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,
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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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
140 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 137
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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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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 $68.86 closing price on the New York
Stock Exchange on June 30, 2008) of the 72,025,651 shares of common equity held
by non-affiliates as of December 31, 2008 was approximately $4,959,686,328,
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, 2008 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 72,547,177 shares of common stock of the
registrant were outstanding at December 31, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement relating to the 2009 Annual
Meeting of Stockholders (the "2009 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; cash requirements and sources of liquidity and uses of
available cash; financing plans and activities; 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 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.
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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22
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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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26
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PART II
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5.
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27
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6.
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29
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7.
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31
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7A.
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76
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8.
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77
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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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131
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PART
III
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10.
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132
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11.
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132
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12.
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132
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13.
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133
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14.
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133
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PART
IV
SIGNATURES
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135
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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 eleven manufacturing sites in seven 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 2008,
the Company had sales revenue of $6.7 billion, operating earnings of $519
million, and earnings from continuing operations of $328
million. Earnings per diluted share from continuing operations were
$4.31 in 2008. Included in 2008 operating earnings were asset
impairments and restructuring charges of $46 million, accelerated depreciation
costs related to restructuring decisions of $9 million, and other operating
income of $16 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. For additional information concerning the Company’s
operating segments, see Note 23 "Segment Information" to the Company’s
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
The
Company manages certain costs and initiatives at the corporate level, including
certain research and development costs not allocated to the operating
segments. Industrial gasification, which consists of producing
cost-advantaged chemicals from petroleum coke or coal instead of natural gas or
petroleum, is currently 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 meet long-term demand and create new
opportunities for the Company's products in key markets. The Company
continues to invest in growth initiatives, but timing will depend, in part, on
economic conditions and the Company’s positive free cash flow generation
(operating cash flow less capital expenditures and dividends). The
Company’s current growth initiatives include:
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·
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In
the Fibers segment, in December 2008, the Company announced an alliance
with SK Chemicals Company Ltd. (“SK”) to form a company to acquire and
operate a cellulose acetate tow manufacturing facility and related
business, with the facility to be constructed by SK in
Korea. Eastman will have majority ownership of and will operate
the facility. Construction of the Korean facility began in
first quarter 2009 and is expected to be completed in second quarter
2010.
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·
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In
the SP segment, in 2008 Eastman continued the successful introduction of
new high-temperature copolyester products based on Eastman TritanTM
copolyester and is progressing on a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in
2010.
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·
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The
SP segment will continue to pursue sales revenue growth from cellulosic
and copolyester products sold in the liquid crystal displays
market.
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In
the CASPI segment, Eastman is continuing expansion of its hydrogenated
hydrocarbon resins manufacturing capacity in Middelburg, the Netherlands,
by expanding capacity an additional 30 percent, which is expected to be
completed in 2009.
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·
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In
2008, the Company continued to make progress on industrial gasification
including the acquisition of the remaining ownership interest of TX
Energy, L.L.C. (“TX Energy”), with a future plant site planned in
Beaumont, Texas. In 2008, the Company completed the purchase of
an idled methanol and ammonia plant from Terra Industries Inc. in
Beaumont, Texas and intends to restart these facilities using raw
materials supplied via pipeline from its nearby gasification facility,
once the gasification facility is complete. Front-end engineering
and design for the Beaumont industrial gasification project is planned to
be completed by mid-2009. The Company is pursuing non-recourse
project financing utilizing the Department of Energy’s Federal Loan
Guarantee Program.
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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.
The
Company has taken a number of actions to reposition itself in key markets and
geographies, and management believes the Company has been restructured for
sustained success. Recent restructuring actions include:
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·
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The
completed restructuring of the PCI segment to improve long-term
profitability, and the ongoing staged phase-out of the Company’s three
oldest cracking units in Longview, Texas. Eastman shut down the
first of these cracking units in fourth quarter
2007.
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·
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The
restructure of the Performance Polymers segment, which was completed in
fourth quarter 2008 to improve the segment's profitability, in part
enabled by IntegRexTM
technology. In 2008, Eastman debottlenecked the Columbia, South
Carolina facility for ParaStarTM
polyethylene terephthalate (“PET”)
resins. In 2007 and 2008, the Company also completed the
divestiture of its non-US PET facilities in the Netherlands, the United
Kingdom, Spain, Mexico, and
Argentina.
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Manufacturing
Streams
As stated
above, Eastman's objective is to leverage its heritage of expertise and
innovation in acetyl, polyester, and olefins chemistries 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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·
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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. The Company is pursuing opportunities to further
leverage its coal-based process know-how through its industrial
gasification corporate initiative to produce additional cost advantaged
chemicals from petroleum coke and coal instead of natural gas or
petroleum.
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·
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In
the polyester stream, the Company begins with purchased paraxylene and
produces purified terephthalic acid (“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. We
believe that this backward integration of polyester manufacturing is a
competitive advantage, giving Eastman a low cost position, as well as
surety of intermediate supply. In addition, Eastman can add
specialty monomers to 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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·
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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. “Cracking” is a chemical process in which gases
are broken down into smaller, lighter molecules for use in the
manufacturing process. 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 derivative products, acetaldehyde and ethylene
glycol production and is 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 its manufacturing 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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Kuantan,
Malaysia
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X
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Singapore
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X
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Workington,
United Kingdom
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X
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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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Coatings,
Adhesives, Specialty Polymers, and Inks (“CASPI”)
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X
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X
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Adhesives
ingredients (tape, labels, nonwovens), paints 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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Performance
Chemicals and Intermediates (“PCI”)
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X
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X
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X
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Intermediate
chemicals for agrochemicals, 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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Specialty
Plastics (“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 sensitivity to
global economic conditions, many of the products in the Fibers and CASPI
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 North
America, 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
packaged goods, automobiles, durable goods, and housing. Growth in Asia,
Eastern Europe, and Latin America continues to be 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 typically have operating margins in the range of 15 percent to 20
percent. In 2008, the CASPI segment had sales revenue of $1.5
billion, 23 percent of Eastman’s total sales.
The
profitability of the CASPI segment is sensitive to the global economy, market
trends, broader chemical cycles, particularly the olefins cycle, and foreign
currency exchange rates. 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 more 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 (“HAPs”) 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 and HAPs in compliance
with state and federal regulations. A significant portion of
Eastman’s coatings additives, coalescents, and solvents are currently used in
compliant coatings. Additional products are currently being developed
to meet the growing demand for low VOC coatings, with two new products,
SolusTM 2100
and AdvantisTM 510W,
introduced in 2008. Coatings additives, coalescents, and solvents
comprised 60 percent of the CASPI segment’s total sales for 2008.
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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. Global demand for many adhesives products is growing faster
than general economic growth, driven by use in consumable markets and
substitution for other fasteners, such as nails and screws, by formulated
adhesives. Adhesives raw materials comprised 40 percent of the CASPI
segment’s total sales for 2008.
8
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·
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Strategy
and Innovation
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A key
element of the CASPI segment’s 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 make the segment uniquely
capable of offering a broad array of solutions for new and emerging
markets.
The CASPI
segment is focused on expanding 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 for high industrial growth, particularly in Asia from its
facility in Singapore and joint venture operations in China.
The CASPI
segment is also focused on expanding the adhesives raw materials product
offerings into high-growth markets and regions by leveraging applications
technology and increasing production capacity. The segment is meeting
growing demand for specialty hydrocarbon resins through continued expansion of
the Company's hydrogenated hydrocarbon resins manufacturing capacity in
Middelburg, the Netherlands, with a 30 percent expansion expected to be
completed in 2009.
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 can often be successfully shared across multiple
end-uses and markets.
|
·
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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 approximately 1,000
customers around the world, and 80 percent of its sales revenue in 2008 was
attributable to approximately 75 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 to 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 packaged goods,
automobiles, durable goods, and housing.
|
·
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Competition
|
Competition
within the CASPI segment's markets varies widely depending on the specific
product or product group. 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, nor the
breadth of product offerings that Eastman is able to offer its CASPI segment
customers. The Company believes its competitive advantages include
its level of vertical integration, breadth of product, service, and technology
offerings, low-cost manufacturing position, consistent product quality, security
of supply, and process and market knowledge. The CASPI segment
principally competes on
breadth of products and through leveraging its strong customer base and
long-standing customer relationships to promote substantial recurring business
and product development.
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 production 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 was expanded in
2008. In 2008, the Fibers segment had sales revenue of $1.0 billion,
15 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 typically 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
allows it to produce a broad range of high-purity wood pulps. Despite
consolidation in the fiber-grade pulp market in recent years, management
believes the Fibers segment 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 these strengths to improve the
strategic position of its Fibers segment.
Contributing
to the profitability in the Fibers segment is the relatively limited number of
competitors, the high industry capacity utilization, and strong barriers to
entry by potential competitors; these barriers include but are not limited to
high capital costs for integrated manufacturing facilities.
|
·
|
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 one to two percent per year
through 2012, 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. 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 made of acetate yarn are noted for their rich colors,
silky feel, supple drape, breathability, comfort, and when blended with spandex,
easy care.
10
|
|
Ø
|
Acetyl Chemical
Products
|
The
Fibers segment's acetyl chemical products are sold primarily to other acetate
fiber producers and 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.
|
·
|
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 was completed in 2008, expanding Eastman's
world-wide capacity by five percent, serving existing customers in Western
Europe and the growing demand in Eastern Europe. In December 2008,
the Company announced an alliance with SK to form a company to acquire and
operate a cellulose acetate tow manufacturing facility and related business,
with the facility to be constructed by SK in Korea. Eastman will have
majority ownership of and will operate the facility. Construction of
the Korean facility began in first quarter 2009 and is expected to be completed
in second quarter 2010. Annual capacity at the Korea site is expected
to be approximately 27,000 metric tons and Eastman’s total worldwide capacity
for acetate tow will exceed 200,000 metric tons, an increase of 15
percent. The impact of the added Korean facility on global capacity
is estimated to be an increase of approximately two percent.
|
|
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 efforts have resulted in production capacity
improvements. 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.
· Customers and
Markets
The
customer base in the Fibers segment is relatively concentrated, consisting of
approximately 150 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
2008. The segment maintains a strong position in acetate tow exports
to China, one of the largest and fastest growing markets in the
world.
11
· 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, 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, completed in 2008,
included Eastman's Workington, England expansion and an expansion by an Asian
competitor. However, current global capacity utilization rates are
expected to remain high as the capacity provided by the recently completed
expansions will be required to meet the projected world-wide growth in
demand.
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 and the only
acetate yarn producer in North America. The physical properties of
acetate yarn make it desirable for use in textile products such as suit linings,
women’s apparel, medical tape, drapery, ribbons and other specialty
fabrics. However, over the past 20 years, demand for acetate yarn has
been adversely affected by the substitution of lower cost polyester and rayon
yarns. Accordingly, worldwide demand for acetate yarn is expected to
continue to decrease as mills substitute these cheaper yarns for acetate
yarn. Eastman, however, is uniquely positioned because it is the only
producer of both acetate flake and acetate yarn. In addition, during
2009, reductions in acetate filament yarn industry capacity are projected to
occur, which should improve the demand for Eastman acetate yarn.
As
described above under “Fibers Segment – Overview”, the principal methods of
competition include maintaining the Company’s large-scale vertically integrated
manufacturing process from coal-based acetyl raw materials, reliability of
supply, product quality, and sustaining long-term customer
relationships.
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 and olefins streams. In 2008, the PCI segment had sales
revenue of $2.2 billion, 32 percent of Eastman’s total sales.
Many of
the segment's products are affected by the olefins cycle. See
“Corporate Overview – Manufacturing Streams” earlier in this “Part 1 – Item 1.
Business.” 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 costs, 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 oldest cracking units in Longview, Texas in fourth quarter
2007. Shutdown timing for the remaining two units will depend on
feedstock and olefin market conditions. 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 now reported as sales in the
PCI segment.
12
|
·
|
Products
|
The PCI
segment offers over 135 products that include intermediates based on oxo and
acetyl chemistries, and performance chemicals. The PCI segment's 2008
sales revenue was approximately 65 percent from olefin-based, 15 percent from
acetyl-based, and 20 percent from performance and other,
chemicals. Approximately 75 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 believes that it
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.
|
·
|
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. The shutdown of the first of the three cracking
units as part of the staged phase-out in Longview, Texas, with the continued
shutdown dependent on feedstock and olefins market conditions, has been part of
the initiative to increase operational efficiency. 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. One such
market is for flexible plastic products used in highly regulated applications
such as child care articles, toys, and medical packaging and
devices. EastmanTM 168
Plasticizer provides an effective alternative to phthalate plasticizers
traditionally used in these applications. Eastman 168 Plasticizer
allows manufacturers to meet the challenging requirements of changing government
regulations and consumer preferences without sacrificing production efficiency
or product performance.
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 also evaluates licensing opportunities for
acetic acid and oxo derivatives on a selective basis, and has licensed
technology to produce acetyl products to Saudi International Petrochemical
Company in Saudi Arabia and to Chang Chung Petrochemical Company in Taiwan in
2005 and 2007, respectively.
13
|
·
|
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 was positively affected by the olefins upcycle
through third quarter 2008. However, the strength of product-specific
olefin derivative markets will vary widely based upon prevailing supply and
demand conditions. An important negative trend within the PCI
segment's markets is 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 2008 was from 94 out of approximately 1,100
customers worldwide.
|
·
|
Competition
|
Historically,
there have been significant barriers to entry for potential competitors in the
PCI segment's major product lines, including acetic acid and acetic anhydride,
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 2008,
the Performance Polymers segment had sales revenue of $1.1 billion, 16 percent
of the Company’s total sales. The segment is comprised primarily of
the Company's PET product lines, and also includes various polymer
intermediates.
In 2008,
the Company completed strategic actions to improve the operating results of the
Performance Polymers segment through innovation and
restructuring. The Company shut down 300,000 metric tons of higher
cost assets in 2008 after having shut down 100,000 metric tons of higher cost
PET assets during 2007, some of which were converted to SP segment
production. In fourth quarter 2008, the Company also successfully
completed a debottleneck of its IntegRexTM technology facility in
South Carolina, bringing its IntegRexTM
capacity to 525,000 metric tons. As described below under “Strategy
and Innovation”, IntegRexTM
technology provides a sustainable advantaged cost position in the PET
industry. As a result of these completed actions, the Performance
Polymers segment is expected to have total PET capacity of approximately 800,000
metric tons in 2009, of which over 65 percent is based on IntegRexTM
technology and all of which is based in North America.
In 2007
and early 2008, the Company also completed strategic actions for underperforming
PET assets outside the United States, with the divestiture of its PET
manufacturing sites in Spain, Mexico, Argentina and the United Kingdom and its
divestiture of the PET polymers and PTA facilities in the Netherlands and
related businesses. After divesting these PET manufacturing
facilities, Eastman has no PET manufacturing capacity outside the United
States.
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 global 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.
14
|
·
|
Products
|
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, carpet fibers, 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.
|
·
|
Strategy
and Innovation
|
|
Ø
|
Operational
Efficiency
|
The
Performance Polymers segment focuses on improving its performance by directing
its research and development efforts to lowering its manufacturing costs through
technology innovations and process improvement. These efforts
resulted in the breakthrough technology of IntegRexTM, a
lower cost PET manufacturing process that provides manufacturing and capital
cost savings of approximately 50 percent over conventional PET
technologies. These efforts have allowed the Company to shut down
400,000 metric tons of higher cost manufacturing assets from 2007 through 2008,
some of which was converted to SP segment production. As a result of
the changes in its asset base, the Company has reduced its annual costs at the
South Carolina site by more than $30 million.
|
Ø
|
Licensing
|
As a
strategic initiative to create and capture additional value from the IntegRex™
technology, the Company is actively pursuing a licensing
program. IntegRex™ technology provides significant capital and
operating cost benefits relative to conventional PTA and PET technologies.
The Company is offering licensees its Eastman-owned patents and expertise in the
design, construction, and operation of a full range of production facilities,
including IntegRex™ PTA, IntegRex™ PET, or integrated configurations of the two
processes. Also, as the Company improves the IntegRex™ technology for its
own use, it expects it may offer these enhancements to its
licensees.
|
·
|
Customers
and Markets
|
Approximately
15 customers within the Performance Polymers segment accounted for more than 80
percent of the segment’s total sales revenue from continuing operations in
2008. With the completion of certain strategic actions described
above, the segment primarily serves PET customers in the NAFTA
region. These customers are primarily PET container producers for
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 2008,
the worldwide market for PET, including containers, film and sheet, was
approximately 15 million metric tons including 4 million metric tons in the
NAFTA region. Despite the move by customers to light weight PET
packaging, demand for PET is expected to continue to grow. PET
consumption 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. Although near-term growth in demand is uncertain, the
Company projects the NAFTA region for PET to grow by approximately three to four
percent annually on a long-term basis.
|
·
|
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.
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. 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.
15
SP
SEGMENT
|
·
|
Overview
|
In the SP
segment, the Company produces and markets specialized copolyesters and
cellulosic plastics that possess differentiated performance properties for
value-added end uses. In 2008, the SP segment had sales revenue of
$923 million, approximately 14 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. The addition of the
Tritan™ family of products significantly enhances the segment’s ability to
customize copolyesters and cellulosic plastics for new markets and
applications. In addition, the SP segment has a long history of
manufacturing excellence with strong process improvement programs providing
continuing cost reduction.
The
Company typically expects the SP segment to have gross margins of approximately
25 percent with sales revenue growth of five to seven percent
annually. In 2008, the operating margin for the SP segment
was four percent as unprecedented raw material volatility, combined with
substantial demand decline in the second half of the year, resulted in lower
margins. Over time, as demand growth returns to historical levels,
management expects SP segment operating margins of 10 to 15 percent through a
combination of improved capacity utilization and growth in higher margin product
lines such as medical or liquid crystal displays (“LCD”), as well as growth in
the newly launched TritanTM
copolyester.
|
·
|
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 domestic economic growth
due to ongoing specialty copolyester material innovations and displacement
opportunities. Eastman believes that cellulosic materials will grow
at the rate of the domestic economy in general, with the strong demand for
cellulose esters in liquid crystal displays more than offsetting the decline in
legacy photographic markets. For both specialty copolyesters and
cellulosic plastics, the SP segment benefits from integration into the Company’s
polyester and acetyls streams. The SP segment's specialty
copolyesters are currently produced in Kingsport, Tennessee; Columbia, South
Carolina; and Kuantan, Malaysia. The cellulosic products are produced
in Kingsport, Tennessee.
|
Ø
|
Specialty
Copolyesters
|
Eastman’s
specialty copolyesters accounted for approximately 80 percent of the SP
segment’s 2008 sales revenue. Eastman’s specialty copolyesters, which
generally are based on Eastman's production of cyclohexane dimethanol ("CHDM")
modified polymers, typically fill a market position between polycarbonates and
acrylics. Polycarbonates traditionally have offered 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 in some applications.
The SP
segment continues to develop new applications for its core copolyesters to meet
growing demand for greener copolyester products. Eastman’s newest
copolyester, Tritan™, enables the Company to move to higher value applications
by adding high temperature resistance to the other properties of copolyesters,
including toughness, chemical resistance, and excellent
processability. These traits allow Eastman to position TritanTM as an
equal or superior alternative to polycarbonate, in part because TritanTM is a
very desirable Bisphenol A (“BPA”)-free alternative for a variety of food
contact or medical applications such as consumer housewares or baby
bottles. BPA is a raw material used in the production of certain
polycarbonate plastics. Some customers prefer plastics that do not
contain BPA.
16
|
Ø
|
Cellulosic
Plastics
|
Cellulosics
and cellulosic plastics accounted for approximately 20 percent of the SP
segment’s 2008 sales revenue. Sold under the TeniteTM brand,
these products are known for their excellent balance of properties, including
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. Through the development of new
formulations and applications, Eastman’s LCD product line has continued to
experience double digit revenue and operating earnings growth through
2008.
|
·
|
Strategy
and Innovation
|
The SP
segment is focused on providing consistent profit margins and generating cash
which the Company can reinvest in the SP segment’s business 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. In 2008, the Company completed
the conversion of certain PET manufacturing assets in Columbia, South
Carolina.
Through
Eastman’s advantaged asset position and innovation efforts around applications
development, the segment has increased specialty copolyesters sales volume to
twice gross domestic product (“GDP”) growth over the past 5
years. New applications include decorative films for hard surfaces
such as wood molding and trim, shrink films for food packaging, and innovative
clear handleware containers for beverages. Additionally, increased
environmental concerns related to BPA have created new opportunities for various
applications for legacy copolyesters.
The LCD
market is a developing growth market for the SP segment. The Company
continues to invest in the development of copolyester and cellulosic-based
product solutions for this high-growth market, with the objective of being a
strategic raw material supplier in the LCD market.
The
addition of Tritan™ copolyester to Eastman’s SP product offering has created new
opportunities for applications previously occupied by materials such as
polycarbonate or polysulfone. For example, in a number of food
contact applications, OEMs and brand owners have already required the use
of TritanTM, as it
offers a BPA-free alternative that is clear, tough, and offers dishwasher
durability. Examples of such applications are baby bottles, sports
bottles and food containers. The Company’s first full scale
manufacturing facility dedicated to the production of Tritan™ is scheduled to be
operational in 2010.
|
·
|
Customers
and Markets
|
The
customer base in the SP segment is broad and diverse, consisting of
approximately 620 companies worldwide in a variety of
industries. Approximately 80 percent of the SP segment’s 2008 sales
revenue was attributable to approximately 65 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.
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 LCD. The new Tritan™ family of
products is being sold into a range of markets including but not limited to,
consumer housewares, infant care, small appliances and other consumer durables
segments. Additional applications and markets are currently under
development.
17
|
·
|
Competition
|
The
segment principally competes by leveraging price and product performance in
specific applications. The customers’ product selection is typically
determined on an application-by-application basis and often by OEMs rather than
by resin converters. New market opportunities are coming from
substitution of plastic for other materials, and displacement of other plastic
resins in existing applications. While historically the SP segment’s
ability to compete was very closely tied to supply-demand balances of competing
plastics, the addition of Tritan™, a material based on Eastman proprietary
technology, opens new market opportunities in which Eastman expects to leverage
the unique combination of properties of the new family of
products. In certain cases, we believe that Tritan™ offers a unique
solution by bringing properties similar to polycarbonate without containing any
BPA.
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 generating sales
revenue from multiple sources, as well as retaining customers from long-term
relationships. As products become more 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.
The
industry has recently been confronted by unprecedented raw material cost
volatility. While raw material cost volatility is expected to
continue into the future, the segment benefits from diversification of its raw
materials base by using both coal for cellulosics, as well as
petrochemical-based feedstocks for copolyesters.
Eastman’s
primary competitors for copolyester products include SK Chemical Industries,
Bayer AG, Saudi Basic Industries Corporation ("SABIC"), Dow and Evonvik
Industries. Competition for cellulosic plastics is primarily from
other producers of cellulose ester polymers such as Acetati SpA and
Daicel.
CORPORATE
INITIATIVES - INDUSTRIAL GASIFICATION
In
addition to its 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 petroleum coke or coal instead of natural gas or
petroleum. 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 entered into an agreement in 2007 with a
co-investor to jointly develop an industrial gasification facility in Beaumont,
Texas through TX Energy. In June 2008, the Company acquired the
co-investor’s ownership interest in TX Energy for approximately $35 million,
which is primarily allocated to properties and equipment. With this
acquisition, the Company became the sole owner and developer of the Beaumont,
Texas facility. Front-end engineering and design is planned to be
completed by mid-2009. The Company is pursuing non-recourse project
financing utilizing the Department of Energy’s Federal Loan Guarantee
Program. In 2008, the Company completed the purchase of an idled
methanol and ammonia plant in Beaumont, Texas from Terra Industries Inc. and
intends to restart these facilities using raw materials supplied via pipeline
from the nearby gasification facility, once the gasification facility is
complete.
The
Company also continues 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 2008,
operating losses for corporate initiatives were $52 million compared with $47
million in 2007.
18
EASTMAN
CHEMICAL COMPANY GENERAL INFORMATION
Sales, Marketing, and
Distribution
The
Company markets and sells products primarily through a global marketing and
sales organization which has a presence in the United States and in over 35
other countries around the world. Eastman has a marketing and sales
strategy targeting industries and applications where Eastman products and
services provide differentiated value. Market, customer, and
technical expertise are critical capabilities. 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 worldwide.
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 combination of direct and indirect
sales channels, including sales online through its website, allows Eastman to
reliably serve customers throughout the world.
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 Material and Energy
Eastman
purchases a substantial portion, estimated to be approximately 75 percent, of
its key raw materials and energy through long-term contracts, generally of three
to five years in 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, and Eastman uses derivative financial
instruments, valued at quoted market prices, to mitigate the impact of
short-term market price fluctuations. Key raw materials include
propane, ethane, paraxylene, ethylene glycol, PTA, coal, cellulose, methanol,
and a wide variety of precursors for specialty organic
chemicals. Key purchased energy sources include natural gas,
steam, coal, and electricity. 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 its 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 raw material and energy costs as a percent of
total cost of operations were estimated to be approximately 70 percent in 2008,
2007 and 2006.
Capital
Expenditures
Capital
expenditures were $650 million, $518 million, and $389 million for 2008, 2007,
and 2006, respectively. The increased capital spending in 2008 was
primarily due to investment in strategic initiatives, particularly in the
Fibers, Performance Polymers, and SP segments and spending related to the
Company’s corporate initiatives, primarily the industrial gasification
project.
Employees
Eastman
employs approximately 10,500 men and women worldwide. Approximately 4
percent of the total worldwide labor force is represented by unions, mostly
outside the United States.
19
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 70 percent of the Company's 2008 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 750 active United States
patents and more than 1,600 active foreign patents, expiring at various times
over several years, and also owns over 2,500 active worldwide trademark
applications and registrations. The Company’s intellectual property
relates to a wide variety of products and processes. Eastman
continues actively to protect its intellectual property. As the laws of many
countries do not protect intellectual property to the same extent as the laws of
the United States, Eastman cannot ensure that it will be able to adequately
protect its intellectual property assets outside the United States.
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 focused on acetyls technology in the PCI segment. The
Company also is actively pursuing licensing opportunities for its IntegRexTM
technology in the Performance Polymers segment.
Research
and Development
For 2008,
2007, and 2006, Eastman’s research and development expenses totaled $158
million, $156 million, and $155 million, respectively.
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.
20
The
Company's cash expenditures related to environmental protection and improvement
were estimated to be approximately $218 million, $209 million, and $214 million
in 2008, 2007, and 2006, 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 2008 Annual Report on Form
10-K.
On
January 1, 2009 and 2008, Eastman’s backlog of firm sales orders represented
less than 10 percent of the Company’s total consolidated revenue for the
previous year. These orders are primarily short-term and all orders
are expected to be filled in the following year. 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 2008 Annual Report on Form 10-K.
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 Annual Report on 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 7, 2009
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."
21
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 2008,
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, 2008, 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 2008 Annual Report on Form
10-K.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
22
EXECUTIVE
OFFICERS OF THE COMPANY
Certain
information about the Company's executive officers is provided
below:
J. Brian
Ferguson, age 54, 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. Mr. Ferguson will become Executive Chairman of the Board
effective May 7, 2009 when James P. Rogers succeeds him as Chief Executive
Officer.
James P.
Rogers, age 57, is President of Eastman Chemical Company and Chemicals &
Fibers Business Group Head and is a member of the Board of
Directors. 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. Mr. Rogers will
become President and Chief Executive Officer of the Company effective
immediately following the Annual Meeting of Stockholders on May 7,
2009.
Mark J.
Costa, age 42, is Executive Vice President, Polymers Business Group and Chief
Marketing Officer. Mr. Costa joined the Company in June 2006 as
Senior Vice President, Corporate Strategy & Marketing and was appointed to
his current position in August 2008. Prior to joining Eastman, 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 56, 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.
Ronald C.
Lindsay, age 50, is Senior Vice President, Corporate Strategy and Regional
Leadership. 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, in 2005 became Vice President, Performance Chemicals Business, and
in 2006 was appointed Senior Vice President and Chief Technology
Officer. He was appointed to his current position in August
2008.
Norris P.
Sneed, age 53, is Senior Vice President and Chief Administrative
Officer. Mr. Sneed joined the Company in 1979 as a chemical engineer
at Eastman’s South Carolina Operations. 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 Senior Vice President,
Human Resources, Communications and Public Affairs in June
2003. Mr. Sneed was appointed to his current position in
September 2008.
Curtis E.
Espeland, age 44, is Senior Vice President and Chief Financial
Officer. Mr. Espeland joined Eastman in 1996, and has served in
various financial management positions of increasing responsibility, including
Vice President, Finance, Polymers Business Group; Vice President, Finance,
Eastman Division; Vice President and Controller: Director of Corporate Planning
and Forecasting; Director of Finance, Asia Pacific; and Director of Internal
Auditing. He served
as the Company's Chief Accounting Officer from December 2002 to
2008. Prior to joining Eastman, Mr. Espeland was an audit and
business advisory manager with Arthur Andersen LLP. Mr. Espeland was
appointed to his current position in September 2008.
23
Greg W.
Nelson, age 46, is Senior Vice President and Chief Technology
Officer. Dr. Nelson joined Eastman in 1988 in the Research and
Development organization, and served in various positions in technology,
including Technology Manager for the Flexible Plastics business, Vice President,
Polymers Technology, and Vice President Corporate Technology from 2007 until
appointed to his current position in August 2008.
Scott V.
King, age 40, is Vice President, Controller and Chief Accounting
Officer. Since joining Eastman in 1999 as Manager, Corporate
Consolidations and External Reporting, he has held various positions of
increasing responsibility in the financial organization, and was appointed Vice
President and Controller in August 2007. Prior to joining Eastman,
Mr. King was an audit and business advisory manager with PricewaterhouseCoopers
LLP. Mr. King was appointed to his current position in September
2008.
24
ITEM
2. PROPERTIES
PROPERTIES
At
December 31, 2008, Eastman operated eleven manufacturing sites in seven
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
|
x
|
|
|
Franklin,
Virginia(1)
|
x
|
||||
|
Europe
|
|||||
|
Workington,
England
|
x
|
||||
|
Middelburg,
the Netherlands
|
x
|
||||
|
Asia
Pacific
|
|||||
|
Kuantan,
Malaysia (1)
|
x
|
||||
|
Jurong
Island, Singapore (1)
|
x
|
x
|
|||
|
Zibo
City, China(2)
|
x
|
x
|
|||
|
Latin
America
|
|||||
|
Uruapan,
Mexico
|
x
|
||||
|
|
(1)
|
Indicates
a location that Eastman leases from a third
party.
|
|
|
(2)
|
Eastman
holds a 51 percent share in the joint venture Qilu Eastman Specialty
Chemical Ltd.
|
In 2008,
the Company completed the purchase of an idled methanol and ammonia plant in
Beaumont, Texas from Terra Industries Inc. and intends to restart these
facilities using raw materials supplied via pipeline from its nearby
gasification facility, once the gasification facility is complete.
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 2008 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 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.
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 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 fourth
quarter of 2008.
26
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 2008 and 2007.
|
High
|
Low
|
Cash
Dividends Declared
|
|||||
|
2008
|
First
Quarter
|
$
|
67.77
|
$
|
56.31
|
$
|
0.44
|
|
Second
Quarter
|
78.29
|
62.16
|
0.44
|
||||
|
Third
Quarter
|
69.45
|
52.91
|
0.44
|
||||
|
Fourth
Quarter
|
55.22
|
25.87
|
0.44
|
||||
|
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
|
||||
As of
December 31, 2008, there were 72,547,177 shares of the Company's common stock
issued and outstanding, which shares were held by 24,917 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 2009, payable on April 1, 2009 to stockholders of
record on March 16, 2009. 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 2008 Annual Report on Form 10-K for the information
required by Item 201(d) of Regulation S-K.
(b) Not
applicable.
27
(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, 2008
|
--
|
$
|
--
|
0
|
$
|
117
|
|
|
November
1-30, 2008
|
--
|
$
|
--
|
0
|
$
|
117
|
|
|
December
1-31, 2008
|
484
|
$
|
30.28
|
0
|
$
|
117
|
|
|
Total
|
484
|
$
|
30.28
|
0
|
$
|
117
|
|
(1)
|
Shares
surrendered to the Company by employees to satisfy individual tax
withholding obligations upon vesting of previously issued shares of
restricted common stock. Shares are not part of any Company
repurchase plan.
|
|
(2)
|
Average
price paid per share reflects the closing price of Eastman common stock on
the business day the shares were surrendered by the employee stockholder
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, 2008, a total of 9.4 million
shares have been repurchased under this authorization for a total amount
of $583 million. For
additional information, see Note 15, "Stockholders' Equity", to the
Company's consolidated financial statements in Part II, Item 8 of this
2008 Annual Report on Form 10-K.
|
28
ITEM
6. SELECTED FINANCIAL DATA
|
Summary
of Operating Data
|
Year
Ended December 31,
|
|||||||||
|
(Dollars
in millions, except per share amounts)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||
|
Sales
|
$
|
6,726
|
$
|
6,830
|
$
|
6,779
|
$
|
6,460
|
$
|
6,019
|
|
Operating
earnings
|
519
|
504
|
654
|
740
|
146
|
|||||
|
Earnings
from continuing operations
|
328
|
321
|
427
|
541
|
146
|
|||||
|
Earnings
(loss) from discontinued operations
|
--
|
(10)
|
(18)
|
16
|
24
|
|||||
|
Gain
(loss) from disposal of discontinued operations
|
18
|
(11)
|
--
|
--
|
--
|
|||||
|
Net
earnings
|
$
|
346
|
$
|
300
|
$
|
409
|
$
|
557
|
$
|
170
|
|
Basic
earnings per share
|
||||||||||
|
Earnings
from continuing operations
|
$
|
4.36
|
$
|
3.89
|
$
|
5.20
|
$
|
6.70
|
$
|
1.88
|
|
Earnings
(loss) from discontinued operations
|
0.23
|
(0.26)
|
(0.22)
|
0.20
|
0.32
|
|||||
|
Net
earnings
|
$
|
4.59
|
$
|
3.63
|
$
|
4.98
|
$
|
6.90
|
$
|
2.20
|
|
Diluted
earnings per share
|
||||||||||
|
Earnings
from continuing operations
|
$
|
4.31
|
$
|
3.84
|
$
|
5.12
|
$
|
6.61
|
$
|
1.86
|
|
Earnings
(loss) from discontinued operations
|
0.24
|
(0.26)
|
(0.21)
|
0.20
|
0.32
|
|||||
|
Net
earnings
|
$
|
4.55
|
$
|
3.58
|
$
|
4.91
|
$
|
6.81
|
$
|
2.18
|
|
Statement
of Financial Position Data
|
||||||||||
|
Current
assets
|
$
|
1,423
|
$
|
2,293
|
$
|
2,422
|
$
|
1,924
|
$
|
1,768
|
|
Net
properties
|
3,198
|
2,846
|
3,069
|
3,162
|
3,192
|
|||||
|
Total
assets
|
5,281
|
6,009
|
6,132
|
5,737
|
5,839
|
|||||
|
Current
liabilities
|
832
|
1,122
|
1,059
|
1,051
|
1,099
|
|||||
|
Long-term
borrowings
|
1,442
|
1,535
|
1,589
|
1,621
|
2,061
|
|||||
|
Total
liabilities
|
3,728
|
3,927
|
4,103
|
4,125
|
4,655
|
|||||
|
Total
stockholders’ equity
|
1,553
|
2,082
|
2,029
|
1,612
|
1,184
|
|||||
|
Dividends
declared per share
|
1.76
|
1.76
|
1.76
|
1.76
|
1.76
|
|||||
In June
2008, the Company acquired Green Rock Energy, L.L.C.’s ("Green Rock") 50 percent
ownership interest in TX Energy, L.L.C. (“TX Energy”) for approximately $35
million, which is primarily allocated to properties and equipment. In
October 2007, the Company entered into an agreement with Green Rock to jointly
develop an industrial gasification facility in Beaumont, Texas through TX
Energy. 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.
In first
quarter 2008, the Company completed the sale of its polyethylene
terephthalate (“PET”)
polymers and purified terephthalic acid (“PTA”) manufacturing facilities in
Rotterdam, the Netherlands and the PET manufacturing facility in Workington,
United Kingdom and related businesses. Results from, charges related
to, and gains and losses from disposal of the San Roque, Spain, the Netherlands,
and the United Kingdom assets and businesses are presented as discontinued
operations. 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 2008
Annual Report on Form 10-K.
29
In second
quarter 2007, the Company completed the sale of its San Roque, Spain PET
manufacturing facility. During 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 2008 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
2008 Annual Report on Form 10-K.
30
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
ITEM
|
Page
|
|
32
|
|
|
36
|
|
|
37
|
|
|
39
|
|
|
43
|
|
|
49
|
|
|
50
|
|
|
54
|
|
|
61
|
|
|
62
|
|
|
67
|
|
|
68
|
|
|
68
|
|
|
70
|
|
|
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.
31
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 impairment of long-lived 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.
Allowances
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments. The Company believes, based on historical results, the
likelihood of actual write-offs having a material impact on financial results or
earnings per share is low. However, if one of the Company’s key
customers were to file for bankruptcy, or otherwise be unable to make its
required payments, or there was a significant continued slow-down in the
economy, the Company could be forced to increase its allowances. This
could result in a material charge to earnings. The Company’s
allowances were $7 million and $5 million at December 31, 2008 and 2007,
respectively.
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. Goodwill and indefinite-lived
intangibles primarily consist of goodwill in the Chemicals, Adhesives, Specialty
Polymers and Inks (“CASPI”) segment, which has maintained earnings through the
second half of 2008. As such, recent events did not warrant
retesting.
32
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
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 no
fixed (tangible) asset impairment costs and no definite-lived intangible
asset impairment costs in results from continuing operations during
2008. 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.
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 $11 million to the maximum of
$21 million at December 31, 2008.
In
accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
(“SFAS No. 143”) 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 was $41 million at December 31, 2008 and $42 million at
December 31, 2007, 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.
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. For the U.S., at December 31, 2008, the Company assumed a
discount rate of 6.08 percent on its defined benefit pension plan, 6.09 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.
33
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company expects its 2009 pension expense to be similar to 2008. The
December 31, 2008 projected benefit obligation and 2009 expense are affected by
year-end 2008 assumptions. The sensitivities below are specific to
the time periods noted. They also may not be additive, so the impact
of changing multiple factors simultaneously cannot be calculated by combining
the individual sensitivities shown. The following table illustrates
the sensitivity to changes in the Company’s long-term assumptions in the
expected return on assets and assumed discount rate for the U.S. pension plan
and other postretirement welfare plans:
|
Change
in
Assumption
|
Impact
on
2009
Pre-tax U.S.
Benefits
Expense
|
Impact
on
December
31, 2008 Projected Benefit Obligation for U.S. Pension
Plan
|
Impact
on
December
31, 2008 Benefit Obligation for Other U.S. Postretirement
Plans
|
|
25
basis point
decrease
in discount
rate
|
+$5
Million
|
+$39
Million
|
+$22
Million
|
|
25
basis point
increase
in discount
rate
|
-$5
Million
|
-$37
Million
|
-$21
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 equity
markets. Historically, the Company has achieved an actual return
which was equal to or greater than the expected return on
assets. However, due to the global recession in 2008, the actual
returns for 2008 were below expected returns. 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.
The
Company uses the market related valuation method to determine the value of plan
assets, which recognizes the change of the fair value of the plan assets over
five years. If actual experience differs from these long-term
assumptions, the difference is recorded as an unrecognized actuarial gain (loss)
and then amortized into earnings over a period of time based on the average
future service period, which may cause the expense related to providing these
benefits to increase or decrease. The charges applied to earnings in
2008, 2007, and 2006 due to the amortization of these unrecognized actuarial
losses, largely due to actual experience versus assumptions of discount rates,
were $37 million, $47 million, and $54 million, respectively.
34
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company does not anticipate that a change in pension and other post-employment
obligations caused by a change in the assumed discount rate during 2009 will
impact the cash contributions to be made to the pension plans during
2009. 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, 2009 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
2008 Annual Report on Form 10-K.
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. Based upon facts and information
currently available, 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, 2008, a valuation
allowance of $131 million has been provided against the deferred tax
assets.
In
accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB No. 109”, the Company recognizes income
tax positions that meet the more likely than not threshold and accrues interest
related to unrecognized income tax positions which is recorded as a component of
the income tax provision.
Prior to
2007, the Company determined tax contingencies in accordance with SFAS
No. 5, “Accounting for Contingencies.” The Company recorded
estimated tax liabilities to the extent the contingencies were probable and
could be reasonably estimated.
35
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
During
2007 and 2008, 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 and in
first quarter 2008, the Company completed the sale of its PET polymers and
purified terephthalic acid (“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 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 $9 million and $49
million in 2008 and 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.
In 2008,
the Company sold certain mineral rights at an operating manufacturing site,
recognizing $16 million of other operating income.
This
Management's Discussion and Analysis includes the following non-GAAP financial
measures and accompanying reconciliations to the most directly comparable GAAP
financial measures. The non-GAAP financial measures used by the
Company may not be comparable to similarly titled measures used by other
companies and should not be considered in isolation or as a substitute for
measures of performance or liquidity prepared in accordance with
GAAP.
|
·
|
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;
|
|
·
|
Company
and segment gross profit, operating earnings and earnings from continuing
operations excluding accelerated depreciation costs, asset impairments and
restructuring charges, and other operating income;
and
|
|
·
|
Company
earnings from continuing operations excluding net deferred tax benefits
related to the previous divestiture of
businesses.
|
36
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Eastman's
management believes that contract ethylene sales under the transition agreement
related to the divestiture of the PE product lines, 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, and the other operating income from the sale of mineral rights do
not reflect the continuing and expected future business of the PCI and
Performance Polymers segments or of the Company. 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 $6.7 billion for 2008 compared to $6.8
billion for 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 3 percent. The sales
revenue increase was due to increased selling prices in response to higher raw
material and energy costs more than offsetting lower sales
volume. Although the Company had some volume decline through the
first nine months 2008 compared to first nine months 2007, in addition to normal
seasonality, Eastman’s sales volumes had an unprecedented drop in fourth quarter
2008 due to the global recession.
Operating
earnings were $519 million in 2008 compared to $504 million in
2007. Excluding accelerated depreciation costs, asset impairments and
restructuring charges and other operating income, operating earnings were $558
million in 2008 compared with $665 million in 2007. The
Company had strong results, despite Eastman, and the chemical industry as a
whole, facing unprecedented
declines in demand, particularly in fourth quarter 2008, extremely volatile raw
material and energy costs and an uncertain global economy. The lower full
year operating earnings were driven by the year over year decline in
fourth quarter results, primarily due to the sharp deterioration in
demand. This decline in demand caused lower sales volume and
historically low capacity utilization which resulted in higher unit
costs. These challenges resulted in lower than anticipated operating
margins for the majority of the segments and the Company as a
whole.
Primarily
as a result of strategic actions related to the Performance Polymers and PCI
segments, as well as a corporate severance program, operating earnings in 2008
were negatively impacted by $46 million in asset impairments and restructuring
charges and $9 million of accelerated depreciation costs, and were positively
impacted by $16 million in other operating income. Operating earnings
in 2007 were negatively impacted by $112 million in asset impairments and
restructuring charges and $49 million of accelerated depreciation
costs. Asset impairments and restructuring charges for 2007 were
primarily related to the divestiture of the Company’s Mexico and Argentina PET
manufacturing sites.
Earnings
from continuing operations increased by $7 million for 2008 as compared to
2007. Excluding accelerated depreciation costs and asset impairments
and restructuring charges, net, earnings from continuing operations were $342
million and $423 million, respectively. Earnings from continuing
operations for 2008 compared to 2007 benefited from a lower effective tax
rate.
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company generated $653 million in cash from operating activities during 2008
compared to $732 million generated by operating activities in
2007. The difference was primarily due to a more challenging economic
environment resulting in lower net earnings excluding accelerated depreciation
and asset impairments and restructuring charges. In 2007, the Company
contributed $100 million to its U.S. defined benefit pension plan and did not
make any contributions in 2008. In 2008, the Company received
proceeds from sales of assets and investments of $337 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 December 31, 2008, the Company had $387 million
of cash and cash equivalents and an undrawn $700 million committed revolving
credit facility (the “Credit Facility”). The Credit Facility is
substantially 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, actions to improve the performance of its
Performance Polymers segment including the transformation at the South Carolina
facility. In the Fibers segment, the Company completed the acetate
tow capacity expansion in the United Kingdom and announced a cellulose acetate
tow alliance in Korea. Eastman continued to progress on its strategic
growth initiatives including the industrial gasification project in the U.S.
Gulf Coast and.
In June
2008, as part of the progression on the gasification project in Beaumont, Texas,
the Company acquired entire ownership interest in TX Energy, L.L.C. ("TX
Energy") for approximately $35 million, which is primarily allocated to
properties and equipment. Front-end engineering and design for the
project is planned to be completed by mid-2009. The Company is
pursuing non-recourse project financing utilizing the Department of Energy’s
Federal Loan Guarantee Program and its completed application was submitted in
November 2008. In 2008, the Company completed the purchase of
an idled methanol and ammonia plant in Beaumont, Texas from Terra Industries
Inc. and intends to restart these facilities using raw materials supplied via
pipeline from the nearby gasification facility, once the gasification facility
is complete.
In
December 2008, the Company announced an alliance with SK Chemicals Company Ltd.
(“SK”) to form a company to acquire and operate a cellulose acetate tow
manufacturing facility and related business, with the facility to be constructed
by SK in Korea. Eastman will have majority ownership and will operate
the facility. Construction began in first quarter 2009 and is
expected to be completed during second quarter 2010. Annual
capacity at the site is expected to be approximately 27,000 metric tons and
Eastman’s total worldwide capacity for acetate tow is expected to exceed 200,000
metric tons, an increase of 15 percent. The impact on global capacity
is estimated to be an increase of approximately two percent.
38
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
Company’s results of operations as presented in the Company’s consolidated
financial statements in Part II, Item 8 of this 2008 Annual Report on Form 10-K
are summarized and analyzed below.
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||||||||||
|
Sales
|
$
|
6,726
|
$
|
6,830
|
(1)
%
|
(11)
%
|
9
%
|
--
%
|
1
%
|
|||||
|
Sales
- sales from Mexico and Argentina PET manufacturing facilities (1)
|
--
|
413
|
||||||||||||
|
Sales
– contract polymer intermediates sales (2)
|
138
|
15
|
||||||||||||
|
Sales
- contract ethylene sales (3)
|
314
|
314
|
||||||||||||
|
Sales
– excluding listed items
|
$
|
6,274
|
$
|
6,088
|
3
%
|
(7)
%
|
9
%
|
--
%
|
1
%
|
|||||
|
(1)
|
Sales
revenue for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter
2007.
|
|
(2)
|
Included
in 2008 sales revenue are 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 in
fourth quarter 2007.
|
|
(3)
|
Included
in 2008 and 2007 sales revenue are contract ethylene sales under the
transition supply agreement related to the divestiture of the PE
businesses.
|
Sales
revenue for 2008 compared to 2007 decreased $104 million. Excluding
contract ethylene sales, contract polymer intermediates sales, and sales from
Mexico and Argentina PET manufacturing facilities, sales revenue increased 3
percent primarily due to higher selling prices in all segments in response to
higher raw material and energy costs more than offsetting lower sales volume,
particularly in the Performance Polymers, PCI, and CASPI
segments. Although the Company experienced some volume decline
through the first nine months 2008 compared to first nine months 2007, the
global recession, experienced particularly in fourth quarter 2008, resulted in
an unprecedented decrease in sales volume across all segments and all regions in
fourth quarter 2008 compared to fourth quarter 2007.
39
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||
|
Gross
Profit
|
$
|
1,126
|
$
|
1,192
|
(6)
%
|
|
|
As
a percentage of sales
|
17
%
|
17
%
|
||||
|
Accelerated
depreciation included in cost of goods sold
|
9
|
49
|
||||
|
Gross
Profit excluding accelerated depreciation costs
|
1,135
|
1,241
|
(9)
%
|
|||
|
As
a percentage of sales
|
17
%
|
18
%
|
Gross
profit for 2008 decreased compared with 2007 in the PCI, Specialty Plastics
(“SP”) and CASPI segments partially offset by increases in the Performance
Polymers and Fibers segments, as higher raw material and energy costs more than
offset higher selling prices. Gross profit included accelerated
depreciation costs of $9 million and $49 million in 2008 and 2007, respectively,
resulting from the previously reported shutdowns of the cracking units in
Longview, Texas and of higher cost PET polymer assets in Columbia, South
Carolina. The Company's 2008 raw material and energy costs increased
by approximately $600 million compared with 2007.
An
unprecedented decline in demand caused lower sales volume and historically low
capacity utilization resulting in higher unit costs in fourth quarter
2008. The historically low capacity utilization rates in the fourth
quarter negatively affected the average capacity utilization rate for the full
year 2008.
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||
|
Selling,
General and Administrative Expenses ("SG&A")
|
$
|
419
|
$
|
420
|
--
%
|
|
|
Research
and Development Expenses ("R&D")
|
158
|
156
|
1
%
|
|||
|
$
|
577
|
$
|
576
|
--
%
|
||
|
As
a percentage of sales
|
9
%
|
8
%
|
Asset
Impairments and Restructuring Charges, Net
Asset impairments and
restructuring charges totaled $46 million and $112 million in 2008 and 2007,
respectively. Asset impairments and restructuring charges in
2008 were primarily for restructuring at the South Carolina facility in the
Performance Polymers segment, severance and pension costs from the decision to
close a previously impaired site in the United Kingdom in the PCI segment, and
severance costs resulting from a corporate severance program. Asset
impairments and restructuring charges in 2007 were primarily costs associated
with the PET manufacturing facilities in Mexico and Argentina sold in fourth
quarter 2007. For more information regarding asset impairments and
restructuring charges, primarily related to recent strategic decisions and
actions, see the Performance Polymers and PCI segments discussion and Note 18,
"Asset Impairments and Restructuring Charges, Net", to the Company's
consolidated financial statements in Part II, Item 8 of this 2008 Annual Report
on Form 10-K.
Other
Operating Income, Net
Other
operating income, net for 2008 reflects proceeds of $16 million from the sale of
certain mineral rights at an operating manufacturing site.
40
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
Earnings
|
2008
|
2007
|
Change
|
||||
|
(Dollars
in millions)
|
||||||
|
Operating
earnings
|
$
|
519
|
$
|
504
|
3
%
|
|
|
Accelerated
depreciation included in cost of goods sold
|
9
|
49
|
||||
|
Asset
impairments and restructuring charges, net
|
46
|
112
|
||||
|
Other
operating income, net
|
(16)
|
--
|
||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairment and
restructuring charges, net, and other operating income,
net
|
$
|
558
|
$
|
665
|
(16)
%
|
|
Interest
Expense, Net
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
|||
|
Gross
interest costs
|
$
|
106
|
$
|
113
|
||
|
Less:
capitalized interest
|
12
|
10
|
||||
|
Interest
expense
|
94
|
103
|
(9)
%
|
|||
|
Interest
income
|
24
|
41
|
||||
|
Interest
expense, net
|
$
|
70
|
$
|
62
|
13
%
|
Gross
interest costs for 2008 compared to 2007 were lower due to lower average
interest rates and lower average borrowings. Interest income in 2008
compared to 2007 was lower due to lower average invested cash balances and lower
average interest rates.
For 2009,
the Company expects net interest expense to increase compared with 2008
primarily due to lower interest income, driven by lower average invested cash
balances and lower average interest rates.
Other
Charges (Income), Net
|
(Dollars
in millions)
|
2008
|
2007
|
||
|
Foreign
exchange transactions losses (gains)
|
$
|
17
|
$
|
(11)
|
|
Equity
and business venture investments losses (gains)
|
6
|
(12)
|
||
|
Other,
net
|
(3)
|
(5)
|
||
|
Other
charges (income), net
|
$
|
20
|
$
|
(28)
|
Included
in other charges (income), net are gains or losses on foreign exchange
transactions, results from equity investments, gains on the sale of business
venture investments, write-downs to fair value of certain technology business
venture investments due to other than temporary declines in value, other
non-operating income or charges related to Holston Defense Corporation
("HDC"), gains from the sale of non-operating assets, royalty income,
certain litigation costs, fees on securitized receivables, other non-operating
income, and other miscellaneous items.
Equity
and business venture investments (gains) losses include gains of $4 million in
both 2008 and 2007 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 2008 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)
|
2008
|
2007
|
Change
|
|||
|
Provision
for income taxes
|
$
|
101
|
$
|
149
|
(32)
%
|
|
|
Effective
tax rate
|
24
%
|
32
%
|
The 2008
effective tax rate reflects the Company’s tax rate on reported earnings from
continuing operations before income tax, excluding discrete items, of 27
percent. The 2008 effective tax rate was impacted by a $16 million
benefit resulting from a gasification investment tax credit of $11 million and a
research and development credit of $5 million, a $14 million benefit from state
income tax credits (net of federal tax effect), and a $6 million benefit from
the settlement of a non-U.S. income tax audit.
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 Company expects
its effective tax rate in 2009 will be between 30 and 33 percent, including
investment tax credits and research and development tax credits.
|
Earnings
from Continuing Operations
|
||||
|
(Dollars
in millions)
|
2008
|
2007
|
||
|
Earnings
from continuing operations
|
$
|
328
|
$
|
321
|
|
Accelerated
depreciation included in cost of goods sold, net of tax
|
6
|
31
|
||
|
Asset
impairments and restructuring charges, net of tax
|
32
|
71
|
||
|
Other
operating income, net
|
(10)
|
--
|
||
|
Net
deferred tax benefits related to the previous divestiture of
businesses
|
(14)
|
--
|
||
|
Earnings
from continuing operations excluding accelerated depreciation costs, net
of tax, asset impairments and restructuring charges, net of
tax, other operating income, net, and net deferred tax benefits
related to the previous divesture of businesses
|
$
|
342
|
$
|
423
|
Net
Earnings
|
(Dollars
in millions)
|
2008
|
2007
|
||
|
Earnings
from continuing operations
|
$
|
328
|
$
|
321
|
|
Loss
from discontinued operations, net of tax
|
--
|
(10)
|
||
|
Gain
(loss) on disposal of discontinued operations, net of tax
|
18
|
(11)
|
||
|
Net
earnings
|
$
|
346
|
$
|
300
|
42
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The gain
on disposal of discontinued operations, net of tax of $18 million in 2008 is
from the sale of the Company's PET polymers and PTA production facilities in the
Netherlands and its PET production facility in the United Kingdom and related
businesses for approximately $329 million in first quarter 2008. The
loss on disposal of discontinued operations, net of tax of $11 million in 2007
is from the sale of the Company's PET polymers manufacturing facility in Spain
for approximately $42 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, see Note 2, "Discontinued
Operations and Assets Held for Sale", to the Company's consolidated financial
statements in Part II, Item 8 of this 2008 Annual Report on Form
10-K.
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 2008 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)
|
2008
|
2007
|
$
|
%
|
|||||
|
Sales
|
$
|
1,524
|
$
|
1,451
|
$
|
73
|
5
%
|
||
|
Volume
effect
|
(148)
|
(10)
%
|
|||||||
|
Price
effect
|
167
|
12
%
|
|||||||
|
Product
mix effect
|
34
|
2
%
|
|||||||
|
Exchange
rate effect
|
20
|
1
%
|
|||||||
|
Operating
earnings
|
202
|
235
|
(33)
|
(14)
%
|
|||||
|
Asset
impairments and restructuring gains
|
--
|
(1)
|
(1)
|
||||||
|
Other
operating income
|
(5)
|
--
|
(5)
|
||||||
|
Operating
earnings excluding asset impairments and restructuring gains and other
operating income
|
197
|
234
|
(37)
|
(16)
%
|
|||||
Sales
revenue for 2008 increased $73 million compared to 2007 due to higher selling
prices partially offset by lower sales volume. The higher selling
prices were in response to higher raw material and energy costs, particularly
for propane, propylene, and adhesives raw materials. Sales volume
declined due primarily to the recession in North America and the divestiture of
certain adhesives product lines, partially offset by slightly higher sales
volume in Asia Pacific.
Excluding
asset impairments and restructuring gains and other operating income, operating
earnings for 2008 decreased $37 million compared to 2007 due primarily to lower
sales volume and lower capacity utilization, particularly in fourth quarter,
causing higher unit costs. Other operating income for 2008 reflects
the segment’s allocated portion of proceeds from the sale of certain mineral
rights at an operating manufacturing site.
43
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
margins, typically in the range of 15 percent to 20 percent, were slightly below
the anticipated range in 2008 due primarily to the impact of the recession in
North America, particularly in the automotive and construction
industries.
|
Fibers
Segment
|
|||||||||
|
Change
|
|||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$
|
%
|
|||||
|
Sales
|
$
|
1,045
|
$
|
999
|
$
|
46
|
5
%
|
||
|
Volume
effect
|
(11)
|
(1)
%
|
|||||||
|
Price
effect
|
59
|
6
%
|
|||||||
|
Product
mix effect
|
(3)
|
--
%
|
|||||||
|
Exchange
rate effect
|
1
|
--
%
|
|||||||
|
Operating
earnings
|
238
|
238
|
--
|
--
%
|
|||||
Sales
revenue for 2008 increased $46 million compared to 2007 due to higher
selling prices. The higher selling prices were in response to higher
raw material and energy costs, particularly for wood pulp and
coal. An increase in acetate tow sales volume was offset by a
decrease in acetyl chemical and acetate yarn sales volume.
Operating
earnings for 2008 were flat compared to 2007, as an increase in acetate tow
sales volume was offset by a decrease in acetyl chemical and acetate yarn sales
volume.
The
capacity expansion of the Company's acetate tow plant in Workington, England was
completed in 2008, expanding Eastman's world-wide capacity by five percent,
better enabling Eastman to serve existing customers in Western Europe and the
growing demand in Eastern Europe.
In
December 2008, the Company announced an alliance with SK to form a company to
acquire and operate a cellulose acetate tow manufacturing facility and related
business, with the facility to be constructed by SK in Korea. Eastman
will have majority ownership and will operate the
facility. Construction began in first quarter 2009 and should be
completed during the second quarter 2010.
Despite
current economic conditions, the Fibers segment had operating margins in its
typical 20 percent to 25 percent range in 2008.
44
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
PCI
Segment
|
|||||||||
|
Change
|
|||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$
|
%
|
|||||
|
Sales
|
$
|
2,160
|
$
|
2,095
|
$
|
65
|
3
%
|
||
|
Volume
effect
|
(219)
|
(10)
%
|
|||||||
|
Price
effect
|
289
|
14
%
|
|||||||
|
Product
mix effect
|
(15)
|
(1)
%
|
|||||||
|
Exchange
rate effect
|
10
|
--
%
|
|||||||
|
Sales
– contract ethylene sales
|
314
|
314
|
--
|
||||||
|
Sales
– excluding listed items
|
1,846
|
1,781
|
65
|
4
%
|
|||||
|
Volume
effect
|
(135)
|
(8)
%
|
|||||||
|
Price
effect
|
225
|
13
%
|
|||||||
|
Product mix
effect
|
(35)
|
(2)
%
|
|||||||
|
Exchange rate
effect
|
10
|
1
%
|
|||||||
|
Operating
earnings
|
153
|
220
|
(67)
|
(31)
%
|
|||||
|
Accelerated
depreciation costs included in cost of goods sold
|
5
|
19
|
(14)
|
||||||
|
Asset
impairments and restructuring charges (gains)
|
22
|
(1)
|
23
|
||||||
|
Other
operating income
|
(9)
|
--
|
(9)
|
||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges (gains), and other operating income
|
171
|
238
|
(67)
|
(28)
%
|
|||||
Sales
revenue for 2008 increased $65 million compared to 2007. Excluding
contract ethylene sales under the transition agreement resulting from the
divestiture of the Performance Polymers segment's PE business in fourth quarter
2006, sales revenue increased due to higher selling prices in response to higher
raw material and energy costs, partially offset by lower sales volumes,
particularly in fourth quarter 2008. Lower sales volumes
were primarily in olefin-based derivative products, particularly for Asia,
and bulk olefins product lines related to the previously reported shutdown of a
cracking unit in fourth quarter 2007. Contract ethylene sales
revenues remained unchanged as higher selling prices offset lower sales volume
resulting from the shutdown of one of the Company’s cracking units.
45
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Excluding
accelerated depreciation costs, asset impairments and restructuring charges
(gains) and other income, operating earnings in 2008 decreased $67 million
compared to 2007. The decline was primarily in the Asia Pacific
region due to lower sales volume, particularly for olefin-based derivative
product lines, and higher raw material and energy costs partially offset by
higher selling prices. Sales revenue and operating earnings for 2007
included $22 million of earnings from the licensing of acetyl technology.
In addition, 2007 operating earnings were impacted by favorable market
conditions. In 2007, contract ethylene sales had minimal impact on
operating earnings. The accelerated depreciation costs were related
to the continuation of the previously reported planned staged phase-out of older
cracking units at the Company's Longview, Texas facility. Asset
impairments and restructuring charges for 2008 consisted primarily of severance
and pension costs from the decision to close a previously impaired site in the
United Kingdom. Asset impairments and restructuring gains for 2007 were
primarily related to severance costs related to a voluntary reduction in force
in 2006. Other operating income for 2008 reflects the segment’s
allocated portion of proceeds from the sale of certain mineral rights at an
operating manufacturing site.
Despite
current economic conditions, the PCI segment had operating margins in its
typical 5 percent to 10 percent range.
Performance
Polymers Segment
|
Change
|
|||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$
|
%
|
|||||
|
Sales
|
$
|
1,074
|
$
|
1,413
|
$
|
(339)
|
(24)
%
|
||
|
Volume
effect
|
(369)
|
(26)
%
|
|||||||
|
Price
effect
|
51
|
4
%
|
|||||||
|
Product
mix effect
|
(23)
|
(2)
%
|
|||||||
|
Exchange
rate effect
|
2
|
--
%
|
|||||||
|
Sales
from Mexico and Argentina PET manufacturing facilities (1)
|
--
|
413
|
(413)
|
||||||
|
Sales
– contract polymer intermediates sales (2)
|
138
|
15
|
123
|
||||||
|
Sales
– U.S. PET manufacturing facilities
|
936
|
985
|
(49)
|
(5)
%
|
|||||
|
Volume
effect
|
(115)
|
(12)
%
|
|||||||
|
Price
effect
|
47
|
5
%
|
|||||||
|
Product mix
effect
|
17
|
2
%
|
|||||||
|
Exchange rate
effect
|
2
|
--
%
|
|||||||
|
Operating
loss (3)
|
(57)
|
(207)
|
150
|
73
%
|
|||||
|
Operating
loss - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)
|
(3)
|
(127)
|
124
|
98
%
|
|||||
|
Operating
loss - U.S. PET manufacturing facilities (3)
|
(54)
|
(80)
|
26
|
33
%
|
|||||
|
(1)
|
Sales
revenue and operating results for 2007 includes sales revenue from PET
manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina divested in fourth quarter
2007.
|
|
(2)
|
Sales
revenue for 2008 includes 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 in
fourth quarter 2007.
|
|
(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.
|
46
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
Performance
Polymers Segment
|
||||||||
|
Change
|
||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$
|
%
|
||||
|
Operating
loss excluding certain items (1)(2)
|
$
|
(29)
|
$
|
(65)
|
$
|
36
|
55
%
|
|
|
Operating
loss excluding certain items - from sales from Mexico and Argentina PET
manufacturing facilities (1)(3)(4)
|
--
|
(12)
|
12
|
100
%
|
||||
|
Operating
loss excluding certain items - U.S. PET manufacturing
facilities (1)(5)
|
(29)
|
(53)
|
24
|
45
%
|
||||
|
(1)
|
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.
|
|
(2)
|
Items
are accelerated depreciation costs and asset impairments and restructuring
charges, net. In 2008, asset impairments and restructuring
charges of $24 million related to restructuring at the South Carolina
facility using IntegRexTM
technology, the divested PET manufacturing facilities in Mexico and
Argentina, and charges related to a corporate severance program, 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. Accelerated
depreciation costs of $4 million resulted from restructuring actions
associated with higher cost PET polymer assets in Columbia, South
Carolina. 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.
|
|
(3)
|
Operating
results for 2007 includes sales revenue from PET manufacturing facilities
and related businesses in Cosoleacaque, Mexico and Zarate, Argentina
divested in fourth quarter 2007.
|
|
(4)
|
Items
are asset impairments and restructuring charges (gains) relating to the
Mexico and Argentina PET manufacturing facilities, and were $3 million and
$115 million in 2008 and 2007,
respectively.
|
|
(5)
|
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 $21 million and $(2) million in 2008 and 2007,
respectively. Accelerated depreciation costs were $4 million
and $29 million in 2008 and 2007,
respectively.
|
Sales
revenue for 2008 decreased $339 million compared to 2007 due to the divestiture
of PET manufacturing facilities and related businesses in Cosoleacaque, Mexico
and Zarate, Argentina.
For U.S.
PET manufacturing facilities, excluding contract polymer intermediates sales to
the buyer of the divested Mexico and Argentina facilities and sales from the
divested PET facilities in Mexico and Argentina, sales revenue for 2008
decreased $49 million compared to 2007 due to lower sales volume resulting from
the shutdown of higher cost PET assets in the first half of 2008, weaker demand
for bottled carbonated soft drinks, and lighter-weight water
bottles.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating expense, operating results for 2008 for U.S. PET manufacturing
facilities improved $24 million compared to 2007 due primarily to actions
at the Company’s South Carolina PET facility, including the PET facility based
on IntegRex™ technology and higher selling prices, partially offset by higher
raw material and energy costs and higher unit costs due to lower capacity
utilization particularly in fourth quarter.
Manufacturing
ParaStarTM PET
resins, the 350,000 metric ton PET manufacturing facility utilizing
IntegRexTM technology in Columbia,
South Carolina was fully operational in first quarter of 2007. A
previously disclosed reduction of $30 million in annual costs at this facility
was completed in second quarter 2008. The debottleneck of the PET
facility based on IntegRexTM technology was
successfully completed in fourth quarter 2008, expanding annual capacity of the
plant to 525,000 metric tons of ParaStarTM PET
resins.
47
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
SP
Segment
|
|||||||||
|
Change
|
|||||||||
|
(Dollars
in millions)
|
2008
|
2007
|
$
|
%
|
|||||
|
Sales
|
$
|
923
|
$
|
872
|
$
|
51
|
6
%
|
||
|
Volume
effect
|
(9)
|
(1)
%
|
|||||||
|
Price
effect
|
28
|
3
%
|
|||||||
|
Product
mix effect
|
16
|
2
%
|
|||||||
|
Exchange
rate effect
|
16
|
2
%
|
|||||||
|
Operating
earnings
|
35
|
65
|
(30)
|
(46)
%
|
|||||
|
Accelerated
depreciation included in cost of goods sold
|
--
|
1
|
(1)
|
||||||
|
Asset
impairments and restructuring charges
|
--
|
1
|
(1)
|
||||||
|
Other
operating income
|
(2)
|
--
|
(2)
|
||||||
|
Operating
earnings excluding accelerated depreciation costs, asset impairments and
restructuring charges, net, and other operating income
|
33
|
67
|
(34)
|
(51)
%
|
|||||
Sales
revenue for 2008 increased $51 million compared to 2007 due to higher selling
prices, a favorable exchange rate and a favorable shift in product
mix. Selling prices increased in response to higher raw material and
energy costs, particularly for paraxylene and ethylene glycol. While
sales volume in full year 2008 decreased only slightly, increases through nine
months 2008 compared to nine months 2007 were more than offset by a sharp
decline in sales volume in fourth quarter 2008 attributed to the global
recession particularly impacting end-use demand for consumer and durable goods
(appliances and electronics), in-store fixtures and displays, and specialty
packaging.
Excluding
accelerated depreciation costs, asset impairments and restructuring charges and
other operating income, operating earnings for 2008 decreased $34 million
compared to 2007 due to higher raw material and energy costs and lower capacity
utilization resulting in higher unit costs, particularly in fourth quarter
2008. The 2008 operating results included $2 million in other
operating income related to the segment’s allocated portion of proceeds from the
sale of certain mineral rights at an operating manufacturing site. The 2007
operating results included $1 million in asset impairment and restructuring
costs primarily for the Spain cyclohexane dimethanol ("CHDM") facility and $1
million of accelerated depreciation costs for restructuring actions associated
with higher cost PET polymer assets in Columbia, South Carolina.
The SP
segment is progressing with the introduction of its new copolyester, Eastman
TritanTM
copolyester, including a new 30,000 metric ton TritanTM
manufacturing facility expected to be online in 2010.
48
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
(Dollars
in millions)
|
2008
|
2007
|
Change
|
Volume
Effect
|
Price
Effect
|
Product
Mix
Effect
|
Exchange
Rate
Effect
|
|||||||
|
United
States and Canada
|
$
|
4,065
|
$
|
4,043
|
1
%
|
(12)
%
|
12
%
|
1
%
|
--
%
|
|||||
|
Asia
Pacific
|
1,185
|
1,103
|
8
%
|
1
%
|
6
%
|
--
%
|
1
%
|
|||||||
|
Europe,
Middle East, and Africa
|
977
|
932
|
5
%
|
(2)
%
|
1
%
|
2
%
|
4
%
|
|||||||
|
Latin
America
|
499
|
752
|
(34)
%
|
(33)
%
|
4
%
|
(5)
%
|
--
%
|
|||||||
|
$
|
6,726
|
$
|
6,830
|
(1)
%
|
(11)
%
|
9
%
|
--
%
|
1
%
|
Sales
revenue in the United States and Canada increased slightly primarily due to
higher selling prices in all segments and a favorable shift in product mix,
particularly in the CASPI segment, partially offset by lower sales volumes in
all segments.
Sales
revenue in Asia Pacific increased primarily due to higher selling prices in all
segments in response to higher raw material and energy costs. Sales
volume increased in the CASPI, Fibers and SP segments, partially offset by lower
sales volume primarily in the PCI segment.
Sales
revenue in Europe, the Middle East and Africa increased primarily due to the
effect of the foreign currency exchange rates, particularly in the CASPI, SP and
Fibers segments.
Sales
revenue in Latin America decreased primarily due to lower sales volume,
particularly in the Performance Polymers segment. Excluding divested
PET manufacturing facilities and related businesses in Cosoleacaque, Mexico and
Zarate, Argentina and contract polymer intermediates sales to those facilities,
sales revenue increased 12 percent primarily due to higher selling prices in all
segments as a result of higher raw material and energy costs and higher sales
volume, particularly in the PCI segment. During fourth quarter 2007,
the Company sold its PET polymers production facilities in Mexico and Argentina
and the related businesses, which is expected to 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 sold a limited set
of PET products manufactured in the U.S. in certain Latin American markets
through 2008.
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 or 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 2008 Annual Report
on Form 10-K and Part II, Item 7A--"Quantitative and Qualitative Disclosures
About Market Risk."
49
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
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 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
%
|
19
%
|
||||
|
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
%
|
19
%
|
50
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 material 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
|
|||