
Ø
|
Growth
|
In the
Fibers segment, Eastman is leveraging its strong customer relationships and
knowledge of the industry to identify growth options. These growth
options are enabled by its excess acetate flake capacity at the Kingsport,
Tennessee site. The capacity expansion of the Company's acetate tow
plant in Workington, England, announced in 2006, is underway and expected to be
completed in the second half of 2008, expanding Eastman's world-wide capacity by
five percent. The location of this site will serve existing customers
in Western Europe and the growing demand in Eastern Europe. The
acetate flake for the capacity expansion will be supplied by existing flake
capacity in Kingsport, Tennessee. The Company is also exploring
options for new acetate tow capacity in Asia, a major growth
region. The Company would plan to supply acetate flake for this
expansion from its Kingsport, Tennessee site.
|
|
Ø
|
Continue to Capitalize on
Fibers Technology Expertise
|
The
Fibers segment 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.
|
Ø
|
Maintain
Cost-Effective Operations and Consistent Cash Flows and
Earnings
|
The
Fibers segment intends to continue to operate in a cost effective manner,
capitalizing on its technology, scale and vertical integration, and to make
further productivity and efficiency improvements through continued investments
in research and development. The Company plans to continue to
reinvest in the Fibers business to sustain consistently strong earnings and cash
flows.
|
Ø
|
Research
and Development
|
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. Recent Fibers segment research
and development successes are fiber product advancements that allow improved
processability on customers’ equipment and improved packaging
designs. 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.
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·
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Customers and
Markets
|
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 170 companies in the tobacco, textile, and acetate fibers
industries. Eastman's Fibers segment customers are located in all
regions of the world. The largest 20 customers within the Fibers
segment include multinational as well as regional cigarette producers, fabric
manufacturers, and other acetate fiber producers. These top 20
customers accounted for about 80 percent of the segment’s total sales revenue in
2007. The segment maintains a strong position in acetate tow exports
to China, one of the largest and fastest growing markets in the
world.
|
·
|
Competition
|
Eastman
is the second largest acetate tow manufacturer in the
world. Competitors in the fibers market for acetate tow include three
global companies, Celanese Corporation ("Celanese"), Rhodia S.A., and Daicel
Chemical Industries Ltd ("Daicel"); and two regional companies in Asia, SK
Chemicals Co. ("SK"), Ltd., and Mitsubishi Rayon Co., Ltd. ("Mitsubishi
Rayon"). In the acetate tow market, two major competitors, Celanese
and Daicel, have joint venture capacity in China. Modest acetate tow
capacity expansions begun in 2007 included Eastman's Workington, England
expansion and an expansion by a Japanese acetate tow
manufacturer. However, current global capacity utilization
rates are expected to remain high as the rate of world-wide growth in demand for
acetate tow is projected to exceed the announced capacity
expansions.
11
In the
segment's acetate yarn business, major competitors include five companies that
target multi-regional markets, Industrias del Acetato de Celulosa S.A.
("INACSA"), SK, Mitsubishi Rayon, UAB Korelita, and Novaceta
SpA. Eastman is the world leader in acetate yarn production and
the only acetate yarn producer vertically integrated to acetate flake
production, the main raw material for acetate fiber
production. Eastman is the only acetate yarn producer in North
America.
PCI
SEGMENT
|
·
|
Overview
|
The
Company’s PCI segment manufactures diversified products that are sold
externally, as well as used internally by other segments. The PCI
segment's earnings are highly dependent on how the Company chooses to optimize
the acetyl stream and the olefins stream. In 2007, the PCI segment
had sales revenue of $2.1 billion, 31 percent of Eastman’s total
sales.
Many of
the segment's products are affected by the olefins cycle. 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. Demand, in turn, is
based on general economic conditions, raw material and energy prices, and other
factors beyond the Company’s control. Future PCI segment results will
continue to fluctuate from period to period due to these changing economic
conditions. The Company expects the PCI segment typically to have a
range of operating margins between 5 percent and 10 percent through the olefins
cycle.
Eastman
shut down the first of three cracking units as part of the staged phase-out of
its three older cracking units in Longview, Texas in fourth quarter
2007. Shutdown timing for the remaining two units will depend on
market conditions and is expected to result in continued accelerated
depreciation costs over the next twelve months. In addition, as part
of the sale of the Performance Polymers segment's polyethylene business, the
Company agreed to supply ethylene to the buyer. These sales of
ethylene, previously used internally as a raw material, are reported in the PCI
segment.
|
·
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Products
|
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries, and performance chemicals. The PCI segment's 2007
sales revenue was approximately 65 percent olefin-based, 15 percent
acetyl-based, and 20 percent from performance and other
chemicals. Approximately 74 percent of the PCI segment's sales
revenue is generated in North America. Sales in all regions are
generated through a mix of the Company’s direct sales force and a network of
distributors. The Company's PCI segment is the largest marketer of
acetic anhydride in the United States, an intermediate that is a critical
component of analgesics and other pharmaceutical and agricultural products, and
is the only U.S. producer of acetaldehyde, a key intermediate in the production
of vitamins and other specialty products. Eastman manufactures one of
the world's broadest ranges of products derived from oxo
aldehydes. The PCI segment’s other intermediate products include
plasticizers and glycols. Many of the intermediates products in the
PCI segment are priced based on supply and demand of substitute and competing
products. In order to maintain a competitive position, the Company
strives to operate with a low cost manufacturing base.
The PCI
segment also manufactures performance chemicals, complex organic molecules such
as diketene derivatives, specialty ketones, and specialty anhydrides for
pharmaceutical, fiber, and food and beverage ingredients, which are typically
used in specialty market applications. These specialty products are
typically priced based on the amount of value added rather than supply and
demand factors.
12
|
·
|
Strategy
and Innovation
|
To build
on and maintain its status as a low cost producer, the PCI segment continuously
focuses on cost control, operational efficiency, and capacity utilization to
maximize earnings. Through the PCI segment, the Company maximizes the
advantage of its highly integrated and world-scale manufacturing
facilities. For
example, the Kingsport, Tennessee manufacturing facility allows the PCI 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 PCI segment uses its proprietary oxo-technology in the
world’s largest single-site, oxo aldehyde manufacturing facility to produce a
wide range of alcohols, esters, and other derivative products utilizing propane
and local ethane supplies, as well as purchased propylene. These
integrated facilities, combined with large scale production processes and a
continuous focus on additional process improvements, allow the PCI segment to
remain cost competitive with, and for some products cost-advantaged over, its
competitors.
The PCI
segment selectively focuses on continuing to develop and access markets with
high-growth potential for the Company’s chemicals. The Company
engages in customer-focused research and development initiatives in order to
develop new PCI products and find additional applications for existing products.
The Company is currently focusing these efforts on applications in the personal
care market and markets using plasticizers. The Company also
evaluates licensing opportunities for acetic acid and oxo derivatives on a
selective basis, and has recently licensed technology to produce acetyl products
to Saudi International Petrochemical Company in Saudi Arabia and to Chang Chung
Petrochemical Company in Taiwan.
|
·
|
Customers
and Markets
|
The PCI
segment’s products are used in a variety of markets and end uses, including
agrochemical, automotive, beverages, nutrition, pharmaceuticals, coatings,
flooring, medical devices, toys, photographic and imaging, household products,
polymers, textiles, and industrials. The Company believes its
position in many of these markets is being positively affected by the current
olefins upcycle. However, the strength of product-specific olefin
derivative markets will vary widely based upon prevailing supply and demand
conditions. An important trend within the PCI segment's markets is a
tendency toward increased regionalization of key markets, especially for acetyl
and olefins products, due to increased transportation
costs. Additionally, the PCI segment is engaged in continuous efforts
to optimize product and customer mix. Approximately 80 percent of the
PCI segment’s sales revenue in 2007 was from 90 out of approximately 1,120
customers worldwide.
|
·
|
Competition
|
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, primarily due to the fact that the relevant
technology has been held by a small number of companies. As this
technology has become more readily available, competition from multinational
chemical manufacturers has intensified. Eastman competes with these
and other producers primarily based on price, as products are interchangeable,
but also on technology, marketing, and services. Eastman’s major
competitors in this segment include large multinational companies such as Dow,
Celanese, BASF, and Exxon Mobil Corporation. While some competitors
in PCI's product markets may have greater financial resources than Eastman, the
Company believes it maintains a strong competitive position due to the
combination of its scale of operations, breadth of product line, level of
integration, and technology leadership.
PERFORMANCE
POLYMERS SEGMENT
|
·
|
Overview
|
In 2007,
the Performance Polymers segment had sales revenue of $1.4 billion, 21 percent
of the Company’s total sales. The segment is comprised primarily of
the Company's PET product lines, and also includes various polymer intermediate
derivatives.
The
segment is being restructured and the Company expects substantially to improve
the segment's profitability, in part enabled by IntegRexTM
technology.
13
The
Company continues to make significant progress with its proprietary
IntegRexTM
technology for manufacturing PET. In the first quarter 2007, the
Company's new PET manufacturing facility utilizing IntegRexTM technology became fully
operational after coming online during fourth quarter 2006. In
2007, with this new IntegRexTM
technology, the Company validated its earlier estimates of conversion and
capital cost savings of approximately 50 percent compared to conventional PET
technology. In addition, the Company demonstrated an operating rate
for its PET manufacturing facility utilizing IntegRexTM technology of greater
than 120 percent of the nameplate capacity of 350,000 metric
tons. ParaStarTM PET
resins, enabled by IntegRexTM technology, were widely
accepted in the marketplace during 2007. The Company is also actively
pursing licensing opportunities of its IntegRexTM
technology.
In 2007,
the Company also made significant progress on strategic actions for
underperforming PET assets outside the United States. In the second
quarter, the Company completed the divestiture of its PET manufacturing site in
Spain. During the fourth quarter 2007, the Company entered into
definitive agreements to divest its PET polymers and PTA facilities in the
Netherlands and the PET facility in the United Kingdom and related businesses,
and expects to complete the sale in first quarter 2008. Because the
Company is exiting the PET business in the European region, results from sales
of PET products manufactured at the Spain, the Netherlands, and United Kingdom
sites are presented as discontinued operations and are not included in results
from continuing operations. Also during the fourth quarter 2007, the
Company completed the divestiture of its PET manufacturing sites in Mexico and
Argentina. In 2007, sales revenue from the Mexico and Argentina PET
manufacturing facilities was $413 million and the operating loss from those
sales was $127 million, which included $115 million in asset impairments and
restructuring charges. Combined, the PET manufacturing facilities
outside the U.S. being divested represent over 850,000 metric tons,
approximately 55 percent of Eastman's PET capacity. After divesting
the PET manufacturing facilities in the Netherlands and England, Eastman will
have no PET manufacturing capacity outside the United States. For
2007, the segment's operating loss from continuing operations was $207 million,
including accelerated depreciation costs of $29 million and asset impairments
and restructuring charges of $113 million.
In 2008,
the Company expects to continue to take actions to improve the operating results
of the Performance Polymers segment through innovation and strategic
actions. The Company expects to shut down 300,000 metric tons of
higher cost assets by mid-year 2008 after having shut down 100,000 metric tons
of higher cost PET assets during 2007, some of which will be converted to SP
segment production. As a result of the changes in the asset base at
the South Carolina facility, the Company expects to reduce annual costs at the
South Carolina site by more than $30 million. The Company also
expects to debottleneck the PET capacity using IntegRexTM
technology in South Carolina by 50 percent above nameplate capacity which will
add an additional 175,000 metric tons of new capacity by year end
2008. As a result of these actions, the Performance Polymers segment
will have total PET capacity of approximately 735,000 metric tons, all based in
North America. Of the remaining capacity, over 60 percent will be
based on IntegRexTM
technology which provides an advantaged cost position in the
industry. Following these actions, Eastman expects typical
Performance Polymers segment operating margins of approximately 10
percent.
Pricing
and profitability are strongly affected by raw material costs and capacity
utilization. PET global supply has exceeded demand since 1997 as a
result of capacity being introduced into the market at a rate exceeding that of
demand growth. While the demand for PET continues to increase
steadily, excess capacity, particularly in Asia, remains. Excess
Asian capacity and related exports are expected to continue to have an adverse
impact on PET pricing and profitability worldwide and in the North American Free
Trade Agreement ("NAFTA") region.
|
·
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Products
|
|
Ø
|
PET
|
PET is
used in beverage and food packaging and other applications such as personal care
and cosmetics packaging, health care and pharmaceutical uses, household
products, and industrial packaging applications. PET offers fast and
easy processing, superb clarity, excellent colorability and color consistency,
durability and strength, impact and chemical resistance, and high heat
stability. Packages made from PET are characterized by their light
weight, high strength, durability, clarity, low cost, safety, and
recyclability.
14
|
·
|
Strategy
and Innovation
|
|
Ø
|
Growth
|
In first
quarter 2007, the Company's PET manufacturing facility based on IntegRexTM
technology became fully operational with a capacity of 350,000 metric
tons. The facility produces ParaStarTM, the next generation PET
resins. The facility has demonstrated run-rates above nameplate capacity and the
Company plans to debottleneck it by the end of 2008 by 175,000 metric tons
for a total capacity of 525,000 metric tons of ParaStarTM
PET. The Company continues to pursue options to create value from its
IntegRexTM
technology, primarily by actively pursing licensing opportunities.
|
Ø
|
Innovation
|
The
Performance Polymers segment expects to continue to provide customers with
innovative new products and incremental improvements in existing
products. Eastman currently maintains the industry’s broadest product
offering for PET polymers including ParaStarTM next
generation PET resins for carbonated soft drink packaging enabled by
IntegRexTM
technology, AquaTM polymer
for the water bottle market, HeatwaveTM polymer
for hotfill markets, and VitivaTM polymer
for ultraviolet light sensitive applications.
|
Ø
|
Research
and Development
|
Eastman
directs its research and development efforts in the Performance Polymers segment
toward three key objectives:
|
·
|
Lowering
manufacturing costs through process technology innovations and process
improvement efforts;
|
|
·
|
Developing
new products and services in PET polymers that both meet customers'
fitness for use requirements and are protective of the environment through
applications research and customer feedback;
and
|
|
·
|
Enhancing
product quality by improvements in manufacturing technology and
processes.
|
The
Company's Performance Polymers research and development efforts resulted in its
IntegRexTM
technology, a breakthrough innovation in the integrated manufacturing of
paraxylene to PET resin, specifically designed for packaging
applications. During 2007, the Company validated that PET produced
utilizing IntegRexTM
technology yields over 50 percent manufacturing cost savings and 50 percent
capital cost savings compared to conventional PET manufacturing and capital
costs.
Enabled
by IntegRexTM technology,
ParaStarTM next
generation PET resins offer Eastman's customers significant advantages in the
performance and delivered cost of their packages, including higher clarity and
lower energy use in conversion from pellets to containers.
|
·
|
Customers
and Markets
|
Approximately
40 PET customers within the Performance Polymers segment accounted for more than
80 percent of the segment’s total sales revenue from continuing operations in
2007. With the completion of strategic actions, the segment will
primarily serve customers in the NAFTA market. These customers are
primarily PET container suppliers to large volume beverage markets such as
carbonated soft drinks, water, and juice, with strong participation in custom
areas such as food, liquor, sport and fruit beverages, health and beauty aids,
and household products. In 2007, the worldwide market for PET,
including containers, film and sheet, was approximately 14 million metric tons
including 4 million metric tons in the NAFTA market. Demand for PET
has grown steadily over the past several years, driven by the preference for
recyclable, single-serve containers and as a substitute for glass and
aluminum. PET has already made significant inroads in soft drink and
water bottles, and producers are currently targeting markets such as hot-fill
soups and sauces and containers for beer. Demand in the NAFTA market
for PET is expected to grow by approximately 200 thousand metric tons annually
over the next several years.
|
·
|
Competition
|
The
Company's PET product lines compete to a large degree on price in a capital
intensive industry. Profitability is dependent on attaining low cost
positions through technology innovation, manufacturing scale, capacity
utilization, access to reliable and competitive utilities, energy and raw
materials, and efficient manufacturing and distribution
processes.
15
The
Company's PET production is vertically integrated back to the raw material
paraxylene. This
gives Eastman a cost advantage and reliable intermediate
supply.
As a
result of recent strategic actions, the Performance Polymers segment competes
primarily in the NAFTA region markets. Major
competitors in the NAFTA region for the Performance Polymers segment include DAK
Americas LLC, Indorama Group, Invista, Mossi & Ghisolfi Group, Nan Ya
Plastics Corporation, and Wellman Inc., as well as Asian PET
exporters.
SP
SEGMENT
|
·
|
Overview
|
In the SP
segment, the Company produces and markets highly specialized copolyesters and
cellulosic plastics that possess differentiated performance properties for
value-added end uses. In 2007, the SP segment had sales revenue of
$872 million, approximately 13 percent of Eastman’s total
sales.
Eastman
has the ability within its SP segment to modify its polymers and plastics to
control and customize their final properties, creating numerous opportunities
for new application development, including the expertise to develop new
materials and new applications starting from the molecular level in the research
laboratory to the final designed application. In addition, the SP
segment has a long history of manufacturing excellence with strong process
improvement programs providing continuing cost reduction.
The
Company expects the SP segment to have gross margins of approximately 25 percent
with sales revenue growth of 7 to 8 percent annually. In 2007, the
operating margin for the SP segment was 7 percent as the Company continued to
invest in growth initiatives. Over time, management expects SP
segment operating margins of 10 to 15 percent.
|
·
|
Products
|
The SP
segment consists of two primary product lines – specialty copolyesters and
cellulosics. Eastman estimates that the market growth for
copolyesters will continue to be higher than general economic growth due to
ongoing specialty copolyester material innovations and displacement
opportunities. Eastman believes that cellulosic materials will grow
at the rate of the economy in general, with the strong demand for cellulose
esters in liquid crystal displays more than offsetting the decline in legacy
photographic markets. The SP segment's specialty copolyesters are
currently produced in Kingsport, Tennessee and Kuantan,
Malaysia. Rationalized PET lines are currently being converted to
produce specialty copolyesters in Columbia, South
Carolina. Cellulosics products are produced in Kingsport,
Tennessee.
|
Ø
|
Specialty
Copolyesters
|
Specialty
copolyesters accounted for approximately 79 percent of the SP segment’s 2007
sales revenue. Eastman’s specialty copolyesters, which generally are
based on Eastman's market leading supply of cyclohexane dimethanol ("CHDM")
modified polymers, typically fill a market position between polycarbonates and
acrylics. Polycarbonates traditionally have had some superior
performance characteristics, while acrylics have been less
expensive. Specialty copolyesters combine superior performance with
competitive pricing and are being substituted for both polycarbonates and
acrylics.
Specialty
copolyesters are sold into a wide range of markets and applications including
specialty packaging (medical and electronic component trays, shrink label films,
general purpose packaging, and multilayer films); in-store fixtures and displays
(point of purchase displays including indoor sign and store fixtures); consumer
and durable goods (appliances, housewares, toys, and sporting goods); medical
goods (disposable medical devices, health care equipment and instruments, and
pharmaceutical packaging); personal care and consumer packaging (food and
beverage packaging and consumer packaging); photographic film, optical film,
fibers/nonwovens, tapes/labels, and liquid crystal displays
("LCD").
16
In
November 2007, Eastman commercialized a new family of high-temperature
copolyester products, Eastman TritanTM
copolyester. This new copolyester innovation offers a combination of
chemical and temperature resistance that enables the SP segment to create new
material solutions in markets and applications that the SP segment's current
copolyesters have insufficient properties to meet.
|
Ø
|
Cellulosic
Plastics
|
Cellulosics
and cellulosic plastics accounted for approximately 21 percent of the SP
segment’s 2007 sales revenue. Sold under the TeniteTM brand,
these products are known for their excellent balance of properties - toughness,
hardness, strength, surface gloss, clarity, chemical resistance, and warmth to
the touch. This product line includes TeniteTM
acetate, TeniteTM
butyrate and TeniteTM
propionate flake and polymers, as well as a family of colored products for each
line.
In 2006,
Eastman commercialized a new family of cellulosic polymers, VisualizeTM
cellulosics, for the LCD market. Sales from these products continued to grow at
double digit rates through 2007 and are expected to show similar growth in
2008.
|
·
|
Strategy
and Innovation
|
The SP
segment is focused on delivering consistent gross margins and reinvesting for
continued growth. The Company continues to leverage the advantages of
being an integrated polyester manufacturer and will continue to pursue
opportunities within the integrated polyester stream. The Company is
utilizing rationalized PET assets to reduce SP copolyester conversion costs and
expand production with larger scale assets. The Company is also
pursuing options to increase capacity for its cellulose ester products to
support continued demand in key markets such as LCD.
The SP
segment continues to pursue growth by investing in marketing, research and
development, and manufacturing to meet the needs of the global
marketplace. Recent innovations include VisualizeTM cellulose
esters for the LCD market and Eastman TritanTM
copolyester for
markets and applications requiring the advantages of traditional copolyesters,
such as clarity and chemical resistance, along with higher heat resistance,
improved design flexibility, and ease of processing.
The LCD
market is a developing growth market for the SP segment. The Company
is investing in the development of copolyester and cellulosic-based product
solutions for this high-growth market, with the objective of becoming a
strategic raw material supplier in the LCD market.
|
·
|
Customers
and Markets
|
The
customer base in the SP segment is broad and diverse, consisting of
approximately 640 companies worldwide in a variety of
industries. Approximately 80 percent of the SP segment’s 2007 sales
revenue was attributable to approximately 70 customers. The SP
segment seeks to develop mutually beneficial relationships with its customers
throughout various stages of product life cycles. By doing so, it is
better able to understand its customers’ needs as those customers develop new
products, and more effectively bring new solutions to market.
17
|
·
|
Competition
|
The SP
segment competes in the market for plastics that meet specific performance
criteria, typically determined on an application-by-application basis and often
by OEMs rather than by resin converters. Product development in the
SP segment is dependent upon Eastman’s ability to design plastics products that
achieve performance characteristics specified by its customers, while providing
a better value proposition than alternative materials such as polycarbonate and
acrylic. Increases in market share are gained through the development
of new applications, substitution of plastic for other materials, and
displacement of other plastic resins in existing applications.
Competition
in the SP segment varies as a function of where the products are in their life
cycle. The SP segment believes that it maintains competitive
advantages throughout the product life cycle. At product
introduction, the segment’s breadth of offerings combined with its research and
development capabilities and customer service orientation enable it quickly to
bring a wide variety of products to market. As products enter the
growth phase of the life cycle, the SP segment is able to continue to leverage
its product breadth by receiving sales revenue from multiple sources, as well as
retaining customers from long-term relationships. As products become
price sensitive, the SP segment can take advantage of Eastman's scale of
operations, including conversion of rationalized PET assets, and vertical
integration to maintain a superior product conversion cost
position.
Eastman’s
primary competitors for copolyesters include Bayer AG, Dow, SK Chemical
Industries, Saudi Basic Industries Corporation ("SABIC"), and Nova Chemicals
Corporation. Competition for cellulose esters is primarily from other
producers of cellulose ester polymers such as Acetati SpA and
Daicel.
CORPORATE
INITIATIVES - INDUSTRIAL GASIFICATION
In
addition to the business segments, the Company manages certain costs and
initiatives at the corporate level, including certain research and development
costs not allocated to any one operating segment. The most significant
corporate initiative is industrial gasification, which consists of producing
cost-advantaged chemicals from coal or petroleum coke. The Company was the
first to operate a commercial coal gasification facility in the United States in
1983 at its headquarters in Kingsport, Tennessee and has achieved
industry-leading reliability and production capacity performance since that
time. The Company has developed significant operating experience and other
know-how as well as proprietary intellectual property related to industrial
gasification for the last quarter century. The gasification initiatives
are intended to leverage the Company's operational expertise and exploit the
continued high price spread between coal and petroleum coke compared to oil and
natural gas, and the chemicals derived from them. The initiatives are
intended to drive long-term growth in overall profitability and sales
revenue for the Company.
As part
of these initiatives, the Company has announced its role in two major industrial
gasification projects. One of these will be located in Beaumont, Texas and
will use petroleum coke as the primary feedstock to produce hydrogen, methanol,
and ammonia. Eastman is the developer of the project and is co-investor
with Green Rock Energy, L.L.C., a company formed by the D.E. Shaw Group and
Goldman, Sachs & Co. Capital costs for the total project are
expected to be approximately $1.6 billion, and Eastman and Green Rock each has a
50 percent equity stake in the project. Eastman will be responsible for
operating, maintaining, and providing other site management services for the
facility. Air Products and Chemicals, Inc. has signed a letter of intent
to purchase hydrogen produced by the facility and Eastman intends to purchase
synthesis gas for methanol production, both on a long-term basis. The
project entity has signed a letter of intent with a company that intends to take
the carbon dioxide and use it for enhanced oil recovery, which would then be
sequestered. Front-end engineering and design, being provided by Fluor
Corporation, is expected to be completed in the second half of 2008.
Project financing is expected to be obtained by the end of 2008.
Construction is scheduled to begin in early 2009, with the project expected to
be online in 2011.
Eastman
also plans to participate in a project sponsored by Faustina Hydrogen Products,
L.L.C. which will use petroleum coke as the primary feedstock to make anhydrous
ammonia and methanol. Faustina Hydrogen Products is primarily owned
by Green Rock Energy, L.L.C. The Company intends to take a 25 percent or
greater equity position in the project, provide operations, maintenance, and
other site management services, and purchase methanol under a long-term
contract. Capital costs for the facility are estimated to be approximately
$1.6 billion. Project financing is expected to be obtained by the end of
2008. The facility will be built in St. James Parish, Louisiana and is
expected to be complete by 2011.
18
The
Company also continues work on development of additional industrial
gasification projects and to make progress on research and development for
converting gasification-derived synthesis gas and methanol to other chemicals
that are of strategic interest.
In 2007,
funding for corporate initiatives was $47 million compared with $43 million in
2006.
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets products primarily through a global sales organization which has
a presence in the United States and in over 35 other countries around the
world. Eastman has a number of broad product lines which require a
sales and marketing strategy that is tailored to specific customers in order to
deliver high quality products and high levels of service to all of its customers
worldwide. Technical expertise and process knowledge are critical in
determining the application of products for a particular
customer. Through a highly skilled and specialized sales force that
is capable of providing customized business solutions for each of its five
operating segments, Eastman is able to establish long-term customer
relationships and strives to become the preferred supplier of specialty
chemicals and plastics.
The
Company's products are also marketed through indirect channels, which include
distributors. Non-U.S. sales tend to be made more frequently through
distributors than U.S. sales. The Company's customers throughout the
world have the choice of obtaining products and services through Eastman's
website, www.eastman.com, through any of its global customer service centers, or
through any of Eastman's direct sales force or independent
distributors.
The
Company’s products are shipped to customers directly from Eastman's
manufacturing plants, as well as from distribution centers
worldwide.
Sources
and Availability of Raw Materials and Energy
Eastman
purchases a substantial portion, estimated to be approximately 80 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years 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, although derivative financial instruments,
valued at quoted market prices, have been utilized to mitigate the impact of
short-term market price fluctuations. Key raw materials and purchased
energy include propane, ethane, paraxylene, ethylene glycol, PTA, natural gas,
coal, cellulose, methanol, electricity, and a wide variety of precursors for
specialty organic chemicals. 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 the 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 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, or due to domestic or world market and political 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
been in the past and may be in the future, at times, adversely affected by these
factors. The Company’s cost of raw materials and energy as a percent
of total cost of operations was estimated to be approximately 70 percent for
2007, compared with 70 percent in 2006 and 65 percent in 2005.
19
Capital
Expenditures
Capital
expenditures were $518 million, $389 million, and $343 million for 2007, 2006,
and 2005, respectively. The increased capital spending in 2007 was
primarily due to investment in strategic initiatives, particularly in the
Performance Polymers and SP segments. The Company expects that 2008
capital spending will be above $600 million as it funds previously disclosed
growth projects. These initiatives include debottlenecking the
South Carolina manufacturing facility utilizing IntegRexTM technology, completing
the front end engineering and design for the two industrial gasification
projects, increasing capacity of cellulose triacetate ("CTA") for LCD
screens and increased capacity for Eastman TritanTM
copolyester in the
SP segment, and completing the acetate tow expansion in Workington, England in
the Fibers segment.
Employees
Eastman
employs approximately 10,800 men and women worldwide, including approximately
300 associated with discontinued operations. Approximately 5 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 65 percent of the Company's 2007 sales revenue.
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 and diverse portfolio of both specialty and commodity
chemicals, plastics, and fibers, Eastman owns over 800 active United States
patents and more than 1,500 active foreign patents, expiring at various times
over several years, and also owns over 3,000 active worldwide trademark
applications and registrations. The Company’s intellectual property
relates to a wide variety of products and processes. With two recent
significant research and development innovations, Eastman continues actively to
protect its intellectual property. In support of the development of
the IntegRexTM
technology, the Company has filed over 165 patent
applications. In support of the development of Eastman
TritanTM
copolyester, the Company has filed over 70 patent
applications. Eastman cannot assure that a patent will be granted
from every application filed. As the laws of many countries do not
protect intellectual property to the same extent as the laws of the United
States, Eastman cannot assure that it will be able to adequately protect its
intellectual property assets.
The
Company pursues opportunities to license proprietary technology to third parties
in areas where it has determined competitive impact to core 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 centered on acetyls technology in the PCI segment. The
Company is actively pursing licensing opportunities for its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2007,
2006, and 2005, Eastman’s research and development expenses totaled $156
million, $155 million, and $150 million, respectively. Research and
development expenses in 2008 are expected to remain consistent with 2007 as the
Company continues to progress on corporate initiatives.
20
Environmental
Eastman
is subject to 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
reviews 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.
The
Company’s policy is to operate its plants and facilities in a manner that
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 U.S. Clean Air Act and
Resource Conservation and Recovery Act, and related actions of regulatory
agencies, determine the timing and amount of environmental costs incurred by the
Company.
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 data exists. With respect to a contaminated
site, the amount accrued reflects the Company’s assumptions about remedial
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 estimated to be approximately $209 million, $214 million, and $198 million
in 2007, 2006, and 2005, respectively. These amounts were primarily
for operating costs associated with environmental protection equipment and
facilities, but also included expenditures for construction and
development. The Company does not expect future 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",
and 13, "Environmental Matters", to the Company’s consolidated financial
statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
On
January 1, 2008, Eastman’s backlog of firm sales orders was estimated to be
approximately $367 million compared with approximately $290 million at January
1, 2007. All orders are expected to be filled in 2008. 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.
Financial
Information About Geographic Areas
For sales
revenue and long-lived assets by geographic areas, see Note 23, "Segment
Information", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2007 Annual Report on Form 10-K.
21
Available
Information – SEC Filings and Corporate Governance Materials
The
Company makes available free of charge, through the "Investors – SEC Filings"
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
Securities and Exchange Commission (the "SEC"). Once filed with the
SEC, such documents may be read and/or copied 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, including Eastman Chemical Company, that electronically file
with the SEC at www.sec.gov.
The
Company also makes available free of charge, through the "Investors – Corporate
Governance" section of its internet website (www.eastman.com), the Corporate
Governance Guidelines of its Board of Directors, the charters of each of the
committees of the Board, and codes of ethics and business conduct for directors,
officers and employees. Such materials are also available in print
upon the written request of any stockholder to Eastman Chemical Company, P.O.
Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor
Relations.
Stockholder
Information
Corporate
Offices Address: See Cover Page to this Form 10-K
Telephone:
877-EMN-INFO (877-366-4636)
Corporate
Website: www.eastman.com
Annual
Meeting:
Toy F.
Reid Employee Center
Kingsport,
Tennessee
Thursday,
May 1, 2008
11:30
a.m. (ET)
Stock Exchange
Listing:
Eastman
Chemical Company common stock is listed and traded on the New York Stock
Exchange under the ticker symbol "EMN." Most newspaper tables list
the Company's stock as "EmanChem."
Stock Transfer Agent and
Registrar:
Inquiries
and changes to stockholder accounts should be directed to our transfer
agent:
American
Stock Transfer & Trust Company
59 Maiden
Lane
New York,
NY 10038
In the
United States: 800-937-5449
Outside
the United States: (1) 212-936-5100 or (1) 718-921-8200
Website:
www.amstock.com
New
York Stock Exchange and Securities and Exchange Commission
Certifications
In 2007,
the Company submitted to the New York Stock Exchange (the "NYSE") the
certification of the Chief Executive Officer that he was not aware of any
violation by Eastman Chemical Company of the NYSE's corporate governance listing
standards as required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual. In addition, the Company has filed with the
SEC, as exhibits to this Form 10-K for the year ended December 31, 2007, the
Chief Executive Officer's and the Chief Financial Officer's certifications
regarding the quality of the Company's public disclosure, disclosure controls
and procedures, and internal controls over financial reporting as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC
rules.
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 – Forward-Looking
Statements and Risk Factors" of this 2007 Annual Report on Form
10-K.
22
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
23
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 53, is Chairman of the Board and Chief Executive
Officer. Mr. Ferguson joined the Company in 1977. He was
named Vice President, Industry and Federal Affairs in 1994, became Managing
Director, Greater China in 1996, was named President, Eastman Chemical Asia
Pacific in 1998, became President, Polymers Group in 1999, became President,
Chemicals Group in 2001, and was elected to his current position in
2002.
James P.
Rogers, age 56, is President of Eastman Chemical Company and Chemicals &
Fibers Business Group Head. Mr. Rogers was appointed Executive Vice
President of the Company and President of Eastman Division effective November
2003. Mr. Rogers joined the Company in 1999 as Senior Vice President
and Chief Financial Officer and in 2002, was also appointed Chief Operations
Officer of Eastman Division. He was appointed to his current position
in 2006. Mr. Rogers served previously as Executive Vice President and
Chief Financial Officer of GAF Materials Corporation ("GAF"). He also
served as Executive Vice President, Finance, of International Specialty
Products, Inc., which was spun off from GAF in 1997.
Gregory
O. Nelson, age 56, is Executive Vice President and Polymers Business Group
Head. Dr. Nelson joined Eastman in 1982 as a research chemist and
held a number of positions in the research and development
organization. He became Director, Polymers Research Division in 1995
and was named Vice President, Polymers Technology in 1997. He was
appointed as Chief Technology Officer in 2001 and named Senior Vice President in
2002. He was appointed to his present position in 2006.
Mark J.
Costa, age 41, is Senior Vice President, Corporate Strategy &
Marketing. Prior to joining Eastman on June 1, 2006, Mr. Costa was a
senior partner within Monitor Group's integrated North American and global
client service networks. He joined Monitor 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,
including specialty and commodity chemicals, electricity, natural gas and
truck/auto manufacturing.
Theresa
K. Lee, age 55, is Senior Vice President, Chief Legal Officer and Corporate
Secretary. Ms. Lee joined Eastman as a staff attorney in 1987, served
as Assistant General Counsel for the health, safety, and environmental legal
staff from 1993 to 1995, and served as Assistant General Counsel for the
corporate legal staff from 1995 until her appointment as Vice President,
Associate General Counsel and Secretary in 1997. She became Vice
President, General Counsel, and Corporate Secretary of Eastman in 2000 and was
appointed to her current position in 2002.
Richard
A. Lorraine, age 62, joined Eastman in November 2003 as Senior Vice President
and Chief Financial Officer. Mr. Lorraine served as Executive Vice
President and Chief Financial Officer of Occidental Chemical Corporation from
1995 until 2003, and at ITT Automotive Group as President of the Aftermarket
Group from 1990 to 1995 and Vice President and Chief Financial Officer from 1985
to 1990. Mr. Lorraine started his career with Westinghouse Electric
Corporation, where he held various financial positions.
Ronald C.
Lindsay, age 49, is Senior Vice President and Chief Technology
Officer. He joined Eastman in 1980 and held a number of positions in
manufacturing and business organizations. In 2003, Mr. Lindsay was
appointed Vice President and General Manager of the Intermediates Business
Organization and in 2005 he became Vice President, Performance Chemicals
Business. He was appointed to his current position in April
2006.
Norris P.
Sneed, age 52, is Senior Vice President, Human Resources, Communications and
Public Affairs. Mr. Sneed joined the Company in 1979 as a chemical
engineer. In 1989, he was assigned to Eastman’s Arkansas Operations
where he was superintendent for different manufacturing and new business
development departments. In 1997, he served as assistant to the Chief
Executive Officer. He was named managing director for Eastman’s
Argentina operations in 1999, Vice President of Organization Effectiveness in
2001, and was appointed to his current position in June 2003.
Curtis E. Espeland, age 43, is Vice
President, Finance, and Chief Accounting Officer. Mr. Espeland joined
Eastman in 1996, and has served in various financial management positions,
including Controller; Director of Corporate Planning and Forecasting; Director
of Financial Services, Asia Pacific; and Director of Internal
Auditing. He has served as the Company's Chief Accounting Officer
since December 2002. Prior to joining Eastman, Mr. Espeland was an
audit and business advisory manager with Arthur Andersen
LLP.
24
ITEM
2. PROPERTIES
PROPERTIES
At
December 31, 2007, Eastman operated thirteen manufacturing sites in eight
countries. Utilization of these facilities may vary with product mix and
economic, seasonal, and other business conditions, however none of the principal
plants are 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
major manufacturing facilities are:
|
Segment using manufacturing
facility
|
|||||
|
Location
|
CASPI
|
PCI
|
SP
|
Performance
Polymers
|
Fibers
|
|
USA
|
|||||
|
Jefferson,
Pennsylvania
|
x
|
||||
|
Columbia,
South Carolina
|
x
|
x
|
|||
|
Kingsport,
Tennessee
|
x
|
x
|
x
|
x
|
x
|
|
Longview,
Texas
|
x
|
x
|
x
|
||
|
Franklin,
Virginia(1)
|
x
|
||||
|
Europe
|
|||||
|
Workington,
England (2)
|
x
|
x
|
|||
|
Middelburg,
the Netherlands
|
x
|
||||
|
Rotterdam,
the Netherlands (1)
(2)
|
x
|
||||
|
Llangefni,
Wales
|
x
|
||||
|
Asia
Pacific
|
|||||
|
Kuantan,
Malaysia (1)
|
x
|
||||
|
Jurong
Island, Singapore (1)
|
x
|
x
|
|||
|
Zibo
City, China(3)
|
x
|
x
|
|||
|
Latin
America
|
|||||
|
Uruapan,
Mexico
|
x
|
||||
|
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
|
(2)
|
Rotterdam,
the Netherlands and the Performance Polymers portion of the Workington,
England facility are included in assets held for sale at December 31,
2007.
|
|
|
(3)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
In
addition, Eastman has a 50 percent interest in Primester, a joint venture that
manufactures cellulose acetate at Eastman's Kingsport, Tennessee plant. The
production of cellulose acetate is an intermediate step in the manufacture of
acetate tow and other cellulose acetate based products. The Company also has a
50 percent interest in a manufacturing facility in Nanjing, China. The Nanjing
facility produces EastotacTM
hydrocarbon tackifying resins for pressure-sensitive adhesives, caulks, and
sealants. EastotacTM
hydrocarbon resins are also used to produce hot melt adhesives for packaging
applications in addition to glue sticks, tapes, labels, and other adhesive
applications.
Eastman
has distribution facilities at all of its plant sites. In addition,
the Company owns or leases over 100 stand-alone distribution facilities in the
United States and 17 other countries. Corporate headquarters are in
Kingsport, Tennessee. The Company's regional headquarters are in
Miami, Florida; Capelle aan den Ijssel, the Netherlands; Zug, Switzerland;
Singapore; and Kingsport, Tennessee. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Shanghai, China and Singapore. Customer service
centers are located in Kingsport, Tennessee; Capelle aan den Ijssel, the
Netherlands; Miami, Florida; and Singapore.
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 2007 Annual Report
on Form 10-K.
25
ITEM
3. LEGAL PROCEEDINGS
General
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, including the asbestos litigation (described below),
will have a material adverse effect on its overall financial condition, results
of operations or cash flows. However, adverse developments could
negatively impact earnings or cash flows in a particular future
period.
Asbestos
Litigation
Over the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing
sites. More recently, certain plaintiffs have claimed exposure to an
asbestos-containing plastic, which Eastman manufactured in limited amounts
between the mid-1960s and the early 1970s.
To date,
the Company has obtained dismissals or settlements of its asbestos-related
lawsuits with no material effect on its financial condition, results of
operations or cash flows, and over the past several years, has substantially
reduced its number of pending asbestos-related claims. The Company
has also obtained insurance coverage that applies to a portion of certain of the
Company’s defense costs and payments of settlements or judgments in connection
with asbestos-related lawsuits.
Based on
an ongoing evaluation, the Company believes that the resolution of its pending
asbestos claims will not have a material impact on the Company’s financial
condition, results of operations, or cash flows, although these matters could
result in the Company being subject to monetary damages, costs or expenses, and
charges against earnings in particular periods.
Middelburg
(Netherlands) Environmental Proceeding
In June
2005, Eastman Chemical Middelburg, B.V., a wholly owned subsidiary of the
Company (the "Subsidiary"), received a summons from the Middelburg (Netherlands)
District Court Office to appear before the economic magistrate of that District
and respond to allegations that the Subsidiary's manufacturing facility in
Middelburg had exceeded certain conditions in the permit that allows the
facility to discharge wastewater into the municipal wastewater treatment system.
The summons proposed penalties in excess of $100,000 as a result of the alleged
violations. A hearing in this matter took place on July 28, 2005, at which time
the magistrate bifurcated the proceeding into two phases: a compliance phase and
an economic benefit phase. With respect to the compliance phase, the magistrate
levied a fine of less than $100,000. With respect to the economic benefit phase,
where the prosecutor proposed a penalty in excess of $100,000, the district
court in November 2006 assessed against the Subsidiary a penalty of less than
$100,000. The prosecutor has appealed this ruling, and the appeal is
pending. This disclosure is made pursuant to SEC Regulation S-K, Item
103, Instruction 5.C., which requires disclosure of administrative proceedings
commenced under environmental laws that involve governmental authorities as
parties and potential monetary sanctions in excess of $100,000. The
Company believes that the ultimate resolution of this proceeding
will not have a material impact on the Company’s financial condition, results of
operations, or cash flows.
26
Jefferson
(Pennsylvania) Environmental Proceeding
In
December 2005, Eastman Chemical Resins, Inc., a wholly-owned subsidiary of the
Company (the "ECR Subsidiary"), received a Notice of Violation ("NOV") from the
United States Environmental Protection Agency's Region III Office ("EPA")
alleging that the ECR Subsidiary's West Elizabeth, Jefferson Borough, Allegheny
County, Pennsylvania manufacturing operation (the "Jefferson Facility") violated
certain federally enforceable local air quality regulations and certain
provisions in a number of air quality-related permits. The NOV did
not assess a civil penalty and EPA has to date not proposed any specific civil
penalty amount. In October 2006, EPA referred the matter to the
United States Department of Justice's Environmental Enforcement Section
("DOJ"). Company representatives met with EPA and DOJ in November,
2006 and again in December, 2007, and determined that it is not reasonably
likely that any civil penalty assessed by the EPA and DOJ will be less than
$100,000. While the Company intends to vigorously defend against these
allegations, this disclosure is made pursuant to SEC Regulation S-K, Item 103,
Instruction 5.C., which requires disclosure of administrative proceedings
commenced under environmental laws that involve governmental authorities as
parties and potential monetary sanctions in excess of $100,000. The
Company believes that the ultimate resolution of this proceeding will not have a
material impact on the Company's financial condition, results of operations, or
cash flows.
There
were no matters submitted to a vote of the Company's stockholders during the
fourth quarter of 2007.
27
PART
II
(a)
Eastman Chemical Company's ("Eastman" or the "Company") common stock is
traded on the New York Stock Exchange ("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 2007 and 2006.
|
High
|
Low
|
Cash
Dividends Declared
|
|||||
|
2007
|
First
Quarter
|
$
|
64.77
|
$
|
57.54
|
$
|
0.44
|
|
Second
Quarter
|
69.77
|
63.02
|
0.44
|
||||
|
Third
Quarter
|
72.44
|
61.55
|
0.44
|
||||
|
Fourth
Quarter
|
68.97
|
58.81
|
0.44
|
||||
|
2006
|
First
Quarter
|
$
|
53.83
|
$
|
47.30
|
$
|
0.44
|
|
Second
Quarter
|
58.15
|
50.00
|
0.44
|
||||
|
Third
Quarter
|
54.69
|
48.72
|
0.44
|
||||
|
Fourth
Quarter
|
61.29
|
53.62
|
0.44
|
||||
As of
December 31, 2007, there were 79,753,015 shares of the Company's common stock
issued and outstanding, which shares were held by 26,539 stockholders of record.
These shares include 82,674 shares held by the Company's charitable foundation.
The Company has declared a cash dividend of $0.44 per share during the first
quarter of 2008, payable on April 1, 2008 to stockholders of record on March 17,
2008. Quarterly dividends on common stock, if declared by the Company's 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 the 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 2007 Annual Report on Form 10-K for the information
required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
28
(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
|
Period
|
Total
Number
of
Shares
Purchased
(1)
|
Average
Price Paid Per Share
(2)
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans
or
Programs
(3)
|
Approximate
Dollar
Value
(in Millions) that May Yet Be Purchased Under the Plans or
Programs
(3)
|
|||
|
October
1- 31, 2007
|
3,405
|
$
|
68.00
|
0
|
$
|
700
|
|
|
November
1-30, 2007
|
768,200
|
60.89
|
768,200
|
653
|
|||
|
December
1-31, 2007
|
556,800
|
63.08
|
556,800
|
|
618
|
||
|
Total
|
1,328,405
|
61.83
|
1,325,000
|
|
(1)
|
Shares
purchased as part of the Company's repurchase plan and
shares surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock.
|
|
(2)
|
Average
price paid per share reflects the individual trade price of repurchases
under the authorized Company repurchase plan and the weighted average of
the closing price of Eastman common stock on the business days the shares
were surrendered by the employee stockholders to satisfy individual tax
withholding obligations.
|
|
(3)
|
In
October 2007, the Board of Directors authorized $700 million for
repurchase of the Company's outstanding common shares at such times, in
such amounts, and on such terms, as determined to be in the best interests
of the Company. As of December 31, 2007, a total of 1.3 million
shares have been repurchased under this authorization for a total amount
of $82 million. For
additional information, see Note 15, "Stockholders' Equity", to the
Company’s consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K.
|
29
During
2007, the Company took strategic actions in its Performance Polymers segment to
address its underperforming polyethylene terephthalate ("PET") manufacturing
facilities outside the United States. In second quarter 2007, the Company
completed the sale of its PET manufacturing facility in Spain. In fourth quarter
2007, the Company entered into definitive agreements to sell its PET polymers
and purified terephthalic acid ("PTA") facilities in the Netherlands and the PET
facility in the United Kingdom and related businesses. The
manufacturing facilities in the Netherlands, United Kingdom and Spain, and
related businesses represent the Company's European PET business and qualify as
a component of an entity under SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"; accordingly, their results are presented as
discontinued operations and are not included in the results from continuing
operations for all periods presented in the Company's consolidated financial
statements.
|
Summary
of Operating Data
|
Year Ended December 31, | |||||||||
|
(Dollars
in millions, except per share amounts)
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||
|
Sales
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
$
|
6,019
|
$
|
5,377
|
|
Operating
earnings (loss)
|
504
|
654
|
740
|
146
|
(275)
|
|||||
|
Earnings
(loss) from continuing operations
|
321
|
427
|
541
|
146
|
(276)
|
|||||
|
Earnings
(loss) from discontinued operations
|
(10)
|
(18)
|
16
|
24
|
3
|
|||||
|
Loss
from disposal of discontinued operations
|
(11)
|
--
|
--
|
--
|
--
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
3
|
|||||
|
Net
earnings (loss)
|
$
|
300
|
$
|
409
|
$
|
557
|
$
|
170
|
$
|
(270)
|
|
Basic
earnings per share
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
3.89
|
$
|
5.20
|
$
|
6.70
|
$
|
1.88
|
$
|
(3.58)
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.22)
|
0.20
|
0.32
|
0.04
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
0.04
|
|||||
|
Net
earnings (loss)
|
$
|
3.63
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
$
|
(3.50)
|
|
Diluted
earnings per share
|
||||||||||
|
Earnings
(loss) from continuing operations
|
$
|
3.84
|
$
|
5.12
|
$
|
6.61
|
$
|
1.86
|
$
|
(3.58)
|
|
Earnings
(loss) from discontinued operations
|
(0.26)
|
(0.21)
|
0.20
|
0.32
|
0.04
|
|||||
|
Cumulative
effect of change in accounting principles, net
|
--
|
--
|
--
|
--
|
0.04
|
|||||
|
Net
earnings (loss)
|
$
|
3.58
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
$
|
(3.50)
|
|
Statement
of Financial Position Data
|
||||||||||
|
Current
assets
|
$
|
2,293
|
$
|
2,422
|
$
|
1,924
|
$
|
1,768
|
$
|
2,010
|
|
Net
properties
|
2,846
|
3,069
|
3,162
|
3,192
|
3,419
|
|||||
|
Total
assets
|
6,009
|
6,132
|
5,773
|
5,839
|
6,244
|
|||||
|
Current
liabilities
|
1,122
|
1,059
|
1,051
|
1,099
|
1,477
|
|||||
|
Long-term
borrowings
|
1,535
|
1,589
|
1,621
|
2,061
|
2,089
|
|||||
|
Total
liabilities
|
3,927
|
4,103
|
4,161
|
4,655
|
5,201
|
|||||
|
Total
stockholders’ equity
|
2,082
|
2,029
|
1,612
|
1,184
|
1,043
|
|||||
|
Dividends
declared per share
|
1.76
|
1.76
|
1.76
|
1.76
|
1.76
|
|||||
30
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During the fourth quarter 2007, the
Company sold its PET polymers production facilities in Cosoleacaque, Mexico and
Zarate, Argentina and the related businesses and entered into definitive
agreements to sell its PET polymers production facilities in Rotterdam, the
Netherlands and Workington, United Kingdom and the related
businesses. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management Discussion and Analysis" and Part II, Item 8 – "Notes to
the Audited Consolidated Financial Statements" – Note 2, "Discontinued
Operations and Assets Held for Sale" and Note 17, "Divestitures" of this 2007
Annual Report on Form 10-K.
In fourth
quarter 2006, the Company completed the sale of its Batesville, Arkansas
manufacturing facility and related assets and specialty organic chemicals
product lines in the Performance Chemicals and Intermediates segment and the
sale of its polyethylene and EpoleneTM polymer
businesses and related assets located at the Longview, Texas site and the
Company's ethylene pipeline. The polyethylene assets and product
lines were in the Performance Polymers segment, while the EpoleneTM assets
and product lines were in the Coatings, Adhesives, Specialty Polymers and Inks
("CASPI") segment. For more information regarding the impact of these
divestitures on financial results, refer to the segment discussions of Part II,
Item 7 – "Management Discussion and Analysis" and Part II, Item 8 – "Notes to
the Audited Consolidated Financial Statements" – Note 17, "Divestitures" of this
2007 Annual Report on Form 10-K.
In second
quarter 2005, the Company completed the early repayment of $500 million of its
outstanding long-term bonds. For more information, refer to Note 9,
"Early Extinguishment of Debt", to the Company's consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
In second
quarter 2005, the Company completed the sale of its equity investment in
Genencor International, Inc. ("Genencor"). For more information,
refer to Note 6, "Equity Investments", to the Company's consolidated financial
statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
On July
31, 2004, the Company completed the sale of certain businesses, product lines
and related assets within the CASPI segment. For more information regarding the
impact of this divestiture on financial results, refer to the CASPI segment
discussion of Part II, Item 7 – "Management Discussion and Analysis" of the 2006
Annual Report on Form 10-K.
Effective
January 1, 2003, the Company’s method of accounting for environmental closure
and post-closure costs changed as a result of the adoption of Statement of
Accounting Standards ("SFAS") No. 143, “Accounting for Asset Retirement
Obligations” resulting in a cumulative effect of change in accounting principles
of $3 million. If the provisions of SFAS No. 143 had been in effect
in prior years, the impact on the Company’s financial results would have been
immaterial. For additional information see Note 12, "Environmental Matters", to
the Company’s consolidated financial statements in Part II, Item 8 of the 2005
Annual Report on Form 10-K.
31
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
ITEM
|
Page
|
|
33
|
|
|
36
|
|
|
37
|
|
|
38
|
|
|
43
|
|
|
50
|
|
|
51
|
|
|
55
|
|
|
61
|
|
|
62
|
|
|
66
|
|
|
68
|
|
|
68
|
|
|
69
|
|
|
71
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the consolidated financial statements for 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 Annual Report
on Form 10-K. All references to earnings per share contained in this report are
diluted earnings per share unless otherwise noted.
During
second quarter 2007, the Company completed the sale of its polyethylene
terephthalate ("PET") manufacturing facility in Spain. In
fourth quarter 2007, the Company entered into definitive agreements to sell its
PET polymers and purified terephthalic acid ("PTA") manufacturing facilities in
the Netherlands and its PET manufacturing facility in the United Kingdom and the
related businesses. Because the Company is exiting the PET business
in the European region, results related to sales of PET products manufactured at
the Spain, the Netherlands, and the United Kingdom sites are presented as
discontinued operations for all periods presented and are therefore not included
in results from continuing operations under GAAP. For additional
information, see Note 2, "Discontinued Operations and Assets Held for Sale", to
the Company's consolidated financial statements in Part II, Item 8 of this 2007
Annual Report on Form 10-K. Also in 2007, the Company sold its
Mexico and Argentina PET manufacturing sites. Sales from these sites
are not presented as discontinued operations due to the Performance Polymers
segment's continuing involvement in the Latin America region and raw material
sales to the divested facilities.
32
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 impaired assets, environmental costs, U.S.
pension and other post-employment benefits, litigation and contingent
liabilities, and income taxes. 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.
Impairment
of Long-Lived Assets
The
Company evaluates the carrying value of long-lived assets, including
definite-lived intangible assets, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Such events
and circumstances include, but are not limited to, significant decreases in the
market value of the asset, adverse change in the extent or manner in which the
asset is being used, significant changes in business conditions, or current or
projected cash flow losses associated with the use of the assets. The
carrying value of a long-lived asset is considered impaired when the total
projected undiscounted cash flows from such asset is separately identifiable and
is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. For long-lived assets to be held and used, fair
value of fixed (tangible) assets and definite-lived intangible assets is
determined primarily using either the projected cash flows discounted at a rate
commensurate with the risk involved or an appraisal. For long-lived
assets to be disposed of by sale or other than by sale, fair value is determined
in a similar manner, except that fair values are reduced for disposal
costs.
The
provisions of Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," require that goodwill and
indefinite-lived intangible assets be tested at least annually for impairment
and require reporting units to be identified for the purpose of assessing
potential future impairments of goodwill. The carrying value of
goodwill and indefinite lived intangibles is considered impaired when their fair
value, as established by appraisal or based on undiscounted future cash flows of
certain related products, is less than their carrying value. The
Company conducts its annual testing of goodwill and indefinite-lived intangible
assets for impairment in the third quarter of each year, unless events warrant
more frequent testing.
As the
Company’s assumptions related to long-lived assets are subject to change,
additional write-downs may be required in the future. If estimates of fair value
less costs to sell are revised, the carrying amount of the related asset is
adjusted, resulting in a charge to earnings. The Company recognized fixed
(tangible) asset impairment costs of $120 million and definite-lived
intangible asset impairment costs of $2 million in results from continuing
operations during 2007. The Company recognized fixed (tangible) asset
impairment costs of $61 million and definite-lived intangible asset impairment
costs of $1 million in results from continuing operations during
2006.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 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 range from the minimum or best estimate of $13 million to the maximum of
$17 million at December 31, 2007.
In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," the
Company also establishes reserves for closure/postclosure costs associated with
the environmental and other assets it maintains. Environmental assets, as
defined in SFAS No. 143, include but are not limited to waste management units,
such as landfills, water treatment facilities, and ash ponds. When these types
of assets are constructed or installed, a 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 expenses 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 asset retirement obligation costs or its
estimate of the useful lives of these assets, expenses to be charged against
earnings could increase or decrease.
In
accordance with Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” ("FIN 47"), the Company also monitors conditional
obligations and will record reserves associated with them when and to the extent
that more detailed information becomes available concerning applicable
retirement costs.
The
Company’s reserve for environmental contingencies was $42 million at December
31, 2007 and $47 million at December 31, 2006, 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.
United
States Pension and Other Post-employment Benefits
The
Company maintains defined benefit pension plans that provide eligible employees
with retirement benefits. Additionally, Eastman provides life insurance and
health care benefits for eligible retirees and health care 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. At
December 31, 2007, the Company assumed a discount rate of 6.16 percent on
its defined benefit pension plan, 6.21 percent on its other post-employment
benefit plan and an expected return on assets of 9 percent. The cost of
providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and plan participation.
34
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
following table illustrates the sensitivity to a change in the expected return
on assets and assumed discount rate for U.S. pension plan and other
postretirement welfare plans:
|
Change
in
Assumption
|
Impact
on
2008
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2007
Projected
Benefit Obligation for
U.S.
Pension Plan
|
Impact
on
December
31, 2007
Benefit
Obligation for
Other
U.S. Postretirement Plans
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$41
Million
|
+$20
Million
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$39
Million
|
-$19
Million
|
|
25
basis point
decrease
in expected
return
on assets
|
+$3
Million
|
No
Impact
|
N/A
|
|
25
basis point
increase
in expected
return
on assets
|
-$3
Million
|
No
Impact
|
N/A
|
The
expected return on assets and assumed discount rate used to calculate the
Company’s pension and other post-employment benefit obligations are established
each December 31. The expected return on assets is based upon the long-term
expected returns in the markets in which the pension trust invests its funds,
primarily the domestic, international, and private equities
markets. The actual return on assets has exceeded the expected return
for the last 5 years. 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 post-employment benefit obligations. As future benefits
under the U.S. benefit plan have been fixed at a certain contribution amount,
changes in the health care trend assumptions do not have a material impact on
the results of operations.
If actual
experience differs from these assumptions, the difference is recorded as an
unrecognized actuarial gain (loss) and then amortized into earnings over a
period of time, which may cause the expense related to providing these benefits
to increase or decrease. The charges applied to earnings in 2007,
2006, and 2005 due to the amortization of these unrecognized actuarial losses,
largely due to actual experience versus assumptions of discount rates, were $47
million, $54 million, and $56 million, respectively.
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate will impact the cash
contributions to be made to the pension plans during 2008. However, an after-tax
charge or credit will be recorded directly to accumulated other comprehensive
income (loss), a component of stockholders’ equity, as of December 31, 2008 for
the impact on the pension’s projected benefit obligation of the change in
interest rates, if any. 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 post-employment obligations, see Note 11, "Retirement
Plans", to the Company’s consolidated financial statements in Part
II, Item 8 of this 2007 Annual Report on Form 10-K.
35
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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. 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
The
Company records deferred tax assets and liabilities 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 the
deferred tax assets is evaluated through the forecasting of taxable income using
historical and projected future operating results, the reversal of existing
temporary differences, and the availability of tax planning strategies.
Valuation allowances are recorded 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 of future tax consequences differs from our 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, 2007, a valuation allowance
of $146 million has been provided against the deferred tax assets.
During
2007, the Company took strategic actions in its Performance Polymers segment to
address its underperforming PET manufacturing facilities outside the United
States. In second quarter 2007, the Company completed the sale of its PET
manufacturing facility in Spain. In fourth quarter 2007, the Company entered
into definitive agreements to sell its PET polymers and PTA manufacturing
facility in the Netherlands and the PET manufacturing facility in the United
Kingdom and related businesses. Because the Company is exiting the
PET manufacturing business in the European region, results from the sales of PET
products manufactured at the Spain, the Netherlands and the United Kingdom
manufacturing sites are presented as discontinued operations and are therefore
not included in results from continuing operations under GAAP. Also
in 2007, the Company sold its Mexico and Argentina PET manufacturing
sites. Sales from
these sites are not presented as discontinued operations due to the Performance
Polymers segment's continuing involvement in the Latin America region and raw
material sales to the divested facilities. In order to provide
a better understanding of the impact on Performance Polymers segment results of
the Latin American PET assets, this Management's Discussion and Analysis
includes certain financial measures with and without sales and operating results
in Latin America from PET manufacturing facilities and related businesses in
Mexico and Argentina.. For more information on discontinued
operations, refer to Note 2, "Discontinued Operations and Assets Held for Sale",
to the Company's consolidated financial statements in Part II, Item 8 of this
2007 Annual Report on Form 10-K. Asset impairments and restructuring
charges resulting from these actions were $15 million net of tax for the Spain
divestiture reported in discontinued operations and $115 million before tax for
the Latin American manufacturing sites reported in continuing operations in
2007.
36
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In fourth
quarter 2006, the Company sold its Batesville, Arkansas manufacturing facility
and related assets in the Performance Chemicals and Intermediates ("PCI")
segment and its polyethylene ("PE") and EpoleneTM polymer
businesses and related assets of the Performance Polymers and Coatings,
Adhesives, Specialty Polymers, and Inks ("CASPI") segments. For 2006,
sales revenue of $811 million and operating earnings of $124 million were
attributed to these divested product lines. Asset impairments and
restructuring charges from the divested Arkansas manufacturing facility were $18
million in 2006. Other operating (income) charges, net were a charge
of $7 million from the divestiture of the Arkansas manufacturing facility and
income of $75 million from the divestiture of the PE and EpoleneTM polymer
product lines. As part of the PE divestiture, the Company entered
into a transition agreement for contract ethylene sales, sales revenue and
operating earnings from which are included in PCI segment results in
2007.
Also in
the fourth quarter 2006, the Company made strategic decisions relating to the
scheduled shutdown of cracking units in Longview, Texas and a planned shutdown
of higher cost PET assets in Columbia, South Carolina. Accelerated
depreciation costs resulting from these decisions were $49 million and $10
million in 2007 and 2006, respectively. For more information on
accelerated depreciation, refer to "Gross Profit" in the "Results of Operations"
section of this Management's Discussion and Analysis.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures:
|
·
|
Company
sales and segment sales and results from continuing operations excluding
sales revenue and results from continuing operations from sales in Latin
America of PET products manufactured at the divested Mexico and Argentina
PET manufacturing sites;
|
|
·
|
Company
and segment sales excluding contract ethylene sales under a transition
agreement related to the PE product lines divested in
2006;
|
|
·
|
Company
sales and segment sales and results from continuing operations excluding
sales revenue and operating results from the product lines
divested in 2006; and
|
|
·
|
Company
and segment gross profit, operating earnings, and net earnings excluding
accelerated depreciation costs, asset impairments and restructuring
charges (gains), and other operating (income) loss,
net.
|
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines do not reflect the continuing
and expected future business of the PCI segment. In addition, for
evaluation and analysis of ongoing business results and of the impact on the
Company and segments of strategic decisions and actions to reduce costs and to
improve the profitability of the Company, management believes that Company and
segment earnings from continuing operations should be considered both with and
without accelerated depreciation costs, asset impairments and restructuring
charges, and other operating (income) loss, and that Company and segment sales
and results from continuing operations should be considered both with and
without sales revenue and results from continuing operations from divested
product lines and from sales in Latin America of PET products manufactured at
the divested Mexico and Argentina manufacturing
facilities. Management believes that investors can better evaluate
and analyze historical and future business trends if they also consider the
reported Company and segment results, respectively, without the identified
items. Management utilizes Company and segment results including and excluding
the identified items in the measures it uses to evaluate business performance
and in determining certain performance-based compensation. These measures,
excluding the identified items, are not recognized in accordance with GAAP and
should not be viewed as alternatives to the GAAP measures of
performance.
The Company's sales revenue was $6.8
billion for both full year 2007 and 2006. Excluding contract
ethylene sales and sales from divested PET facilities in Mexico and Argentina
for both periods and sales from the divested PE product line for 2006, sales
revenue increased 11 percent in 2007.
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
strategic decisions and actions described above resulted in accelerated
depreciation costs of $49 million and asset impairments and restructuring
charges of $112 million in 2007 and accelerated depreciation costs of $10
million, asset impairments and restructuring charges of $101 million, and other
operating income of $68 million in 2006. Operating earnings were $504
million in 2007, a $150 million decrease compared with
2006. Excluding accelerated depreciation costs, asset impairments and
restructuring charges and other operating income, operating earnings were $665
million in 2007 compared with $697 million in 2006. Earnings from
continuing operations were $321 million for 2007 compared with $427
million for 2006. Excluding accelerated depreciation costs,
asset impairments and restructuring charges and other operating income, earnings
from continuing operations were $423 million and $434 million for 2007 and 2006,
respectively. The Company's broad base of businesses continues to achieve
strong financial results, with the decline in earnings primarily due to the
operating loss in the Performance Polymers segment.
The
Company generated $732 million in cash from operating activities during 2007
compared to $609 million in 2006. The increase was due primarily to a
reduction in working capital. During 2007, the Company reduced
working capital $86 million primarily related to reductions in
inventories. The Company contributed $100 million and $75 million to
its U.S. defined benefit pension plan in 2007 and 2006,
respectively. The Company does not plan to make additional
contributions to its U.S. defined benefit pension plans in
2008. Priorities for use of available cash are paying the quarterly
cash dividend, funding targeted growth initiatives, and repurchasing shares. In
2007, the Company repurchased shares for a total of $382 million at an
average price of $64 per share.
In
addition to achieving the above results, Eastman continued to progress on its
overall growth objectives including the announcement in July 2007 of two
industrial gasification projects in the U.S. Gulf Coast and actions to improve
the performance of its Performance Polymers segment.
The
gasification project announcements are an important milestone in the Company's
continuing efforts to leverage its technology and operational expertise for
future growth. In October 2007, the Company announced it has entered
into an agreement with Green Rock Energy, L.L.C. ("Green Rock"), a company
formed by the D. E. Shaw Group and Goldman, Sachs & Co., to
jointly develop the approximately $1.6 billion industrial gasification facility
in Beaumont, Texas. The Beaumont, Texas project is expected to be
operational in 2011 and will produce hydrogen, methanol, and
ammonia. The Company will be an investor, developer, service
provider, and customer for this project. The Company also announced
an agreement with Green Rock to invest in its St. James Parish, Louisiana
project. This project is expected to be operational in 2011 and will
produce anhydrous ammonia and methanol. The Company will be an
investor, service provider and customer for this project.
In
addition to the Performance Polymers divestitures described under "Strategic
Actions and Related Presentation of Non-GAAP Financial Measures", in 2007 the
Company started-up the new 350,000 metric ton PET facility using IntegRexTM technology in Columbia,
South Carolina, which was fully operational in the first quarter of
2007. ParaStarTM PET
resins, enabled by IntegRexTM technology, were widely
accepted in the marketplace during 2007. The Company plans to
increase capacity at this facility to over 525,000 metric tons of ParaStarTM next
generation PET resins by the end of 2008 and to reduce the annual costs at this
facility by $30 million.
The
Company’s results of operations as presented in the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form 10-K
are summarized and analyzed below.
38
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As a
result of the Company's strategic actions in the Performance Polymers segment,
the discussion below reflects results from continuing operations. For
additional information, see Note 2, "Discontinued Operations and Assets Held for
Sale", to the Company's consolidated financial statements in Part II, Item 8 of
this 2007 Annual Report on Form 10-K.
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||||||||||
|
Sales
|
$
|
6,830
|
$
|
6,779
|
1
%
|
(3)
%
|
3
%
|
--
%
|
1
%
|
|||||
|
Sales
- contract ethylene sales (1)
|
314
|
27
|
||||||||||||
|
Sales
– 2006 divested product lines (2)
|
--
|
811
|
||||||||||||
|
Sales
- sales from Mexico and Argentina PET manufacturing facilities (3)
|
413
|
440
|
||||||||||||
|
Sales
– excluding listed items
|
$
|
6,103
|
$
|
5,501
|
11
%
|
5
%
|
4
%
|
1
%
|
1
%
|
|||||
|
|
(1)
Included in 2007 and 2006 sales revenue are contract ethylene sales under
the transition supply agreement related to the divestiture of the PE
businesses.
|
|
|
(2)
Included in 2006 sales revenue are sales revenue from sales of products of
the divested product lines of the Company's Batesville, Arkansas
manufacturing facility and related assets in the PCI segment and of the
divested PE and EpoleneTM
polymer businesses and related assets of the Performance Polymers and
CASPI segments.
|
|
|
(3)
Included in 2007 and 2006 sales revenue are sales revenue from PET
manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina divested in the fourth quarter
2007. These sales are not considered discontinued operations
due to continuing involvement in the Latin America region and raw material
sales to the divested facilities.
|
Sales
revenue for 2007 compared to 2006 increased $51 million. Excluding
contract ethylene sales, sales from 2006 divested product lines, and sales from
Mexico and Argentina PET manufacturing facilities, sales revenue increased 11
percent primarily due to higher sales volume, particularly in the Performance
Polymers and PCI segments, and higher selling prices in all segments except the
Performance Polymers segment in response to higher raw material and energy
costs.
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Gross
Profit
|
$
|
1,192
|
$
|
1,265
|
(6)
%
|
|
|
As
a percentage of sales
|
17.5
%
|
18.7
%
|
||||
|
Accelerated
depreciation included in cost of goods sold
|
49
|
10
|
||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,241
|
1,275
|
(3)
%
|
|||
|
As
a percentage of sales
|
18.2
%
|
18.8
%
|
39
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Gross
profit and gross profit as a percentage of sales for 2007 decreased compared
with 2006 primarily due to higher raw materials and energy costs more than
offsetting higher selling prices. Gross profit and gross profit as a
percentage of sales were also impacted by accelerated depreciation costs
resulting from the scheduled shutdown of cracking units in Longview, Texas and
of higher cost PET polymer assets in Columbia, South Carolina. In 2007, raw
material and energy costs increased by approximately $250 million over the prior
year, compared to increases in selling prices of approximately $200
million.
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Selling,
General and Administrative Expenses ("SG&A")
|
$
|
420
|
$
|
423
|
(1)
%
|
|
|
Research
and Development Expenses ("R&D")
|
156
|
155
|
--
%
|
|||
|
$
|
576
|
$
|
578
|
--
%
|
||
|
As
a percentage of sales
|
8.4%
|
8.5%
|
SG&A
expenses in 2007 decreased compared to 2006 primarily as a result of the
manufacturing sites, businesses, and product lines divested in 2007 and 2006
partially offset by increased spending on growth initiatives. For
additional information refer to Note 17, "Divestitures" to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K.
R&D
expenses for 2007 were flat compared to 2006 as decreased expenses in
Performance Polymers resulting from the fourth quarter 2006 completion
of the Company's new PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina were offset by increased spending on the industrial gasification
initiatives and on growth projects in the Specialty Plastics ("SP")
segment.
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges totaled $112 million and $101 million in 2007 and 2006,
respectively. Asset impairments and restructuring charges in
2007 were primarily costs associated with the PET manufacturing facilities
in Mexico and Argentina sold in the fourth quarter 2007. Asset
impairments and restructuring charges in 2006 were primarily severance charges
for work force reductions and impairments resulting from the shutdown of an
R&D pilot plant and the shutdown of the cyclohexane dimethanol ("CHDM")
manufacturing assets in San Roque, Spain. For more information
regarding asset impairments and restructuring charges, primarily related to
recent strategic decisions and actions, see the Performance Polymers segment
discussion and Note 18, "Asset Impairments and Restructuring Charges, Net", to
the Company's consolidated financial statements in Part II, Item 8 of this 2007
Annual Report on Form 10-K.
Other
Operating Income, Net
Other
operating income, net for 2006 reflects a gain of $75 million on the sale of the
Company's PE and EpoleneTM polymer
businesses, related assets, and the Company's ethylene pipeline and a charge of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and its related assets and product
lines. For more information concerning divestitures, see Note 17,
"Divestitures", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2007 Annual Report on Form 10-K.
40
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating Earnings
|
2007
|
2006
|
Change
|
||||
|
(Dollars
in millions)
|
||||||
|
Operating
earnings
|
$
|
504
|
$
|
654
|
(23)
%
|
|
|
Accelerated
depreciation included in cost of goods sold
|
49
|
10
|
||||
|
Asset
impairments and restructuring charges, net
|
112
|
101
|
||||
|
Other
operating income, net
|
--
|
(68)
|
||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$
|
665
|
$
|
697
|
(5)
%
|
|
Interest
Expense, Net
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Gross
interest costs
|
$
|
113
|
$
|
109
|
||
|
Less:
capitalized interest
|
10
|
7
|
||||
|
Interest
expense
|
103
|
102
|
1
%
|
|||
|
Interest
income
|
41
|
25
|
||||
|
Interest
expense, net
|
$
|
62
|
$
|
77
|
(19)
%
|
Gross
interest costs for 2007 compared to 2006 were higher due to higher average
interest rates. Higher capitalized interest is due to
higher levels of capital expenditures. Higher interest income for
2007 compared to 2006 reflected higher invested
cash balances, as well as higher average interest rates, resulting in lower net
interest expense.
For 2008,
the Company expects net interest expense to increase compared with 2007
primarily due to lower interest income, driven by declining interest
rates.
Other
(Income) Charges, Net
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Other
income
|
$
|
(33)
|
$
|
(25)
|
$
|
(8)
|
|
Other
charges
|
5
|
8
|
(3)
|
|||
|
Other
(income) charges, net
|
$
|
(28)
|
$
|
(17)
|
$
|
(11)
|
Included
in other (income) charges, net are the Company’s portion of net earnings from
its equity investments, gains on the sale of certain technology business venture
investments, royalty income, net gains on foreign exchange transactions, and
other non-operating income related to Holston Defense Corporation
("HDC"). Included in other charges are net losses on foreign exchange
transactions, the Company’s portion of losses from its equity investments,
write-downs to fair value of certain technology business venture investments due
to other than temporary declines in value, and fees on securitized
receivables.
Included
in 2007 other income is $11 million of income from investments and $7 million in
net gains on foreign exchange transactions. Other income for 2007 and
2006 included gains of $4 million and $12 million, respectively, resulting
from a favorable decision of the U.S. Department of the Army to
reimburse post-employment benefits being provided to retirees of HDC, a wholly
owned subsidiary. This gain reflected a portion of the
unrecognized gain resulting from the reimbursement decision that will
be amortized into earnings over future periods. For additional
information, see Note 11,
"Retirement Plans", to the Company’s consolidated financial statements in Part
II, Item 8 of this 2007 Annual Report on Form 10-K.
41
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Provision
for Income Taxes
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
|||
|
Provision
for income taxes
|
$
|
149
|
$
|
167
|
(11)
%
|
|
|
Effective
tax rate
|
32
%
|
28
%
|
The 2007
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 33
percent.
The 2006
effective tax rate reflects the Company's tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 31
percent. The effective tax rate was impacted by $25 million of
deferred tax benefit resulting from the reversal of capital loss carryforward
valuation reserves and $11 million of deferred tax benefit resulting from the
reversal of foreign net operating loss valuation reserves.
The Company expects
its effective tax rate in 2008 will be approximately 34 percent.
|
Earnings
from Continuing Operations
|
||||
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Earnings
from continuing operations
|
$
|
321
|
$
|
427
|
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
31
|
6
|
||
|
Asset
impairments and restructuring charges, net of tax
|
71
|
69
|
||
|
Other
operating income, net
|
--
|
(68)
|
||
|
Earnings
from continuing operations excluding accelerated depreciation costs, asset
impairments and restructuring charges, net of tax, and other operating
income, net
|
$
|
423
|
$
|
434
|
Net
Earnings
|
(Dollars
in millions)
|
2007
|
2006
|
||
|
Earnings
from continuing operations
|
$
|
321
|
$
|
427
|
|
Loss
from discontinued operations, net of tax
|
(10)
|
|
(18)
|
|
|
Loss
on disposal of discontinued operations, net of tax
|
(11)
|
--
|
||
|
Net
earnings
|
$
|
300
|
$
|
409
|
The loss
on disposal of discontinued operations, net of tax of $11 million is from the
sale of the Company's San Roque, Spain PET manufacturing facility in the
Performance Polymer's segment. Net proceeds from the sale of the San
Roque site were approximately $43 million. During 2007, the Company
also recognized site closure costs of $4 million, net of tax, for the San Roque
PET site. For
additional information on discontinued operations, see to Note 2,
"Discontinued Operations and Assets Held for Sale", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K.
42
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company’s products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the PCI
segment, the Performance Polymers, segment and the SP
segment. For additional information concerning the Company’s
operating businesses and products, refer to Note
23, "Segment Information", to the consolidated financial statements in Part II,
Item 8 of this 2007 Annual Report on Form 10-K.
Sales
revenue and expenses not identifiable to an operating segment are not included
in segment operating results for either of the periods presented and are shown
in Note 23, "Segment Information", as "other" sales revenue and operating
losses.
|
CASPI
Segment
|
|||||||||||||
|
Change
|
|||||||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
|||||||||
|
Sales
|
$
|
1,451
|
$
|
1,421
|
$
|
30
|
2
%
|
||||||
|
Volume
effect
|
(68)
|
(5)
%
|
|||||||||||
|
Price
effect
|
48
|
3
%
|
|||||||||||
|
Product
mix effect
|
26
|
2
%
|
|||||||||||
|
Exchange
rate effect
|
24
|
2
%
|
|||||||||||
|
Operating
earnings
|
235
|
229
|
6
|
3
%
|
|||||||||
|
Asset
impairments and restructuring charges, net
|
(1)
|
13
|
(14)
|
||||||||||
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
234
|
242
|
(8)
|
(3)
%
|
|||||||||
Sales
revenue for 2007 increased $30 million compared to 2006 as higher selling
prices, a favorable shift in product mix, and favorable foreign currency
exchange rates were partially offset by lower sales volume. Selling
prices increased in response to higher raw material and energy costs. The lower
sales volume was primarily attributed to the divestiture of the Company's
EpoleneTM product
lines in fourth quarter 2006 and slightly lower sales volume for coatings
product lines in North America.
Operating
earnings for 2007 increased $6 million compared to 2006. Excluding
asset impairments and restructuring charges, operating earnings decreased $8
million in 2007 compared to 2006. The decrease in operating earnings is
primarily due to lower sales volumes, primarily in the coatings product lines,
partially offset by higher selling prices, a favorable shift in product mix, and
favorable foreign currency exchange rates. Asset impairments and
restructuring charges in 2006 were related to previously closed manufacturing
facilities and severance costs related to a voluntary reduction in
force.
43
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Fibers
Segment
|
|||||||||||||
|
Change
|
|||||||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
|||||||||
|
Sales
|
$
|
999
|
$
|
910
|
$
|
89
|
10
%
|
||||||
|
Volume
effect
|
25
|
3
%
|
|||||||||||
|
Price
effect
|
51
|
6
%
|
|||||||||||
|
Product
mix effect
|
9
|
1
%
|
|||||||||||
|
Exchange
rate effect
|
4
|
--
%
|
|||||||||||
|
Operating
earnings
|
238
|
226
|
12
|
5
%
|
|||||||||
|
Asset
impairments and restructuring charges, net
|
--
|
2
|
(2)
|
||||||||||
|
Operating
earnings excluding asset impairments and restructuring charges,
net
|
238
|
228
|
10
|
4
%
|
|||||||||
Sales
revenue for 2007 increased $89 million compared to 2006 primarily due to higher
selling prices and higher sales volume. Selling prices increased
primarily due to efforts to offset higher raw material and energy costs,
particularly for wood pulp. The increased sales volume was attributed
to continued industry market growth in acetate tow product lines and competitor
outages.
Operating earnings for 2007 increased
$12 million compared to 2006 due to higher selling prices and higher sales
volume. Asset impairments and restructuring charges of $2 million in
2006 primarily related to severance costs of a voluntary reduction in
force.
44
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
PCI
Segment
|
||||||||||
|
Change
|
||||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
||||||
|
Sales
|
$
|
2,095
|
$
|
1,659
|
$
|
436
|
26
%
|
|||
|
Volume
effect
|
401
|
24
%
|
||||||||
|
Price
effect
|
74
|
4
%
|
||||||||
|
Product
mix effect
|
(49)
|
(3)
%
|
||||||||
|
Exchange
rate effect
|
10
|
1
%
|
||||||||
|
Sales
– contract ethylene sales (1)
|
314
|
27
|
287
|
|||||||
|
Sales
– divested product lines (2)
|
--
|
111
|
(111)
|
|||||||
|
Sales
– excluding listed items
|
1,781
|
1,521
|
260
|
17
%
|
||||||
|
Volume
effect
|
131
|
9
%
|
||||||||
|
Price
effect
|
98
|
6
%
|
||||||||
|
Product
mix effect
|
22
|
1
%
|
||||||||
|
Exchange
rate effect
|
9
|
1
%
|
||||||||
|
Operating
earnings
|
220
|
132
|
88
|
67
%
|
||||||
|
Operating
earnings (loss) – divested product lines (2)(3)
|
--
|
(15)
|
15
|
100
%
|
||||||
|
Operating
earnings – excluding divested product lines (3)
|
220
|
147
|
73
|
50
%
|
||||||
|
Operating
earnings excluding certain items (4)
|
238
|
161
|
77
|
48
%
|
||||||
|
Operating
earnings excluding certain items (4)
– divested product lines (2)(3)
|
--
|
3
|
(3)
|
(100)%
|
||||||
|
Operating
earnings excluding certain items (4)
– excluding divested product lines (3)
|
238
|
158
|
80
|
51
%
|
||||||
|
|
(1)
Sales revenue for 2007 and 2006 included contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
|
|
(2)
Sales revenue and operating results for 2006 included sales revenue from
sales of products of the divested product lines of the Company's
Batesville, Arkansas manufacturing facility and related assets and
specialty organic chemicals product
lines.
|
|
|
(3) Includes
allocated costs consistent with the Company’s historical practices, some
of which may remain and could be reallocated to the remainder of the
segment and other segments.
|
|
|
(4)
Items are accelerated depreciation costs, asset impairments and
restructuring charges (gains) and other operating
charges. Accelerated depreciation costs and asset impairments
and restructuring gains for 2007 were $19 million and $1 million,
respectively. Accelerated depreciation costs, asset impairments
and restructuring charges, and other operating charges for 2006 were $2
million, $20 million, and $7 million, respectively. The accelerated
depreciation costs are related to the continuation of the planned staged
phase-out of older cracking units at the Company's Longview, Texas
facility. Asset impairments and restructuring charges were
primarily related to the divestiture of the PCI segment's Batesville,
Arkansas manufacturing facility and related assets and specialty organic
chemicals product lines completed in the fourth quarter 2006 and to
severance costs related to a voluntary reduction in force in
2006. The other operating charges resulted from the Batesville,
Arkansas divestiture.
|
45
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue for 2007 increased $436 million compared to 2006 primarily due to
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in the fourth
quarter 2006. Excluding the contract ethylene sales and sales revenue
from divested product lines, sales revenue for 2007 increased due to higher
sales volume and increased selling prices, which were attributed to favorable
market conditions, primarily for olefin-based derivative products and acetyl
chemicals in Asia Pacific and the United States, and competitor
outages.
Operating
earnings increased $88 million in 2007 compared to 2006. Excluding
accelerated depreciation costs, asset impairment and restructuring charges
(gains), and other operating charges, operating earnings increased $77
million. The increase is due to higher sales volume, higher selling
prices, and earnings from the licensing of acetyl technology, with contract
ethylene sales having minimal impact on operating earnings for 2007 compared to
2006. Selling prices increased in response to higher raw material and
energy costs. The accelerated depreciation costs are related to the
continuation of the planned staged phase-out of older cracking units at the
Company's Longview, Texas facility.
The
Company evaluates licensing opportunities for acetic acid and oxo derivatives on
a selective basis, and has licensed technology for two projects to produce
acetyl products -- one to Saudi International Petrochemical Company ("SipChem")
in Saudi Arabia in 2005, and a second to Chang Chung Petrochemical Company in
Taiwan in 2007.
In the
fourth quarter 2006 the Company completed its divestiture of the PCI segment's
Batesville, Arkansas manufacturing facility and related assets and specialty
organic chemicals product lines. Sales revenue and operating loss
attributed to the divested product lines were $111 million and $15 million,
respectively for 2006.
46
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Performance
Polymers Segment
As a
result of the Company's strategic actions in the Performance Polymers segment,
the financial discussion below is of results from continuing operations in all
periods presented. For additional information, see Note 2,
"Discontinued Operations and Assets Held for Sale", to the Company's
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K.
|
Change
|
||||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
||||||
|
Sales
|
$
|
1,413
|
$
|
1,971
|
$
|
(558)
|
(28)
%
|
|||
|
Volume
effect
|
(557)
|
(28)
%
|
||||||||
|
Price
effect
|
(5)
|
--
%
|
||||||||
|
Product
mix effect
|
4
|
--
%
|
||||||||
|
Exchange
rate effect
|
--
|
--
%
|
||||||||
|
Sales
– divested PE product lines (1)
|
--
|
635
|
(635)
|
(100)%
|
||||||
|
Sales
from Mexico and Argentina PET manufacturing facilities (2)
|
413
|
440
|
(27)
|
(6)%
|
||||||
|
Sales
– U.S. PET manufacturing facilities
|
1,000
|
896
|
104
|
12%
|
||||||
|
Volume
effect
|
115
|
13%
|
||||||||
|
Price
effect
|
(15)
|
(1)%
|
||||||||
|
Product
mix effect
|
4
|
--
%
|
||||||||
|
Exchange
rate effect
|
--
|
--
%
|
||||||||
|
Operating
earnings (loss) (3)
|
(207)
|
68
|
(275)
|
>(100)
%
|
||||||
|
Operating
earnings - divested PE product lines (1)(4)
|
--
|
136
|
(136)
|
(100)
%
|
||||||
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (2)(4)
|
(127)
|
(12)
|
(115)
|
>(100)
%
|
||||||
|
Operating
loss - U.S. PET manufacturing facilities (3)(4)
|
(80)
|
(56)
|
(24)
|
(43)
%
|
||||||
|
(1)
|
PE
product lines of the PE businesses and related assets located at the
Longview, Texas site which were sold in fourth quarter
2006.
|
|
(2)
|
Sales
revenue and operating results for 2007 and 2006 include sales revenue from
PET manufacturing facilities and related businesses in Cosoleacaque,
Mexico and Zarate, Argentina divested in fourth quarter
2007. These sales are not presented as discontinued
operations due to the Performance Polymers segment's continuing
involvement in the Latin American region and raw material sales to the
divested facilities.
|
|
(3)
|
Includes
allocated costs not included in discontinued operations, some of which may
remain and could be reallocated to the remainder of the segment and other
segments.
|
|
(4)
|
Includes
allocated costs consistent with the Company's historical practices, some
of which may remain and could be reallocated to the remainder of the
segment and other segments.
|
47
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Performance
Polymers Segment
|
||||||||
|
Change
|
||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
||||
|
Operating
earnings (loss) excluding certain items (1)(2)
|
$
|
(65)
|
$
|
46
|
$ |
(111)
|
>(100)
%
|
|
|
Operating
earnings excluding certain items (3)
- divested PE product line (4)
|
--
|
61
|
(61)
|
>(100)
%
|
||||
|
Operating
loss excluding certain items (5)
- from sales from Mexico and Argentina PET manufacturing facilities
(6)
|
(12)
|
(12)
|
--
|
--
%
|
||||
|
Operating
loss excluding certain items (7) -
U.S. PET manufacturing facilities (1)
|
(53)
|
(3)
|
(50)
|
>(100)
%
|
||||
|
(1)
|
Includes
allocated costs not included in discontinued operations, some of which may
remain and could be reallocated to the remainder of the segment and other
segments.
|
|
(2)
|
Items
are accelerated depreciation costs, asset impairments and restructuring
charges, net and other operating income. In 2007, asset
impairments and restructuring charges of $113 million primarily related to
the Mexico and Argentina PET manufacturing facilities sale. Accelerated
depreciation costs of $29 million resulted from restructuring actions
associated with higher cost PET polymer assets in Columbia, South
Carolina. In 2006, asset impairments and restructuring charges
of $46 million were primarily related to the shutdown of a research and
development Kingsport, Tennessee pilot plant, discontinued production of
CHDM modified polymers in San Roque, Spain and severance costs from a
reduction in force in the U.S. and Spain. CHDM, an internal
intermediate product primarily used in copolyester and PET production, was
discontinued in San Roque, Spain to gain operational efficiencies at other
facilities. Accelerated depreciation of $7 million in 2006
related to the restructuring decisions and actions for higher cost PET
polymer intermediates assets in Columbia. Other operating income was $75
million in 2006 from the divestiture of the PE businesses and
assets.
|
|
(3)
|
Items
are other operating income from the sale of the PE businesses and related
assets located at the Longview, Texas site which were sold in fourth
quarter 2006, and which were $75 million in
2006.
|
|
(4)
|
PE
product lines of the PE businesses and related assets located at the
Longview, Texas site which were sold in fourth quarter
2006. Includes allocated costs consistent with the Company's
historical practices, some of which may remain and could be reallocated to
the remainder of the segment and other
segments.
|
|
(5)
|
Items
are asset impairments and restructuring charges (gains) relating to the
Mexico and Argentina PET manufacturing facilities, and were $115 million
in 2007.
|
|
(6)
|
Sales
revenue and operating results for 2007 and 2006 include sales revenue from
PET manufacturing facilities and related businesses in Mexico and
Argentina divested in fourth quarter 2007. These sales are not
presented as discontinued operations due to the Performance Polymers
segment's continuing involvement in the Latin American region and raw
material sales to the divested facilities. Includes allocated
costs consistent with the Company's historical practices, some of which
may remain and could be reallocated to the remainder of the segment and
other segments.
|
|
(7)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges (gains) related to the U.S. PET manufacturing
facilities. Asset impairments and restructuring charges (gains)
were $(2) million and $46 million in 2007 and 2006,
respectively. Accelerated depreciation costs were $29 million
and $7 million in 2007 and 2006,
respectively.
|
Sales
revenue decreased $558 million in 2007 compared to 2006 primarily due to the
divested PE product lines. For U.S. PET manufacturing facilities,
sales revenue increased $104 million primarily due to the increased North
America sales volumes attributed to increased capacity from the Company's
ParaStarTM PET
facility based on IntegRexTM technology.
48
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
operating losses from sales from Mexico and Argentina PET manufacturing
facilities of $127 million and $12 million for 2007 and 2006, respectively, and
operating earnings from the divested PE product lines of $136 million in 2006,
operating results decreased $24 million for 2007 compared to
2006. Excluding asset impairments and restructuring charges and
accelerated depreciation costs, operating results from U.S. manufacturing
facilities decreased $50 million due to costs associated with the new PET
facility based on IntegRexTM technology becoming
fully operational and the timing of the commercial launch of ParaStarTM PET
produced in the IntegRexTM technology facility as
well as higher and continued volatile raw material and energy costs resulting in
compressed gross margins, particularly in North America.
Production
began in November 2006 at the Company's new PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina. Manufacturing ParaStarTM next
generation PET resins, the 350,000 metric tons facility was fully operational in
first quarter of 2007. The Company plans to increase capacity at this
facility to over 525,000 metric tons of ParaStarTM next
generation PET resins by the end of 2008 and to reduce annual costs at this
facility by $30 million.
During
the fourth quarter 2007, the Company completed the sale of Eastman's PET
polymers production facilities in Mexico and Argentina and the related
businesses. Sales revenue attributed to PET product manufactured at
the Mexico and Argentina PET sites for 2007 and 2006 was $413 million and $440
million, respectively.
|
SP
Segment
|
|||||||||
|
Change
|
|||||||||
|
(Dollars
in millions)
|
2007
|
2006
|
$
|
%
|
|||||
|
Sales
|
$
|
872
|
$
|
818
|
$
|
54
|
6
%
|
||
|
Volume
effect
|
10
|
1
%
|
|||||||
|
Price
effect
|
23
|
3
%
|
|||||||
|
Product
mix effect
|
10
|
1
%
|
|||||||
|
Exchange
rate effect
|
11
|
1
%
|
|||||||
|
Operating
earnings
|
65
|
46
|
19
|
41
%
|
|||||
|
Accelerated
depreciation included in cost of goods sold
|
1
|
1
|
--
|
||||||
|
Asset
impairments and restructuring charges, net
|
1
|
16
|
(15)
|
||||||
|
Operating
earnings excluding accelerated depreciation costs and asset impairments
and restructuring charges, net
|
67
|
63
|
4
|
6
%
|
|||||
Sales
revenue for 2007 increased $54 million compared to 2006 primarily due to higher
selling prices, favorable foreign currency exchange rates, higher sales volume,
and a favorable shift in product mix. Selling prices increased to
offset higher raw material, energy, and transportation costs. The increased
sales volume was primarily attributed to continued market development efforts,
particularly in copolyester and cellulose esters product lines, which more than
offset a decline in demand for polyester products used in photographic and
optical films.
49
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings increased $19 million. Excluding asset impairments and
restructuring charges and accelerated depreciation costs, operating earnings for
2007 increased compared to 2006 as higher selling prices and favorable foreign
currency exchange rates more than offset increased raw material and energy costs
and increased expenditures related to growth initiatives. The 2007
operating earnings included $1 million in asset impairments and restructuring
charges primarily for the Spain CHDM facility and $1 million of accelerated
depreciation costs from restructuring actions for higher cost PET polymer assets
in Columbia, South Carolina. The 2006 operating results included $16
million in asset impairments and restructuring charges related to the
discontinued production of CHDM and $1 million of accelerated depreciation costs
from restructuring actions for higher cost PET polymer assets in Columbia, South
Carolina.
Sales
Revenue
|
(Dollars
in millions)
|
2007
|
2006
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||
|
United
States and Canada
|
$
|
4,043
|
$
|
4,221
|
(4)
%
|
(4)
%
|
2
%
|
(2)
%
|
--
%
|
|||||
|
Europe,
Middle East, and Africa
|
932
|
816
|
14
%
|
3
%
|
3
%
|
2
%
|
6
%
|
|||||||
|
Asia
Pacific
|
1,103
|
941
|
17
%
|
3
%
|
8
%
|
6
%
|
--
%
|
|||||||
|
Latin
America
|
752
|
801
|
(6)
%
|
(8)
%
|
2
%
|
--
%
|
--
%
|
|||||||
|
$
|
6,830
|
$
|
6,779
|
1
%
|
(3)
%
|
3
%
|
--
%
|
1
%
|
Sales
revenue in the United States and Canada decreased primarily due to lower volumes
particularly in the CASPI and Performance Polymers segments due to the
divestitures in those segments, partially offset by higher volumes in the PCI
segment due to the contract ethylene sales.
Sales
revenue in Europe, the Middle East and Africa increased due to the effect of the
foreign currency exchange rates, particularly in the CASPI and SP segments,
higher selling prices, particularly in the Fibers and SP segments, and higher
volumes, particularly in the SP
and Fibers segments. The higher selling
prices were primarily in response to increases in raw material and energy
costs.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices and a
favorable shift in product mix, primarily in the PCI segment. Product
mix was positively impacted by $20 million from technology licensing in the PCI
segment.
Sales
revenue in Latin America decreased primarily due to lower sales volume,
particularly in the Performance Polymers segment. Excluding divested
product lines and manufacturing facilities, sales revenue was
flat. During the fourth quarter 2007, the Company sold its PET
polymers production facilities in Mexico and Argentina and the related
businesses, which will result in significantly lower sales revenue in Latin
America in future periods. However, subject to certain
product-specific agreements associated with the sale of the manufacturing
facilities in Mexico and Argentina, the Company plans to continue to sell a
limited set of PET products manufactured in the U.S. in certain Latin American
markets.
50
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
With a
substantial portion of sales to customers outside the United States, Eastman is
subject to the risks associated with operating in international
markets. To mitigate its exchange rate risks, the Company frequently
seeks to negotiate payment terms in U.S. dollars and euros. In
addition, where it deems such actions advisable, the Company engages in foreign
currency hedging transactions and requires letters of credit and prepayment for
shipments where its assessment of individual customer and country risks
indicates their use is appropriate. For more information on these
practices see Note 10, "Fair Value of Financial Instruments", to the Company’s
consolidated financial statements in Part II, Item 8 of this 2007 Annual Report
on Form 10-K and Part II, Item 7A--"Quantitative and Qualitative Disclosures
About Market Risk."
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||||||||||
|
Sales
|
$
|
6,779
|
$
|
6,460
|
5
%
|
1
%
|
5
%
|
(1)
%
|
--
%
|
|||||
|
Sales
– 2006 divested product lines (1)
|
811
|
786
|
||||||||||||
|
Sales
- sales from Mexico and
Argentina PET manufacturing facilities (2)
|
440
|
427
|
||||||||||||
|
Sales
– excluding listed items
|
$
|
5,528
|
$
|
5,247
|
5
%
|
--
%
|
6
%
|
(1)
%
|
--
%
|
|||||
|
(1)
|
Included in 2006 and 2005
sales revenue are sales revenue from sales of products of the divested
product lines of the Company's Batesville, Arkansas manufacturing facility
and related assets in the PCI segment and of the divested PE and
EpoleneTM
polymer businesses and related assets of the Performance Polymers and
CASPI segments.
|
|
(2)
|
Included in 2006 and 2005 sales
revenue are sales revenue from PET manufacturing facilities and related
businesses in Cosoleacaque, Mexico and Zarate, Argentina divested in
fourth quarter 2007. These sales are not considered
discontinued operations due to continuing involvement in the Latin America
region and raw material sales to the divested
facilities.
|
Sales
revenue for 2006 compared to 2005 increased $319 million. Excluding
sales from divested product lines and sales from the Mexico and Argentina PET
manufacturing facilities, sales revenue increased 5 percent primarily due to
higher selling prices in response to both higher raw material and energy costs
and continued strong economic conditions.
51
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
Gross
Profit
|
$
|
1,265
|
$
|
1,360
|
(7)
%
|
|
|
As
a percentage of sales
|
18.7
%
|
21.1
%
|
||||
|
Accelerated
depreciation included in cost of goods sold
|
10
|
--
|
||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,275
|
1,360
|
(6)
%
|
|||
|
As
a percentage of sales
|
18.8
%
|
21.1
%
|
Gross
profit and gross profit as a percentage of sales for 2006 decreased,
particularly in the Performance Polymers segment, compared with 2005 primarily
due to increased raw material and energy costs and operational disruptions that
were partially offset by higher selling prices. In 2006, raw material and energy
costs increased by approximately $400 million compared to the prior year,
compared to a selling price increase of $323 million. In
addition, 2006 included $10 million of accelerated depreciation costs resulting
from the scheduled shutdown of cracking units in Longview, Texas and of higher
cost PET polymer assets in Columbia, South Carolina.
|
(Dollars
in millions)
|
2006
|
2005
|
Change
|
|||
|
SG&A
Expenses
|
$
|
423
|
$
|
439
|
(4)
%
|
|
|
R&D
Expenses
|
155
|
150
|
(3)
%
|
|||
|
$
|
578
|
$
|
589
|
(2)
%
|
||
|
As
a percentage of sales
|
8.5%
|
9.1%
|
SG&A
expenses in 2006 decreased compared to 2005 primarily due to lower incentive
compensation expense in 2006, which included compensation expense recorded under
SFAS No. 123 Revised December 2004 ("SFAS No. 123(R)"), "Share-Based
Payment". For more information concerning SFAS No. 123(R), see Note
16, "Share Based Compensation Plans and Awards", to the Company’s consolidated
financial statements in Part II, Item 8 of this 2007 Annual Report on Form
10-K.
R&D
expenses for 2006 increased compared with 2005 primarily due to increased
spending on growth initiatives, particularly in the SP segment, which more than
offset decreased expenses in the Performance Polymers segment related to the
IntegRexTM technology.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges totaled $101 million and $33 million in
2006 and 2005, respectively. Asset impairments and restructuring
charges in 2006 were primarily severance charges for work force reductions and
impairments resulting from the shutdown of an R&D pilot plant and the
shutdown of the CHDM manufacturing assets in San Roque, Spain. Asset
impairments and restructuring charges in 2005 were primarily related to the
shutdown of Cendian Corporation, the Company's logistics subsidiary and fixed
asset impairments related to the Company's PCI manufacturing facilities outside
the United States. For more information regarding asset impairments
and restructuring charges, see Note 18, "Asset Impairments and Restructuring
Charges, Net", to the Company’s consolidated financial statements in
Part II, Item 8 of this 2007 Annual Report on Form 10-K.
52
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
Operating Income, Net
Other
operating income, net for 2006 reflects a gain of $75 million on the sale of the
Company's PE and EpoleneTM polymer
businesses, related assets, and the Company's ethylene pipeline and charges of
approximately $7 million related to the sale of the Company's Batesville,
Arkansas manufacturing facility and its related assets and product
lines. For more information concerning divestitures, see Note 17,
"Divestitures", to the Company’s consolidated financial statements in Part II,
Item 8 of this 2007 Annual Report on Form 10-K.
Other
operating income for 2005 reflects a $2 million gain related to the 2004
divestiture of certain businesses and product lines within the CASPI
segment.
|
Operating
Earnings
|
||||||
|
2006
|
2005
|
Change
|
||||
|
(Dollars
in millions)
|
||||||
|
Operating
earnings
|
$
|
654
|
$
|
740
|
(12)
%
|
|
|
Accelerated
depreciation included in cost of goods sold
|
10
|
--
|
||||
|
Asset
impairments and restructuring charges, net
|
101
|
33
|
||||
|
Other
operating income, net
|
||||||