Global Enclosed File Count
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 June 30, 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 June 30, 2006
|
Common
Stock, par value $0.01 per share
|
|
82,262,980
|
(including
rights to purchase shares of Common Stock or Participating Preferred
Stock)
|
|
|
--------------------------------------------------------------------------------------------------------------------------------
PAGE
1 OF 62 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT
INDEX ON PAGE 45
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
1.
|
Financial
Statements
|
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
|
2.
|
|
23
|
|
|
|
4.
|
|
40
|
PART
II. OTHER INFORMATION
1.
|
|
41
|
|
|
|
1A.
|
|
41
|
|
|
|
2.
|
|
42
|
|
|
|
4.
|
|
42
|
|
|
|
6.
|
|
43
|
SIGNATURES
UNAUDITED
CONSOLIDATED STATEMENTS OF EARNINGS,
COMPREHENSIVE
INCOME AND RETAINED EARNINGS
|
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,929
|
$
|
1,752
|
$
|
3,732
|
$
|
3,514
|
Cost
of sales
|
|
1,579
|
|
1,378
|
|
3,051
|
|
2,741
|
Gross
profit
|
|
350
|
|
374
|
|
681
|
|
773
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
113
|
|
122
|
|
211
|
|
231
|
Research
and development expenses
|
|
44
|
|
39
|
|
86
|
|
78
|
Asset
impairments and restructuring charges, net
|
|
3
|
|
10
|
|
10
|
|
19
|
Other
operating income
|
|
--
|
|
--
|
|
--
|
|
(2)
|
Operating
earnings
|
|
190
|
|
203
|
|
374
|
|
447
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
21
|
|
24
|
|
41
|
|
54
|
Income
from equity investment in Genencor
|
|
--
|
|
(171)
|
|
--
|
|
(173)
|
Early
debt extinguishment costs
|
|
--
|
|
46
|
|
--
|
|
46
|
Other
(income) charges, net
|
|
(2)
|
|
--
|
|
(3)
|
|
(1)
|
Earnings
before income taxes
|
|
171
|
|
304
|
|
336
|
|
521
|
Provision
for income taxes
|
|
57
|
|
98
|
|
117
|
|
153
|
Net
earnings
|
$
|
114
|
$
|
206
|
$
|
219
|
$
|
368
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.39
|
$
|
2.55
|
$
|
2.68
|
$
|
4.59
|
Diluted
|
$
|
1.37
|
$
|
2.51
|
$
|
2.64
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
|
114
|
$
|
206
|
$
|
219
|
$
|
368
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Change
in cumulative translation adjustment
|
|
23
|
|
(56)
|
|
40
|
|
(79)
|
Change
in minimum pension liability, net of tax
|
|
--
|
|
1
|
|
--
|
|
--
|
Change
in unrealized gains (losses) on investments, net of tax
|
|
8
|
|
1
|
|
11
|
|
1
|
Change
in unrealized gains (losses) on derivative instruments, net of
tax
|
|
(1)
|
|
1
|
|
(1)
|
|
13
|
Total
other comprehensive income (loss)
|
|
30
|
|
(53)
|
|
50
|
|
(65)
|
Comprehensive
income
|
$
|
144
|
$
|
153
|
$
|
269
|
$
|
303
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Retained
earnings at beginning of period
|
$
|
1,992
|
$
|
1,636
|
$
|
1,923
|
$
|
1,509
|
Net
earnings
|
|
114
|
|
206
|
|
219
|
|
368
|
Cash
dividends declared
|
|
(36)
|
|
(36)
|
|
(72)
|
|
(71)
|
Retained
earnings at end of period
|
$
|
2,070
|
$
|
1,806
|
$
|
2,070
|
$
|
1,806
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
June
30,
|
|
December
31,
|
(Dollars
in millions, except per share amounts)
|
|
2006
|
|
2005
|
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
$
|
497
|
$
|
524
|
Trade
receivables, net of allowance of $16 and $20
|
|
750
|
|
575
|
Miscellaneous
receivables
|
|
93
|
|
81
|
Inventories
|
|
728
|
|
671
|
Other
current assets
|
|
50
|
|
73
|
Total
current assets
|
|
2,118
|
|
1,924
|
|
|
|
|
|
Properties
|
|
|
|
|
Properties
and equipment at cost
|
|
9,705
|
|
9,597
|
Less:
Accumulated depreciation
|
|
6,496
|
|
6,435
|
Net
properties
|
|
3,209
|
|
3,162
|
|
|
|
|
|
Goodwill
|
|
313
|
|
312
|
Other
noncurrent assets
|
|
362
|
|
375
|
Total
assets
|
$
|
6,002
|
$
|
5,773
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Payables
and other current liabilities
|
$
|
1,050
|
$
|
1,047
|
Borrowings
due within one year
|
|
3
|
|
4
|
Total
current liabilities
|
|
1,053
|
|
1,051
|
|
|
|
|
|
Long-term
borrowings
|
|
1,581
|
|
1,621
|
Deferred
income tax liabilities
|
|
305
|
|
317
|
Post-employment
obligations
|
|
1,049
|
|
1,017
|
Other
long-term liabilities
|
|
162
|
|
155
|
Total
liabilities
|
|
4,150
|
|
4,161
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
Common
stock ($0.01 par value - 350,000,000 shares authorized;
shares
issued
- 90,191,995 and 89,566,115 for 2006 and 2005,
respectively)
|
|
1
|
|
1
|
Additional
paid-in capital
|
|
363
|
|
320
|
Retained
earnings
|
|
2,070
|
|
1,923
|
Accumulated
other comprehensive loss
|
|
(150)
|
|
(200)
|
|
|
2,284
|
|
2,044
|
Less:
Treasury stock at cost (8,035,786 shares for 2006 and 8,034,901 shares
for
2005)
|
|
432
|
|
432
|
|
|
|
|
|
Total
stockholders’ equity
|
|
1,852
|
|
1,612
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
6,002
|
$
|
5,773
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
Net
earnings
|
$
|
219
|
$
|
368
|
|
|
|
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
Income
from equity investment in Genencor
|
|
--
|
|
(173)
|
Depreciation
and amortization
|
|
150
|
|
153
|
Early
debt extinguishment costs
|
|
--
|
|
46
|
Asset
impairments
|
|
8
|
|
1
|
Provision
for deferred income taxes
|
|
29
|
|
67
|
Changes
in operating assets and liabilities:
|
|
|
|
|
(Increase)
decrease in receivables
|
|
(156)
|
|
(38)
|
(Increase)
decrease in inventories
|
|
(49)
|
|
(173)
|
Increase
(decrease) in trade payables
|
|
59
|
|
22
|
Increase
(decrease) in liabilities for employee benefits and incentive
pay
|
|
(74)
|
|
(46)
|
Other
items, net
|
|
(23)
|
|
(16)
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
163
|
|
211
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
Proceeds
from sale of equity investment in Genencor, net
|
|
--
|
|
417
|
Additions
to properties and equipment
|
|
(169)
|
|
(124)
|
Proceeds
from sale of assets and investments
|
|
11
|
|
50
|
Additions
to capitalized software
|
|
(8)
|
|
(6)
|
Other
items, net
|
|
(1)
|
|
(2)
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
(167)
|
|
335
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
Net
increase (decrease) in commercial paper, credit facility and other
short-term borrowings
|
|
23
|
|
(104)
|
Repayment
of borrowings
|
|
--
|
|
(544)
|
Dividends
paid to stockholders
|
|
(72)
|
|
(70)
|
Proceeds
from stock option exercises and other items
|
|
24
|
|
90
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
(25)
|
|
(628)
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
2
|
|
(2)
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(27)
|
|
(84)
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
524
|
|
325
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
497
|
$
|
241
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
ITEM
|
Page
|
|
|
|
7
|
|
7
|
|
7
|
|
8
|
|
8
|
|
8
|
|
9
|
|
10
|
|
11
|
|
12
|
|
13
|
|
14
|
|
14
|
|
15
|
|
15
|
|
19
|
|
21
|
|
22
|
|
22
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
16
to the unaudited consolidated financial statements.
|
June
30,
|
|
December
31,
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
|
|
|
At
FIFO or average cost (approximates current cost)
|
|
|
|
Finished
goods
|
$
|
637
|
$
|
664
|
Work
in process
|
210
|
|
207
|
Raw
materials and supplies
|
328
|
|
247
|
Total
inventories
|
1,175
|
|
1,118
|
LIFO
Reserve
|
(447)
|
|
(447)
|
Total
inventories
|
$
|
728
|
$
|
671
|
Inventories
valued on the LIFO method were approximately 60% as of June 30, 2006 and 65%
as
of December 31, 2005 of total inventories.
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 June 30, 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 June 30, 2006 and December 31, 2005, the Company’s investment in
Nanjing was approximately $5 million.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
On
April
21, 2005, the Company completed the sale of its preferred and common stock
of
Genencor International, Inc. ("Genencor") for cash proceeds of approximately
$417 million, net of $2 million in fees. The book value of the investment prior
to sale was $246 million, and the Company recorded a
pre-tax
gain on the sale of $171 million.
|
|
June
30,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Trade
creditors
|
$
|
600
|
$
|
534
|
Accrued
payrolls, vacation, and variable-incentive compensation
|
|
89
|
|
154
|
Accrued
taxes
|
|
37
|
|
49
|
Post-employment
obligations
|
|
80
|
|
134
|
Interest
payable
|
|
31
|
|
31
|
Bank
overdrafts
|
|
74
|
|
10
|
Other
|
|
139
|
|
135
|
Total
|
$
|
1,050
|
$
|
1,047
|
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for
income
taxes
|
$
|
57
|
$
|
98
|
|
(42)%
|
$
|
117
|
$
|
153
|
|
(24)%
|
Effective
tax rate
|
|
33.5
%
|
|
32.2
%
|
|
|
|
34.9
%
|
|
29.3
%
|
|
|
The
second quarter and first six months 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 Standards ("SFAS") No. 123 (Revised December
2004) - Share Based Payment ("SFAS No. 123 (R)"), effective January 1, 2006,
did
not have a material effect on the Company's effective income tax rate in the
second quarter and first six months 2006. For additional information regarding
SFAS 123 (R), see Note 15 to the unaudited consolidated financial statements.
The
second 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 higher applicable tax rates related to the early extinguishment
of
debt costs and the gain on the sale of Genencor stock. The first six months
2005
effective tax rate also reflects 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.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
June
30,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Borrowings
consisted of:
|
|
|
|
|
3
1/4% notes due 2008
|
$
|
72
|
$
|
72
|
6.30%
notes due 2018
|
|
175
|
|
185
|
7%
notes due 2012
|
|
137
|
|
142
|
7
1/4% debentures due 2024
|
|
497
|
|
497
|
7
5/8% debentures due 2024
|
|
200
|
|
200
|
7.60%
debentures due 2027
|
|
297
|
|
297
|
Credit
facility borrowings
|
|
189
|
|
214
|
Other
|
|
17
|
|
18
|
Total
borrowings
|
|
1,584
|
|
1,625
|
Borrowings
due within one year
|
|
(3)
|
|
(4)
|
Long-term
borrowings
|
$
|
1,581
|
$
|
1,621
|
At
June
30, 2006, the Company has credit facilities with various U.S. and non-U.S.
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, and a 148 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 credit facility borrowings at June
30,
2006 and December 31, 2005 were $189 million and $214 million at weighted
average interest rates of 3.23 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.
At
June
30, 2006 and December 31, 2005, the Company had outstanding interest rate swaps
associated with the entire outstanding principle of the 7% notes due in 2012
and
$150 million of the outstanding principle of the 6.30% notes due in 2018. The
average variable interest rate on the 7% notes was 8.11 percent and 7.22 percent
for June 30, 2006 and December 31, 2005, respectively. The average variable
interest rate on the 6.30% notes was 6.51 percent and 5.63 percent for June
30,
2006 and December 31, 2005, respectively.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Early
Extinguishment of Debt
In
the
second quarter 2005, the Company completed the early repayment of $500 million
of its outstanding long-term debt for $544 million in cash, which resulted
in a
charge of $46 million for early debt extinguishment costs including $2 million
in unamortized bond issuance costs. The book value of the repaid debt was $500
million, as follows:
(dollars
in millions)
|
|
Book
Value
|
|
|
|
3
1/4% notes due 2008
|
$
|
178
|
6.30%
notes due 2018
|
|
68
|
7%
notes due 2012
|
|
254
|
Total
|
$
|
500
|
In
the
second quarter and first six months 2006, asset impairments and restructuring
charges totaled $3 million and $10 million, respectively, relating primarily
to
previously closed manufacturing facilities.
During
the second quarter 2005, the Company recognized asset impairments and
restructuring charges of $10 million, primarily related to Cendian Corporation's
("Cendian") shutdown of its business activities as well as the closures of
other
manufacturing facilities. In the first quarter 2005, the Company recorded
approximately $9 million in asset impairments and restructuring charges
primarily related to the shutdown of Cendian and the expected severance of
approximately 90 employees at the Company's Batesville, Arkansas manufacturing
facility.
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 six months 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
June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charges
|
$
|
--
|
$
|
8
|
$
|
(8)
|
$ |
--
|
$
|
--
|
Severance
costs
|
|
3
|
|
--
|
|
--
|
|
(1)
|
|
2
|
Site
closure and other restructuring costs
|
|
7
|
|
2
|
|
--
|
|
--
|
|
9
|
Total
|
$
|
10
|
$
|
10
|
$ |
(8)
|
$ |
(1)
|
$
|
11
|
A
majority of the remaining severance and site closure costs is expected to be
applied to the reserves within one year.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 Components of Net Periodic Benefit Costs
|
|
|
|
|
|
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
11
|
$
|
11
|
$
|
22
|
$
|
21
|
Interest
cost
|
|
20
|
|
20
|
|
40
|
|
40
|
Expected
return on assets
|
|
(23)
|
|
(20)
|
|
(44)
|
|
(39)
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
(2)
|
|
(3)
|
|
(4)
|
|
(5)
|
Actuarial
loss
|
|
10
|
|
8
|
|
19
|
|
17
|
Net
periodic benefit cost
|
$
|
16
|
$
|
16
|
$
|
33
|
$
|
34
|
In
July
2006, the Company announced plans to change the U.S. defined benefit plans
such
that employees hired on or after January 1, 2007 will not be eligible for those
plans. This change will not impact net periodic benefit cost in 2006 and will
begin to impact the financial statements in first quarter 2007.
As
of
June 30, 2006, the Company has contributed $50 million to its U.S. defined
benefit plans during 2006 and expects to contribute an additional $25 million
in
the second half of 2006.
DEFINED
CONTRIBUTION PLANS
The
Company sponsors a defined contribution employee stock ownership plan (the
"ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code,
which is a component of the Eastman Investment Plan and Employee Stock Ownership
Plan ("EIP/ESOP"). Eastman anticipates that it will make annual contributions
for substantially all U.S. employees equal to 5 percent of eligible compensation
to the ESOP, or for employees who have five or more prior ESOP contributions,
to
either the Eastman Stock Fund or other investment funds within the EIP.
Employees may diversify to other investment funds within the EIP from the ESOP
at any time without restrictions.
In
July
2006, the Company announced plans to change its EIP/ESOP to provide a
company match of 50 percent of the first 7 percent of an employee's compensation
contributed to the plan for employees who are hired on or after January 1,
2007.
Employees who are hired on or after January 1, 2007, will be eligible for the
5
percent contribution to the ESOP as described above.
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 Components of Net Periodic Benefit Costs
|
|
|
|
|
|
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Service
cost
|
$
|
2
|
$
|
2
|
$
|
4
|
$
|
4
|
Interest
cost
|
|
10
|
|
11
|
|
21
|
|
22
|
Amortization
of:
|
|
|
|
|
|
|
|
|
Prior
service credit
|
|
(6)
|
|
(6)
|
|
(12)
|
|
(12)
|
Actuarial
loss
|
|
4
|
|
5
|
|
8
|
|
10
|
Net
periodic benefit cost
|
$
|
10
|
$
|
12
|
$
|
21
|
$
|
24
|
In
July
2006, the Company announced plans to change its U.S. life insurance and health
care benefit plans such that employees hired on or after January 1, 2007 will
have access to post-retirement health care benefits only, while Eastman will
not
provide a company contribution toward the premium cost of post-retirement
benefits for those employees. This change will begin to impact the financial
statements in first quarter 2007.
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 $54
million and $51 million at June 30, 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 $21 million to
the
maximum of $43 million at June 30, 2006 and the minimum or best estimate of
$21
million to the maximum of $42 million at December 31, 2005.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Purchasing
Obligations and Lease Commitments
At
June
30, 2006, the Company had various purchase obligations totaling approximately
$1.9 billion over a period of approximately 15 years for materials, supplies,
and energy incident to the ordinary conduct of business. The Company also had
various lease commitments for property and equipment under cancelable,
non-cancelable, and month-to-month operating leases totaling approximately
$201
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 45 percent
relate to real property, including office space, storage facilities and land;
and approximately 40 percent relate to vehicles, primarily railcars.
Accounts
Receivable Securitization Program
In
1999,
the Company entered into an agreement that allows the Company to sell certain
domestic accounts receivable under a planned continuous sale program to a third
party. The agreement permits the sale of undivided interests in domestic trade
accounts receivable. Receivables sold to the third party totaled $200 million
at
June 30, 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 $317
million and $243 million in the second quarter 2006 and 2005, respectively,
and
$319 million and $268 million for the first six months of 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 June 30, 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 legal
entities involved with these material relationships 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 June 30, 2006. These potential VIEs are joint ventures from
which
the Company has purchased raw materials and utilities for several years and
purchases approximately $70 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.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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.
At
June
30, 2006, mark-to-market gains from raw material, currency and certain interest
rate hedges that were included in accumulated other comprehensive loss totaled
approximately $6 million. If realized, approximately $4 million of these gains
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 second quarter
and
first six months 2006.
A
reconciliation of the changes in stockholders’ equity for the first six 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
|
--
|
--
|
219
|
--
|
--
|
219
|
Cash
Dividends Declared
|
--
|
--
|
(72)
|
--
|
--
|
(72)
|
Other
Comprehensive Income
|
--
|
--
|
--
|
50
|
--
|
50
|
Stock
Option Exercises and Other Items (1)
|
--
|
43
|
--
|
--
|
--
|
43
|
Balance
at June 30, 2006
|
1
|
363
|
2,070
|
(150)
|
(432)
|
1,852
|
(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
|
|
40
|
|
--
|
|
11
|
|
(1)
|
|
50
|
Balance
at June 30, 2006
|
$
|
101
|
$
|
(255)
|
$
|
6
|
$
|
(2)
|
$
|
(150)
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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.
|
Second
Quarter
|
|
First
Six Months
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Shares
used for earnings per share calculation:
|
|
|
|
|
|
|
|
Basic
|
81.9
|
|
80.7
|
|
81.7
|
|
80.1
|
Diluted
|
83.0
|
|
82.0
|
|
82.7
|
|
81.5
|
In
the
second quarter and first six months 2005, common shares underlying options
to
purchase 1,306,724 shares of common stock at a range of prices from $56.87
to
$67.50 and 802,273 shares of common stock at a range of prices from $56.50
to
$63.25, respectively, 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 second quarters 2006
and 2005 and $0.88 per share in the first six months 2006 and 2005.
On
January 1, 2006, the Company adopted SFAS
No.
123 (R). 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.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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.
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:
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
and shares in millions, except per share amounts)
|
2006
|
|
Proforma
2005
|
|
2006
|
|
Proforma
2005
|
|
|
|
|
|
|
|
|
Net
earnings, as reported
|
$
|
114
|
$
|
206
|
$
|
219
|
$
|
368
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based employee compensation expense
|
|
|
|
|
|
|
|
|
included
in net earnings, as reported
|
|
4
|
|
6
|
|
7
|
|
7
|
|
|
|
|
|
|
|
|
|
Deduct:
Total additional stock-based employee compensation cost, net of
tax, that
would have been included in net earnings under fair value
method
|
|
4
|
|
7
|
|
7
|
|
9
|
|
|
|
|
|
|
|
|
|
Pro
forma net earnings
|
$
|
114
|
$
|
205
|
$
|
219
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
As
reported
|
$
|
1.39
|
$
|
2.55
|
$
|
2.68
|
$
|
4.59
|
|
Pro
forma
|
$
|
N.A.
|
$
|
2.54
|
$
|
N.A.
|
$
|
4.57
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
As
reported
|
$
|
1.37
|
$
|
2.51
|
$
|
2.64
|
$
|
4.52
|
|
Pro
forma
|
$
|
N.A.
|
$
|
2.51
|
$
|
N.A.
|
$
|
4.51
|
In
the
second quarter and first six months 2006, approximately $6 million and $11
million, respectively, 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 and $4 million related
to
stock options in the second quarter and the first six months 2006, respectively.
The impact on second quarter 2006 net earnings of $4 million is net of a $2
million credit to deferred tax expense for recognition of deferred tax assets.
The impact on the first six months 2006 net earnings of $7 million is net of
a
$4 million credit to deferred tax expense for recognition of deferred tax
assets.
The
impact on the financial statements of implementing SFAS No. 123 (R) is that
compensation expense for stock options is now 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 weighted average assumptions relevant to options
granted in the second quarter and first six months 2006 and the same periods
for
2005 are identified in the table below:
Assumptions
|
Second
Quarter 2006
|
|
Second
Quarter 2005
|
|
First
Six Months 2006
|
|
First
Six Months 2005
|
|
|
|
|
|
|
|
|
Exercise
Price
|
$56.37
|
|
$58.89
|
|
$56.37
|
|
$56.52
|
Expected
term years
|
4.40
|
|
6.00
|
|
4.40
|
|
6.00
|
Expected
volatility rate
|
22.50%
|
|
27.90%
|
|
22.50%
|
|
27.90%
|
Expected
dividend yield
|
3.12%
|
|
3.70%
|
|
3.12%
|
|
3.70%
|
Average
risk-free interest rate
|
5.02%
|
|
3.50%
|
|
5.02%
|
|
3.50%
|
Expected
forfeiture rate
|
0.75%
|
|
Actual
|
|
0.75%
|
|
Actual
|
The
Company granted 107,638 options in the second quarter and first six months
2006.
The Company did not grant any options in the first quarter 2006. For the second
quarter and first six months 2005, the Company granted 52,784 and 64,788
options, respectively.
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 fourth 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.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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.
The
following tables provide a reconciliation of option activity for the first
six
months 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
|
107,638
|
$
|
56.37
|
|
|
|
Exercises
|
(519,607)
|
$
|
44.87
|
|
$
|
5,721,295
|
Cancelled/Forfeited/Expired
|
(65,734)
|
$
|
62.10
|
|
|
|
Outstanding
at 6/30/2006
|
6,139,100
|
$
|
48.54
|
5.7
|
$
|
37,468,243
|
Exercisable
at 6/30/2006
|
4,353,007
|
$
|
47.31
|
4.4
|
$
|
32,769,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at 12/31/2004
|
8,155,148
|
$
|
46.86
|
|
|
|
Grants
|
64,788
|
$
|
56.52
|
|
|
|
Exercises
|
(2,130,915)
|
$
|
43.32
|
|
$
|
32,547,349
|
Cancelled/Forfeited/Expired
|
(19,250)
|
$
|
46.89
|
|
|
|
Outstanding
at 6/30/2005
|
6,069,771
|
$
|
48.21
|
5.3
|
$
|
49,797,698
|
Exercisable
at 6/30/2005
|
5,104,765
|
$
|
48.75
|
4.6
|
$
|
40,156,501
|
(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 1,786,093 options are unvested at June 30, 2006 for which $14 million in
compensation expense will be recognized over 3 years. A total of 975,021 options
were unvested at June 30, 2005. Cash proceeds from the exercise of options
in
the first six months 2006 total approximately $22 million with a related tax
benefit of approximately $2 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 second quarter and first six months 2006, is approximately $4
million and $7 million, respectively. The unrecognized compensation cost before
tax for these same awards total approximately $25 million at June 30, 2006
and
will be recognized through 2008.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 Performance Chemicals and
Intermediates ("PCI") segment, the Performance 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 concerning 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 Current Report
Form 8-K dated April 20, 2006.
In
the
first quarter of 2006, management determined that the Developing Businesses
("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 expenses not identifiable to an operating segment
are not included in segment operating results for either of the periods
presented and are shown in the tables below as "other" revenues and operating
losses.
|
|
Second
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
362
|
$
|
325
|
Fibers
|
|
238
|
|
205
|
PCI
|
|
453
|
|
397
|
Performance
Polymers
|
|
674
|
|
642
|
SP
|
|
202
|
|
180
|
Total
Sales by Segment
|
|
1,929
|
|
1,749
|
Other
|
|
--
|
|
3
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
1,929
|
$
|
1,752
|
|
|
|
|
|
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
Sales
by Segment
|
|
|
|
|
CASPI
|
$
|
711
|
$
|
644
|
Fibers
|
|
468
|
|
405
|
PCI
|
|
864
|
|
786
|
Performance
Polymers
|
|
1,300
|
|
1,298
|
SP
|
|
389
|
|
357
|
Total
Sales by Segment
|
|
3,732
|
|
3,490
|
Other
|
|
--
|
|
24
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
3,732
|
$
|
3,514
|
|
|
|
|
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Second
Quarter
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Operating
Earnings (Loss) (1)
|
|
|
|
|
CASPI
|
$
|
68
|
$
|
64
|
Fibers
|
|
61
|
|
47
|
PCI
|
|
47
|
|
43
|
Performance
Polymers
|
|
12
|
|
50
|
SP
|
|
14
|
|
21
|
Total
Operating Earnings by Segment
|
|
202
|
|
225
|
Other
|
|
(12)
|
|
(22)
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
190
|
$
|
203
|
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Operating
Earnings (Loss) (1)
|
|
|
|
|
CASPI
|
$
|
123
|
$
|
131
|
Fibers
|
|
127
|
|
95
|
PCI
|
|
88
|
|
88
|
Performance
Polymers
|
|
29
|
|
134
|
SP
|
|
32
|
|
42
|
Total
Operating Earnings by Segment
|
|
399
|
|
490
|
Other
|
|
(25)
|
|
(43)
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
374
|
$
|
447
|
(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 8 in this Form 10-Q. As previously discussed, operating
earnings (loss) for 2005 have been restated to eliminate the effects
of
interdivisional sales.
|
|
|
June
30,
|
|
December
31,
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Assets
by Segment
|
|
|
|
|
CASPI
|
$
|
1,480
|
$
|
1,393
|
Fibers
|
|
662
|
|
675
|
PCI
|
|
1,552
|
|
1,589
|
Performance
Polymers
|
|
1,528
|
|
1,416
|
SP
|
|
777
|
|
689
|
Total
Assets by Segment
|
|
5,999
|
|
5,762
|
Other
|
|
3
|
|
11
|
|
|
|
|
|
Total
Eastman Chemical Company
|
$
|
6,002
|
$
|
5,773
|
|
|
|
|
|
20
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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
(described below), will have a material adverse effect on its overall financial
condition, results of operations or cash flows. However, adverse developments
could negatively impact earnings or cash flows in a particular future period.
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 appealed the trial court's decision.
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.
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.
21
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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 has evaluated the effect
of
SFAS No. 155 and determined that it does not expect a material impact from
the
adoption to 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 has evaluated the effect of SFAS No. 156 and
determined that it does not expect a material impact from the adoption to its
consolidated financial position, liquidity, or results from operations.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes—an Interpretation of SFAS 109 "Accounting for Income
Taxes". FIN 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that a company has taken or expects to take on a tax return.
Under
FIN 48, the financial statements will reflect expected future tax consequences
of such positions presuming the taxing authorities' full knowledge of the
position and all relevant facts, but without considering time values. FIN 48
also revises disclosure requirements and introduces a prescriptive, annual,
tabular roll-forward of the unrecognized tax benefits. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the effect FIN 48 will have on its consolidated financial position,
liquidity, or results of operations.
On
July
24, 2006, the Company announced it entered into a definitive agreement for
the
sale of its Arkansas-based wholly owned subsidiary, which includes Eastman's
Batesville, Arkansas manufacturing facility and its related assets and product
lines. The sale is for a purchase price of $75 million at
closing. Subject to regulatory approval and customary
conditions, the sale is expected to close in fourth quarter
2006.
ITEM
|
Page
|
|
|
|
23
|
|
|
|
24
|
|
|
Results
of Operations
|
|
|
24
|
|
27
|
|
32
|
|
|
|
33
|
|
|
|
36
|
|
|
|
37
|
|
|
|
37
|
|
|
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.
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
Sales
revenue in second quarter 2006 was $1.9 billion, a 10 percent increase over
second quarter 2005. Sales revenue in the first six months 2006 was $3.7
billion, a 6 percent increase over the first six months 2005. Operating
earnings were $190 million in second quarter 2006, a $13 million decrease from
second quarter 2005. Operating
earnings were $374 million in the first six months 2006, a $73 million decrease
from first six months 2005. Despite higher raw material and energy costs,
especially for propane in all segments except Fibers, and paraxylene in the
Performance Polymers and Specialty Plastics ("SP") segments, these results
reflect strong earnings from a broad base of businesses. Second
quarter
and first six months 2006 results were negatively impacted by $3 million and
$10
million, respectively, in asset impairments and restructuring charges compared
to $10 million and $19 million for the comparable periods 2005.
First
six
months 2006 results were negatively impacted by approximately $15 million of
costs, net of insurance, associated with operational disruptions at the
Company's Longview, Texas, manufacturing facility, primarily in the first
quarter 2006. The Company expects no significant impact on results in the second
half of 2006.
Net
earnings for the second quarter 2006 and first six months 2006 were $114 million
and $219 million, respectively, versus the second quarter and first six months
2005 net earnings of $206 million and $368 million, respectively. Net
earnings in 2005 reflected a $171 million gain on the sale of the Company's
equity investment in Genencor and early debt retirement costs of $46 million.
The
Company generated $163 million in cash from operating activities during first
six months 2006, a decrease of $48 million compared to the first six months
of
2005 primarily due to higher net earnings in the prior year.
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. 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.
|
Second
Quarter
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
1,929
|
$
|
1,752
|
|
10
%
|
|
5
%
|
|
5
%
|
|
--
%
|
|
--
%
|
Sales
revenue for second quarter 2006 increased $177 million over second quarter
2005.
The increase was primarily due to higher selling prices in response to both
higher raw material and energy costs and strong economic conditions and
increased sales volume throughout the Company.
|
First
Six Months
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
3,732
|
$
|
3,514
|
|
6
%
|
|
3
%
|
|
5
%
|
|
(1)
%
|
|
(1)
%
|
Sales
revenue for first six months 2006 increased $218 million over 2005. The increase
was primarily due to higher selling prices in response to both higher raw
material and energy costs and strong economic conditions, and increased sales
volume.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
$
|
350
|
$
|
374
|
|
(8)
%
|
$
|
681
|
$
|
773
|
|
(13)
%
|
As
a percentage of sales
|
|
18
%
|
|
21
%
|
|
|
|
18
%
|
|
22
%
|
|
|
Gross
profit and gross profit as a percentage of sales for second quarter and first
six months 2006 decreased compared to the second quarter and first six months
2005 primarily due to reduced gross margins in the Performance Polymers segment.
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
|
$
|
113
|
$
|
122
|
|
(7)
%
|
$
|
211
|
$
|
231
|
|
(9)
%
|
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
44
|
|
39
|
|
13
%
|
|
86
|
|
78
|
|
10
%
|
|
$
|
157
|
$
|
161
|
|
(2)
%
|
$
|
297
|
$
|
309
|
|
(4)
%
|
As
a percentage of sales
|
|
8
%
|
|
9
%
|
|
|
|
8
%
|
|
9
%
|
|
|
Selling,
general and administrative ("SG&A") expenses for the second quarter 2006
decreased primarily due to lower incentive compensation. SG&A expenses in
first six months also decreased due to Cendian Corporation's ("Cendian")
shutdown of its business activities in the first quarter of 2005. SG&A
expenses include compensation expense under Statement of Financial Accounting
Standards ("SFAS") No. 123 Revised December 2004 ("SFAS No. 123 (R)") -
"Share-Based Payment". For more information on SFAS No. 123 (R), see Note 15
to
the Company's unaudited consolidated financial statements.
Research
and development ("R&D") expenses increased $5 million in second quarter 2006
compared to second quarter 2005 and $8 million in first six months 2006 compared
to first six months 2005 primarily due to increased spending on growth
initiatives, particularly in the SP segment. The Company expects that R&D
expenses will be approximately 3 percent of revenue in 2006.
Asset
Impairments and Restructuring Charges, Net
Asset
impairments and restructuring charges totaled $3 million and $10 million for
the
second quarter and first six months 2006 compared to $10 million and $19 million
in second quarter and first six months 2005, respectively. 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 8 to the
Company's unaudited consolidated financial statements.
Other
Operating (Income) Expense, Net
Other
operating income for the first six months 2005 reflects a gain of $2 million
related to the 2004 divestiture of certain businesses and product
lines
within
the Coatings,
Adhesives, Specialty Polymers and Inks
("CASPI") segment.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest
Expense, Net
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest costs
|
$
|
28
|
$
|
30
|
|
|
$
|
56
|
$
|
64
|
|
|
Less:
Capitalized interest
|
|
2
|
|
1
|
|
|
|
3
|
|
2
|
|
|
Interest
expense
|
|
26
|
|
29
|
|
(9)%
|
|
53
|
|
62
|
|
(16)%
|
Interest
income
|
|
5
|
|
5
|
|
|
|
12
|
|
8
|
|
|
Interest
expense, net
|
$
|
21
|
$
|
24
|
|
(14)%
|
$
|
41
|
$
|
54
|
|
(25)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
interest costs for the second quarter and first six months 2006 were lower
compared to the second quarter and first six months 2005 due to lower average
borrowings that more than offset higher average interest rates.
For
2006,
the Company expects net interest expense to decrease compared to 2005 due to
anticipated lower average borrowings, increased capitalized interest and higher
interest income.
Income
from Equity Investment in Genencor
Income
from equity investment in Genencor includes the
Company's portion of earnings from its equity investment in Genencor for the
first six months 2005. In the second quarter 2005,
the
Company completed the sale of its equity interest in Genencor for net cash
proceeds of approximately $417 million. The book value of the investment prior
to sale was $246 million resulting
in a pre-tax gain on the sale of $171 million.
Early
Debt Extinguishment Costs
In
the
second quarter 2005, the Company completed the early repayment of $500 million
of its outstanding long-term debt for $544 million in cash and recorded a charge
of $46 million for early debt extinguishment costs including $2 million in
unamortized bond issuance costs. The book value of the repaid debt was $500
million.
Other
(Income) Charges, Net
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income)
|
$
|
(4)
|
$
|
(2)
|
$
|
(2)
|
$
|
(7)
|
$
|
(6)
|
$
|
(1)
|
Other
charges
|
|
2
|
|
2
|
|
--
|
|
4
|
|
5
|
|
(1)
|
Other
(income) charges, net
|
$
|
(2)
|
$
|
--
|
$
|
(2)
|
$
|
(3)
|
$
|
(1)
|
$
|
(2)
|
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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision
for Income Taxes
|
Second
Quarter
|
|
First
Six Months
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
Change
|
|
2006
|
|
2005
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income
taxes
|
$
|
57
|
$
|
98
|
|
(42)%
|
$
|
117
|
$
|
153
|
|
(24)%
|
Effective
tax rate
|
|
33.5%
|
|
32.2%
|
|
|
|
34.9%
|
|
29.3%
|
|
|
The
second quarter and first six months 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 increases in the
effective tax rates for second quarter and first six months 2005 are primarily
attributable to lower foreign earnings in favorable tax jurisdictions and to
a
decrease in tax deductions for charitable contributions. The
implementation of SFAS
No.
123(R), effective January 1, 2006, did not have a material effect on the
Company's effective income tax rate in the second quarter and first six months
2006. For additional information regarding SFAS No. 123(R), see Note 15 to
the
unaudited consolidated financial statements.
The
second quarter 2005 effective tax rate reflects the Company's expected tax
rate
on reported operating earnings before income tax, excluding discrete items,
of
approximately 30 percent and higher applicable tax rates related to the early
extinguishment of debt costs and the gain on the sale of Genencor stock. The
first six months 2005 effective tax rate also reflects 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.
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 Performance Polymers segment and the 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 concerning 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 Current
Report Form 8-K dated April 20, 2006.
In
the
first quarter of 2006, management determined that the Developing Businesses
("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 Note 16 to the Company's unaudited consolidated
financial statements as "other" revenues and operating losses.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CASPI
Segment
|
|
Second
Quarter
|
|
First
Six Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
362
|
$
|
325
|
$
|
37
|
|
11
%
|
$
|
711
|
$
|
644
|
$
|
67
|
|
10
%
|
|
Volume
effect
|
|
|
|
|
9
|
|
3
%
|
|
|
|
|
|
7
|
|
1
%
|
|
Price
effect
|
|
|
|
|
27
|
|
8
%
|
|
|
|
|
|
62
|
|
9
%
|
|
Product
mix effect
|
|
|
|
|
2
|
|
1
%
|
|
|
|
|
|
6
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
(1)
|
|
(1)
%
|
|
|
|
|
|
(8)
|
|
(1)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
68
|
|
64
|
|
4
|
|
6
%
|
|
123
|
|
131
|
|
(8)
|
|
(6)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
charges, net
|
1
|
|
1
|
|
--
|
|
|
|
8
|
|
2
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating income
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
(2)
|
|
2
|
|
|
The
increase in sales revenue of $37 million for the second quarter 2006 compared
to
the second quarter 2005 was primarily due to an increase in selling prices,
particularly in the adhesives product lines, and an increase in sales volume,
particularly in the coatings product lines. The higher selling prices in
adhesives product lines were in response to higher raw material and energy
costs. The increase in the sales volume for coatings product lines was
attributed to strengthened end-market demand.
The
increase in sales revenue of $67 million for the first six months 2006 compared
to the first six months 2005 was primarily due to an increase in selling prices
in response to higher raw material and energy costs.
Operating
earnings increased $4 million for the second quarter 2006 compared to the second
quarter 2005 due to the increase in selling prices and sales volume which were
partially offset by an increase in raw materials and energy costs. Operating
earnings also included asset impairments and restructuring charges of $1 million
related to a previously closed manufacturing facility for both periods.
Operating
earnings decreased $8 million for the first six months 2006 compared to the
first six months 2005, primarily due to increased asset impairment and
restructuring charges and increased raw material and energy costs which more
than offset an increase in selling prices. Asset impairments and restructuring
charges of $8 million and $2 million, respectively, related primarily to
previously closed manufacturing facilities.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Fibers
Segment
|
|
Second
Quarter
|
|
First
Six Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
238
|
$
|
205
|
$
|
33
|
|
16
%
|
$
|
468
|
$
|
405
|
$
|
63
|
|
16
%
|
|
Volume
effect
|
|
|
|
|
9
|
|
4
%
|
|
|
|
|
|
43
|
|
11
%
|
|
Price
effect
|
|
|
|
|
18
|
|
9
%
|
|
|
|
|
|
42
|
|
10
%
|
|
Product
mix effect
|
|
|
|
|
6
|
|
3
%
|
|
|
|
|
|
(21)
|
|
(5)
%
|
|
Exchange
rate effect
|
|
|
|
|
--
|
|
--
%
|
|
|
|
|
|
(1)
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
61
|
|
47
|
|
14
|
|
30
%
|
|
127
|
|
95
|
|
32
|
|
34
%
|
Sales
revenue increased $33 million for second quarter 2006 compared to the second
quarter 2005 primarily due to higher selling prices throughout the segment.
The
higher selling prices were in response to higher raw material and energy costs
as well as continued strong demand for and limited supply of acetate yarn and
acetyl chemical products.
Sales
revenue increased $63 million for the first six months 2006 compared to the
first six months 2005 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 acetate tow demand.
Operating
earnings for the second quarter and the first six months 2006 compared to the
second quarter and the first six months 2005 increased $14 million and $32
million, respectively, 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
|
|
Second
Quarter
|
|
First
Six Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
453
|
$
|
397
|
$
|
56
|
|
14
%
|
$
|
864
|
$
|
786
|
$
|
78
|
|
10
%
|
|
Volume
effect
|
|
|
|
|
15
|
|
4
%
|
|
|
|
|
|
(5)
|
|
(1)
%
|
|
Price
effect
|
|
|
|
|
36
|
|
9
%
|
|
|
|
|
|
78
|
|
10
%
|
|
Product
mix effect
|
|
|
|
|
6
|
|
1
%
|
|
|
|
|
|
8
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
(1)
|
|
--
%
|
|
|
|
|
|
(3)
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
47
|
|
43
|
|
4
|
|
9
%
|
|
88
|
|
88
|
|
--
|
|
--
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairments and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
charges, net
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
4
|
|
(4)
|
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue for the second quarter and the first six months 2006 compared to the
second quarter and the first six months 2005 increased $56 million and $78
million, respectively, primarily due to higher selling prices. Selling prices
were higher particularly in the intermediates product lines in response to
increases in raw material and energy costs.
Operating
earnings increased $4 million for the second quarter 2006 compared to second
quarter 2005 and were primarily the result of higher selling prices. Operating
earnings remained constant for the first six months 2006 compared to first
six
months 2005 due to lower gross margins in the resin intermediates and oxo
derivatives products offset by lower asset impairment and restructuring charges
and increased sales volume in the acetyl products.
On
July
24, 2006, the Company announced it entered into a definitive agreement for
the
sale of its Arkansas-based wholly owned subsidiary, which includes Eastman's
Batesville, Arkansas manufacturing facility and its related assets and product
lines. The sale is for a purchase price of $75 million at closing. Subject
to regulatory approval and customary conditions, the sale is expected to
close in fourth quarter 2006.
Performance
Polymers Segment
|
|
Second
Quarter
|
|
First
Six Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
674
|
$
|
642
|
$
|
32
|
|
5
%
|
$
|
1,300
|
$
|
1,298
|
$
|
2
|
|
--
%
|
|
Volume
effect
|
|
|
|
|
37
|
|
6
%
|
|
|
|
|
|
30
|
|
2
%
|
|
Price
effect
|
|
|
|
|
(4)
|
|
(1)
%
|
|
|
|
|
|
(24)
|
|
(2)
%
|
|
Product
mix effect
|
|
|
|
|
1
|
|
--
%
|
|
|
|
|
|
10
|
|
1
%
|
|
Exchange
rate effect
|
|
|
|
|
(2)
|
|
--
%
|
|
|
|
|
|
(14)
|
|
(1)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
12
|
|
50
|
|
(38)
|
|
(76)%
|
|
29
|
|
134
|
|
(105)
|
|
(78)
%
|
Sales
revenue increased $32 million in second quarter 2006 compared to second quarter
2005 primarily due to higher sales volume, particularly in Latin America and
Europe, which was partially offset by lower sales volume for PET polymers in
North America due to continued above historical levels of Asian imports.
Sales
revenue increased $2 million in first six months 2006 compared to first six
months 2005 primarily due to higher sales volume in Latin America more than
offsetting lower selling prices for PET polymers globally.
Operating
earnings decreased $38 million and $105 million, respectively, in second quarter
and first six months 2006 compared to second quarter and first six months 2005
primarily due to higher raw material and energy costs and lower selling prices
for PET polymers globally.
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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SP
Segment
|
|
Second
Quarter
|
|
First
Six Months
|
|
|
|
|
|
Change
|
|
|
|
|
|
Change
|
(Dollars
in millions)
|
2006
|
|
2005
|
|
$
|
|
%
|
|
2006
|
|
2005
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
202
|
$
|
180
|
$
|
22
|
|
12
%
|
$
|
389
|
$
|
357
|
$
|
32
|
|
9
%
|
|
Volume
effect
|
|
|
|
|
16
|
|
9
%
|
|
|
|
|
|
21
|
|
6
%
|
|
Price
effect
|
|
|
|
|
9
|
|
5
%
|
|
|
|
|
|
21
|
|
6
%
|
|
Product
mix effect
|
|
|
|
|
(1)
|
|
(1)
%
|
|
|
|
|
|
(4)
|
|
(1)
%
|
|
Exchange
rate effect
|
|
|
|
|
(2)
|
|
(1)
%
|
|
|
|
|
|
(6)
|
|
(2)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
earnings
|
14
|
|
21
|
|
(7)
|
|
(33)
%
|
|
32
|
|
42
|
|
(10)
|
|
(24)%
|
Sales
revenue for the second quarter 2006 increased $22 million compared to the second
quarter 2005 primarily due to increased sales volume. The higher sales volume
was primarily driven by continued market development efforts, particularly
in
copolyester product lines. Selling prices increased to offset higher raw
material and energy costs with increases limited by competitive industry
dynamics.
Sales
revenue for the first six months 2006 increased $32 million compared to the
first six months 2005 due primarily to higher sales volume and higher selling
prices. Higher selling prices were in response to increased raw material and
energy costs. The higher sales volume was primarily driven by continued market
development and incremental sales volume gains.
Operating
earnings for second quarter 2006 declined $7 million compared with second
quarter 2005 due to an increase in expenditures related to growth efforts,
including the Company's copolyester technology innovation with the expectation
for the first family of such products to be introduced in 2007.
Operating
earnings for first six months 2006 declined $10 million compared with first
six
months 2005 primarily due to higher raw material and energy costs and increased
expenditures related to growth initiatives more than offsetting increased sales
volume and higher selling prices.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales
Revenue
|
Second
Quarter
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
1,094
|
$
|
1,006
|
|
9
%
|
|
1
%
|
|
7
%
|
|
1
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
384
|
|
351
|
|
10
%
|
|
5
%
|
|
3
%
|
|
3
%
|
|
(1)
%
|
Asia
Pacific
|
|
248
|
|
231
|
|
7
%
|
|
5
%
|
|
6
%
|
|
(3)
%
|
|
(1)
%
|
Latin
America
|
|
203
|
|
164
|
|
24
%
|
|
29
%
|
|
(7)
%
|
|
2
%
|
|
--
%
|
|
$
|
1,929
|
$
|
1,752
|
|
10
%
|
|
5
%
|
|
5
%
|
|
--
%
|
|
--
%
|
Sales
revenue in the United States and Canada increased for the second quarter 2006
compared to the second quarter 2005 primarily due to higher selling prices,
particularly for the PCI segment and the CASPI segment, which had a $72 million
positive impact on sales revenue. The higher selling prices were primarily
in
response to increases in raw material and energy costs.
Sales
revenue in Europe, Middle East and Africa increased for the second quarter
2006
compared to the second quarter 2005 primarily due to higher sales volume,
particularly in the Performance Polymers and Fibers segments.
Sales
revenue in Asia Pacific increased for the second quarter 2006 compared to second
quarter 2005 primarily due to higher selling prices, particularly in Fibers
and
CASPI, and higher sales volume for the PCI segment which were partially offset
by lower sales volume in the Performance Polymers segment.
Sales
revenue in Latin America increased for the second quarter 2006 compared to
second quarter 2005 primarily due to higher sales volume, particularly for
the
Performance Polymers segment, which was partially offset by lower selling prices
in the same segment.
|
First
Six Months
|
|
|
|
|
|
|
|
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
Change
|
|
Volume
Effect
|
|
Price
Effect
|
|
Product
Mix
Effect
|
|
Exchange
Rate
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States and Canada
|
$
|
2,167
|
$
|
2,016
|
|
8
%
|
|
2
%
|
|
8
%
|
|
(2)
%
|
|
--
%
|
Europe,
Middle East, and Africa
|
|
709
|
|
719
|
|
(1)
%
|
|
--
%
|
|
1
%
|
|
2
%
|
|
(4)
%
|
Asia
Pacific
|
|
459
|
|
450
|
|
2
%
|
|
(3)
%
|
|
7
%
|
|
(1)
%
|
|
(1)
%
|
Latin
America
|
|
397
|
|
329
|
|
21
%
|
|
26
%
|
|
(7)
%
|
|
2
%
|
|
--
%
|
|
$
|
3,732
|
$
|
3,514
|
|
6
%
|
|
3
%
|
|
5
%
|
|
(1)
%
|
|
(1)
%
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales
revenue in the United States and Canada increased for the first six months
2006
compared to the first six months 2005 primarily due to higher selling prices,
particularly for the PCI and CASPI segments, which had a $162 million positive
impact on sales revenue. The higher selling prices were primarily in response
to
increases in raw material and energy costs.
Sales
revenue in Europe, Middle East and Africa decreased for the first six months
2006 compared to the first six months 2005 primarily due to unfavorable foreign
currency exchange rates.
Sales
revenue in Asia Pacific increased for the
first
six months 2006 compared to the first six months 2005
primarily due to increased selling prices, particularly in the Fibers
segment.
Sales
revenue in Latin America increased for the first six months 2006 compared to
the
first six months 2005 primarily due to higher sales volume, particularly for
the
Performance Polymers segment, which was partially offset by lower selling prices
in the same 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.
Cash
Flows
|
|
First
Six Months
|
(Dollars
in millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
Net
cash provided by (used in)
|
|
|
|
|
Operating
activities
|
$
|
163
|
$
|
211
|
Investing
activities
|
|
(167)
|
|
335
|
Financing
activities
|
|
(25)
|
|
(628)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
2
|
|
(2)
|
Net
change in cash and cash equivalents
|
$
|
(27)
|
$
|
(84)
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
497
|
$
|
241
|
The
Company generated $163 million in cash from operating activities during first
six months 2006, a decrease of $48 million compared to the first six months
of
2005 primarily due to higher net earnings in the prior year.
Cash
used
in investing activities totaled $167 million in the first six months 2006 and
cash provided by investing activities totaled $335 million in the first six
months 2005. In the first six months 2005, the Company received $417 million
in
net cash proceeds from the sale of its equity investment in Genencor. Capital
spending in the first six months 2006 included expenditures related to the
on-going construction of the IntegRex
facility.
Cash
used
in financing activities in the first six months 2006 totaled $25 million, a
decrease of $603 million compared with the first six months of 2005. Cash used
in financing activities in the first six months 2005 includes the Company's
early repayment of $500 million of its outstanding long-term debt and a decrease
in commercial paper, credit facility, and other short-term borrowings including
bank overdrafts of $104 million, offset by cash received from stock option
exercises of $90 million.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
payment of dividends is also reflected in financing activities in all
periods.
In
the
second half of 2006, priorities for use of available cash from operations are
to
pay dividends and fund both targeted growth initiatives and U.S. defined benefit
pension plans.
Liquidity
At
June
30, 2006, the Company had credit facilities with various U.S. and non-U.S.
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, and a 148 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 was in compliance with all such covenants for
all
periods presented. The Company's combined credit facility borrowings at June
30,
2006 and December 31, 2005 were $189 million and $214 million at weighted
average interest rates of 3.23 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.
For
more
information regarding interest rates, refer to Note 7 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 $50 million to its U.S. defined benefit pension plan in
the
first six months 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. 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. 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 $169 million and $124 million for the first six months 2006
and 2005, respectively. The Company expects that capital spending in 2006 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other
Commitments
At
June
30, 2006, the Company’s obligations related to notes and debentures totaled
approximately $1.4 billion to be paid over a period of up to 21 years. Other
borrowings, related primarily to credit facility borrowings, totaled
approximately $200 million.
The
Company had various purchase obligations at June 30, 2006 totaling approximately
$1.9 billion over a period of approximately 15 years for materials, supplies
and
energy incident to the ordinary conduct of business. For information on
the
Company's lease commitments, refer to Note 11 of the unaudited consolidated
financial statements.
In
addition, the Company had other liabilities at June 30, 2006 totaling
approximately $1.1 billion primarily related to pension, retiree medical, and
other post-employment obligations.
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. For information on the
Company's residual value guarantees, refer to Note 11 of the 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. For information on the
Company's accounts receivable securitization program, refer to Note 11 of the
unaudited consolidated financial statements.
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 legal
entities involved with these material relationships 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 June 30, 2006. These potential VIEs are joint ventures from which
the
Company has purchased raw materials and utilities for several years and
purchases approximately $70 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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Dividends
The
Company declared cash dividends of $0.44 per share in the second quarter 2006
and 2005 and $0.88 per share in the first six months 2006 and 2005.
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 has evaluated the effect
of
SFAS No. 155 and determined that it does not expect a material impact from
the
adoption to 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 has evaluated the effect of SFAS No. 156 and
determined that it does not expect a material impact from the adoption to its
consolidated financial position, liquidity, or results from operations.
In
July
2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes—an Interpretation of SFAS 109 "Accounting for Income
Taxes". FIN 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that a company has taken or expects to take on a tax return.
Under
FIN 48, the financial statements will reflect expected future tax consequences
of such positions presuming the taxing authorities' full knowledge of the
position and all relevant facts, but without considering time values. FIN 48
also revises disclosure requirements and introduces a prescriptive, annual,
tabular roll-forward of the unrecognized tax benefits. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the effect FIN 48 will have on its consolidated financial position,
liquidity, or results of operations.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
volume 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 plan of which $50 million had been completed as of June
30,2006;
|
· |
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 expenses 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.
|
Considering
the above factors, particularly pricing as a key determinant of profitability
due to the continued volatility of raw material and energy costs, the Company
expects full-year 2006 net earnings per share to follow its typical pattern
of
about 60 percent in the first-half and about 40 percent in the
second-half.
See
“Forward-Looking Statements and Risk Factors below.”
The
expectations under "Outlook" and certain other statements in this Quarterly
Report 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.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
· |
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.
|
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
Quarterly Report 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.
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. Disclosure controls
and procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities and Exchange Act of 1934 is
accumulated and communicated to the issuer's management, including its principal
executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. 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 June 30, 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 second 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 18 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 scheduled a hearing on the issue
of economic benefit for October 27, 2006. The Subsidiary intends to vigorously
contest the assessment of an economic benefit penalty, but given the current
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.
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.
(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)
|
April
1- 30, 2006
|
--
|
$
|
--
|
|
0
|
$
|
288
|
May
1-31, 2006
|
126
|
$
|
57.99
|
|
0
|
$
|
288
|
June
1-30, 2006
|
40
|
$
|
53.05
|
|
0
|
$
|
288
|
Total
|
166
|
$
|
56.80
|
|
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.
|
The
2006
Annual Meeting of the Stockholders of Eastman Chemical Company was held on
May
4, 2006. There were 81,752,676 shares of common stock entitled to be voted,
and
70,541,505 shares represented in person or by proxy, at the Annual
Meeting.
Two
items
of business were acted upon by stockholders at the Annual Meeting:
· |
the
election of three directors to serve in the class for which the term
in
office expires at the Annual Meeting of Stockholders in 2009 and
their
successors are duly elected and qualified;
and
|
· |
the
ratification of the action by the Audit Committee of the Board of
Directors appointing PricewaterhouseCoopers LLP as independent accountants
for the Company for the year ended December 31, 2006.
|
The
results of the voting for the election of directors were as
follows:
Nominee
|
Votes
For
|
Votes
Withheld
|
Abstentions
|
Broker
Non-Votes
|
Stephen
R. Demeritt
|
68,229,003
|
2,312,502
|
-0-
|
-0-
|
Robert
M. Hernandez
|
69,715,157
|
826,348
|
-0-
|
-0-
|
David
W. Raisbeck
|
69,716,845
|
824,660
|
-0-
|
-0-
|
Accordingly,
the three nominees received a plurality of the votes cast in the election of
directors at the meeting and were elected.
The
results of the voting on the ratification of the action by the Audit Committee
of the Board of Directors appointing PricewaterhouseCoopers LLP as independent
accountants for the Company for 2006 were as follows:
Votes
For
|
Votes
Against
|
Abstentions
|
Broker
Non-Votes
|
69,455,291
|
583,568
|
502,641
|
-0-
|
Accordingly,
the number of affirmative votes cast on the proposal constituted more than
a
majority of the votes cast on the proposal at the meeting, and the appointment
of PricewaterhouseCoopers LLP as independent accountants was
ratified.
Exhibits
filed as part of this report are listed in the Exhibit Index appearing on page
45.
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:
July 31, 2006
|
|
By:
|
/s/
Richard A. Lorraine
|
|
|
|
Richard
A. Lorraine
|
|
|
|
Senior
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Sequential
Page 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
|
|
|
|
|
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Sequential
Page 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)
|
|
|
|
|
|
|
|
10.01
|
|
|
|
47-53
|
|
|
|
|
|
10.02
|
|
|
|
54-55
|
|
|
|
|
|
10.03
|
|
|
|
56-57
|
|
|
|
|
|
12.01
|
|
|
|
58
|
|
|
|
|
|
31.01
|
|
|
|
59
|
|
|
|
|
|
31.02
|
|
|
|
60
|
|
|
|
|
|
32.01
|
|
|
|
61
|
|
|
|
|
|
32.02
|
|
|
|
62
|
|
|
|
|
|
46