UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
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(Mark
One)
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[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended September 30, 2008
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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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||
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Kingsport,
Tennessee
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37660
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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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Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES
[X] NO [ ]
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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 the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
[X] Accelerated
filer [ ]
Non-accelerated
filer
[ ] Smaller
reporting company [ ]
(Do
not check if a smaller reporting company)
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|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES
[ ] NO [X]
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Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
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Class
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Number
of Shares Outstanding at September 30, 2008
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Common
Stock, par value $0.01 per share
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72,543,848
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--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 53 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 52
TABLE
OF CONTENTS
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ITEM
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PAGE
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PART
I. FINANCIAL INFORMATION
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1.
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Financial
Statements
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3
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4
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5
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6
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2.
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20
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3.
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48
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4.
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48
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PART
II. OTHER INFORMATION
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1.
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49
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1A.
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50
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2.
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50
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6.
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50
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SIGNATURES
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5111
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2
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Third
Quarter
|
First
Nine Months
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|||||||||||||||
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(Dollars
in millions, except per share amounts)
|
2008
|
2007
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2008
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2007
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||||||||||||
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Sales
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$ | 1,819 | $ | 1,692 | $ | 5,380 | $ | 5,093 | ||||||||
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Cost
of sales
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1,497 | 1,385 | 4,400 | 4,191 | ||||||||||||
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Gross
profit
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322 | 307 | 980 | 902 | ||||||||||||
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Selling,
general and administrative expenses
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107 | 104 | 324 | 311 | ||||||||||||
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Research
and development expenses
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39 | 43 | 120 | 115 | ||||||||||||
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Asset
impairments and restructuring charges, net
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2 | 114 | 22 | 116 | ||||||||||||
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Operating
earnings
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174 | 46 | 514 | 360 | ||||||||||||
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Interest
expense, net
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19 | 16 | 53 | 47 | ||||||||||||
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Other
(income) charges, net
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7 | (10 | ) | 7 | (18 | ) | ||||||||||
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Earnings
from continuing operations before income taxes
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148 | 40 | 454 | 331 | ||||||||||||
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Provision
for income taxes from continuing operations
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48 | 15 | 124 | 111 | ||||||||||||
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Earnings
from continuing operations
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100 | 25 | 330 | 220 | ||||||||||||
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Loss
from discontinued operations, net of tax
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-- | (5 | ) | -- | (7 | ) | ||||||||||
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Gain
(loss) from disposal of discontinued operations, net of
tax
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-- | -- | 18 | (11 | ) | |||||||||||
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Net
earnings
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$ | 100 | $ | 20 | $ | 348 | $ | 202 | ||||||||
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Basic
earnings per share
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||||||||||||||||
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Earnings
from continuing operations
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$ | 1.35 | $ | 0.30 | $ | 4.34 | $ | 2.63 | ||||||||
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Earnings
(loss) from discontinued operations
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-- | (0.06 | ) | 0.23 | (0.22 | ) | ||||||||||
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Basic
earnings per share
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$ | 1.35 | $ | 0.24 | $ | 4.57 | $ | 2.41 | ||||||||
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Diluted
earnings per share
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||||||||||||||||
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Earnings
from continuing operations
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$ | 1.33 | $ | 0.30 | $ | 4.27 | $ | 2.60 | ||||||||
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Earnings
(loss) from discontinued operations
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-- | (0.06 | ) | 0.23 | (0.22 | ) | ||||||||||
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Diluted
earnings per share
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$ | 1.33 | $ | 0.24 | $ | 4.50 | $ | 2.38 | ||||||||
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Comprehensive
Income
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||||||||||||||||
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Net
earnings
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$ | 100 | $ | 20 | $ | 348 | $ | 202 | ||||||||
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Other
comprehensive income (loss)
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||||||||||||||||
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Change
in cumulative translation adjustment, net of tax
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(27 | ) | 21 | (68 | ) | 31 | ||||||||||
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Change
in pension liability, net of tax
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(1 | ) | 22 | 7 | 18 | |||||||||||
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Change
in unrealized losses on derivative instruments, net of tax
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(6 | ) | (8 | ) | (3 | ) | (5 | ) | ||||||||
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Change
in unrealized gains on investments, net of tax
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-- | -- | -- | 1 | ||||||||||||
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Total
other comprehensive income (loss)
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(34 | ) | 35 | (64 | ) | 45 | ||||||||||
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Comprehensive
income
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$ | 66 | $ | 55 | $ | 284 | $ | 247 | ||||||||
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Retained
Earnings
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||||||||||||||||
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Retained
earnings at beginning of period
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$ | 2,529 | $ | 2,302 | $ | 2,349 | $ | 2,186 | ||||||||
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Net
earnings
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100 | 20 | 348 | 202 | ||||||||||||
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Cash
dividends declared
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(31 | ) | (36 | ) | (99 | ) | (110 | ) | ||||||||
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Adoption
of accounting standard
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-- | -- | -- | 8 | ||||||||||||
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Retained
earnings at end of period
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$ | 2,598 | $ | 2,286 | $ | 2,598 | $ | 2,286 | ||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
3
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September
30,
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December
31,
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|||||||
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(Dollars
in millions, except per share amounts)
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2008
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2007
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||||||
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(Unaudited)
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||||||||
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Assets
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||||||||
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Current
assets
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||||||||
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Cash
and cash equivalents
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$ | 337 | $ | 888 | ||||
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Trade
receivables, net of allowance of $2 and $6
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548 | 546 | ||||||
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Miscellaneous
receivables
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99 | 112 | ||||||
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Inventories
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715 | 539 | ||||||
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Other
current assets
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66 | 74 | ||||||
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Current
assets related to discontinued operations
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-- | 134 | ||||||
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Total
current assets
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1,765 | 2,293 | ||||||
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Properties
and equipment
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||||||||
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Properties
and equipment at cost
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8,448 | 8,152 | ||||||
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Less: Accumulated
depreciation
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5,355 | 5,306 | ||||||
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Net
properties and equipment
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3,093 | 2,846 | ||||||
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Goodwill
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325 | 316 | ||||||
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Other
noncurrent assets
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346 | 313 | ||||||
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Noncurrent
assets related to discontinued operations
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-- | 241 | ||||||
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Total
assets
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$ | 5,529 | $ | 6,009 | ||||
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Liabilities
and Stockholders’ Equity
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||||||||
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Current
liabilities
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||||||||
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Payables
and other current liabilities
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$ | 1,019 | $ | 1,013 | ||||
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Borrowings
due within one year
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-- | 72 | ||||||
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Current
liabilities related to discontinued operations
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-- | 37 | ||||||
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Total
current liabilities
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1,019 | 1,122 | ||||||
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Long-term
borrowings
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1,436 | 1,535 | ||||||
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Deferred
income tax liabilities
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283 | 300 | ||||||
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Post-employment
obligations
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862 | 852 | ||||||
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Other
long-term liabilities
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109 | 118 | ||||||
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Total
liabilities
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3,709 | 3,927 | ||||||
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Stockholders’
equity
|
||||||||
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Common
stock ($0.01 par value – 350,000,000 shares authorized; shares issued –
94,492,047 and 93,630,292 for 2008 and 2007, respectively)
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1 | 1 | ||||||
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Additional
paid-in capital
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627 | 573 | ||||||
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Retained
earnings
|
2,598 | 2,349 | ||||||
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Accumulated
other comprehensive loss
|
(92 | ) | (28 | ) | ||||
| 3,134 | 2,895 | |||||||
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Less:
Treasury stock at cost (22,030,873 shares for 2008 and 13,959,951 shares
for 2007)
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1,314 | 813 | ||||||
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Total
stockholders’ equity
|
1,820 | 2,082 | ||||||
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Total
liabilities and stockholders’ equity
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$ | 5,529 | $ | 6,009 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
4
|
First
Nine Months
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||||||||
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(Dollars
in millions)
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2008
|
2007
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||||||
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Cash
flows from operating activities
|
||||||||
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Net
earnings
|
$ | 348 | $ | 202 | ||||
|
Adjustments
to reconcile net earnings to net cash provided by (used in) operating
activities:
|
||||||||
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Depreciation
and amortization
|
199 | 247 | ||||||
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Asset
impairments
|
1 | 138 | ||||||
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Gains
on sale of assets
|
(13 | ) | (3 | ) | ||||
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Provision
(benefit) for deferred income taxes
|
(56 | ) | (23 | ) | ||||
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Changes
in operating assets and liabilities:
|
||||||||
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(Increase)
decrease in receivables
|
(16 | ) | 22 | |||||
|
(Increase)
decrease in inventories
|
(170 | ) | 1 | |||||
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Increase
(decrease) in trade payables
|
(49 | ) | (63 | ) | ||||
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
(6 | ) | (88 | ) | ||||
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Other
items, net
|
55 | (22 | ) | |||||
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Net
cash provided by operating activities
|
293 | 411 | ||||||
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Cash
flows from investing activities
|
||||||||
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Additions
to properties and equipment
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(430 | ) | (346 | ) | ||||
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Proceeds
from sale of assets and investments
|
333 | 43 | ||||||
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Investments
in and acquisitions of joint ventures
|
(38 | ) | (12 | ) | ||||
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Additions
to capitalized software
|
(8 | ) | (8 | ) | ||||
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Other
items, net
|
(2 | ) | 24 | |||||
|
Net
cash provided by (used in) investing activities
|
(145 | ) | (299 | ) | ||||
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Cash
flows from financing activities
|
||||||||
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Net
increase (decrease) in commercial paper, credit facility and other
borrowings
|
42 | 53 | ||||||
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Repayment
of borrowings
|
(175 | ) | (11 | ) | ||||
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Dividends
paid to stockholders
|
(103 | ) | (112 | ) | ||||
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Treasury
stock purchases
|
(501 | ) | (300 | ) | ||||
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Proceeds
from stock option exercises and other items
|
38 | 100 | ||||||
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Net
cash provided by (used in) financing activities
|
(699 | ) | (270 | ) | ||||
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Effect
of exchange rate changes on cash and cash equivalents
|
-- | -- | ||||||
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Net
change in cash and cash equivalents
|
(551 | ) | (158 | ) | ||||
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Cash
and cash equivalents at beginning of period
|
888 | 939 | ||||||
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Cash
and cash equivalents at end of period
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$ | 337 | $ | 781 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
5
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Page
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7
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7
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9
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9
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9
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10
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10
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11
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12
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13
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13
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14
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14
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15
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16
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16
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18
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19
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6
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited consolidated financial statements have been prepared by
Eastman Chemical Company (the "Company" or "Eastman") in accordance and
consistent with the accounting policies stated in the Company's 2007 Annual
Report on Form 10-K, except as described below with respect to the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements," ("SFAS No. 157"), and should be read in conjunction with the
consolidated financial statements in Part II, Item 8 of the Company’s 2007
Annual Report on Form 10-K. The unaudited consolidated
financial statements are prepared in conformity with generally accepted
accounting principles ("GAAP") and, of necessity, include some amounts that are
based upon management estimates and judgments. Future actual results
could differ from such current estimates. The unaudited consolidated
financial statements include assets, liabilities, revenues and expenses of all
majority-owned subsidiaries and joint ventures. Eastman accounts for
other joint ventures and investments in minority-owned companies where it
exercises significant influence on the equity basis. Intercompany
transactions and balances are eliminated in consolidation.
The
Company adopted SFAS No. 157 as of January 1, 2008, with the exception of the
application of the statement to non-recurring nonfinancial assets and
nonfinancial liabilities, which has been deferred until January 1,
2009. The standard establishes a valuation hierarchy for disclosure
of the inputs to the valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3
inputs are unobservable inputs based on the Company's assumptions used to
measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the
lowest level input that is significant to the fair value
measurement. The following chart shows the securities valued on a
recurring basis.
|
(Dollars
in millions)
|
Fair
Value Measurements at September 30, 2008
|
|||||||||||||||
|
Description
|
September 30, 2008
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other Observable Inputs (Level
2)
|
Significant Unobservable Inputs (Level
3)
|
||||||||||||
|
Derivative
Assets
|
$ | 51 | $ | -- | $ | 51 | $ | -- | ||||||||
|
Derivative
Liabilities
|
(50 | ) | -- | (50 | ) | -- | ||||||||||
| $ | 1 | $ | -- | $ | 1 | $ | -- | |||||||||
The
Company will be required to measure the assets of its defined benefit pension
and post-retirement welfare plans pursuant to SFAS No. 157 at the next
measurement date, which will be December 31, 2008.
|
DISCONTINUED
OPERATIONS
|
In first
quarter 2008, the Company sold its polyethylene terephthalate ("PET") polymers
and purified terephthalic acid ("PTA") production facilities in the Netherlands
and its PET production facility in the United Kingdom and related businesses for
approximately $340 million, subject to working capital adjustments and retained
approximately $10 million of working capital. The Company recognized
a gain of $18 million, net of tax, related to the sale of these businesses which
includes the recognition of deferred currency translation adjustments of
approximately $40 million, net of tax. In addition, the Company
indemnified the buyer against certain liabilities primarily related to taxes,
legal matters, environmental matters, and other representations and
warranties. As of December 31, 2007, the Company had definitive
agreements to sell assets and liabilities related to these businesses, resulting
in them being classified as assets held for sale at December 31,
2007. The Company also entered into contracts with the buyer for
transition services to supply raw materials for a period of less than one
year. During first quarter 2007, the Company recorded asset
impairments and restructuring charges of $21 million for its PET polymers
manufacturing facility in Spain, which it sold in second quarter
2007. Net proceeds from the sale of the Spain site were approximately
$42 million. In addition, the Company indemnified the buyer against
certain liabilities primarily related to taxes, legal matters, environmental
matters, and other representations and warranties.
7
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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 No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," and 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 unaudited consolidated
financial statements.
In fourth
quarter 2007, the Company sold its PET polymers production facilities in Mexico
and Argentina and the related businesses. The results related to the
Mexico and Argentina facilities are not presented as discontinued operations due
to continuing involvement of the Company's Performance Polymers segment in the
region including contract polymer intermediates sales under a transition supply
agreement to the divested sites.
Operating
results of the discontinued operations which were formerly included in the
Performance Polymers segment are summarized below:
|
Third
Quarter
|
First
Nine Months
|
|||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
|
||||||||||||||||
|
Sales
|
$ | -- | $ | 121 | $ | 169 | $ | 410 | ||||||||
|
Earnings
before income taxes
|
-- | (8 | ) | 2 | (7 | ) | ||||||||||
|
Earnings
(loss) from discontinued operations, net of tax
|
-- | (5 | ) | -- | (7 | ) | ||||||||||
|
Gain
(loss) on disposal, net of tax
|
-- | -- | 18 | (11 | ) | |||||||||||
Assets
and liabilities of the discontinued operations classified as held for sale as of
December 31, 2007 are summarized below:
|
December
31,
|
||
|
(Dollars
in millions)
|
2007
|
|
|
Current
assets
|
||
|
Trade
receivables
|
$
|
85
|
|
Inventories
|
49
|
|
|
Total
current assets held for sale
|
134
|
|
|
Non-current
assets
|
||
|
Properties
and equipment, net
|
236
|
|
|
Other
non-current assets
|
5
|
|
|
Total
non-current assets held for sale
|
241
|
|
|
Total
assets
|
$
|
375
|
|
Current
liabilities
|
||
|
Payables
and other current liabilities, net
|
$
|
37
|
|
Total
current liabilities held for sale
|
37
|
|
|
Total
liabilities
|
$
|
37
|
8
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
INVENTORIES
|
|
September
30,
|
December
31,
|
|||
|
(Dollars
in millions)
|
2008
|
2007
|
||
|
At
FIFO or average cost (approximates current cost)
|
||||
|
Finished
goods
|
$
|
737
|
$
|
607
|
|
Work
in process
|
235
|
195
|
||
|
Raw
materials and supplies
|
333
|
247
|
||
|
Total
inventories
|
1,305
|
1,049
|
||
|
LIFO
Reserve
|
(590)
|
(510)
|
||
|
Total
inventories
|
$
|
715
|
$
|
539
|
Inventories
valued on the LIFO method were approximately 80 percent as of September 30, 2008
and 70 percent as of December 31, 2007 of total inventories.
|
ACQUISITION
AND DIVESTITURE OF INDUSTRIAL GASIFICATION
INTERESTS
|
In
October 2007, the Company entered into an agreement with Green Rock Energy,
L.L.C. ("Green Rock") to jointly develop an industrial gasification facility in
Beaumont, Texas through TX Energy, L.L.C. ("TX Energy"). In June
2008, the Company acquired Green Rock’s 50 percent ownership interest in TX
Energy for approximately $35 million, which is primarily allocated to properties
and equipment.
The
results of operations of TX Energy for the periods subsequent to the acquisition
have been included in Eastman's consolidated financial statements. If
TX Energy had been consolidated for the periods prior to the acquisition, the
Company’s consolidated revenue, net income and earnings per share would not have
been materially different than reported. With this acquisition, the
Company became the sole owner and developer of the industrial gasification
facility in Beaumont, Texas.
Eastman
had also begun to participate in an industrial gasification project in St. James
Parish, Louisiana sponsored by Faustina Hydrogen Products, L.L.C.
("Faustina"). Through May 2008, the Company had invested
approximately $11 million in Faustina. In June 2008, the Company sold
its ownership interest in Faustina for approximately $11 million and will no
longer participate in the project.
|
PAYABLES
AND OTHER CURRENT LIABILITIES
|
|
September
30,
|
December
31,
|
|||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Trade
creditors
|
$ | 551 | $ | 578 | ||||
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
123 | 138 | ||||||
|
Accrued
taxes
|
50 | 36 | ||||||
|
Post-employment
obligations
|
54 | 60 | ||||||
|
Interest
payable
|
23 | 31 | ||||||
|
Bank
overdrafts
|
44 | 6 | ||||||
|
Other
|
174 | 164 | ||||||
|
Total
payables and other current liabilities
|
$ | 1,019 | $ | 1,013 | ||||
The
current portion of post-employment obligations is an estimate of current year
payments in excess of plan assets.
9
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
PROVISION
FOR INCOME TAXES
|
|
Third
Quarter
|
First
Nine Months
|
|||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Provision
for income taxes
|
$ | 48 | $ | 15 | $ | 124 | $ | 111 | ||||||||
|
Effective
tax rate
|
33 | % | 38 | % | 27 | % | 34 | % | ||||||||
The third
quarter 2008 and 2007 effective tax rates, excluding discrete items, were
approximately 33 percent. The Company expects a full year tax rate
for 2008 on earnings from continuing operations before income tax, excluding
discrete items, of approximately 30 percent. The variance in third
quarter and expected full year tax rates is due to timing of recognition of
general business credits expected during 2008.
The
effective tax rate for first nine months 2008 reflects an estimated benefit
resulting from a federal gasification investment tax credit associated with the
Company’s expected capital spending in 2008 on the Beaumont, Texas industrial
gasification project. Excluding discrete items, first nine months
2008 and 2007 effective tax rates reflect the Company’s expected full year rate
on reported operating earnings before income tax of approximately 30 percent and
33 percent, respectively. The full year effective tax will also
reflect the recognition of the research and development tax credit that was
renewed on October 3, 2008 as part of the Emergency Economic Stabilization Act
of 2008.
The
Company or one of its subsidiaries files tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years before
2002.
|
BORROWINGS
|
|
September
30,
|
December
31,
|
|||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Borrowings
consisted of:
|
||||||||
|
3
1/4% notes due 2008
|
$ | -- | $ | 72 | ||||
|
7%
notes due 2012
|
149 | 148 | ||||||
|
6.30%
notes due 2018
|
191 | 188 | ||||||
|
7
1/4% debentures due 2024
|
497 | 497 | ||||||
|
7
5/8% debentures due 2024
|
200 | 200 | ||||||
|
7.60%
debentures due 2027
|
298 | 298 | ||||||
|
Credit
facilities borrowings
|
85 | 188 | ||||||
|
Other
|
16 | 16 | ||||||
|
Total
borrowings
|
1,436 | 1,607 | ||||||
|
Borrowings
due within one year
|
-- | (72 | ) | |||||
|
Long-term
borrowings
|
$ | 1,436 | $ | 1,535 | ||||
At
September 30, 2008, the Company has credit facilities with various U.S. and
non-U.S. banks totaling approximately $800 million. These credit
facilities consist of a $700 million revolving credit facility (the "Credit
Facility") and a 60 million euro credit facility ("Euro
Facility"). The Credit Facility has two tranches, with $125 million
expiring in 2012 and $575 million expiring in 2013. The Euro Facility
expires in 2012. Borrowings under these credit facilities are subject
to interest at varying spreads above quoted market rates. The Credit
Facility requires a facility fee on the total commitment. In
addition, these credit facilities contain a number of customary covenants and
events of default, including the maintenance of certain financial
ratios. The Company was in compliance with all such covenants for all
periods presented. At September 30, 2008, the Company’s credit
facility borrowings totaled $85 million, primarily the Euro Facility, at an
effective interest rate of 5.36 percent. At December 31, 2007,
borrowings on these credit facilities were $188 million, primarily from the Euro
Facility, at an effective interest rate of 4.79 percent.
The
Credit Facility provides liquidity support for general corporate
purposes.
10
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
At
September 30, 2008 and December 31, 2007, the Company had outstanding interest
rate swaps associated with the entire outstanding principal of the 7% notes due
in 2012 and $150 million of the outstanding principal of the 6.30% notes due in
2018. The average variable interest rate on the 7% notes was 6.50
percent and 7.12 percent for September 30, 2008 and December 31, 2007,
respectively. The average variable interest rate on the 6.30% notes
was 4.91 percent and 5.52 percent for September 30, 2008 and December 31, 2007,
respectively.
|
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES,
NET
|
In third
quarter and first nine months 2008, asset impairments and restructuring charges,
net totaled $2 million and $22 million, respectively, primarily for severance,
pension charges and site closure costs in the Performance Chemicals and
Intermediates ("PCI") segment resulting from the decision to close a previously
impaired site in the United Kingdom, and in the Performance Polymers segment for
restructuring at the South Carolina facility and the divestiture of the PET
manufacturing facilities in Mexico and Argentina.
In third
quarter 2007 and first nine months 2007, asset impairments and restructuring
charges, net totaled $114 million and $116 million, respectively, related
primarily to the impairment of assets of Eastman's PET manufacturing facilities
in Cosoleacaque, Mexico, and Zarate, Argentina which were classified as held for
sale in third quarter 2007. The Company impaired the assets of these
facilities in third quarter 2007 to adjust the asset values to the expected
sales price less cost to sell. These charges were reflected in the
Performance Polymers segment. Also in third quarter 2007, the Company
adjusted the severance accrual recorded in fourth quarter 2006 which resulted in
a reversal reflected in all segments.
Changes
in Reserves for Asset Impairments, Restructuring Charges, and Severance
Charges
The
following table summarizes the beginning reserves, charges to and changes in
estimates to the reserves as described above, and the cash and non-cash
reductions to the reserves attributable to asset impairments and the cash
payments for severance and site closure costs for the full year 2007 and first
nine months 2008:
|
(Dollars
in millions)
|
Balance
at
January
1, 2007
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
December
31, 2007
|
|||||||||||||||
|
Non-cash
charges
|
$ | -- | $ | 122 | $ | (122 | ) | $ | -- | $ | -- | |||||||||
|
Severance
costs
|
34 | (9 | ) | -- | (18 | ) | 7 | |||||||||||||
|
Site
closure and other restructuring costs
|
14 | (1 | ) | -- | (2 | ) | 11 | |||||||||||||
|
Total
|
$ | 48 | $ | 112 | $ | (122 | ) | $ | (20 | ) | $ | 18 | ||||||||
|
Balance
at
January
1, 2008
|
Provision/
Adjustments
|
Non-cash
Reductions
|
Cash
Reductions
|
Balance
at
September
30,
2008
|
||||||||||||||||
|
Non-cash
charges
|
$ | -- | $ | 1 | $ | (1 | ) | $ | -- | $ | -- | |||||||||
|
Severance
costs
|
7 | 5 | -- | (11 | ) | 1 | ||||||||||||||
|
Site
closure and other restructuring costs
|
11 | 16 | -- | (20 | ) | 7 | ||||||||||||||
|
Total
|
$ | 18 | $ | 22 | $ | (1 | ) | $ | (31 | ) | $ | 8 | ||||||||
A
majority of the remaining severance and site closure costs is expected to be
applied to the reserves within one year.
11
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
RETIREMENT
PLANS
|
DEFINED
BENFIT PENSION PLANS
Eastman
maintains defined benefit pension plans that provide eligible employees hired
prior to January 1, 2007, with retirement benefits. Costs recognized
for these benefits are recorded using estimated amounts, which may change as
actual costs derived for the year are determined.
Below is
a summary of the components of net periodic benefit cost recognized for
Eastman's significant defined benefit pension plans:
|
Summary
of Components of Net Periodic Benefit Costs
|
||||||||||||||||
|
Third
Quarter
|
First
Nine Months
|
|||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Service
cost
|
$ | 11 | $ | 12 | $ | 34 | $ | 36 | ||||||||
|
Interest
cost
|
22 | 23 | 66 | 68 | ||||||||||||
|
Expected
return on assets
|
(26 | ) | (26 | ) | (79 | ) | (78 | ) | ||||||||
|
Curtailment
charge
|
-- | -- | 9 | -- | ||||||||||||
|
Amortization
of:
|
||||||||||||||||
|
Prior
service credit
|
(5 | ) | (2 | ) | (12 | ) | (6 | ) | ||||||||
|
Actuarial
loss
|
7 | 8 | 21 | 25 | ||||||||||||
|
Other
loss
|
-- | 4 | -- | 4 | ||||||||||||
|
Net
periodic benefit cost
|
$ | 9 | $ | 19 | $ | 39 | $ | 49 | ||||||||
The
Company contributed $100 million to its U.S. defined benefit pension plan in
first quarter 2007.
The
curtailment charge is primarily related to the decision to close a previously
impaired site in the United Kingdom.
POSTRETIREMENT
WELFARE PLANS
Eastman
provides a subsidy toward life insurance and health care and dental benefits for
eligible retirees hired prior to January 1, 2007, and a subsidy toward health
care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S.
plans. Similar benefits are also made available to retirees of
Holston Defense Corporation, a wholly-owned subsidiary of the Company that,
prior to January 1, 1999, operated a government-owned ammunitions
plant.
Employees
hired on or after January 1, 2007 will have access to post-retirement health
care benefits only; Eastman will not provide a subsidy toward the premium cost
of post-retirement benefits for those employees.
A few of
the Company's non-U.S. operations have supplemental health benefit plans for
certain retirees, the cost of which is not significant to the
Company. Costs recognized for benefits for eligible retirees hired
prior to January 1, 2007 are recorded using estimated amounts, which may change
as actual costs derived for the year are determined. Below is a
summary of the components of net periodic benefit cost recognized for the
Company’s U.S. plans:
|
Summary
of Components of Net Periodic Benefit Costs
|
||||||||||||||||
|
Third
Quarter
|
First
Nine Months
|
|||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Service
cost
|
$ | 2 | $ | 1 | $ | 5 | $ | 5 | ||||||||
|
Interest
cost
|
11 | 11 | 33 | 32 | ||||||||||||
|
Expected
return on assets
|
(1 | ) | (1 | ) | (3 | ) | (2 | ) | ||||||||
|
Amortization
of:
|
||||||||||||||||
|
Prior
service credit
|
(6 | ) | (6 | ) | (17 | ) | (17 | ) | ||||||||
|
Actuarial
loss
|
2 | 3 | 7 | 9 | ||||||||||||
|
Net
periodic benefit cost
|
$ | 8 | $ | 8 | $ | 25 | $ | 27 | ||||||||
12
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
ENVIRONMENTAL
MATTERS
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP"), by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company
will be required to incur costs for environmental remediation and closure and
postclosure under the federal Resource Conservation and Recovery
Act. Reserves for environmental contingencies have been established
in accordance with Eastman’s policies described in Note 1, "Significant
Accounting Policies", to the consolidated financial statements in Part II, Item
8 of the Company’s 2007 Annual Report on Form 10-K. Because of
expected sharing of costs, the availability of legal defenses, and the Company’s
preliminary assessment of actions that may be required, management does not
believe that the Company's liability for these environmental matters,
individually or in the aggregate, will be material to the Company’s consolidated
financial position, results of operations or cash flows. The
Company’s reserve for environmental contingencies was $41 million and $42
million at September 30, 2008 and December 31, 2007, respectively, representing
the minimum or best estimate for remediation costs and the best estimate accrued
to date over the facilities' estimated useful lives for asset retirement
obligation costs. Estimated future environmental expenditures for
remediation costs range from the minimum or best estimate of $11 million to the
maximum of $21 million at September 30, 2008 and $13 million to the maximum of
$17 million at December 31, 2007.
|
COMMITMENTS
|
Purchasing
Obligations and Lease Commitments
At
September 30, 2008, the Company had various purchase obligations totaling
approximately $2.0 billion over a period of approximately 15 years for
materials, supplies, and energy incident to the ordinary conduct of
business. The Company also had various lease commitments for property
and equipment under cancelable, non-cancelable, and month-to-month operating
leases totaling approximately $120 million over a period of several
years. Of the total lease commitments, approximately 15 percent
relate to machinery and equipment, including computer and communications
equipment and production equipment; approximately 35 percent relate to real
property, including office space, storage facilities and land; and approximately
50 percent relate to vehicles, primarily railcars.
Accounts
Receivable Securitization Program
In 1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in
domestic trade accounts receivable. Receivables sold to the third
party totaled $200 million at September 30, 2008 and December 31,
2007. Undivided interests in designated receivable pools were sold to
the purchaser with recourse limited to the purchased interest in the receivable
pools. Average monthly proceeds from collections reinvested in the
continuous sale program were approximately $370 million and $320 million in
third quarter 2008 and 2007, respectively, and $345 million and $310 million for
first nine months of 2008 and 2007, respectively.
Guarantees
Financial
Accounting Standards Board, ("FASB") Interpretation No. 45, "Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to the guarantor’s
accounting for, and disclosure of, the issuance of certain types of
guarantees. If certain operating leases are terminated by the
Company, it guarantees a portion of the residual value loss, if any, incurred by
the lessors in disposing of the related assets. Under these operating
leases, the residual value guarantees at September 30, 2008 totaled $152 million and
consisted primarily of leases for railcars, aircraft, and other
equipment. Leases with guarantee amounts totaling $2 million, $11
million, and $139 million will expire in 2008, 2011, and 2012,
respectively. The Company believes, based on current facts and
circumstances, that the likelihood of a material payment pursuant to such
guarantees is remote.
13
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Variable
Interest Entities
The
Company has evaluated its material contractual relationships and has concluded
that the entities involved in these relationships are not Variable Interest
Entities ("VIEs") or, in the case of Primester, a joint venture that
manufactures cellulose acetate at the Company's Kingsport, Tennessee plant, the
Company is not the primary beneficiary of the VIE. As such, in
accordance with FASB Interpretation Number 46, "Consolidation of Variable
Interest Entities", the Company is not required to consolidate these
entities. In addition, the Company has evaluated long-term purchase
obligations with an entity that may be a VIE at September 30,
2008. This potential VIE is a joint venture from which the Company
has purchased raw materials and utilities for several years and purchases
approximately $50 million of raw materials and utilities on an annual
basis. The Company has no equity interest in this entity and has
confirmed that one party to this joint venture does consolidate the potential
VIE. However, due to competitive and other reasons, the Company has
not been able to obtain the necessary financial information to determine whether
the entity is a VIE, and whether or not the Company is the primary
beneficiary.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
Hedging
Programs
The
Company is exposed to market risk, such as changes in currency exchange rates,
raw material and energy costs and interest rates. The Company uses
various derivative financial instruments pursuant to the Company's hedging
policies to mitigate these market risk factors and their effect on the cash
flows of the underlying transactions. Designation is performed on a specific
exposure basis to support hedge accounting. The changes in fair value
of these hedging instruments are offset in part or in whole by corresponding
changes in the cash flows of the underlying exposures being
hedged. The Company does not hold or issue derivative financial
instruments for trading purposes. For further information, see Note 10 to the
consolidated financial statements in Part II, Item 8 of the Company's 2007
Annual Report on Form 10-K.
At
September 30, 2008, net mark-to-market gains from raw material and energy,
currency and certain interest rate hedges that were included in accumulated
other comprehensive income totaled $3 million. If realized,
approximately $20 million in losses will be reclassified into earnings during
the next 12 months. The mark-to-market gains or losses on
non-qualifying, excluded and ineffective portions of hedges are immediately
recognized in cost of sales or other income and charges. Such amounts
did not have a material impact on earnings during third quarter of
2008.
|
STOCKHOLDERS'
EQUITY
|
A
reconciliation of the changes in stockholders’ equity for first nine months 2008
is provided below:
|
(Dollars
in millions)
|
Common
Stock at Par Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Treasury
Stock at Cost
$
|
Total
Stockholders' Equity
$
|
||||||||||||||||||
|
Balance
at December 31, 2007
|
1 | 573 | 2,349 | (28 | ) | (813 | ) | 2,082 | ||||||||||||||||
|
Net
Earnings
|
-- | -- | 348 | -- | -- | 348 | ||||||||||||||||||
|
Cash
Dividends Declared (1)
|
-- | -- | (99 | ) | -- | -- | (99 | ) | ||||||||||||||||
|
Other
Comprehensive Income
|
-- | -- | -- | (64 | ) | -- | (64 | ) | ||||||||||||||||
|
Stock-Based
Compensation and Other Items
(2)(3)
|
-- | 54 | -- | -- | -- | 54 | ||||||||||||||||||
|
Share
Repurchases
|
-- | -- | -- | -- | (501 | ) | (501 | ) | ||||||||||||||||
|
Balance
at September 30, 2008
|
1 | 627 | 2,598 | (92 | ) | (1,314 | ) | 1,820 | ||||||||||||||||
|
(1)
|
Includes
dividends declared but unpaid.
|
|
(2)
|
The
tax benefits relating to the difference between the amounts deductible for
federal income taxes over the amounts charged to income for book value
purposes have been credited to paid-in
capital.
|
|
(3)
|
Includes
the fair value of equity share-based awards recognized under SFAS No. 123
Revised December 2004 , "Share-Based
Payment".
|
14
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
|
(Dollars
in millions)
|
Cumulative
Translation Adjustment
$
|
Unfunded
Additional
Minimum
Pension Liability
$
|
Unrecognized
Loss and Prior Service Cost
$
|
Unrealized
Gains (Losses) on Derivative Instruments and Other
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
|||||||||||||||
|
Pre-SFAS
No. 158 (1)
balance at December 31, 2006
|
121 | (207 | ) | -- | (7 | ) | (93 | ) | ||||||||||||
|
Adjustments
to apply SFAS No. 158
|
-- | 207 | (288 | ) | -- | (81 | ) | |||||||||||||
|
Balance
at December 31, 2006
|
121 | -- | (288 | ) | (7 | ) | (174 | ) | ||||||||||||
|
Period
change
|
36 | -- | 106 | 4 | 146 | |||||||||||||||
|
Balance
at December 31, 2007
|
157 | -- | (182 | ) | (3 | ) | (28 | ) | ||||||||||||
|
Period
change
|
(68 | ) | -- | 7 | (3 | ) | (64 | ) | ||||||||||||
|
Balance
at September 30, 2008
|
89 | -- | (175 | ) | (6 | ) | (92 | ) | ||||||||||||
|
(1)
|
SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" ("SFAS No.
158")
|
Amounts
of other comprehensive income (loss) are presented net of applicable
taxes. The Company records deferred income taxes on the cumulative
translation adjustment related to branch operations and other entities included
in the Company's consolidated U.S. tax return. No deferred income
taxes are provided on the cumulative translation adjustment of subsidiaries
outside the United States, as such cumulative translation adjustment is
considered to be a component of permanently invested, unremitted earnings of
these foreign subsidiaries.
|
EARNINGS
AND DIVIDENDS PER SHARE
|
|
Third
Quarter
|
First
Nine Months
|
||||||
|
2008
|
2007
|
2008
|
2007
|
||||
|
Shares
used for earnings per share calculation (in millions):
|
|||||||
|
Basic
|
74.2
|
82.6
|
76.1
|
83.6
|
|||
|
Diluted
|
75.1
|
83.6
|
77.2
|
84.6
|
|||
In third
quarter and first nine months 2008, common shares underlying options to purchase
655,884 shares of common stock and 596,784 shares of common stock, respectively,
were excluded from the computation of diluted earnings per share, because the
total market value of option exercises for these awards was less than the total
proceeds that would be received for these awards. Additionally, the
basic and diluted shares were reduced in third quarter and first nine months
2008 as a result of the share repurchase program. For third quarter
and first nine months 2008, a total of 3,867,770 shares and 8,065,948 shares,
respectively, were repurchased under the current $700 million share repurchase
authorization.
In third
quarter and first nine months 2007, common shares underlying options to purchase
20,000 shares of common stock and 591,233 shares of common stock, respectively,
were excluded from the computation of diluted earnings per share, because the
total market value of option exercises for these awards was less than the total
proceeds that would be received for these awards. Additionally, the
basic and diluted shares were reduced in third quarter and first nine months
2007 as a result of the share repurchase programs. For third quarter
and first nine months 2007, a total of 3,231,348 shares and 4,601,448 shares,
respectively were repurchased under a prior $300 million share repurchase
authorization.
15
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
SHARE-BASED
COMPENSATION AWARDS
|
The
Company utilizes share-based awards under employee and non-employee director
compensation programs. These share-based awards may include
restricted and unrestricted stock grants, restricted stock units, stock options
and performance shares. In third quarter 2008 and 2007, approximately
$6 million and $5 million, respectively, of compensation expense before tax was
recognized in selling, general and administrative expense in the earnings
statement for all share-based awards. The impact on third quarter
2008 and 2007 net earnings of $4 million and $3 million, respectively, is net of
deferred tax expense related to share-based award compensation for each
period. In first nine months 2008 and 2007, approximately $19 million
and $18 million, respectively, of compensation expense before tax were
recognized in selling, general and administrative expense in the earnings
statement for all share-based awards. The impact on first nine months
2008 and 2007 net earnings of $12 million and $11 million, respectively, is net
of deferred tax expense related to share-based award compensation for each
period.
Additional
information regarding share-based compensation plans and awards may be found in
Note 16 to the consolidated financial statements in Part II, Item 8 of the
Company's 2007 Annual Report on Form 10-K.
|
SEGMENT
INFORMATION
|
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the Coatings, Adhesives, Specialty Polymers,
and Inks ("CASPI") segment, the Fibers segment, the PCI segment, the Performance
Polymers segment, and the Specialty Plastics ("SP") segment. For
additional information concerning the Company's segments' businesses and
products, refer to Note 23 to the consolidated financial statements in Part II,
Item 8 of the Company's 2007 Annual Report on Form 10-K.
Research
and development and other expenses not identifiable to an operating segment are
not included in segment operating results for either of the periods presented
and are shown in the tables below as "other" operating losses.
|
Third
Quarter
|
||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Sales
by Segment
|
||||||||
|
CASPI
|
$ | 410 | $ | 368 | ||||
|
Fibers
|
269 | 258 | ||||||
|
PCI
|
594 | 509 | ||||||
|
Performance
Polymers
|
293 | 340 | ||||||
|
SP
|
253 | 217 | ||||||
|
Total
Sales
|
$ | 1,819 | $ | 1,692 | ||||
|
First
Nine Months
|
||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Sales
by Segment
|
||||||||
|
CASPI
|
$ | 1,213 | $ | 1,089 | ||||
|
Fibers
|
783 | 731 | ||||||
|
PCI
|
1,768 | 1,559 | ||||||
|
Performance
Polymers
|
886 | 1,070 | ||||||
|
SP
|
730 | 644 | ||||||
|
Total
Sales
|
$ | 5,380 | $ | 5,093 | ||||
16
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
Third
Quarter
|
||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Operating
Earnings (Loss)
|
||||||||
|
CASPI
(1)
|
$ | 55 | $ | 59 | ||||
|
Fibers
|
65 | 66 | ||||||
|
PCI
(2)
|
62 | 50 | ||||||
|
Performance
Polymers (3)
|
(1 | ) | (128 | ) | ||||
|
SP
|
6 | 13 | ||||||
|
Total
Operating Earnings by Segment
|
187 | 60 | ||||||
|
Other
(4)
|
(13 | ) | (14 | ) | ||||
|
Total
Operating Earnings
|
$ | 174 | $ | 46 | ||||
|
(1)
|
CASPI
includes $1 million in third quarter 2007 gains for an adjustment to
severance charges recorded in fourth quarter
2006.
|
|
(2)
|
PCI
includes $2 million in both third quarter 2008 and third quarter 2007 in
accelerated depreciation costs related to cracking units at the Company's
Longview, Texas facility and $1 million in third quarter 2008 in asset
impairments and restructuring charges, net, primarily related to severance
and pension costs from the decision to close a previously impaired site in
the United Kingdom and $(1) million in third quarter 2007 related
primarily to an adjustment to severance charges recorded in fourth quarter
2006.
|
|
(3)
|
Performance
Polymers includes $1 million and $7 million in third quarter 2008 and
third quarter 2007, respectively, in accelerated depreciation costs
related to assets in Columbia, South Carolina and asset impairments and
restructuring charges, net of $1 million in third quarter 2008 related to
previously divested manufacturing facilities in Mexico and Argentina and
restructuring at the South Carolina facility using IntegRexTM
technology, partially offset by a resolution of a contingency from
the sale of the Company’s polyethylene (“PE”) and EpoleneTM
polymer businesses divested in fourth quarter 2006, and $114 million in
third quarter 2007 primarily related to the divested PET manufacturing
facilities in Mexico and Argentina.
|
|
(4)
|
Other
includes $2 million in third quarter 2007 in intangible asset impairment
charges.
|
|
First
Nine Months
|
||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Operating
Earnings (Loss)
|
||||||||
|
CASPI(1)
|
$ | 167 | $ | 190 | ||||
|
Fibers
|
195 | 176 | ||||||
|
PCI
(2)
|
160 | 161 | ||||||
|
Performance
Polymers (3)
|
(5 | ) | (181 | ) | ||||
|
SP
(4)
|
36 | 49 | ||||||
|
Total
Operating Earnings by Segment
|
553 | 395 | ||||||
|
Other
(5)
|
(39 | ) | (35 | ) | ||||
|
Total
Operating Earnings
|
$ | 514 | $ | 360 | ||||
|
(1)
|
CASPI
includes $2 million in first nine months 2008 gains for an adjustment to a
reserve for asset impairments and restructuring costs for the first
quarter divestiture of certain product lines and $1 million in first nine
months 2007 gains for an adjustment to severance charges recorded in
fourth quarter 2006.
|
|
(2)
|
PCI
includes $4 million and $16 million in first nine months 2008 and first
nine months 2007, respectively, in accelerated depreciation costs related
to cracking units at the Company's Longview, Texas facility and $20
million in first nine months 2008 in asset impairments and restructuring
charges, net, primarily related to severance and pension costs from the
decision to close a previously impaired site in the United Kingdom and
$(1) million in first nine months 2007 related primarily to an adjustment
to severance charges recorded in fourth quarter
2006.
|
|
(3)
|
Performance
Polymers includes $4 million and $20 million in first nine months 2008 and
first nine months 2007, respectively, in accelerated depreciation costs
related to assets in Columbia, South Carolina and asset impairments and
restructuring charges, net of $4 million in first nine months 2008 related
to previously divested manufacturing facilities in Mexico and Argentina
and restructuring at the South Carolina facility using IntegRexTM
technology partially offset by a resolution of a contingency from the sale
of the Company’s PE and EpoleneTM
polymer businesses divested in fourth quarter 2006, and $115 million in
first nine months 2007 primarily related to the divested PET manufacturing
facilities in Mexico and Argentina.
|
|
(4)
|
SP
includes $1 million in first nine months 2007 in accelerated depreciation
costs related to assets in Columbia, South Carolina and $1 million in
first nine months 2007 in asset impairments and restructuring charges, net
related to the discontinued production of cyclohexane dimethanol (“CHDM”)
at the San Roque, Spain facility.
|
|
(5)
|
Other
includes $2 million in first nine months 2007 in intangible asset
impairment charges.
|
17
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
September
30,
|
December
31,
|
|||||||
|
(Dollars
in millions)
|
2008
|
2007
|
||||||
|
Assets
by Segment (1)
|
||||||||
|
CASPI
|
$ | 1,231 | $ | 1,114 | ||||
|
Fibers
|
789 | 692 | ||||||
|
PCI
|
959 | 1,062 | ||||||
|
Performance
Polymers
|
637 | 727 | ||||||
|
SP
|
839 | 622 | ||||||
|
Total
Assets by Segment
|
4,455 | 4,217 | ||||||
|
Corporate
Assets
|
1,074 | 1,417 | ||||||
|
Total
Assets Before Assets Related to Discontinued Operations
|
5,529 | 5,634 | ||||||
|
Assets
Related to Discontinued Operations (2)
|
-- | 375 | ||||||
|
Total
Assets
|
$ | 5,529 | $ | 6,009 | ||||
|
(1)
|
Assets
managed by segment are accounts receivable, inventory, fixed assets, and
goodwill.
|
|
(2)
|
For
more information regarding assets related to discontinued operations, see
Note 2, “Discontinued Operations”.
|
|
LEGAL
MATTERS
|
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. Additionally, certain plaintiffs have claimed exposure to an
asbestos-containing plastic, which Eastman manufactured in limited amounts
between the mid-1960’s and the early 1970’s.
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.
18
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
|
RECENTLY
ISSUED ACCOUNTING STANDARDS
|
Effective
first quarter 2008, the Company adopted SFAS No. 157, except as it
applies to those nonfinancial assets and nonfinancial liabilities addressed in
FASB Staff Position FAS 157-2 ("FSP FAS 157-2"). The FASB
issued FSP FAS 157-2 which delays the effective date of SFAS No. 157 to
fiscal years beginning after November 15, 2008 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). The Company is currently evaluating the effect FSP FAS 157-2
will have on its consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 141 (revised 2007) "Business Combinations" ("SFAS No. 141R") which replaces
SFAS No. 141 "Business Combinations" ("SFAS No. 141"). SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 that the acquisition method
of accounting be used for all business combinations. However, SFAS
No. 141R provides for the following changes from SFAS No. 141: an acquirer will
record 100% of assets and liabilities of acquired business, including goodwill,
at fair value, regardless of the level of interest acquired; certain contingent
assets and liabilities will be recognized at fair value at the acquisition date;
contingent consideration will be recognized at fair value on the acquisition
date with changes in fair value to be recognized in earnings upon settlement;
acquisition-related transaction and restructuring costs will be expensed as
incurred; reversals of valuation allowances related to acquired deferred tax
assets and changes to acquired income tax uncertainties will be recognized in
earnings; and when making adjustments to finalize preliminary accounting,
acquirers will revise any previously issued post-acquisition financial
information in future financial statements to reflect any adjustments as if they
occurred on the acquisition date. SFAS No. 141R applies prospectively
to business combinations for which the acquisition date is on or after January
1, 2009. SFAS No. 141R will not have an impact on the Company's
consolidated financial statements when effective, but the nature and magnitude
of the specific effects will depend upon the nature, terms, and size of the
acquisitions consummated after the effective date.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51" ("SFAS No. 160"),
which establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 provides that accounting and reporting for
minority interests be recharacterized as noncontrolling interests and
classified as a component of equity. This Statement also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that
prepare consolidated financial statements but will affect only those entities
that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. This Statement is effective as of
the beginning of an entity’s first fiscal year beginning after December 15,
2008. The Company has concluded that SFAS No. 160 will not have a
material impact on the Company’s consolidated financial statements.
In March
2008, the FASB issued SFAS Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The new standard also improves
transparency about the location and amounts of derivative instruments in an
entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities"; and how derivative instruments and related
hedged items affect its financial position, financial performance, and cash
flows. The Company has concluded that SFAS No. 161 will not have a
material impact on the Company’s consolidated financial statements.
In
June 2008, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task
Force ("EITF") Issue No. 03-6-1, "Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities" ("EITF Issue
No. 03-6-1"). The FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method. The FSP affects
entities that accrue dividends on share-based payment awards during the awards’
service period when the dividends do not need to be returned if the employees
forfeit the award. This FSP is effective for fiscal years beginning
after December 15, 2008. The Company has concluded that EITF
Issue No. 03-6-1 will not have a material impact on the Company’s consolidated
financial statements.
19
|
ITEM
|
Page
|
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21
|
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|
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22
|
|
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24
|
|
|
28
|
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36
|
|
|
38
|
|
|
41
|
|
|
42
|
|
|
44
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with Eastman Chemical Company's (the
"Company" or "Eastman") audited consolidated financial statements,
including related notes, and Management’s Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's 2007 Annual
Report on Form 10-K, and the Company's unaudited consolidated financial
statements, including related notes, included elsewhere in this
report. All references to earnings per share contained in this report
are diluted earnings per share unless otherwise noted.
As
described below in "Strategic Actions and Related Presentation of Non-GAAP
Financial Measures", the Company sold its polyethylene terephthalate ("PET")
manufacturing facility in Spain in second quarter 2007 and sold 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 in first quarter 2008. Because the Company has
exited the PET business in the European region, results from sales of PET
products manufactured at the Spain, the Netherlands, and the United Kingdom
sites, including impairments and restructuring charges of those operations, and
gains and losses from disposal of those assets and businesses, are presented as
discontinued operations for all periods presented and are therefore not included
in results from continuing operations under generally accepted accounting
principles ("GAAP"). For additional information, see Note 2,
"Discontinued Operations ", to the Company's unaudited consolidated
financial statements in Part I, Item 1 of this quarterly report on Form
10-Q. Also in 2007, the Company sold its Mexico and Argentina
PET manufacturing sites. Sales and results from these sites are not
presented as discontinued operations due to the Performance Polymers segment's
continuing involvement in the Latin American region including polymer
intermediates sales to the divested facilities.
20
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
In
preparing the consolidated financial statements in conformity with GAAP in the
United States, 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, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the Company
evaluates its estimates, including those related to impairment of 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 listed and described in Part II, Item 7 of the Company's 2007 Annual
Report on Form 10-K 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.
During
2007 and 2008, 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 and in first quarter 2008, the
Company completed the sale of its PET polymers and PTA manufacturing facilities
in the Netherlands and the PET manufacturing facility in the United Kingdom and
related businesses. Results from, charges related to, and gains and
losses from disposal of the Spain, the Netherlands, and the United Kingdom
assets and businesses are presented as discontinued operations. In
fourth quarter 2007, the Company completed the sale of its Mexico and Argentina
manufacturing facilities. As part of this divestiture, the Company
entered into transition supply agreements for polymer
intermediates. In order to provide a better understanding of the
impact on Performance Polymers segment results of the divested 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 and with
and without contract polymer intermediates sales.
In fourth
quarter 2006, the Company sold its polyethylene ("PE") and EpoleneTM polymer
businesses and related assets of the Performance Polymers and Coatings,
Adhesives, Specialty Polymers, and Inks ("CASPI") segments. As part
of the PE divestiture, the Company entered into a transition supply agreement
for contract ethylene sales, from which sales revenue and operating earnings are
included in the Performance Chemicals and Intermediates ("PCI") segment results
in 2008 and 2007.
Also in
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 $3 million and $9 million
in third quarter 2008 and third quarter 2007, respectively, and $8 million and
$37 million in first nine months 2008 and first nine months 2007,
respectively. For more information on accelerated depreciation
costs, see "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 divestiture of the PE product
lines;
|
|
·
|
Company
and segment sales excluding contract polymer intermediates sales under a
transition supply agreement related to the divestiture of the PET
manufacturing facilities and related businesses in Mexico and
Argentina;
|
21
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
·
|
Company
and segment gross profit, operating earnings and earnings from continuing
operations excluding accelerated depreciation costs and asset impairments
and restructuring charges; and
|
|
·
|
Company
earnings from continuing operations excluding net deferred tax benefits
related to the previous divestiture of
businesses.
|
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines and the contract polymer
intermediates sales under the transition supply agreement related to the
divestiture of the PET manufacturing facilities and related businesses in Mexico
and Argentina do not reflect the continuing and expected future business of the
PCI and Performance Polymers segments. 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
deferred tax benefits related to the previous divestiture of businesses, 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 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 generated sales revenue of $1.8 billion for third quarter 2008 and $1.7
billion for third quarter 2007. Excluding the results of contract
ethylene sales, contract polymer intermediates sales, and sales from divested
PET facilities in Mexico and Argentina, sales revenue increased by 12
percent. The Company generated sales revenue of $5.4 billion for
first nine months 2008 compared to $5.1 billion for first nine months
2007. Excluding the results of contract ethylene sales, contract
polymer intermediates sales, and sales from divested PET facilities in Mexico
and Argentina, sales revenue increased by 10 percent. Sales revenue
increases for both third quarter and first nine months 2008 compared to
comparable periods 2007 were due to increased selling prices in response to
higher raw material and energy costs more than offsetting lower sales
volume.
Operating
earnings were $174 million in third quarter 2008 compared to $46 million in
third quarter 2007. Excluding accelerated depreciation costs and asset
impairments and restructuring charges from both third quarter 2008 and 2007,
operating earnings were $179 million in third quarter 2008 compared with $169
million in third quarter 2007. Operating earnings were $514 million
in first nine months 2008 compared to $360 million in first nine months
2007. Excluding accelerated depreciation costs and asset impairments
and restructuring charges from first nine months 2008, operating earnings were
$544 million in first nine months 2008 compared with $513 million in first nine
months 2007. The Company's broad base of businesses continues to have
strong results, despite increasing and volatile raw material and energy
costs. The Performance Polymers segment had significant improvement
due primarily to improved operation of the South Carolina PET facility based on
the IntegRexTM
technology.
22
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Primarily
as a result of strategic actions related to the Performance Polymers and PCI
segments, operating earnings in third quarter 2008 were negatively impacted by
$3 million of accelerated depreciation costs and $2 million in asset impairments
and restructuring charges. Operating earnings in third quarter 2007
were negatively impacted by $9 million of accelerated depreciation costs and
$114 million in asset impairments and restructuring
charges. Operating earnings in first nine months 2008 were negatively
impacted by $8 million of accelerated depreciation costs and $22 million in
asset impairments and restructuring charges. Operating earnings in
first nine months 2007 were negatively impacted by $37 million of accelerated
depreciation costs and $116 million in asset impairments and restructuring
charges. Asset impairments and restructuring charges for both third
quarter and first nine months 2007 were primarily related to the divestiture of
the Company’s Mexico and Argentina PET manufacturing sites.
Earnings
from continuing operations increased by $75 million for third quarter 2008 as
compared to third quarter 2007. Excluding accelerated depreciation
costs and asset impairments and restructuring charges, net, earnings from
continuing operations were $102 million and $107 million,
respectively. Earnings from continuing operations increased by $110
million for first nine months 2008 compared to first nine months
2007. Excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and net deferred tax benefits related to the
previous divestiture of businesses, earnings from continuing operations were
$338 million and $322 million, respectively. Earnings from continuing
operations for first nine months 2008 compared to first nine months 2007
included a reduction in the provision for income taxes resulting from an
estimated benefit from a federal gasification investment tax credit associated
with the Company’s expected capital spending in 2008 on the Beaumont, Texas
industrial gasification project.
The
Company generated $293 million in cash from operating activities during first
nine months 2008 compared to $411 million generated by operating activities in
first nine months 2007. The difference was primarily due to a greater
increase in working capital largely resulting from an increase in inventory
attributable to higher raw material costs, which was partially offset by lower
pension contributions. In first nine months 2007, the Company
contributed $100 million to its U.S. defined benefit pension plan and does not
plan to make any contributions in 2008. In first nine months 2008,
the Company received proceeds from sales of assets and investments of $333
million, repurchased shares totaling $501 million, and repaid $175 million of
borrowings.
The
Company believes that cash balances, cash flows from operations, and external
sources of liquidity will be available and sufficient to meet foreseeable cash
flow requirements. As of September 30, 2008, the Company had $337 million
of cash and cash equivalents and an undrawn $700 million committed revolving
credit facility. The revolving credit facility (the “Credit
Facility”) is available through 2013, is supported by a diverse group of banks,
and can be drawn for general corporate purposes. The Company is
currently in compliance with all covenants under the Credit
Facility. In addition, there are no material debt maturities until
2012. The Company believes the combination of cash from operations,
manageable leverage, and committed external sources of liquidity provides a
solid financial foundation that positions it well in the current volatile
economic and financial environments.
In
addition to the completion of the sale of its PET polymers and PTA manufacturing
facilities in the Netherlands and the PET manufacturing facility in the United
Kingdom in first quarter 2008, Eastman continued to progress on its overall
growth objectives including the industrial gasification project in the U.S. Gulf
Coast and actions to improve the performance of its Performance Polymers segment
including the transformation at the South Carolina facility. In June
2008, the Company acquired the remaining ownership interest in TX Energy, LLC
(“TX Energy”) for approximately $35 million. With this acquisition,
the Company became the sole owner and developer of the industrial gasification
facility in Beaumont, Texas. Additionally in June 2008, the Company
sold its ownership interest in the St. James Parish, Louisiana industrial
gasification project for approximately $11 million and will no longer
participate in the project.
23
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
Third
Quarter
|
||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||||||||||||
|
Sales
|
$ | 1,819 | $ | 1,692 | 8 | % | (8 | ) % | 14 | % | 1 | % | 1 | % | ||||||||||||||
|
Sales
from Mexico and Argentina PET manufacturing facilities (1)
|
-- | 90 | ||||||||||||||||||||||||||
|
Sales
- contract polymer intermediates sales (2)
|
35 | -- | ||||||||||||||||||||||||||
|
Sales
- contract ethylene sales (3)
|
89 | 84 | ||||||||||||||||||||||||||
|
Sales
– excluding listed items
|
1,695 | 1,518 | 12 | % | (3 | ) % | 14 | % | -- | |||||||||||||||||||