First Quarter 2006 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
|
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended March 31, 2006
|
|
OR
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from ______________ to
______________
|
Commission
file number 1-12626
|
EASTMAN
CHEMICAL COMPANY
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
62-1539359
|
(State
or other jurisdiction of
|
|
(I.R.S.
employer
|
incorporation
or organization)
|
|
identification
no.)
|
|
|
|
200
South Wilcox Drive
|
|
|
Kingsport,
Tennessee
|
|
37660
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant’s
telephone number, including area code: (423)
229-2000
|
Indicate
by check mark whether the registrant (1) has filed all reports required
to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
YES
[X] NO [ ]
|
|
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (check one);
Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer
[
]
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act) YES [ ] NO
[X]
|
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
Class
|
|
Number
of Shares Outstanding at March 31, 2006
|
Common
Stock, par value $0.01 per share
|
|
81,758,708
|
(including
rights to purchase shares of Common Stock or Participating Preferred
Stock)
|
|
|
--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 42 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 41
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
|
|
|
|
Unaudited
Consolidated Statements of Earnings, Comprehensive Income and Retained
Earnings
|
3
|
|
Consolidated
Statements of Financial Position
|
4
|
|
Unaudited
Consolidated Statements of Cash Flows
|
5
|
|
Notes
to Unaudited Consolidated Financial Statements
|
6
|
|
|
|
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
|
|
|
4.
|
Controls
and Procedures
|
37
|
PART
II. OTHER INFORMATION
1.
|
Legal
Proceedings
|
38
|
|
|
|
1A.
|
Risk
Factors
|
38
|
|
|
|
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
|
|
|
6.
|
Exhibits
|
41
|
SIGNATURES
UNAUDITED
CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE
INCOME AND RETAINED EARNINGS
|
|
First
Quarter
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
|
|
|
|
Sales
|
$
|
1,803
|
$
|
1,762
|
Cost
of sales
|
|
1,472
|
|
1,363
|
Gross
profit
|
|
331
|
|
399
|
|
|
|
|
|
Selling
and general administrative expenses
|
|
98
|
|
109
|
Research
and development expenses
|
|
42
|
|
39
|
Asset
impairments and restructuring charges, net
|
|
7
|
|
9
|
Other
operating income
|
|
-
|
|
(2)
|
Operating
earnings
|
|
184
|
|
244
|
|
|
|
|
|
Interest
expense, net
|
|
20
|
|
30
|
Income
in equity investment in Genencor
|
|
--
|
|
(2)
|
Other
income, net
|
|
(1)
|
|
(1)
|
Earnings
before income taxes
|
|
165
|
|
217
|
Provision
for income taxes
|
|
60
|
|
55
|
Net
earnings
|
$
|
105
|
$
|
162
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
Basic
|
$
|
1.28
|
$
|
2.04
|
Diluted
|
$
|
1.27
|
$
|
2.00
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
Net
earnings
|
$
|
105
|
$
|
162
|
Other
comprehensive income (loss)
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
17
|
|
(23)
|
Change
in minimum pension liability, net of tax
|
|
--
|
|
(1)
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
3
|
|
12
|
Total
other comprehensive income (loss)
|
|
20
|
|
(12)
|
Comprehensive
income
|
$
|
125
|
$
|
150
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
Retained
earnings at beginning of period
|
$
|
1,923
|
$
|
1,509
|
Net
earnings
|
|
105
|
|
162
|
Cash
dividends declared
|
|
(36)
|
|
(35)
|
Retained
earnings at end of period
|
$
|
1,992
|
$
|
1,636
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
485
|
$
|
524
|
Trade
receivables, net of allowance of $16 and $20
|
|
635
|
|
575
|
Miscellaneous
receivables
|
|
80
|
|
81
|
Inventories
|
|
683
|
|
671
|
Other
current assets
|
|
46
|
|
73
|
Total
current assets
|
|
1,929
|
|
1,924
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
9,670
|
|
9,597
|
Less:
Accumulated depreciation
|
|
6,494
|
|
6,435
|
Net
properties
|
|
3,176
|
|
3,162
|
|
|
|
|
|
Goodwill
|
|
312
|
|
312
|
Other
noncurrent assets
|
|
365
|
|
375
|
Total
assets
|
$
|
5,782
|
$
|
5,773
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
993
|
$
|
1,047
|
Borrowings
due within one year
|
|
4
|
|
4
|
Total
current liabilities
|
|
997
|
|
1,051
|
|
|
|
|
|
Long-term
borrowings
|
|
1,587
|
|
1,621
|
Deferred
income tax liabilities
|
|
311
|
|
317
|
Post-employment
obligations
|
|
1,021
|
|
1,017
|
Other
long-term liabilities
|
|
149
|
|
155
|
Total
liabilities
|
|
4,065
|
|
4,161
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value - 350,000,000 shares authorized;
shares
issued
- 89,687,597 and 89,566,115 for 2006 and 2005,
respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
336
|
|
320
|
Retained
earnings
|
|
1,992
|
|
1,923
|
Accumulated
other comprehensive loss
|
|
(180)
|
|
(200)
|
|
|
2,149
|
|
2,044
|
Less:
Treasury stock at cost (8,035,660 shares for 2006 and 8,034,901 shares
for
2005)
|
|
432
|
|
432
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,717
|
|
1,612
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
5,782
|
$
|
5,773
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
Net
earnings
|
$
|
105
|
$
|
162
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
Depreciation
and amortization
|
|
74
|
|
76
|
Asset
impairments
|
|
6
|
|
1
|
Benefit
for deferred income taxes
|
|
22
|
|
(11)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Increase
in receivables
|
|
(55)
|
|
(56)
|
Increase
in inventories
|
|
(9)
|
|
(94)
|
Increase
(decrease) in trade payables
|
|
(36)
|
|
16
|
Decrease
in liabilities for employee benefits and incentive pay
|
|
(82)
|
|
(36)
|
Other
items, net
|
|
12
|
|
45
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
37
|
|
103
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
Additions
to properties and equipment
|
|
(78)
|
|
(50)
|
Proceeds
from sale of assets and investments
|
|
7
|
|
3
|
Additions
to capitalized software
|
|
(4)
|
|
(3)
|
Other
items, net
|
|
(1)
|
|
(1)
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(76)
|
|
(51)
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Net
increase in commercial paper, credit facility and other short-term
borrowings
|
|
35
|
|
6
|
Dividends
paid to stockholders
|
|
(36)
|
|
(35)
|
Proceeds
from stock option exercises and other items
|
|
1
|
|
46
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
--
|
|
17
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
(1)
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(39)
|
|
68
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
524
|
|
325
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
485
|
$
|
393
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ITEM
|
Page
|
|
|
Note
1. Basis of Presentation
|
7
|
Note
2. Inventories
|
7
|
Note
3. Other Noncurrent Assets and Liabilities
|
7
|
Note
4. Payables and Other Current Liabilities
|
8
|
Note
5. Provision for Income Taxes
|
8
|
Note
6. Borrowings
|
8
|
Note
7. Asset Impairments and Restructuring Charges, Net
|
9
|
Note
8. Pension and Other Post-Employment Benefits
|
10
|
Note
9. Environmental Matters
|
11
|
Note
10. Commitments
|
11
|
Note
11. Derivative Financial Instruments Held or Issued for Purposes
Other
Than Trading
|
12
|
Note
12. Stockholders' Equity
|
13
|
Note
13. Earnings and Dividends per Share
|
13
|
Note
14. Share-Based Compensation Awards
|
14
|
Note
15. Segment Information
|
17
|
Note
16. Legal Matters
|
19
|
Note
17. Recently Issued Accounting Standards
|
20
|
The
accompanying unaudited consolidated financial statements have been prepared
by
Eastman Chemical Company (the "Company" or "Eastman") in accordance and
consistent with the accounting policies stated in the Company's 2005 Annual
Report on Form 10-K and should be read in conjunction with the consolidated
financial statements in Part II, Item 8 of the Company’s 2005 Annual Report on
Form 10-K. In the opinion of the Company, all normal recurring adjustments
necessary for a fair presentation have been included in the unaudited
consolidated financial statements. The unaudited consolidated financial
statements are prepared in conformity with accounting principles generally
accepted in the United States and, of necessity, include some amounts that
are
based upon management estimates and judgments. Future actual results could
differ from such current estimates. The unaudited consolidated financial
statements include assets, liabilities, revenues and expenses of all
majority-owned subsidiaries and joint ventures. Eastman accounts for other
joint
ventures and investments in minority-owned companies where it exercises
significant influence on the equity basis. Intercompany transactions and
balances are eliminated in consolidation. The Company has reclassified certain
2005 amounts to conform to the 2006 presentation including the reclassification
of segment sales and operating earnings. For additional information, see Note
15
to the unaudited consolidated financial statements.
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
Finished
goods
|
$
|
666
|
$
|
664
|
Work
in process
|
208
|
|
207
|
Raw
materials and supplies
|
255
|
|
247
|
Total
inventories
|
1,129
|
|
1,118
|
LIFO
Reserve
|
(446)
|
|
(447)
|
Total
inventories
|
$
|
683
|
$
|
671
|
Inventories
valued on the LIFO method were approximately 65% of total inventories in both
periods.
3. |
OTHER
NONCURRENT ASSETS AND
LIABILITIES
|
The
Company has a 50 percent interest in and serves as the operating partner in
Primester, a joint venture which manufactures cellulose acetate at Eastman's
Kingsport, Tennessee plant. This investment is accounted for under the equity
method. During
fourth quarter 2005, the
Company provided a line of credit to the joint venture of up to $125 million,
which Primester fully utilized to repay the principal amount of the joint
venture's third-party borrowings, previously guaranteed by Eastman. The Company
holds an interest-bearing note receivable. Eastman's investment in the joint
venture was approximately $87 million and $86 million at March 31, 2006 and
December 31, 2005, respectively, which was comprised of the recognized portion
of the venture's accumulated deficits and the line of credit of $125 million.
Such amount was included in other noncurrent assets.
Eastman
also owns a 50 percent interest in Nanjing Yangzi Eastman Chemical Ltd.
(“Nanjing”), a company which manufactures Eastotac
hydrocarbon tackifying resins for the adhesives market. This joint venture
is
accounted for under the equity method and is included in other noncurrent
assets. At March 31, 2006 and December 31, 2005, the Company’s investment in
Nanjing was approximately $5 million.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. |
PAYABLES
AND OTHER CURRENT
LIABILITIES
|
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Trade
creditors
|
$
|
500
|
$
|
534
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
83
|
|
154
|
Accrued
taxes
|
|
63
|
|
49
|
Post-employment
obligations
|
|
121
|
|
134
|
Interest
payable
|
|
26
|
|
31
|
Bank
overdrafts
|
|
76
|
|
10
|
Other
|
|
124
|
|
135
|
Total
|
$
|
993
|
$
|
1,047
|
5. |
PROVISION
FOR INCOME TAXES
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
60
|
$
|
55
|
|
9%
|
Effective
tax rate
|
|
36%
|
|
25
%
|
|
|
The
first
quarter 2006 effective tax rate reflects the Company's expected tax rate on
reported operating earnings before income tax, excluding discrete items, of
approximately 35 percent. The implementation of Statement of Financial
Accounting Standard ("SFAS") No. 123(R), effective January 1, 2006, did not
have
a material effect on the Company's effective income tax rate in the first
quarter 2006. For additional information, see Note 14 to the unaudited
consolidated financial statements. Additionally,
the first quarter 2005 effective tax rate reflects a deferred tax benefit
resulting from the reversal of a capital loss carryforward valuation allowance.
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
6.30%
notes due 2018
|
|
179
|
|
185
|
7%
notes due 2012
|
|
138
|
|
142
|
7
1/4% debentures due 2024
|
|
497
|
|
497
|
7
5/8% debentures due 2024
|
|
200
|
|
200
|
7.60%
debentures due 2027
|
|
298
|
|
297
|
Credit
facility borrowings
|
|
189
|
|
214
|
Other
|
|
18
|
|
18
|
Total
borrowings
|
|
1,591
|
|
1,625
|
Borrowings
due within one year
|
|
(4)
|
|
(4)
|
Long-term
borrowings
|
$
|
1,587
|
$
|
1,621
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
March
31, 2006, the Company has credit facilities with various U.S. and foreign banks
totaling approximately $890 million as disclosed in Note 7 of Part II, Item
8 -
Financial Statements and Supplementary Data, of the 2005 Annual Report on Form
10-K. These credit facilities consist of a $700 million revolving credit
facility (the "Credit Facility"), which was amended in April 2006 to extend
the
expiration date to April 2011, as well as a 156 million Euro credit facility
("Euro Facility") which expires in December 2010. Borrowings under these credit
facilities are subject to interest at varying spreads above quoted market rates.
These credit facilities require facility fees on the total commitment that
are
based on Eastman's credit rating. In addition, these credit facilities contain
a
number of covenants and events of default, including the maintenance of certain
financial ratios. The Company's combined revolving credit facility borrowings
at
March 31, 2006 and December 31, 2005 were $189 million and $214 million at
a
weighted average interest rate of 2.76 percent and 3.01 percent,
respectively.
The
Credit Facility provides liquidity support for commercial paper borrowings
and
general corporate purposes. Accordingly, any outstanding commercial paper
borrowings reduce borrowings available under the Credit Facility. Since the
Credit Facility expires in April 2011, any commercial paper borrowings supported
by the Credit Facility are classified as long-term borrowings because the
Company has the ability to refinance such borrowings on a long-term basis.
In
the
third quarter 2003 and the second quarter of 2004, the Company entered into
interest rate swaps that converted the effective fixed interest rate to variable
rates of $250 million and $100 million, respectively, of the $400 million 7%
notes due in 2012. The Company settled $50 million of these interest rate swaps
during the first quarter 2005. Cash proceeds received and the gain resulting
from the settlement were immaterial. During the second quarter 2005, the Company
received cash proceeds and recognized a gain of approximately $2 million
resulting from the settlement of $155 million of these interest rate swaps
in
connection with the early extinguishment of debt. The average effective interest
rate on the variable portion of the notes due 2012 was 7.66 percent at March
31,
2006 and 7.22 percent at December 31, 2005. The recording of the fair value
of
the interest rate swaps and the corresponding debt resulted in an approximately
$3 million decrease in long-term borrowings and an approximately $3 million
increase in other long-term liabilities in the first quarter of 2006. The fair
values of the interest rate swaps were a liability of approximately $7 million
at March 31, 2006 and $4 million at December 31, 2005.
In
the
fourth quarter 2003, the Company entered into interest rate swaps that converted
the effective fixed interest rate of $150 million of the $250 million 6.30%
notes due in 2018 to variable rates such that the average rate on the variable
portion was 6.07 percent at March 31, 2006 and 5.63 percent at December 31,
2005. The recording of the fair value of the interest rate swaps and the
corresponding debt resulted in an approximately $6 million decrease in long-term
borrowings and an approximately $6 million increase in other long-term
liabilities in the first quarter of 2006. The fair values of the interest rate
swaps were liabilities of $1 million at March 31, 2006, and assets of $5 million
at December 31, 2005.
7. |
ASSET
IMPAIRMENTS AND RESTRUCTURING CHARGES, NET
|
In
the
first quarter 2006, asset impairments and restructuring charges totaled $7
million, relating primarily to the divestiture of a previously closed
manufacturing facility. In
the
first quarter 2005, the Company recorded approximately $9 million in
restructuring charges and fixed asset impairments. Of these charges, $4 million
related to the previously announced decision to restructure and reintegrate
Cendian Corporation's ("Cendian") logistics activities. The carrying value
of the fixed assets was written down to fair value, as established by market
data. The Company also recognized approximately $4 million in severance charges
within its Performance Chemicals and Intermediates (“PCI”) segment related to
the expected severance of approximately 90 employees at the Company's
Batesville, Arkansas manufacturing facility. The decision to separate these
employees was made in order to achieve a more competitive cost structure. Also
in first quarter 2005, the Company recognized approximately $1 million in site
closure costs related to previously announced closures of certain manufacturing
facilities.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Changes
in Reserves for Asset Impairments, Restructuring Charges, and Severance
Charges
The
following table summarizes the beginning reserves, charges to and changes in
estimates to the reserves as described above, and the cash and non-cash
reductions to the reserves attributable to asset impairments and the cash
payments for severance and site closure costs for the full year 2005 and the
first quarter 2006:
(Dollars
in millions)
|
|
Balance
at
January
1, 2005
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
12
|
$
|
(12)
|
$
|
--
|
$
|
--
|
Severance
costs
|
|
26
|
|
3
|
|
--
|
|
(26)
|
|
3
|
Site
closure and other restructuring costs
|
|
9
|
|
18
|
|
(1)
|
|
(19)
|
|
7
|
Total
|
$
|
35
|
$
|
33
|
$
|
(13)
|
$
|
(45)
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
January
1, 2006
|
|
Provision/
Adjustments
|
|
Non-cash
Reductions
|
|
Cash
Reductions
|
|
Balance
at
March
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
6
|
|
(6)
|
|
--
|
$
|
--
|
Severance
costs
|
|
3
|
|
--
|
|
--
|
|
--
|
|
3
|
Site
closure and other restructuring costs
|
|
7
|
|
1
|
|
--
|
|
(1)
|
|
7
|
Total
|
$
|
10
|
$
|
7
|
|
(6)
|
|
(1)
|
$
|
10
|
A
majority of the remaining severance and site closure costs is expected to be
applied to the reserves within one year.
8. |
PENSION
AND OTHER POST-EMPLOYMENT
BENEFITS
|
Eastman
maintains defined benefit plans that provide eligible employees with retirement
benefits. Costs recognized for these benefits are recorded using estimated
amounts, which may change as actual costs derived for the year are
determined.
PENSION
PLANS
Below
is
a summary of the components of net periodic benefit cost recognized for
Eastman's significant defined benefit pension plans:
Summary
of Benefit Costs
|
|
|
|
|
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
Service
cost
|
$
|
11
|
$
|
10
|
Interest
cost
|
|
20
|
|
20
|
Expected
return on assets
|
|
(21)
|
|
(19)
|
Amortization
of:
|
|
|
|
|
Prior
service credit
|
|
(2)
|
|
(3)
|
Actuarial
loss
|
|
9
|
|
9
|
Net
periodic benefit cost
|
$
|
17
|
$
|
17
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT
WELFARE PLANS
Eastman
provides life insurance and health care benefits for eligible retirees, and
health care benefits for retirees' eligible survivors. In general, Eastman
provides those benefits to retirees eligible under the Company's U.S. pension
plans. A few of the Company's non-U.S. operations have supplemental health
benefit plans for certain retirees, the cost of which is not significant to
the
Company. Costs recognized for these benefits are recorded using estimated
amounts, which may change as actual costs derived for the year are determined.
Below is a summary of the components of net periodic benefit cost recognized
for
the Company’s U.S. plans:
Summary
of Benefit Costs
|
|
|
|
|
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
Service
cost
|
$
|
2
|
$
|
2
|
Interest
cost
|
|
11
|
|
11
|
Amortization
of:
|
|
|
|
|
Prior
service credit
|
|
(6)
|
|
(6)
|
Actuarial
loss
|
|
4
|
|
5
|
Net
periodic benefit cost
|
$
|
11
|
$
|
12
|
Certain
Eastman manufacturing sites generate hazardous and nonhazardous wastes, the
treatment, storage, transportation, and disposal of which are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required
to
incur costs for environmental remediation and closure and postclosure under
the
federal Resource Conservation and Recovery Act. Reserves for environmental
contingencies have been established in accordance with Eastman’s policies
described in Note 1 to the consolidated financial statements in Part II, Item
8
of the Company's 2005 Annual Report on Form 10-K. Because of expected sharing
of
costs, the availability of legal defenses, and the Company’s preliminary
assessment of actions that may be required, it does not believe its liability
for these environmental matters, individually or in the aggregate, will be
material to the Company’s consolidated financial position, results of operations
or cash flows. The Company’s reserve for environmental contingencies was $53
million and $51 million at March 31, 2006 and December 31, 2005, respectively,
representing the minimum or best estimate for remediation costs and the best
estimate accrued to date over the facilities’ estimated useful lives for asset
retirement obligation costs. Estimated future environmental expenditures for
remediation costs range from the minimum or best estimate of $20 million to
the
maximum of $41 million at March 31, 2006 and the minimum or best estimate of
$21
million to the maximum of $42 million at December 31, 2005.
Purchasing
Obligations and Lease Commitments
At
March
31, 2006, the Company had various purchase obligations totaling approximately
$1.7 billion over a period of approximately 15 years for materials, supplies,
and energy incident to the ordinary conduct of business. The Company also had
various lease commitments for property and equipment under cancelable,
noncancelable, and month-to-month operating leases totaling approximately $197
million over a period of several years. Of the total lease commitments,
approximately 15 percent relate to machinery and equipment, including computer
and communications equipment and production equipment; approximately 50 percent
relate to real property, including office space, storage facilities and land;
and approximately 35 percent relate to vehicles, primarily railcars.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accounts
Receivable Securitization Program
In
1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in domestic trade
accounts receivable. Receivables sold to the third party totaled $200 million
at
March 31, 2006 and December 31, 2005. Undivided interests in designated
receivable pools were sold to the purchaser with recourse limited to the
purchased interest in the receivable pools. Average monthly proceeds from
collections reinvested in the continuous sale program were approximately $320
million and $293 million in the first quarter 2006 and 2005, respectively.
Guarantees
Interpretation
No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), clarifies
the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to
the guarantor’s accounting for, and disclosure of, the issuance of certain types
of guarantees.
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of
the
related assets. Under these operating leases, the residual value guarantees
at
March 31, 2006 totaled $85 million and consisted primarily of leases for
railcars, aircraft, and other equipment. The Company believes, based on current
facts and circumstances, that a material payment pursuant to such guarantees
is
remote. Leases with guarantee amounts totaling $4 million, $27 million, and
$54
million will expire in 2006, 2008, and 2012, respectively.
Variable
Interest Entities
The
Company has evaluated material relationships and has concluded that the entities
are not Variable Interest Entities ("VIEs") or, in the case of Primester, a
joint venture which manufactures cellulose acetate at the Company's Kingsport,
Tennessee plant, the Company is not the primary beneficiary of the VIE. As
such,
in accordance with Interpretation No. 46R "Consolidation of Variable Interest
Entities" ("FIN 46R"), the Company is not required to consolidate these
entities. In addition, the Company has evaluated long-term purchase obligations
with two entities that may be VIEs at March 31, 2006. These potential VIEs
are
joint ventures from which the Company has purchased raw materials and utilities
for several years and purchases approximately $60 million of raw materials
and
utilities on an annual basis. The Company has no equity interest in these
entities and has confirmed that one party to each of these joint ventures does
consolidate the potential VIE. However, due to competitive and other reasons,
the Company has not been able to obtain the necessary financial information
to
determine whether the entities are VIEs, and if one or both are VIEs, whether
or
not the Company is the primary beneficiary.
11. |
DERIVATIVE
FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER
THAN
TRADING
|
Hedging
Programs
Financial
instruments held as part of the hedging programs discussed below are recorded
at
fair value based upon comparable market transactions as quoted by
brokers.
The
Company is exposed to market risk, such as changes in currency exchange rates,
raw material and energy costs and interest rates. The Company uses various
derivative financial instruments pursuant to the Company's hedging policies
to
mitigate these market risk factors and their effect on the cash flows of the
underlying transactions. Designation is performed on a specific exposure basis
to support hedge accounting. The changes in fair value of these hedging
instruments are offset in part or in whole by corresponding changes in the
cash
flows of the underlying exposures being hedged. The Company does not hold or
issue derivative financial instruments for trading purposes. For further
information, see Note 9 to the consolidated financial statements in Part II,
Item 8 of the Company's 2005 Annual Report on Form 10-K.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At
March
31, 2006, mark-to-market losses from raw material, currency and certain interest
rate hedges that were included in accumulated other comprehensive loss totaled
approximately $3 million. If realized, substantially all of these losses will
be
reclassified into earnings during the next 12 months. The mark-to-market gains
or losses on non-qualifying, excluded and ineffective portions of hedges are
immediately recognized in cost of sales or other income and charges. Such
amounts did not have a material impact on earnings during the first quarter
2006.
A
reconciliation of the changes in stockholders’ equity for the first three months
2006 is provided below:
(Dollars
in millions)
|
Common
Stock at Par Value
$
|
Paid-in
Capital
$
|
Retained
Earnings
$
|
Accumulated
Other Comprehensive Income (Loss)
$
|
Treasury
Stock at Cost
$
|
Total
Stockholders' Equity
$
|
Balance
at December 31, 2005
|
1
|
320
|
1,923
|
(200)
|
(432)
|
1,612
|
|
|
|
|
|
|
|
Net
Earnings
|
--
|
--
|
105
|
--
|
--
|
105
|
Cash
Dividends Declared
|
--
|
--
|
(36)
|
--
|
--
|
(36)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
20
|
--
|
20
|
Stock
Option Exercises and Other Items (1)
|
--
|
16
|
--
|
--
|
--
|
16
|
Balance
at March 31, 2006
|
1
|
336
|
1,992
|
(180)
|
(432)
|
1,717
|
(1)
The tax
benefits relating to the difference between the amounts deductible for federal
income taxes over the amounts charged to income for book purposes have been
credited to paid-in capital.
(Dollars
in millions)
|
Cumulative
Translation Adjustment
|
|
Unfunded
Minimum Pension Liability
|
|
Unrealized
Gains (Losses) on Derivative Instruments
|
|
Unrealized
Gains (Losses) on Investments
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
$
|
155
|
$
|
(248)
|
$ |
(8)
|
$ |
(2)
|
$ |
(103)
|
Period
change
|
|
(94)
|
|
(7)
|
|
3
|
|
1
|
|
(97)
|
Balance
at December 31, 2005
|
|
61
|
|
(255)
|
|
(5)
|
|
(1)
|
|
(200)
|
Period
change
|
|
17
|
|
--
|
|
3
|
|
--
|
|
20
|
Balance
at March 31, 2006
|
$
|
78
|
$
|
(255)
|
$
|
(2)
|
$
|
(1)
|
$
|
(180)
|
Except
for cumulative translation adjustment, amounts of other comprehensive loss
are
presented net of applicable taxes. Because cumulative translation adjustment
is
considered a component of permanently invested unremitted earnings of
subsidiaries outside the United States, no taxes are provided on such
amounts.
13. |
EARNINGS
AND DIVIDENDS PER SHARE
|
|
First
Quarter
|
|
2006
|
|
2005
|
|
|
|
|
Shares
used for earnings per share calculation (in millions):
|
|
|
|
Basic
|
81.5
|
|
79.5
|
Diluted
|
82.4
|
|
81.0
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
the
first quarter 2005, common shares underlying options to purchase 1,290,348
shares of common stock at a range of prices from $56.50 to $67.50 were excluded
from the computation of diluted earnings per share because the option exercise
prices were greater than the average market price of the common shares during
those periods.
The
Company declared cash dividends of $0.44 per share in the first quarter 2006
and
2005.
14. |
SHARE-BASED
COMPENSATION AWARDS
|
On
January 1, 2006, the Company adopted SFAS
No. 123
(Revised December 2004) - Share-Based Payment.
SFAS
No. 123(R) replaces SFAS No. 123 - Accounting for Stock-Based Compensation
and
supersedes Accounting Principles Board Opinion ("APB") No. 25 - Accounting
for
Stock Issued to Employees and amends SFAS No. 95 - Statement of Cash Flows.
Prior to adoption, the Company implemented the disclosure-only requirements
of
SFAS No. 123 and continued to implement the requirements of APB No. 25 for
financial statement reporting. Additional information regarding SFAS No. 123(R),
SFAS No. 123 and APB No. 25 may be found in Note 23 - Recently Issued Accounting
Standards, of Part II, Item 8 - Financial Statements and Supplementary Data,
of
the Company's 2005 Annual Report on Form 10-K.
The
Company adopted SFAS No. 123(R) using the "modified prospective" method that
requires compensation expense of all employee and non-employee director
share-based compensation awards be recognized in the financial statements based
upon their fair value over the requisite service or vesting period: a) based
upon the requirements of SFAS No. 123(R) for all new awards granted after the
effective date and b) based upon the requirements of SFAS No. 123 for all awards
granted prior to the effective date of SFAS No. 123(R) that remain unvested
on
the effective date. Under the requirements of APB No. 25, the Company was
required to recognize compensation cost for such awards unless the employee
or
non-employee director paid an amount to acquire the awarded shares at least
equal to the quoted market price of the stock at the measurement date (typically
the date of grant). This requirement resulted in compensation expense
recognition and reporting in the financial statements for most share-based
awards (unrestricted stock awards, restricted stock awards, long-term
performance stock awards and stock appreciation rights) except for stock
options, in which, substantially all were awarded at the closing market price
of
the Company's common stock on the date of grant. Effective with adoption of
SFAS
No. 123(R), compensation expense related to stock option awards are recognized
in the financial statements at their fair value.
The
Company is authorized by the Board of Directors under the 2002 Omnibus Long-Term
Compensation Plan and 2002 Director Long-Term Compensation Plan to provide
grants to employees and non-employee members of the Board of Directors.
Additional information regarding compensation plans may be found in Note 15
-
Stock Based Compensation Plans, of Part II, Item 8 - Financial Statements and
Supplementary Data, of the Company's 2005 Annual Report on Form 10-K. It has
been the Company's practice to issue new shares rather than treasury shares
for
equity awards that require payment by the issuance of common stock and
to accept back shares awarded necessary to cover the income taxes of
employee participants. Shares of non-employee directors are not acquired for
the
withholding of their income taxes. Shares of unrestricted common stock owned
by
specified senior management level employees are accepted by the Company to
pay
for the exercise price of stock option exercises in accordance with the terms
and conditions expressly stated in their awards.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In
accordance with implementation requirements of SFAS No. 123(R) under the
modified prospective method, the Company did not restate prior fiscal periods
and is required to continue the same disclosure-only requirements of SFAS
No. 123 for comparative purposes until all periods reported are comparable
on
the same basis. The following table illustrates the effect on net earnings
and
earnings per share as formerly provided under SFAS No. 123:
|
First
Quarter
|
(Dollars
in millions, except per share amounts)
|
2006
|
|
Proforma
2005
|
|
|
|
|
Net
earnings, as reported
|
$
|
105
|
$
|
162
|
|
|
|
|
|
Add:
Stock-based employee compensation
|
|
|
|
|
expense
included in net earnings, as reported
|
|
3
|
|
1
|
|
|
|
|
|
Deduct:
Total additional stock-based employee
|
|
|
|
|
compensation
cost, net of tax, that would
|
|
|
|
|
have
been included in net earnings under
|
|
|
|
|
fair
value method
|
|
(3)
|
|
(2)
|
Pro
forma net earnings
|
$
|
105
|
$
|
161
|
|
|
|
|
|
Basic
earnings per share
|
As
reported
|
$
|
1.28
|
$
|
2.04
|
|
Pro
forma
|
$
|
N.A.
|
$
|
2.02
|
|
|
|
|
|
|
Diluted
earnings per share
|
As
reported
|
$
|
1.27
|
$
|
2.00
|
|
Pro
forma
|
$
|
N.A.
|
$
|
2.00
|
In
the
first quarter 2006, approximately $5 million of compensation expense before
tax
was recognized in selling, general and administrative expense in the earnings
statement for all share-based awards of which approximately $2 million related
to stock options. The impact on net earnings of $3 million is attributable
to a
$2 million credit to deferred tax expense for recognition of deferred tax
assets, calculated at the statutory tax rate of 38%.
The
impact on the financial statements of implementing SFAS No. 123(R) is that
compensation expense for stock options will now be recorded in the financial
statements.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Stock
Option Awards
Option
awards are granted to non-employee directors on an annual basis and to employees
who meet certain eligibility requirements. A single large volume option grant
is
usually awarded to eligible employees in the fourth quarter of each year if
and
when granted by the Compensation Committee of the Board of Directors and
occasional individual grants are awarded to eligible employees throughout the
year. Substantially all employee and non-employee directors are awarded options
at an exercise price equal to the closing price of the Company's stock on the
date of grant. The term life of options is ten years with vesting periods that
vary up to three years. Actual vesting usually occurs ratably or at the end
of
the vesting period. The fair value of options cannot be determined by market
value as they are not traded in an open market. Accordingly, a financial pricing
model is utilized to determine fair value. The Company utilizes the Black
Scholes Merton ("BSM") model which relies on certain assumptions to estimate
an
option's fair value. These assumptions relevant to options granted in the first
quarter 2005 are identified in the table below:
Assumptions
|
First
Quarter 2005
|
|
|
Exercise
Price (Weighted Average)
|
$53.78
|
Expected
term years
|
6.00
|
Expected
volatility rate
|
27.90%
|
Expected
dividend yield
|
3.70%
|
Average
risk-free interest rate
|
3.50%
|
Expected
forfeiture rate
|
Actual
|
The
Company did not grant any options in the first quarter 2006.
Prior
to
adoption of SFAS No. 123(R), the Company calculated the expected term of stock
options using a standard formula prescribed in accounting literature which
indicated a six year expected term. Effective with the third quarter 2005 large
annual option award, the company analyzed historical pre-vesting and
post-vesting cancellations, forfeitures, expirations and exercise transactions
of large annual grants to determine the expected term. The Company expects
to
analyze historical transactions preceding the large annual option grant to
ensure that all assumptions based upon internal data reflect the most reasonable
expectations for fair value analysis.
The
volatility rate is derived from actual Company common stock volatility over
the
same time period as the expected term. The Company uses a weekly high closing
stock price based upon daily closing prices in the week. The volatility rate
is
derived by mathematical formula utilizing the weekly high closing price
data.
The
expected dividend yield is derived by mathematical formula which uses the
expected Company annual dividends over the expected term divided by the fair
market value of the Company's common stock at the grant date.
The
average risk-free interest rate is derived from United States Department of
Treasury published interest rates of daily yield curves for the same time period
as the expected term.
Prior
to
adoption of SFAS No. 123(R), the Company did not estimate forfeitures and
recognized them as they occurred for proforma disclosure of share-based
compensation expense. With adoption of SFAS No. 123(R), estimated forfeitures
must be considered in recording share-based compensation expense. While not
actually utilized by the BSM model to determine the fair value amount of a
share-based payment award, it is a factor that must be estimated, monitored
and
reviewed over the life of share-based compensation awards to record the most
probable expected compensation expense related to the award. Estimated
forfeiture rates vary with each type of award affected by several factors,
one
of which is the varying composition and characteristics of the award
participants. Estimated forfeitures for the Company's share-based awards range
from 0.75 percent to 10.0 percent with the estimated forfeitures for options
at
0.75 percent.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
following tables provide a reconciliation of option activity through the end
of
the first quarter 2006 and 2005:
Stock
Options
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (years)
|
|
Aggregate
Intrinsic Value(1)
|
Outstanding
at 12/31/2005
|
6,616,803
|
$
|
48.26
|
|
|
|
Grants
|
0
|
$
|
0
|
|
|
|
Exercises
|
(24,712)
|
$
|
37.94
|
|
$
|
327,860
|
Cancelled/Forfeited/Expired
|
(9,300)
|
$
|
45.09
|
|
|
|
Outstanding
at 3/31/2006
|
6,582,791
|
$
|
48.31
|
5.8
|
$
|
29,161,942
|
Exercisable
at 3/31/2006
|
4,659,784
|
$
|
47.55
|
4.5
|
$
|
24,238,926
|
|
|
|
|
|
|
|
Outstanding
at 12/31/2004
|
8,155,148
|
$
|
46.86
|
|
|
|
Grants
|
12,004
|
$
|
53.78
|
|
|
|
Exercises
|
(1,001,557)
|
$
|
46.59
|
|
$
|
11,890,958
|
Cancelled/Forfeited/Expired
|
(16,050)
|
$
|
46.05
|
|
|
|
Outstanding
at 3/31/2005
|
7,149,545
|
$
|
46.92
|
5.7
|
$
|
81,926,776
|
Exercisable
at 3/31/2005
|
5,097,152
|
$
|
50.53
|
4.6
|
$
|
41,205,641
|
(1)
Intrinsic value is the amount by which the market price of the stock or the
market price at the exercise date underlying the option exceeds the exercise
price of the option.
A
total
of 1,923,007 options are unvested at the end of first quarter 2006 for which
$15
million in compensation expense will be recognized over 3 years. Cash proceeds
from the exercise of options in first quarter 2006 total approximately $1
million and a related tax benefit of approximately $0.1 million.
Other
Share-Based Compensation Awards
In
addition to stock option awards, the Company has long-term performance stock
awards, restricted stock awards and stock appreciation rights. The long-term
performance awards are based upon return on capital and total shareholder
return. The recognized compensation cost before tax for these other share-based
awards in the first quarter 2006 and first quarter 2005 is approximately $3
million and $1 million, respectively. The unrecognized compensation cost before
tax for these awards in the first quarter 2006 and first quarter 2005 total
approximately $26 million and $18 million, respectively, to be recognized over
approximately three years for each period.
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the Coatings,
Adhesives, Specialty Polymers and Inks
("CASPI") segment, the Fibers segment, the PCI segment, the Polymers segment
and
the Specialty
Plastics
("SP")
segment.
The
Company's segments were previously aligned in a divisional structure that
provided for goods and services to be transferred between divisions at
predetermined prices that may have been in excess of cost, which resulted in
the
recognition of intersegment sales revenue and operating earnings. Such
interdivisional transactions were eliminated in the Company's consolidated
financial statements. In first quarter 2006, the Company realigned its
organizational structure to support its growth strategy and to better reflect
the integrated nature of the Company's assets. A result of the realigned
organizational structure is that goods and services are transferred among the
segments at cost. As part of this change, the Company's segment results have
been restated to eliminate the impact of interdivisional sales revenue and
operating earnings. For additional information on the
Company's products, refer to Note 21 of the consolidated financial statements
in
Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K and the United
States Securities and Exchange Commission Form 8-K filed on April 20,
2006.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
With
the
recent actions taken in the Developing Businesses ("DB") segment, including
the
shutdown and reintegration of Cendian's logistics activities in second quarter
2005 and the sale of Ariel
Research Corporation, a provider of international chemical and regulatory
compliance solutions for environmental, health and safety operations in fourth
quarter 2004,
the
criteria for a reportable operating segment are no longer met. Management has
determined that the DB segment is not of continuing significance for financial
reporting purposes. As a result, revenues and costs previously included in
the
DB segment and research and development expenditures not identifiable to an
operating segment are not included in segment operating results for either
of
the periods presented and are shown in the tables below as "other" revenues
and
operating losses.
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
349
|
$
|
319
|
Fibers
|
|
230
|
|
200
|
PCI
|
|
411
|
|
389
|
Polymers
|
|
626
|
|
656
|
SP
|
|
187
|
|
177
|
Total
Sales by Segment
|
|
1,803
|
|
1,741
|
Other
|
|
--
|
|
21
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
1,803
|
$
|
1,762
|
|
|
|
|
|
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Operating
Earnings (Loss) (1)
|
|
|
|
|
CASPI
|
$
|
55
|
$
|
67
|
Fibers
|
|
66
|
|
48
|
PCI
|
|
41
|
|
45
|
Polymers
|
|
17
|
|
84
|
SP
|
|
18
|
|
21
|
Total
Operating Earnings by Segment
|
|
197
|
|
265
|
Other
|
|
(13)
|
|
(21)
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
184
|
$
|
244
|
(1) |
Operating
earnings (loss) includes the impact of asset impairments and restructuring
charges, goodwill impairments, and other operating income and expense
as
described in Note 7 in this Form 10-Q. As previously discussed, operating
earnings (loss) for 2005 have been restated to eliminate the effects
of
interdivisional sales.
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
March
31,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Assets
by Segment
|
|
|
|
|
CASPI
|
$
|
1,431
|
$
|
1,393
|
Fibers
|
|
637
|
|
675
|
PCI
|
|
1,469
|
|
1,589
|
Polymers
|
|
1,489
|
|
1,416
|
SP
|
|
752
|
|
689
|
Total
Assets by Segment
|
|
5,778
|
|
5,762
|
Other
|
|
4
|
|
11
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
5,782
|
$
|
5,773
|
|
|
|
|
|
General
From
time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are
being handled and defended in the ordinary course of business. While the Company
is unable to predict the outcome of these matters, it does not believe, based
upon currently available facts, that the ultimate resolution of any such pending
matters, including the sorbates litigation and the asbestos litigation, 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.
Sorbates
Litigation
Two
civil
cases relating to sorbates remain. The first is a case filed by a multi-state
class of indirect purchasers seeking claimed damages, whose claims have been
dismissed by Tennessee's trial court and that state's court of appeals. The
Tennessee Supreme Court affirmed the dismissal of the plaintiffs' claims, and
subsequently the trial court denied a motion to amend the complaint, ruling
the
case over. An appeal of the trial court's determination has been filed. The
second is a case filed by New York's attorney general, also seeking claimed
damages. The trial court has dismissed New York's claims, and the plaintiffs
have filed a notice of appeal.
Asbestos
Litigation
Over
the
years, Eastman has been named as a defendant, along with numerous other
defendants, in lawsuits in various state courts in which plaintiffs have alleged
injury due to exposure to asbestos at Eastman’s manufacturing sites and sought
unspecified monetary damages and other relief. Historically, these cases have
been dismissed or settled without a material effect on Eastman’s financial
condition, results of operations, or cash flows.
In
recently filed cases, plaintiffs allege exposure to asbestos-containing products
allegedly made by Eastman. Based on its investigation to date, the Company
has
information that it manufactured limited amounts of an asbestos-containing
plastic product between the mid-1960’s and the early 1970’s. The Company’s
investigation has found no evidence that any of the plaintiffs worked with
or
around any such product alleged to have been manufactured by the Company. The
Company intends to defend vigorously the approximately 1,500 pending claims
or
to settle them on acceptable terms.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company has finalized an agreement with an insurer that issued primary general
liability insurance to certain predecessors of the Company prior to the
mid-1970's, pursuant to which that insurer will provide coverage for a portion
of certain of the Company's defense costs and payments of settlements or
judgments in connection with asbestos-related lawsuits.
Evaluation
of the allegations and claims made in recent asbestos-related lawsuits continue
to be reviewed by the Company. Based on such evaluation to date, the Company
continues to believe that the ultimate resolution of asbestos cases will not
have a material impact on the Company’s financial condition, results of
operations, or cash flows, although these matters could result in the Company
being subject to monetary damages, costs or expenses, and charges against
earnings in particular periods. To date, costs incurred by the Company related
to the recent asbestos-related lawsuits have not been material.
17. |
RECENTLY
ISSUED ACCOUNTING
STANDARDS
|
In
February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 155 simplifies accounting for certain
hybrid instruments under SFAS No. 133 by permitting fair value remeasurement
for
financial instruments containing an embedded derivative that otherwise would
require bifurcation. SFAS No. 155 eliminates both the previous restriction
under
SFAS No. 140 on passive derivative instruments that a qualifying special-purpose
entity may hold and SFAS No. 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets,” which
provides that beneficial interests are not subject to the provisions of SFAS
No.
133. SFAS No. 155 also establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, and clarifies that concentrations of credit
risk in the form of subordination are not imbedded derivatives. SFAS No. 155
is
effective for all financial instruments acquired, issued, or subject to a
remeasurement event occurring after the beginning of an entity’s fiscal year
that begins after September 15, 2006. The Company is currently evaluating the
effect SFAS No. 155 will have on its consolidated financial position, liquidity,
or results from operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets,” an amendment of SFAS No. 140. SFAS No. 156 permits entities to choose
to either subsequently measure servicing rights at fair value and report changes
in fair value in earnings or amortize servicing rights in proportion to and
over
the estimated net servicing income or loss and assess to rights for impairment
or the need for an increased obligation. SFAS No. 156 also clarifies when a
servicer should separately recognize servicing assets and liabilities; requires
all separately recognized assets and liabilities to be initially measured at
fair value, if practicable; permits a one-time reclassification of
available-for-sales securities to trading securities by an entity with
recognized servicing rights and requires additional disclosures for all
separately recognized servicing assets and liabilities. SFAS No. 156 is
effective as of the beginning of an entity’s fiscal year that begins after
September 15, 2006. The Company is currently evaluating the effect SFAS No.
156
will have on its consolidated financial position, liquidity, or results from
operations.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM
|
Page
|
|
|
Critical
Accounting Policies
|
21
|
|
|
2006
Overview
|
22
|
|
|
Results
of Operations
|
|
Results
of Operations
|
23
|
Summary
by Operating Segment
|
24
|
Summary
by Customer Location
|
28
|
|
|
Liquidity,
Capital Resources, and Other Financial Information
|
29
|
|
|
Recently
Issued Accounting Standards
|
32
|
|
|
Outlook
|
33
|
|
|
Forward-Looking
Statements and Risk Factors
|
33
|
|
|
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's audited consolidated
financial statements, including related notes, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's 2005 Annual Report on Form 10-K, and the unaudited interim
consolidated financial statements, including related notes, included elsewhere
in this report. All references to earnings per share contained in this report
are diluted earnings per share unless otherwise noted.
CRITICAL
ACCOUNTING POLICIES
In
preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States, the Eastman Chemical
Company's (the "Company" or "Eastman") management must make
decisions which impact the reported amounts and the related disclosures. Such
decisions include the selection of the appropriate accounting principles to
be
applied and assumptions on which to base estimates and judgments that affect
the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to allowances for
doubtful accounts, impaired assets, environmental costs, U.S. pension and other
post-employment benefits, litigation and contingent liabilities, and income
taxes. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. The Company’s management believes the critical
accounting policies listed
and described in Part II, Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations of the Company's 2005 Annual
Report on Form 10-K
are the
most important to the fair presentation of the Company’s financial condition and
results. These policies require management’s more significant judgments and
estimates in the preparation of the Company’s consolidated financial
statements.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Sales
revenue in first quarter 2006 was $1.8 billion, a 2 percent increase over first
quarter 2005. Operating
earnings were $184 million in first quarter 2006, a $60 million decrease from
first quarter 2005. These results reflect the sustained performance throughout
the Company that was offset by lower gross margins and lower sales volumes
for
the polyethylene terephthalate ("PET") product line in the Polymers segment.
First
quarter 2006 results were also negatively impacted by $7 million in asset
impairments and restructuring charges compared to $9 million in first quarter
2005.
First-quarter
2006 results were negatively impacted by approximately $19 million of costs
associated with operational disruptions at the Company's Longview, Texas,
manufacturing facility.
The
Company generated $37 million in cash from operating activities during first
quarter 2006 primarily due to continued strong net earnings. Cash flow from
operations for first quarter 2006 decreased by $66 million compared with first
quarter 2005 primarily due to decreased net earnings, the payout of incentive
compensation from 2005 and increased U.S defined benefit pension funding,
partially offset by a decrease in seasonal growth in working capital
requirements.
With
the
successful implementation of the Company's turnaround strategy, as evidenced
by
strong operating results and strengthened financial profile, the Company
believes that it is positioned for profitable growth. In first quarter 2006,
the
Company realigned its management and organizational structure around common
technologies and manufacturing streams to focus on ensuring growth in core
businesses and on being able to take full advantage of growth opportunities.
This growth will be focused in markets in which the Company has expertise and
deep understanding, and where it can leverage the technological innovation
it
has built over the past 85 years.
RESULTS
OF OPERATIONS
|
First
Quarter
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,803
|
$
|
1,762
|
|
2
%
|
|
1
%
|
|
5
%
|
|
(2)
%
|
|
(2)
%
|
Sales
revenue for first quarter 2006 increased $41 million over first quarter 2005.
The increase was primarily due to higher selling prices in response to higher
raw material and energy costs and strong economic conditions, which were
partially offset by unfavorable product mix and unfavorable foreign currency
exchange rates.
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
331
|
$
|
399
|
|
(17)
%
|
As
a percentage of sales
|
|
18.4
%
|
|
22.7
%
|
|
|
Gross
profit and gross profit as a percentage of sales for first quarter 2006
decreased compared to the first quarter 2005 primarily due to reduced gross
margins in the Polymers segment.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Selling,
General and Administrative Expenses (SG&A)
|
$
|
98
|
$
|
109
|
|
(10)
%
|
Research
and Development Expenses (R&D)
|
|
42
|
|
39
|
|
8
%
|
|
$
|
140
|
$
|
148
|
|
|
As
a percentage of sales
|
|
7.8
%
|
|
8.4
%
|
|
|
SG&A
costs for the first quarter 2006 decreased primarily due to the reintegration
of
Cendian Corporation ("Cendian"), as well as lower bad debt expense and lower
employee related costs. SG&A costs in first quarter 2006 include
compensation expense under Statement of Financial Accounting Standards ("SFAS")
No. 123 (Revised December 2004) - "Share-Based Payment". For more information
on
SFAS No. 123(R), see Note 14 to the Company's unaudited consolidated financial
statements. R&D expenses increased $3 million in first quarter 2006 compared
to first quarter 2005 primarily due to increased spending on growth initiatives.
The Company expects that R&D costs will be approximately 3 percent of
revenue in 2006.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges totaled $7 million in first quarter 2006,
compared to $9 million in first quarter 2005. The Company continues to review
its portfolio of products and businesses, which could result in further
restructuring, divestiture, and consolidation. For more information regarding
asset impairments and restructuring charges, see Note 7 to the Company's
unaudited consolidated financial statements.
Other
Operating (Income) Expense, Net
Other
operating income for first quarter 2005 was a gain of $2 million related to
the
2004 divestiture of certain businesses and product lines
within
the Coatings, Adhesives, and Specialty Polymers ("CASPI") segment.
Interest
Expense, Net
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
28
|
$
|
34
|
|
|
Less:
Capitalized interest
|
|
2
|
|
1
|
|
|
Interest
expense
|
|
26
|
|
33
|
|
(21)%
|
Less:
Interest income
|
|
6
|
|
3
|
|
|
Interest
expense, net
|
$
|
20
|
$
|
30
|
|
(33)%
|
Gross
interest costs for the first quarter 2006 were lower compared to the first
quarter 2005 due to lower average borrowings that more than offset higher
average interest rates. Higher interest income reflected larger average cash
levels and higher average interest rates.
For
2006,
the Company expects net interest expense to decrease compared to 2005 due to
lower anticipated average borrowings, increased capitalized interest and higher
interest income.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Other
(Income) Charges, Net
|
First
Quarter
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
|
|
|
Other
income
|
$
|
(3)
|
$
|
(4)
|
Other
charges
|
2
|
|
3
|
Other
(income) charges, net
|
$
|
(1)
|
$
|
(1)
|
Included
in other income are the Company’s portion of earnings from its equity
investments, gains on the sale of certain technology business venture
investments, royalty income, and net gains on foreign exchange transactions.
Included in other charges are net losses on foreign exchange transactions,
the
Company’s portion of losses from its equity investments, write-downs to fair
value of certain technology business venture investments due to other than
temporary declines in value, and fees on securitized receivables.
Provision
for Income Taxes
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
60
|
$
|
55
|
|
9%
|
Effective
tax rate
|
|
36
%
|
|
25
%
|
|
|
The
first
quarter 2006 effective tax rate reflects the Company's expected tax rate on
reported normalized operating earnings before income tax of approximately 35
percent. The increase in the effective tax rate over first quarter 2005 is
primarily attributable to lower foreign earnings in favorable tax jurisdictions
and to a decrease in tax deductions for charitable donations.
The
first
quarter 2005 effective tax rate reflects the Company's expected tax rate on
reported normalized operating earnings before income tax of approximately 30
percent and a net deferred tax benefit adjustment related to the expected
utilization of capital loss carryforwards.
As
described in Note 19 to the consolidated financial statements in Part II, Item
8
of the Company’s 2005 Annual Report on Form 10-K, the Company has significant
net operating loss carryforwards and related valuation allowances. Future tax
provisions may be positively or negatively impacted to the extent that the
realization of these carryforwards is greater or less than anticipated.
SUMMARY
BY OPERATING SEGMENT
The
Company's products and operations are managed and reported in five reportable
operating segments, consisting of the CASPI segment, the Fibers segment, the
Performance Chemicals and Intermediates ("PCI") segment, the Polymers segment
and the Specialty Plastics ("SP") segment.
The
Company's segments were previously aligned in a divisional structure that
provided for goods and services to be transferred between divisions at
predetermined prices that may have been in excess of cost, which resulted in
the
recognition of intersegment sales revenue and operating earnings. Such
interdivisional transactions were eliminated in the Company's consolidated
financial statements. In first quarter 2006, the Company realigned its
organizational structure to support its growth strategy and to better reflect
the integrated nature of the Company's assets. A result of the realigned
organizational structure is that goods and services are transferred among the
segments at cost. As part of this change, the Company's segment results for
have
been restated to eliminate the impact of interdivisional sales revenue and
operating earnings. For additional information on the
segments' products, refer to Note 21 to the consolidated financial statements
in
Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K and the United
States Securities and Exchange Commission Form 8-K filed on April 20,
2006.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
With
the
recent actions taken in the Developing Businesses ("DB") segment, including
the
shutdown and reintegration of Cendian's logistics activities in second quarter
2005 and the sale of Ariel
Research Corporation, a provider of international chemical and regulatory
compliance solutions for environmental, health and safety operations in fourth
quarter 2004,
the
criteria for a reportable operating segment are no longer met. Management has
determined that the DB segment is not of continuing significance for financial
reporting purposes. As a result, revenues and costs previously included in
the
DB segment and research and development expenditures not identifiable to an
operating segment are not included in segment operating results for either
of
the periods presented. For additional information, refer to Note 15 to the
unaudited consolidated financial statements.
CASPI
Segment
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
349
|
$
|
319
|
$
|
30
|
|
10%
|
Volume
effect
|
|
|
|
|
|
(2)
|
|
(1)%
|
Price
effect
|
|
|
|
|
|
34
|
|
11%
|
Product
mix effect
|
|
|
|
|
|
5
|
|
2%
|
Exchange
rate effect
|
|
|
|
|
|
(7)
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
55
|
|
67
|
|
(12)
|
|
(18)
%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
7
|
|
1
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
|
--
|
|
2
|
|
(2)
|
|
|
The
increase in sales revenue of $30 million for the first quarter 2006 compared
to
the first quarter 2005 was primarily due to an increase in selling prices.
Operating
earnings decreased $12 million compared to first quarter 2005, particularly
in
adhesives product lines, due primarily to moderately lower sales volume and
the
unfavorable effect of a strengthening U.S. dollar versus the Euro. Operating
earnings also included asset impairments and restructuring charges of $7 million
related primarily to the divestiture of a previously closed manufacturing
facility.
Fibers
Segment
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
230
|
$
|
200
|
$
|
30
|
|
15%
|
Volume
effect
|
|
|
|
|
|
35
|
|
17%
|
Price
effect
|
|
|
|
|
|
24
|
|
12%
|
Product
mix effect
|
|
|
|
|
|
(28)
|
|
(14)%
|
Exchange
rate effect
|
|
|
|
|
|
(1)
|
|
--%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
66
|
|
48
|
|
18
|
|
38%
|
|
|
|
|
|
|
|
|
|
Sales
revenue increased by 15 percent primarily due to higher sales volume and higher
selling prices that were partially offset by an unfavorable shift in product
mix. The increased sales volume was due to strong demand for acetyl chemical
products resulting from strengthened global industry acetate tow demand and
an
increase in market share for the Company's acetate yarn products due to a change
in industry structure. The unfavorable shift in product mix was the result
of
increased sales volume for acetyl chemicals products.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Operating
earnings increased as higher selling prices and increased sales volume more
than
offset higher raw material and energy costs.
The
Company believes that acetate tow has modest growth potential in future years
and is evaluating growth options in Europe and Asia.
PCI
Segment
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
411
|
$
|
389
|
$
|
22
|
|
6%
|
Volume
effect
|
|
|
|
|
|
(20)
|
|
(5)%
|
Price
effect
|
|
|
|
|
|
41
|
|
11%
|
Product
mix effect
|
|
|
|
|
|
4
|
|
1%
|
Exchange
rate effect
|
|
|
|
|
|
(3)
|
|
(1)%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
41
|
|
45
|
|
(4)
|
|
(9)%
|
|
|
|
|
|
|
|
|
|
Asset
impairments and restructuring charges, net
|
|
--
|
|
4
|
|
(4)
|
|
|
The
increase in sales revenue of $22 million was primarily due to higher selling
prices which more than offset lower sales volumes. Selling prices were higher
particularly in the intermediates product lines in response to significant
increases in raw material and energy costs. The lower sales volume, primarily
in
the intermediates product lines, was attributed to the impact of an operational
disruption at the Company's Longview, Texas, cracker facility.
The
decrease in operating earnings of $4 million was primarily attributed to
industry capacity additions in Asia that negatively impacted resins intermediate
gross margins. Higher selling prices more than offset higher raw material and
energy costs for the remaining PCI business.
The
Company continues to identify and implement projects to reduce costs and address
the performance of underperforming PCI product lines.
Polymers
Segment
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
626
|
$
|
656
|
$
|
(30)
|
|
(5)%
|
Volume
effect
|
|
|
|
|
|
--
|
|
--%
|
Price
effect
|
|
|
|
|
|
(18)
|
|
(3)%
|
Product
mix effect
|
|
|
|
|
|
--
|
|
--%
|
Exchange
rate effect
|
|
|
|
|
|
(12)
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
17
|
|
84
|
|
(67)
|
|
(80)%
|
Sales
revenue declined by 5 percent primarily due to lower selling prices and
decreased sales volume for PET polymers globally partially offset by higher
selling prices for polyethylene product lines. The lower selling prices for
PET
polymers were attributed to lower global industry capacity utilization
rates. Operating earnings declined primarily in PET polymers globally due
to lower selling prices. In addition, higher raw material and energy costs
more
than offset increased selling prices for polyethylene product
lines.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
In
early
March, 2005, the Company broke ground on the first commercial scale PET polymers
plant based upon Eastman's IntegRex technology. The plant will be a
350,000 metric ton facility and is expected to begin production in fourth
quarter 2006. Research and development efforts further enhanced
IntegRex technology in parallel with construction of the first
IntegRex manufacturing facility. In September 2005, the Company
announced it was evaluating a second world-class facility in North America
utilizing these further refinements to IntegRex
technology.
The
Company is evaluating its strategic options related to its non-integrated PET
assets outside the United States.
SP
Segment
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
|
|
|
|
|
|
$
|
|
%
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
187
|
$
|
177
|
$
|
10
|
|
5%
|
Volume
effect
|
|
|
|
|
|
5
|
|
3%
|
Price
effect
|
|
|
|
|
|
12
|
|
6%
|
Product
mix effect
|
|
|
|
|
|
(3)
|
|
(2)%
|
Exchange
rate effect
|
|
|
|
|
|
(4)
|
|
(2)%
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
|
18
|
|
21
|
|
(3)
|
|
(14)%
|
|
|
|
|
|
|
|
|
|
Sales
revenue for the first quarter 2006 increased $10 million compared to the first
quarter 2005 due primarily to higher selling prices.
Operating
earnings for first quarter 2006 declined compared with first quarter 2005
primarily due to higher selling prices and increased sales volumes that were
more than offset by higher raw material and energy costs, the unfavorable effect
of a strengthening U.S. dollar versus the Euro and increased expenditures
related to growth initiatives.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
BY CUSTOMER LOCATION
Sales
Revenue
|
First
Quarter
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
1,073
|
$
|
1,010
|
|
6
%
|
|
2
%
|
|
9
%
|
|
(5)
%
|
|
--
|
Europe,
Middle East, and Africa
|
|
325
|
|
368
|
|
(12)
%
|
|
(6)
%
|
|
--
%
|
|
1
%
|
|
(7)
%
|
Asia
Pacific
|
|
211
|
|
219
|
|
(4)
%
|
|
(9)
%
|
|
7
%
|
|
(1)
%
|
|
(1)
%
|
Latin
America
|
|
194
|
|
165
|
|
18
%
|
|
23
%
|
|
(8)
%
|
|
3
%
|
|
--
%
|
|
$
|
1,803
|
$
|
1,762
|
|
2
%
|
|
1
%
|
|
5
%
|
|
(2)
%
|
|
(2)
%
|
Sales
revenue in the United States and Canada increased for the first quarter 2006
compared to the first quarter 2005 primarily due to higher selling prices,
particularly for the PCI segment and the CASPI segment, which had a $90 million
positive impact on sales revenue. The higher selling prices were primarily
in
response to increases in raw material and energy costs. Unfavorable product
mix
had a negative impact of $48 million.
Sales
revenue in Europe, Middle East and Africa decreased for the first quarter 2006
compared to the first quarter 2005 primarily due to lower sales volumes in
the
Polymers segment and unfavorable foreign currency exchange rates.
Sales
revenue in Asia Pacific decreased for the first quarter 2006 compared to first
quarter 2005 primarily due to higher overall selling prices more than offset
by
lower sales volumes in the Fibers segment, particularly for acetate
tow.
Sales
revenue in Latin America increased for the first quarter 2006 compared to first
quarter 2005 primarily due to higher sales volumes, which were partially offset
by lower selling prices, particularly in the Polymers segment.
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. 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
additional information, see Note 9 to the consolidated financial statements
in
Part II, Item 8 and Part
II,
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
of
the
Company’s 2005 Annual Report on Form 10-K.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY,
CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION
Cash
Flows
|
|
First
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
Operating
activities
|
$
|
37
|
$
|
103
|
Investing
activities
|
|
(76)
|
|
(51)
|
Financing
activities
|
|
--
|
|
17
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
--
|
|
(1)
|
Net
change in cash and cash equivalents
|
$
|
(39)
|
$
|
68
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
485
|
$
|
393
|
Cash
provided by operating activities decreased $66 million in the first quarter
2006
compared to first quarter 2005 primarily due to decreased net earnings, the
payout of incentive compensation from 2005 and increased U.S. defined benefit
pension funding partially offset by a decrease in seasonal growth in working
capital requirements in accounts payable. Cash used in investing activities
increased $25 million in the first quarter 2006 compared to first quarter 2005
primarily due to a $28 million increase in additions to properties and
equipment. Capital expenditures in 2006 are expected to increase up
to
$450 million from $343 million in 2005 due primarily to the expected completion
of the new PET facility in South Carolina utilizing IntegRex
technology, a copolyester intermediates expansion, and other targeted growth
initiatives.
Cash
provided by financing activities decreased in the first quarter 2006 compared
to
first quarter 2005 primarily as a result of less cash received from stock option
exercises as well as a decrease in credit facility borrowings.
The
payment of common stock dividends is reflected in all periods.
In
2006,
priorities for use of available cash will be to pay the quarterly cash dividend
and fund targeted growth initiatives and the defined benefit pension plans.
Liquidity
At
March
31, 2006, the Company has credit facilities with various U.S. and foreign banks
totaling approximately $890 million as disclosed in Note 6 of Part II, Item
8 -
Financial Statements and Supplementary Data, of the 2005 Annual Report on Form
10-K. These credit facilities consist of a $700 million revolving credit
facility (the "Credit Facility"), which was amended in April 2006 to extend
the
expiration date to April 2011, as well as a 156 million euro credit facility
("Euro Facility") which expires in December 2010. Borrowings under these credit
facilities are subject to interest at varying spreads above quoted market rates.
These credit facilities require facility fees on the total commitment that
are
based on Eastman's credit rating. In addition, these credit facilities contain
a
number of covenants and events of default, including the maintenance of certain
financial ratios. The Company's combined revolving credit facility borrowings
at
March 31, 2006 and December 31, 2005 were $189 million and $214 million at
a
weighted average interest rate of 2.76 percent and 3.01 percent,
respectively.
The
Credit Facility provides liquidity support for commercial paper borrowings
and
general corporate purposes. Accordingly, any outstanding commercial paper
borrowings reduce borrowings available under the Credit Facility. Since the
Credit Facility expires in April 2011, any commercial paper borrowings supported
by the Credit Facility are classified as long-term borrowings because the
Company has the ability to refinance such borrowings on a long-term basis.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
For
more
information regarding interest rates, refer to Note 6 to the Company's unaudited
consolidated financial statements.
The
Company has effective shelf registration statements filed with the Securities
and Exchange Commission to issue a combined $1.1 billion of debt or equity
securities.
The
Company contributed $20 million to its U.S. defined benefit pension plan in
the
first quarter 2006 and expects to contribute a total of $75 million during
2006.
Cash
flows from operations and the sources of capital described above are expected
to
be available and sufficient to meet foreseeable cash flow requirements including
those requirements related to the normal seasonal increase in working capital
expected in the first half of the year. However, the Company’s cash flows from
operations can be affected by numerous factors including risks associated with
global operations, raw material availability and cost, demand for and pricing
of
Eastman’s products, capacity utilization, and other factors described under
"Forward-Looking Statements and Risk Factors" below. Furthermore, the Company
believes maintaining a financial profile consistent with an investment grade
company is important to its long term strategic and financial
flexibility.
Capital
Expenditures
Capital
expenditures were $78 million and $50 million for the first quarters 2006 and
2005, respectively. The Company expects that capital spending will be up to
$450
million primarily
due to the expected completion of the new PET facility in South Carolina
utilizing IntegRex
technology, a copolyester intermediates expansion, and other targeted growth
initiatives, which
will exceed estimated 2006 depreciation and amortization of $300 million.
Other
Commitments
At
March
31, 2006, the Company’s obligations related to notes and debentures totaled
approximately $1.6 billion to be paid over a period of up to 25 years. Other
borrowings, related primarily to credit facility borrowings, totaled
approximately $189 million.
The
Company had various purchase obligations at March 31, 2006 totaling
approximately $1.7 billion over a period of approximately 15 years for
materials, supplies and energy incident to the ordinary conduct of business.
The
Company also had various lease commitments for property and equipment under
cancelable, noncancelable, and month-to-month operating leases totaling
approximately $197 million over a period of several years. Of the total lease
commitments, approximately 15 percent relate to machinery and equipment,
including computer and communications equipment and production equipment;
approximately 50 percent relate to real property, including office space,
storage facilities and land; and approximately 35 percent relate to vehicles,
primarily railcars.
Off-
Balance Sheet and Other Financing Arrangements
If
certain operating leases are terminated by the Company, it guarantees a portion
of the residual value loss, if any, incurred by the lessors in disposing of
the
related assets. Under these operating leases, the residual value guarantees
at
March 31, 2006 totaled $85 million and consisted primarily of leases for
railcars, aircraft, and other equipment. The Company believes, based on current
facts and circumstances, that the likelihood of a material payment pursuant
to
such guarantees is remote. Leases with guarantee amounts totaling $4 million,
$27 million, and $54 million will expire in 2006, 2008, and 2012, respectively.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
As
described in Note 10 to the Company’s unaudited consolidated financial
statements, Eastman entered into an agreement in 1999 that allows it to generate
cash by reducing its working capital through the sale of undivided interests
in
certain domestic trade accounts receivable under a planned continuous sale
program to a third party. Under this agreement, receivables sold to the third
party totaled $200 million at March 31, 2006 and December 31, 2005. Undivided
interests in designated receivable pools were sold to the purchaser with
recourse limited to the purchased interest in the receivable pools.
The
Company did not have any other material relationships with unconsolidated
entities or financial partnerships, including special purpose entities, for
the
purpose of facilitating off-balance sheet arrangements with contractually narrow
or limited purposes. Thus, Eastman is not materially exposed to any financing,
liquidity, market, or credit risk related to the above or any other such
relationships.
The
Company has evaluated material relationships and has concluded that the entities
are not Variable Interest Entities (“VIEs”) or, in the case of Primester, a
joint venture that manufactures cellulose acetate at its Kingsport, Tennessee
plant, the Company is not the primary beneficiary of the VIE. As such, in
accordance with Interpretation 46R "Consolidation of Variable Interest Entities"
("FIN 46R"), the Company is not required to consolidate these entities. In
addition, the Company has evaluated long-term purchase obligations with two
entities that may be VIEs at March 31, 2006. These potential VIEs are joint
ventures from which the Company has purchased raw materials and utilities for
several years and purchases approximately $60 million of raw materials and
utilities on an annual basis. The Company has no equity interest in these
entities and has confirmed that one party to each of these joint ventures
consolidates the potential VIE. However, due to competitive and other reasons,
the Company has not been able to obtain the necessary financial information
to
determine whether the entities are VIEs, and if one or both are VIEs, whether
or
not the Company is the primary beneficiary.
Guarantees
and claims also arise during the ordinary course of business from relationships
with suppliers, customers, and non-consolidated affiliates when the Company
undertakes an obligation to guarantee the performance of others if specified
triggering events occur. Non-performance under a contract could trigger an
obligation of the Company. These potential claims include actions based upon
alleged exposures to products, intellectual property and environmental matters,
and other indemnifications. The ultimate effect on future financial results
is
not subject to reasonable estimation because considerable uncertainty exists
as
to the final outcome of these claims. However, while the ultimate liabilities
resulting from such claims may be significant to results of operations in the
period recognized, management does not anticipate they will have a material
adverse effect on the Company's consolidated financial position or
liquidity.
In
addition, the Company had other liabilities at March 31, 2006 totaling
approximately $1.1 billion related to pension, retiree medical, and other
post-employment obligations.
Dividends
The
Company declared cash dividends of $0.44 per share in the first quarters 2006
and 2005.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 155 simplifies accounting for certain
hybrid instruments under SFAS No. 133 by permitting fair value remeasurement
for
financial instruments containing an embedded derivative that otherwise would
require bifurcation. SFAS No. 155 eliminates both the previous restriction
under
SFAS No. 140 on passive derivative instruments that a qualifying special-purpose
entity may hold and SFAS No. 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets,” which
provides that beneficial interests are not subject to the provisions of SFAS
No.
133. SFAS No. 155 also establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, and clarifies that concentrations of credit
risk in the form of subordination are not imbedded derivatives. SFAS No. 155
is
effective for all financial instruments acquired, issued, or subject to a
remeasurement event occurring after the beginning of an entity’s fiscal year
that begins after September 15, 2006. The Company is currently evaluating the
effect SFAS No. 155 will have on its consolidated financial position, liquidity,
or results from operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets,” an amendment of SFAS No. 140. SFAS No. 156 permits entities to choose
to either subsequently measure servicing rights at fair value and report changes
in fair value in earnings or amortize servicing rights in proportion to and
over
the estimated net servicing income or loss and assess to rights for impairment
or the need for an increased obligation. SFAS No. 156 also clarifies when a
servicer should separately recognize servicing assets and liabilities, requires
all separately recognized assets and liabilities to be initially measured at
fair value, if practicable, permits a one-time reclassification of
available-for-sales securities to trading securities by an entity with
recognized servicing rights and requires additional disclosures for all
separately recognized servicing assets and liabilities. SFAS No. 156 is
effective as of the beginning of an entity’s fiscal year that begins after
September 15, 2006. The Company is currently evaluating the effect SFAS No.
156
will have on its consolidated financial position, liquidity, or results from
operations.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
OUTLOOK
For
2006,
the Company expects:
· |
that
the volatility of raw material and energy costs will continue and
that the
Company will continue to pursue pricing strategies and ongoing cost
control initiatives to offset the effects on gross
profit;
|
· |
strong
volumes will be maintained due to continued economic strength, continued
substitution of Eastman products for other materials, and new applications
for existing products;
|
· |
that
pension and other post-employment benefit expenses will be similar
to 2005
levels;
|
· |
to
contribute approximately $75 million to the Company’s U.S. defined benefit
pension plans;
|
· |
net
interest expense to decrease compared with 2005 primarily as a result
of
anticipated lower average borrowings, increased capitalized interest
and
higher interest income;
|
· |
that
R&D costs will be approximately 3 percent of
revenue;
|
· |
the
effective tax rate to be approximately 35
percent;
|
· |
to
continue to evaluate its portfolio, which could lead to further
restructuring, divestiture, or consolidation of product lines as
it
continues to focus on profitability;
|
· |
capital
expenditures to be up to $450 million and exceed estimated
depreciation and amortization of approximately $300 million; in 2006,
the
Company plans to complete construction of the new PET facility in
South
Carolina utilizing IntegRex
technology, and pursue a copolyester intermediates expansion and
other
targeted growth initiatives; and
|
· |
that
priorities for use of available cash will be to pay the quarterly
cash
dividend and fund targeted growth initiatives and the defined benefit
pension plans.
|
For
the
second quarter 2006, the Company expects its normal seasonal improvement
in
sales volume and continued solid performance from its strong base of earnings,
which consists of the Fibers, CASPI and SP segments. It also anticipates
continued challenging market conditions for the global PET business in
its
Polymers segment and high and volatile raw material and energy costs. As
a
result, the Company expects second-quarter 2006 earnings per share to be
similar
to first-quarter 2006 earnings per share excluding the impact of asset
impairments and restructuring charges.
See
“Forward-Looking Statements and Risk Factors below.”
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
The
expectations under "Outlook" and certain other statements in this Annual Report
on Form 10-K may be 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 conditions;
expectations, strategies, and plans for individual assets and products,
businesses, segments and divisions as well as for the whole of Eastman Chemical
Company; cash requirements and uses of available cash; financing plans; pension
expenses and funding; credit ratings; anticipated restructuring, divestiture,
and consolidation activities; cost reduction and control efforts and targets;
integration of acquired businesses; 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
These
plans and expectations are based upon certain underlying assumptions, including
those mentioned with the specific statements. Such assumptions are in turn
based
upon internal 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. In addition to the
factors described in this report, the following are some of the important
factors that could cause the Company's actual results to differ materially
from
those in any such forward-looking statements:
· |
The
Company is reliant on certain strategic raw materials for its operations
and utilizes risk management tools, including hedging, as appropriate,
to
mitigate short-term market fluctuations in raw material costs. There
can
be no assurance, however, that such measures will result in cost
savings
or that all market fluctuation exposure will be eliminated. In addition,
natural disasters, changes in laws or regulations, war or other outbreak
of hostilities, or other political factors in any of the countries
or
regions in which the Company operates or does business, or in countries
or
regions that are key suppliers of strategic raw materials, could
affect
availability and costs of raw
materials.
|
· |
While
temporary shortages of raw materials and energy may occasionally
occur,
these items have historically been sufficiently available to cover
current
and projected requirements. However, their continuous availability
and
price are impacted by natural disasters, plant interruptions occurring
during periods of high demand, domestic and world market and political
conditions, changes in government regulation, and war or other outbreak
of
hostilities. Eastman’s operations or products may, at times, be adversely
affected by these factors.
|
· |
The
Company's competitive position in the markets in which it participates
is,
in part, subject to external factors in addition to those that the
Company
can impact. Natural disasters, changes in laws or regulations, war
or
other outbreak of hostilities, or other political factors in any
of the
countries or regions in which the Company operates or does business,
or in
countries or regions that are key suppliers of strategic raw materials,
could negatively impact the Company’s competitive position and its ability
to maintain market share. For example, supply and demand for certain
of
the Company's products is driven by end-use markets and worldwide
capacities which, in turn, impact demand for and pricing of the Company's
products.
|
· |
Limitation
of the Company's available manufacturing capacity due to significant
disruption in its manufacturing operations, including natural disasters,
could have a material adverse affect on sales revenue, costs and
results
of operations and financial condition.
|
· |
The
Company has an extensive customer base; however, loss of, or material
financial weakness of, certain of the largest customers could adversely
affect the Company's financial condition and results of operations
until
such business is replaced and no assurances can be made that the
Company
would be able to regain or replace any lost customers. In addition,
the
Company's competitive position may be adversely impacted by low cost
competitors in certain regions and customers developing internal
or
alternative sources of supply.
|
· |
In
addition to productivity and cost reduction initiatives, the Company
is
striving to improve margins on its products through price increases
where
warranted and accepted by the market; however, the Company's earnings
could be negatively impacted should such increases be unrealized,
not be
sufficient to cover increased raw material and energy costs, or have
a
negative impact on demand and volume. There can be no assurances
that
price increases will be realized or will be realized within the Company’s
anticipated timeframe.
|
· |
The
Company has efforts underway to exploit growth opportunities in certain
core businesses by developing new products, expanding into new markets,
and tailoring product offerings to customer needs. There can be no
assurance that such efforts will result in financially successful
commercialization of such products or acceptance by existing or new
customers or new markets.
|
· |
The
Company has made, and intends to continue making, strategic investments,
including IntegRex
technology,
and has entered, and expects to continue to enter, into strategic
alliances in technology, services businesses, and other ventures
in order
to build, diversify, and strengthen certain Eastman capabilities
and to
maintain high utilization of manufacturing assets. There can be no
assurance that such investments and alliances will achieve their
underlying strategic business objectives or that they will be beneficial
to the Company's results of
operations.
|
· |
The
Company has undertaken and expects to continue to undertake productivity
and cost reduction initiatives and organizational restructurings
to
improve performance and generate cost savings. There can be no assurance
that these will be completed as planned or beneficial or that estimated
cost savings from such activities will be
realized.
|
· |
The
Company's facilities and businesses are subject to complex health,
safety
and environmental laws and regulations, which require and will continue
to
require significant expenditures to remain in compliance with such
laws
and regulations currently and in the future. The Company's accruals
for
such costs and associated liabilities are subject to changes in estimates
on which the accruals are based. The amount accrued 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, chemical control regulations and testing requirements
could
result in higher or lower costs.
|
· |
The
Company and its operations from time to time 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 believes amounts reserved are adequate for
such
pending matters; however, results of operations could be affected
by
significant litigation adverse to the
Company.
|
· |
The
Company has deferred tax assets related to capital and operating
losses.
The Company establishes valuation allowances to reduce these deferred
tax
assets to an amount that is more likely than not to be realized.
The
Company’s ability to utilize these deferred tax assets depends on
projected future operating results, the reversal of existing temporary
differences, and the availability of tax planning strategies. Realization
of these assets is expected to occur over an extended period of time.
As a
result, changes in tax laws, assumptions with respect to future taxable
income and tax planning strategies could result in adjustments to
these
assets.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The
foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure, including
that
under "Outlook" and "Forward-Looking Statements and Risk Factors," and other
forward-looking statements and related disclosures made by the Company in this
Annual Report on Form 10-K and elsewhere from time to time, represents
management's best judgment as of the date the information is given. The Company
does not undertake responsibility for updating any of such information, whether
as a result of new information, future events, or otherwise, except as required
by law. Investors are advised, however, to consult any further public Company
disclosures (such as in filings with the Securities and Exchange Commission
or
in Company press releases) on related subjects.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
Disclosure
Controls and Procedures
The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms. An evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company’s disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective as of March 31,
2006.
Changes
in Internal Control Over Financial Reporting
There
has
been no change in the Company’s internal control over financial reporting that
occurred during the first quarter of 2006 that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
General
From
time
to time, the Company and its operations are parties to, or targets of, lawsuits,
claims, investigations and proceedings, including product liability, personal
injury, asbestos, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are
being handled and defended in the ordinary course of business. While the Company
is unable to predict the outcome of these matters, it does not believe, based
upon currently available facts, that the ultimate resolution of any such pending
matters, including the sorbates litigation and the asbestos litigation, 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. For additional information
about the sorbates and asbestos litigation, refer to Note 16 to the unaudited
consolidated financial statements.
In
June
2005, Eastman Chemical Middelburg, B.V., a wholly owned subsidiary of the
Company, (the "Subsidiary") received a summons from the Middelburg (Netherlands)
District Court Office to appear before the economic magistrate of that District
and respond to allegations that the Subsidiary's manufacturing facility in
Middelburg has exceeded certain conditions in the permit that allows the
facility to discharge wastewater into the municipal wastewater treatment system.
The summons proposed penalties in excess of $100,000 (USD) as a result of the
alleged violations. A hearing in this matter took place on July 28, 2005, at
which time the magistrate bifurcated the proceeding into two phases: a
compliance phase and an economic benefit phase. With respect to the compliance
phase, the magistrate levied a fine of less than $100,000. With respect to
the
economic benefit phase, where the prosecutor's proposed penalty in excess of
$100,000 remains pending, the magistrate instructed the parties to submit their
respective positions in writing for his review and deliberation. In accordance
with the schedule imposed by the magistrate, the Subsidiary submitted its
initial written position on September 30, 2005. The prosecution submitted its
initial written position on December 23, 2005, and the Subsidiary submitted
its
reply brief in March 2006. The magistrate has ordered a hearing on May 18,
2006
on the issue of economic benefit. The Subsidiary intends to vigorously contest
this matter, including the assessment of an economic benefit penalty, but given
the early stage of the proceeding, the ultimate outcome cannot presently be
determined. 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.
ITEM
1A. RISK FACTORS
For
identification and discussion of the most significant risks applicable to the
Company and its business, see Part I - Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward-Looking
Statements and Risk Factors of this 2006 Quarterly Report on Form
10-Q.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
(c)
Purchases of Equity Securities by the Issuer
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)
|
January
1- 31, 2006
|
--
|
$
|
--
|
|
0
|
$
|
288
|
February
1-28, 2006
|
677
|
$
|
50.75
|
|
0
|
$
|
288
|
March
1-31, 2006
|
82
|
$
|
50.28
|
|
0
|
$
|
288
|
Total
|
759
|
$
|
50.70
|
|
0
|
|
|
(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 weighted average closing price
of
Eastman stock on the business date the shares were surrendered by
the
employee stockholder.
|
(3) |
The
Company was authorized by the Board of Directors on February 4, 1999
to
repurchase up to $400 million of its common stock. Common share
repurchases under this authorization in 1999, 2000 and 2001 were
$51
million, $57 million and $4 million, respectively. The Company has
not
repurchased any common shares under this authorization after 2001.
For
additional information see Note 14 to the Company's consolidated
financial
statements in Part II, Item 8 of the 2005 Annual Report on Form
10-K.
|
ITEM
6. EXHIBITS
Exhibits
filed as part of this report are listed in the Exhibit Index appearing on page
41.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
Eastman
Chemical Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 2,
2006
|
|
By:
|
/s/
Richard A. Lorraine
|
|
|
|
Richard
A. Lorraine
|
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
3.01
|
|
Amended
and Restated Certificate of Incorporation of Eastman Chemical Company,
as
amended (incorporated by reference to Exhibit 3.01 to Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended June
30,
2001
|
|
|
|
|
|
|
|
3.02
|
|
Amended
and Restated Bylaws of Eastman Chemical Company, as amended December
4,
2003 (incorporated herein by referenced to Exhibit 3.02 to Eastman
Chemical Company’s Annual Report on Form 10-K for the year ended December
31, 2003 (the “2003 10-K”))
|
|
|
|
|
|
|
|
4.01
|
|
Form
of Eastman Chemical Company common stock certificate as amended February
1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman
Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001)
|
|
|
|
|
|
|
|
4.02
|
|
Stockholder
Protection Rights Agreement dated as of December 13, 1993, between
Eastman
Chemical Company and First Chicago Trust Company of New York, as
Rights
Agent (incorporated herein by reference to Exhibit 4.4 to Eastman
Chemical
Company's Registration Statement on Form S-8 relating to the Eastman
Investment Plan, File No. 33-73810)
|
|
|
|
|
|
|
|
4.03
|
|
Indenture,
dated as of January 10, 1994, between Eastman Chemical Company and
The
Bank of New York, as Trustee (the "Indenture") (incorporated herein
by
reference to Exhibit 4(a) to Eastman Chemical Company's Current Report
on
Form 8-K dated January 10, 1994 (the "8-K"))
|
|
|
|
|
|
|
|
4.04
|
|
Form
of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
|
|
|
|
|
|
|
|
4.05
|
|
Officers’
Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June
8-K"))
|
|
|
|
|
|
|
|
4.06
|
|
Form
of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference
to Exhibit 4(b) to the June 8-K)
|
|
|
|
|
|
|
|
4.07
|
|
Form
of 7.60% Debentures due February 1, 2027 (incorporated herein by
reference
to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form
10-K
for the year ended December 31, 1996 (the "1996 10-K"))
|
|
|
|
|
|
|
|
4.08
|
|
Form
of 7% Notes due April 15, 2012 (incorporated herein by reference
to
Exhibit 4.09 to Eastman Chemical Company's Quarterly Report on Form
10-Q
for the quarter ended March 31, 2002)
|
|
|
|
|
|
|
|
4.09
|
|
Officer's
Certificate pursuant to Sections 201 and 301 of the Indenture related
to
7.60% Debentures due February 1, 2027 (incorporated herein by reference
to
Exhibit 4.09 to the 1996 10-K)
|
|
|
|
|
|
|
|
4.10
|
|
$200,000,000
Accounts Receivable Securitization agreement dated April 13, 1999
(amended
April 11, 2000), between the Company and Bank One, N.A., as agent.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing
a
copy of such agreement, the Company agrees to furnish a copy of such
agreement to the Commission upon request
|
|
|
|
|
|
|
|
4.11
|
|
Amended
and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named therein,
and
Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as
joint
lead arrangers
|
|
43
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
|
Sequential
|
Exhibit
|
|
|
|
Page
|
Number
|
|
Description
|
|
Number
|
|
|
|
|
|
4.12
|
|
Form
of 3 ¼% Notes due June 16, 2008 (incorporated herein by reference to
Exhibit 4.13 to Eastman Chemical Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003)
|
|
|
|
|
|
|
|
4.13
|
|
Form
of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit
4.14
to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003)
|
|
|
|
|
|
|
|
4.14
|
|
Amendments
to Stockholder Protection Rights Agreement (incorporated herein by
reference to Exhibits 4.1 and 4.2 to Eastman Chemical Company’s Current
Report on Form 8-K dated December 4, 2003)
|
|
|
|
|
|
|
|
12.01
|
|
Statement
re: Computation of Ratios of Earnings (Loss) to Fixed
Charges
|
|
44
|
|
|
|
|
|
31.01
|
|
Rule
13a - 14(a) Certification by J. Brian Ferguson, Chairman of the Board
and
Chief Executive Officer, for the quarter ended March 31,
2006
|
|
45
|
|
|
|
|
|
31.02
|
|
Rule
13a - 14(a) Certification by Richard A. Lorraine, Senior Vice President
and Chief Financial Officer, for the quarter ended March 31,
2006
|
|
46
|
|
|
|
|
|
32.01
|
|
Section
1350 Certification by J. Brian Ferguson, Chairman of the Board and
Chief
Executive Officer, for the quarter ended March 31, 2006
|
|
47
|
|
|
|
|
|
32.02
|
|
Section
1350 Certification by Richard A. Lorraine, Senior Vice President
and Chief
Financial Officer, for the quarter ended March 31, 2006
|
|
48
|
|
|
|
|
|